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Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2026 CVR Energy, Inc. earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press star then the number 1 on your telephone keypad. To withdraw your question, press star 1 again. We ask that you please limit your questions to one and one follow-up. I would now like to turn the conference over to Richard Roberts, Vice President of FP&A and Investor Relations. Please go ahead. Richard Roberts: Good afternoon, everyone. We very much appreciate you joining us this afternoon for our CVR Energy, Inc. first quarter 2026 earnings call. With me today are Mark Pytosh, our Chief Executive Officer; Dane Neumann, our Chief Financial Officer; Mike Wright, our Chief Operating Officer; Travis Katz, our Chief Commercial Officer; and other members of management. Before discussing our first quarter 2026 results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except to the extent required by law. This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures, are included in our first quarter 2026 earnings release that we filed with the SEC and our Form 10-Q for the period, and will be discussed during the call. That said, I will turn the call over to Mark. Mark Pytosh: Thank you, Richard. Good afternoon, everyone, and thank you for joining our earnings call. In the first quarter, our operations performed well with crude utilization of 97% and ammonia plant utilization of 103%. Major geopolitical events drove volatility in energy and fertilizer markets, which have set up attractive market opportunities for the balance of 2026. Given the disruptions in global supply chains with loss of production and lack of product movement for refined products and fertilizer, CVR Energy, Inc. is well positioned to improve our margin capture for the balance of the year. We are pleased to announce the first quarter 2026 dividend of $0.10 per share, and we believe our prospects should allow for a balance of debt reduction and capital returns to shareholders as we move forward. Now let me turn the call over to Dane to discuss our financial highlights. Dane Neumann: Thank you, Mark, and good afternoon, everyone. For the first quarter of 2026, our consolidated net loss was $160 million, losses per share were $1.91, and EBITDA was a loss of $52 million. First quarter results include unrealized derivative losses of $158 million, which primarily relate to NYMEX gasoline and diesel crack spread swaps entered into during the quarter against expected future production at a crack spread value of $447 million through 2027, which I will discuss further in our Petroleum segment results. In addition, our results include an unfavorable change in our RFS liability of $51 million and favorable inventory valuation impacts of $120 million. Excluding the above-mentioned items, adjusted EBITDA for the quarter was $37 million and adjusted losses per share were $1.24. Adjusted EBITDA in the Petroleum segment was a loss of $50 million for the first quarter compared to a loss of $30 million for the first quarter of 2025. Increased RINs expenses, higher operating costs, and realized derivative losses drove the majority of the decrease from the prior-year period. Combined total throughput for the first quarter of 2026 was approximately 214,000 barrels per day. Crude utilization for the quarter was approximately 97% of nameplate capacity, and light product yield was 93% on total throughput volumes. Benchmark cracks for the first quarter of 2026 increased from the prior-year period, with the Group 3 2-1-1 averaging $21.58 per barrel compared to $17.65 per barrel in the first quarter of 2025. Our first quarter realized margin, adjusted for unrealized derivative losses, the change in our RFS liability, and inventory valuation, was $4.72 per barrel, representing a 22% capture rate on the Group 3 2-1-1 benchmark. Prices increased significantly from the first quarter 2025 levels, more than doubling to almost $9.50 per barrel for the first quarter of 2026. Net RINs expense for the quarter, excluding the change in RFS liability, was $143 million, or $7.37 per barrel, which negatively impacted our capture rate for the quarter by approximately 34%. EPA has repeatedly stated that the cost of RINs is ultimately passed through to consumers at the pump. The decision to establish the highest RVO in history through the recent Set 2 rule has driven RIN prices significantly higher, which has in turn raised the price of gasoline. This is in direct conflict with the administration's stated goal of lowering fuel cost for American consumers. RIN prices have increased more than 75% since the beginning of the year, in addition to the 18% increase in the RVO, currently adding $0.25 to $0.30 to every gallon of fuel purchased in America. If the administration is serious about lowering fuel prices, it should start with the RFS. The estimated accrued RFS obligation on the balance sheet was $204 million at March 31, 2026, representing 113 million RINs marked to market at an average price of $1.80. As EPA has not yet ruled on our pending 2025 petition, we will continue to recognize 100% of Wynnewood Refining Company's RIN obligation in our financials, which for the first quarter of 2026 was approximately $52 million. If Wynnewood Refining Company received the 100% SRE we believe it is entitled to, our consolidated capture rate for the quarter would have improved by approximately 12%. Once again, EPA has missed the deadline on ruling on Wynnewood Refining Company's 2025 SRE petition. Does the EPA ever meet a deadline? Our first quarter 2026 results include a total derivative loss of $182 million. As previously discussed, $158 million of this loss was the unrealized mark-to-market change in all of our open crack spread swap positions as of March 31, 2026, and our physical positions intended to offset are expected to be sold as the swap contracts expire through 2027. Given this disconnect, we do not view the impact of the unrealized loss as a detriment to the current period and, as we have done in the past, we adjust the amount out for our adjusted EBITDA figures. As we progress through the year, if these positions remain negative, we would anticipate these derivative losses to be more than offset by any gains on physical production as we realize increased crack spreads on the remainder of our unhedged production. As of March 31, 2026, our total open crack swap positions included 9.9 million barrels of diesel and 2.4 million barrels of gasoline. Of this total, approximately 2.9 million barrels of diesel swaps are in 2027, with the remainder in 2026. This represents roughly 15% of our expected gasoline and diesel production volumes for 2026 and 4% for 2027. Since the end of the quarter, prompt NYMEX crack spreads have declined and we have seen Group 3 strengthen relative to the onset of the war. We will continue to actively monitor these positions and plan to be opportunistic managing our exposure going forward, which could include closing out these positions or adding other positions depending on market conditions. Direct operating expenses in the Petroleum segment were $6.10 per barrel for the first quarter, compared to $8.58 per barrel in the first quarter of 2025. The decrease in direct operating expenses per barrel was primarily due to increased throughput volumes, as the Coffeyville refinery was undergoing a turnaround in the first quarter of 2025. Adjusted EBITDA in the Fertilizer segment was $78 million for the first quarter, compared to $53 million for the prior-year period. Ammonia utilization rate was 103%, with both plants running well and experiencing minimal downtime during the quarter. The board of directors of CVR Partners’ general partner declared a distribution of $4.00 per common unit for the first quarter of 2026. As CVR Energy, Inc. owns approximately 37% of CVR Partners' common units, we will receive a proportionate cash distribution of approximately $16 million. Cash flow from operations for the first quarter of 2026 was $64 million and free cash flow was $21 million, of which approximately $63 million was generated by the Fertilizer segment. Significant uses of cash in the quarter included $47 million of capital spending, $40 million of cash interest, $15 million for the costs associated with the debt refinancing, and $3 million paid for the noncontrolling interest portion of the CVR Partners fourth quarter 2025 distribution. Total consolidated capital spending on an accrual basis was $44 million, which included $29 million in the Petroleum segment and $14 million in the Fertilizer segment. For the full year 2026, we estimate total consolidated capital spending to be approximately $200 million to $240 million. Turning to the balance sheet, we ended the quarter with a consolidated cash balance of $512 million, which includes $128 million of cash in the Fertilizer segment. Total liquidity as of March 31, 2026, excluding CVR Partners, was approximately $923 million, which was comprised primarily of $384 million of cash and availability under the ABL facility of $539 million. We remain committed to our deleveraging goal and plan to continue working towards a gross leverage target of $1 billion, excluding debt at CVR Partners. Looking ahead to the second quarter of 2026 for our Petroleum segment, we estimate total throughputs to be approximately 200,000 to 215,000 barrels per day, direct operating expenses to range between $110 million and $120 million, and total capital spending to be between $35 million and $40 million. For the Fertilizer segment, we estimate our ammonia utilization rate to be between 95% and 100%, direct operating expenses excluding inventory and turnaround impacts to be between $57 million and $62 million, and total capital spending to be between $28 million and $32 million. With that, Mark, I will turn it back over to you. Mark Pytosh: Thank you, Dane. In summary, despite a slow start to the year in the refining segment, market fundamentals have changed quickly over the past few months, and we believe the outlook is constructive for both of our businesses. Two areas of the economy that are among the most impacted by the ongoing conflict in the Middle East are energy and fertilizers. Starting with the refining segment, global inventories of crude oil and refined products tightened considerably over the past few months with the effective closure of the Strait of Hormuz. While the extent of the damage to refining capacity is still unclear at this point, the larger impact to global refined product markets has been availability of crude oil supplies and the need to curtail refinery runs as a result. Fortunately, the U.S. refining fleet has largely been unimpacted so far, although refined product inventories in the U.S. have also been declining partly due to increased product exports. Gasoline and diesel inventories in the Mid-Continent were elevated at the beginning of the year, driven by higher-than-average refinery utilization levels that weighed on crack spreads, particularly gasoline cracks. This has changed significantly over the past month with gasoline inventories declining by 17% and diesel inventories declining 20% compared to the beginning of the year. Demand trends have improved as well for both gasoline and distillate in the Mid-Continent. On a days-of-supply basis, gasoline supply is sitting at the low end of the five-year range, while distillate supply is below the five-year average. This improvement in Mid-Continent supply and demand fundamentals over the first quarter has tightened refined product basis in the Mid-Continent relative to other regions of the country. Accessing higher-demand regions outside the Mid-Continent and Gulf Coast remains one of our key strategic initiatives as we work to improve margin capture in the refining segment. We have stepped up these efforts and recently began utilizing the rail loading facility at Wynnewood that was repurposed after the reversion of the renewable diesel unit. We remain optimistic that basis has room to improve further over the intermediate term, with the new product pipeline from Kansas and Denver scheduled to come online later this year. Other pipelines under development over the next few years, including the Western Gateway Pipeline, should offer additional outlets from the Mid-Continent to the Gulf Coast as well. In the Fertilizer segment, the spring planting season is underway, and it is going well so far this year. The USDA is currently estimating approximately 95 million acres of corn will be planted in 2026. While this is a decline from the record levels of 2025, 95 million acres is well above the average level of corn plantings over the last five years. Nitrogen fertilizer inventory levels at the beginning of the year were tight across the industry after the large planting seasons in the U.S. and Brazil in 2025 and the ongoing conflicts in Russia and Ukraine. The recent events in the Middle East have caused fertilizer markets to tighten even further. Roughly 30% of nitrogen fertilizer production typically transits through the Strait of Hormuz, and multiple nitrogen fertilizer production facilities across the Middle East have been damaged or curtailed production over the past few months due to limited natural gas supplies. While it remains unclear how long these issues in the Middle East will persist, we will continue to focus on safely and reliably running our plants at high utilization levels to meet the needs of our customers during this challenging time in our industry. Looking at quarter-to-date pricing metrics for the second quarter of 2026, Group 2-1-1 cracks have averaged $38.36 per barrel, with the Brent–WTI spread at $3.81 per barrel and the WCS differential at $15.46 per barrel under WTI. Prompt fertilizer prices are $950 per ton for ammonia and $525 per ton for UAN. In closing, I would like to thank our employees for their excellent execution, safely achieving 97% crude utilization and 103% ammonia utilization for the first quarter. Strong operating performance along with the improvements in crack spreads and the progress we have made so far in reducing debt have enabled us to announce a dividend of $0.10 per share for the first quarter of 2026. We intend to continue our deleveraging strategy as we look to return to $1 billion of gross debt on the balance sheet. In addition, we will continue to work to improve margin capture in our base business while we seek opportunities to add scale and geographic diversity to our portfolio. With that, operator, we are ready to take questions. Operator: We will now begin the question-and-answer session. To ask a question, press star then the number 1 on your telephone keypad. We ask that you please limit your questions to one and one follow-up and then reenter the queue for any additional questions you may have. Our first question will come from the line of Matthew Blair with TPH. Please go ahead. Matthew Blair: Great. Thank you, and good afternoon. Hoping to talk a little bit about your increase in exposure to WCS at Hardisty. I think your disclosures show roughly an 8% crude slate exposure to WCS in Q1 versus basically zero in Q4. Why are you making that change, and what advantages does that offer to CVR Energy, Inc. here? Mark Pytosh: Matthew, good afternoon. When the actions were taken in Venezuela in early January, we saw almost an immediate change in the values for Western Canadian, and the differential backed up by about $3 per barrel. When we looked at it and ran our models, we saw that had more value than our other alternatives, and so we have been running a lot more Western Canadian, around 18,000 barrels a day. We will continue to do that if the differential holds in there. They have been good so far, and we are almost four months into it, so good value in that crude. Matthew Blair: Sounds good. And then could I just confirm a few things on your derivative exposure? So for the first quarter, was the realized impact that rolled through your numbers approximately a headwind of about $37 million, or about $2 per barrel? I am getting that based on your total impact of $195 million plus the $158 million of unrealized. And then secondly, for the second quarter, if there was a mark-to-market today, do you have an approximate impact that these derivatives would have in Q2? Thank you. Dane Neumann: Yeah, Matt, good afternoon. Just to summarize on the first quarter, we did, as you saw in our 10-K, have some crack swap positions on. The realized loss on those was about $25 million, really due to positions that were put on lower in January and February, and then with March, they got exacerbated. The remainder of the loss is really associated with inventory hedging as prices ran up on crude, particularly in the month of March. As it relates to the second quarter, we will not give any specifics, but we did provide the notional amounts of our hedges and the approximately $4.47 representing the amount of volume at a strike price—you can calculate an average from that. I will remind you that we put on those positions early at the outset of the conflict, and the market was pretty heavily backwardated at that time, so I would not assume that average applies over the entire strip. Operator: Our next question comes from the line of Manav Gupta with UBS. Please go ahead. Manav Gupta: I just want to understand if you could talk a little bit about the macro in the Mid-Continent—what you are seeing in terms of supply, demand, cracks—and how long you expect some of these cracks to remain elevated even if the Strait of Hormuz opens? There are a few out there saying it could take two months for flows to normalize, and many people globally do not have crude, so cracks could remain elevated. From your perspective, where you are sitting, can you talk a little bit about the refining macro? Mark Pytosh: Sure. Thank you, Manav. What we experienced—and this is typical for the Mid-Continent—was a lag. When the conflict broke out, the coastal markets adjusted faster than our market did. Over the course of March, we started to close the gap between the Mid-Continent and the Gulf Coast in particular—our closest market—but also the other Western markets. Our basis has really gotten closer to normal between where we are and those markets, so our cracks have elevated faster than the others. We have been able to move product into other markets, and those other markets are drawing out of the Mid-Continent. We have had a big drop in inventory for the last three weeks, and our market has adjusted now to the conflict. We agree with you that this is likely to go on longer than a quick snapback. Our market is already set up with the other markets, and I think we will benefit without the spread in basis, which took us three or four weeks to fall into place. We are enjoying a lot better cracks in April. The markets have settled in, they are drawing out of the Mid-Continent at this point, and we expect that to continue as long as this conflict is in place. Manav Gupta: Perfect. My quick follow-up here is I think I know the answer, but I just want to make sure: the dividend that has been reinstated—that is not a variable dividend, right? That is your path to a normal dividend, which will be there and maybe grow from here. Is that the right way to think about it? Mark Pytosh: That is correct. It is not a variable dividend. Our fertilizer business is variable. This is not meant to be a variable dividend. Operator: As a reminder, to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Alexa Petrich with Goldman Sachs. Please go ahead. Alexa Petrich: Good morning, team, and thank you for taking our question. We just wanted to ask a follow-up on the hedges announced during the quarter. Can you talk a little bit about what drove the decision to add those hedges? Is there any strategy there that we should expect to continue, or any color on that would be helpful? Dane Neumann: Thanks, Alexa. Historically, we have put hedges on when we have seen market levels above mid-cycle. We have done that over the past couple of years as some downside protection. As the war broke out and we saw things elevate quickly, not knowing if the market was going to correct itself quickly or not, we wanted to get in the market and capture some of those higher values. As we see this dragging on longer, going a little slower might have been better, but we are where we are. As we said in the prepared remarks, we are going to continue to monitor. We do not like to hedge over roughly 30% of our production just to make sure that we are covered between our two refineries. Travis Katz: And that is on gasoline or diesel independently. We have a pretty healthy book on right now that we will continue to monitor and, if anything, look to try to lock in any basis positions as we see improvement from there. Alexa Petrich: Okay. That is helpful. And then our follow-up is just on capital allocation priorities. You have outlined that $1 billion gross leverage target. We have now got the dividend. Can you talk about how you are balancing the two? And you have also previously discussed potentially having interest for M&A. Any color on those pieces would be helpful. Mark Pytosh: Sure. I will separate the two. On capital allocation, with the change in the market dynamics and opportunities there, we feel like we can continue on the path we have been on from deleveraging while also paying dividends going forward. With what we see for economics for the rest of the year, we feel like we can do both. That is why we were comfortable bringing the dividend back this quarter—we feel like we can achieve what we want to achieve and also return some capital to our shareholders. On M&A, that continues to be a priority for us. I would say the last couple of months have been a period where everyone is focused on all the volatility, so that has not been our highest priority in the last two months. As things settle down, we will be back looking for opportunities and engaging in discussions. Volatility management is our number one priority right now—managing the base business and positioning the company to do well in a very volatile market, but with much more attractive economics than we had two months ago. Alexa Petrich: Okay. That is helpful. I will turn it over. Thank you. Mark Pytosh: Sure. Thank you. Operator: This concludes our question-and-answer session. I will hand the call back over for closing comments. Mark Pytosh: Thanks, everybody. We appreciate you joining our call today, and we look forward to discussing our second quarter results in late July. Thank you very much, and have a good day. Operator: That concludes our call today. Thank you all for joining. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to International Paper's First Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Mandi Gilliland, Senior Director of Investor Relations. Ma'am, the floor is yours. Mandi Gilliland: Good morning, and good afternoon. Thank you for joining International Paper's First Quarter 2026 Earnings Call. Our speakers this morning are Andy Silvernail, Chairman and Chief Executive Officer; and Lance Loeffler, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. These and other factors that could cause or contribute to actual results differing materially from such forward-looking statements can be found in our press releases and reports filed with the U.S. Securities and Exchange Commission. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the first quarter earnings press release and today's presentation slides. So now let me turn it over to Andy Silvernail. Andrew Silvernail: Thanks, Mandi. Good morning, good afternoon, everyone. Let's begin on Slide 3. This quarter reinforced the importance of controlling the controllables in a dynamic operating environment. While inflationary pressures and weather-related disruptions created volatility, our focus remains squarely on enabling our strategy and improving execution. Today, we outlined the steps we're taking to manage external pressures strengthen execution across the business and address gaps where performance did not meet expectations, all in support of driving sustainable long-term value at International Paper. I want to start by being clear about what's working and what needs to improve. In North America, we delivered above-market growth for the third straight quarter with box shipments exceeding the industry by 3% as planned customer wins came through. We're seeing mill and box plant productivity improve as strategic investments and lighthouse practices take hold, and we're strengthening our footprint through investments that support long-term profitable growth. We are executing important improvements, but the gains have not been fast enough or consistent enough to offset the macro pressures. North American mill reliability has inflected positively. However, we need to accelerate the momentum. We have more work to do to reach best-in-class reliability and that's essential to delivering the cost and service performance we expect. We also need to improve execution. Unplanned costs have been higher than expected driven by both transformation activity and external factors. While some level of transition cost is inherent as we reshape the footprint and execute our transformation, we need to do a better job of identifying how to mitigate impacts and reliably overcome shortfalls. Let's turn to EMEA. We've made progress on cost-out actions with footprint and overhead efficiencies flowing through the P&L. The conflict in the Middle East has increased the overall challenge across both regions with more energy exposure in EMEA. We're doing a very good job of managing the exposures and pulling forward costs as quickly as possible. Importantly, we stayed focused on the broad improvement work while a small core team executes the separation. The EMEA market has been softer than expected with the macro environment impacting demand. We have modestly underperformed the market in terms of volume as we have held pricing. Our focus is maximizing total value by balancing the price-volume trade-offs in the soft market. We have, however, sharpened our commercial focus, and we want to make sure that we have the right price value trade-offs to maximize that profitability. In parallel, we are pushing hard on the transformation costs that are already underway, and we are focusing on execution and accelerating progress in a very challenging operating environment. We've made important progress in both North America and EMEA, aggressively reshaping our portfolio, footprint and operating structure. These changes have allowed us to radically change and improve investments in asset quality, reliability and cost structure. In turn, we've improved our competitive position, grown in North America, and positioned ourselves for further profit improvement in the back half of the year and beyond. I'm now turning to Slide 4. Let's take a look at the areas where our actions are translating into results. In North America, our team outpaced the market on volume growth for the third consecutive quarter. Even with the challenging backdrop, North American box volumes in the first quarter increased 2.5% year-over-year on a per day basis compared to a decline of 0.3% for the overall industry, which translates to nearly a 3% outperformance of the market. Looking ahead to the second quarter, we expect our North American volumes to be up about 3% with the industry again tracking flat. And on a full year basis, we continue to expect to outperform the industry by about 2%. Lastly, due to macro trends, our full year 2026 industry demand outlook is now approximately flat year-over-year compared to prior assumptions of flat to up 1%. I'm now moving to Slide 5. This page shows how our performance in North America is being supported by underlying improvements across the mill and box system. In the mill system, we're making steady operational progress. The winter storm impacted operational performance in late January and early February, but we saw strong improvements through March and momentum continuing into April. More broadly, capacity utilization has improved meaningfully over time, supported by elevated capital investment that's reversing a decade of underinvestment and improving reliability across the system. These gains are also reinforced by better operating discipline as lighthouse practices are rolled out across the mill system. On the box side, performance is improving as those same lighthouse practices take hold, particularly volume optimization and stronger daily management. As a result, box productivity has improved 7% since the third quarter of 2024 as we have continued to rationalize the footprint. Taken together, these actions strengthen our advantaged cost position by simplifying operations, moving volume to our most advantaged assets and putting capital to work where it earns the highest return. The key takeaway is that these are real measurable improvements from actions already underway. And on the next slide, we'll show how continued targeted investment is expected to build momentum and further strengthen our mill and box system over time. I'm now turning to Slide 6. Building on the productivity improvements and early operating results we just discussed, this slide highlights key strategic investments we're making across North America aligned with our strategic priorities of superior customer experience and high relative supply position. We've meaningfully accelerated investment across our network. These include targeted acquisitions, greenfield facilities, strategic conversions and more than 80 major investments across mill and box system, including corrugators, converting equipment and specialty capabilities with projects underway or planned primarily from late 2025 through 2026 spanning the U.S. and Mexico. Collectively, these investments will improve reliability, modernize our asset base and strengthen our competitive position to win with customers. We also recognize we are temporarily [ short paper ] in North America ahead of the Riverdale conversion. While that conversion creates a near-term headwind, there is a clear long-term tailwind, improving our system mix, expanding lightweight capacity and generating attractive returns as the project comes online. Overall, we are investing approximately 50% more per facility in 2025 through 2027 than the average of the prior 3 years. This level of investment reflects a deliberate shift toward rebuilding reliability, upgrading capabilities, and positioning the system for sustained performance and long-term value creation. Moving to Slide 7. We recently announced a bolt-on acquisition that fits squarely with our strategy, the NORPAC paper mill in Longview, Washington. This is a high-quality, top quartile asset that strengthens our West Coast footprint, which builds on our Springfield mill and box plant network across the region and lowers our overall systems cost. This location creates meaningful freight advantages in West Coast markets and its capabilities improve the efficiency and competitiveness of our integrated network. The mill includes 3 paper machines, 2 of which are producing recycled lightweight containerboard, enhancing our ability to meet growing customer demand for lightweight solutions and higher recycled content. Just as important, this acquisition gives us strategic flexibility, supporting growth in attractive end markets, while creating opportunities for further cost optimization across the system. Post integration, we expect this investment to deliver high teens or better returns over time, consistent with our disciplined capital allocation approach. Overall, this is exactly the kind of targeted, value-accretive investment we're looking for as we continue to optimize our footprint and build long-term value. Turning to Slide 8 and our EMEA business. As we saw in North America, the first step in our transformation is to simplify. Here's what it looks like in EMEA, starting with footprint optimization across the region. The data here reflects the actions that we have completed as well as many still in process. We also believe there are additional opportunities to optimize our footprint with additional actions being proposed or evaluated. When we shared this slide last quarter, we had approximately $160 million of run rate cost savings. Since then, we've continued to make progress, increasing run rate savings by roughly $40 million to more than $200 million in total. To date, 31 closures have been completed or are in process, which will result in net reductions of more than 2,800 positions. We'll continue to provide updates as we advance our actions in a disciplined and respectful way. I'm now turning to Slide 9. Before getting into the results and outlook, I want to step back and frame the macro environment that is influencing near-term results across both regions, particularly in the second quarter, starting with demand. In both North America and EMEA, overall market demand is softer than we expected coming into the year by about 1 point. This reflects a more cautious consumer, particularly as inflation pressures and uncertainty persist. We have not seen abrupt changes in order patterns in either region, but I'm cautious about demand. Visibility beyond the near term is limited. So we're staying focused on what we can control, strengthening the competitiveness of our network, onboarding commercial wins, investing in our assets and executing on cost-out. As we look at energy, in North America, energy cost exposure remains relatively contained as our mills generate more than 70% of their own energy and our principal energy input is natural gas, which is stable now and in the futures market. In Europe, our business has an effective hedging strategy in place to help mitigate the impact of higher energy prices. The exposure is significant, but our strategy should allow inflation pressure to be offset commercially, assuming recent market price increases stick. Now I'm turning to freight. Freight is having a significant near-term impact across both regions. In North America, sharply higher and volatile diesel prices are putting pressure on costs across the supply chain. Combined with an exceptionally tight freight market, this remains a strong headwind. As a reminder, rising freight costs are not passed through directly, they're recovered through pricing over time. And other impacts, in North America, higher diesel prices are also flowing through to OCC and chemicals, reflecting increased transportation costs and oil-linked inputs. In EMEA, OCC prices remain relatively stable given supply availability, but we do expect higher collection and distribution costs to begin showing up as we move into the second quarter. I'm on Slide 10. Now turning to our enterprise results for the first quarter. Overall performance reflects a challenging operating environment, normal seasonal volume declines and several deliberate actions we've taken to strengthen the business long term. On sales, year-over-year growth primarily reflects the additional month of DS Smith in Packaging Solutions EMEA. Sequentially, revenue step-down is expected due to normal seasonality across end markets. In Packaging Solutions North America, sales are also impacted by our decision to exit nonstrategic export business following the Savannah shutdown. Adjusted EBIT for the quarter was $188 million, benefiting from the absence of accelerated depreciation that we saw in prior periods. Adjusted EBITDA was $677 million and margins were 11.3%. We'll address the underlying margin drivers, including mix, cost timing and execution related impacts in more details as we move through the discussion. Free cash flow was $94 million in the quarter, which included a onetime $280 million tax refund. As a reminder, we also received $1.1 billion from the sale of the GCF business in the quarter, allowing us to pay down $660 million of debt, further strengthening the balance sheet. While earnings came in below our expectations, we must control what we can control. We are laser-focused on accelerating cost reductions in both regions, maximizing high-quality organic and inorganic investments and winning share intelligently. Now Lance will provide additional details on each business. Lance Loeffler: Thanks, Andy. Turning to Slide 11 and starting with our Packaging Solutions North America first quarter results compared to our fourth quarter results. Price and mix was favorable by $24 million, driven primarily by product mix as well as higher export pricing. Volume was $52 million unfavorable, reflecting the normal seasonal step down across all channels from a strong fourth quarter as well as lower export sales from repositioning containerboard into the domestic market. Operations and costs were $29 million unfavorable, primarily due to the winter storm impact of approximately $18 million as well as elevated costs due to reliability challenges. While we still experience some isolated reliability incidents each quarter, we are seeing progress. Improved operational performance across the mill system contributed $15 million of benefit in the quarter. Converting run rates continue to improve and the footprint rationalization is delivering cost-out each quarter. These improvements helped offset inflation and weather-related disruptions. Maintenance and outages were $17 million favorable, driven primarily by the timing of a planned outage. With reduced production in our mill system during the winter storm, our timing for certain planned outages shifted in order to support inventory build in advance of a heavy second quarter outage schedule. That deferral created approximately $20 million of timing benefit in the first quarter with the outage now expected to take place in the second quarter. Input costs were $43 million unfavorable, primarily due to a regional spike in natural gas prices and local utility costs related to the winter storm across our mill and box system, representing approximately $35 million. Overall, the January winter storm resulted in approximately $53 million of unfavorable EBITDA impact across operations, costs and inputs. In total, Packaging Solutions North America delivered $477 million of adjusted EBITDA in the first quarter. Moving to our second quarter outlook for Packaging Solutions North America on Slide 12. Price and mix are expected to improve, driven primarily by favorable product mix. That improvement is partially offset by the impact of the $20 per ton price decrease published in February. As a reminder, given normal price realization lags, the published price increases of $40 per ton in March and $30 per ton in April will benefit results beginning in the third quarter. Volume is expected to be favorable, reflecting a seasonal pickup and 1 additional shipping day sequentially. Operations and costs are expected to be slightly unfavorable sequentially, primarily driven by the downtime associated with the Riverdale paper machine conversion and costs related to the additional machine work that coincides with planned outages, offset by the nonrepeat of the first quarter weather impacts and the benefit from cost reduction initiatives related to distribution. Maintenance and outages are expected to be unfavorable sequentially as the second quarter represents roughly twice a normal outage schedule, which includes spending tied to the Riverdale conversion. Finally, input costs are expected to be favorable, primarily due to favorable seasonal weather, partially offset by higher OCC and freight costs driven by diesel prices. These items result in an adjusted EBITDA outlook for Packaging Solutions North America of approximately $380 million to $410 million for the second quarter. Let's turn to Slide 13 and walk through what's changed in our 2026 Packaging Solutions North America outlook. At a high level, the full year outlook reflects unfavorable impact of the macro environment, winter weather, and weaker-than-expected operating performance with published pricing actions providing a meaningful offset. We see North America industry demand roughly flat for the year, with our business growing approximately 2% above the market based on known customer wins. On the left-hand side of the slide, you can see our original 2026 adjusted EBITDA outlook of $2.5 billion to $2.6 billion has been updated to $2.35 billion to $2.5 billion. On the right-hand side is a bridge that explains what's driving this change. Pricing is the largest positive impact representing approximately $175 million, which reflects the cumulative price impact of February, March and April price index publications. That benefit is offset by several headwinds. The macro environment represents about a $200 million unfavorable impact primarily driven by higher diesel and chemical costs inflation in OCC and other raw materials as well as the impact of lower demand. Performance represents approximately $75 million of headwinds, primarily driven by operation reliability costs as well as operational and commercial challenges in our specialty business. And finally, winter weather in the first quarter created an impact of approximately $50 million, as I previously discussed. Taken together, these items explain the step down from our original outlook to where we are today. The next slide highlights why we continue to expect meaningful improvement in the second half as these pressures ease and execution benefits come through. Moving to Slide 14. With the full year adjusted EBITDA outlook of $2.35 billion to $2.5 billion, we now expect to deliver $900 million in the first half with a step-up of $650 million, significantly increasing our second half results. The right side of the slide walks through the primary drivers which are well understood and are being executed in detail by our Packaging Solutions North America team. The largest contributor is an uplift in pricing, volume, mix and seasonality, totaling about $300 million. reflecting published price flowing through, seasonal demand patterns and mix benefits as we move into the back half of the year. 80/20 initiatives are expected to drive roughly $150 million of cost-outs driven by footprint actions, productivity improvements and supply chain initiatives that are already underway. Planned maintenance outages contribute another $150 million as heavier outage activity in the first half rolls off in the second half. Conversion of the Riverdale paper machine in the mill's annual outage will be finished by the end of the second quarter. Those first half impacts of $100 million will not repeat in the second half. These benefits are partially offset by continued macro pressures, which we estimate as roughly a $50 million headwind in the second half, reflecting higher prices for diesel and chemicals. Putting it all together, these growth and timing impacts support an improvement of roughly $650 million. The key takeaway is that the second half improvement is driven by execution, pricing flow-through and normalization of known factors, and it underpins our confidence in Packaging Solutions North America earnings trajectory for the remainder of 2026. Turning to Packaging Solutions EMEA on Slide 15. The business delivered solid first quarter results amid a challenging and dynamic macro environment. Price and mix was $12 million favorable sequentially. Packaging margins expanded due to the EUR 40 paper price decline in January, which was mostly offset by lower paper margins tied to that same price decline. Volume was $3 million favorable sequentially. Although the post-holiday ramp-up in January was lower than expected, we were encouraged by improving trends as the quarter progressed. March volumes were up year-over-year on a same-day basis, indicating momentum heading into the second quarter. Operations and costs were $39 million unfavorable sequentially, primarily reflecting elevated costs as a result of onetime changes in segment allocations and incentive compensation. Higher European energy price volatility had a minimal impact on results in the quarter supported by our existing hedging program. All in, Packaging Solutions EMEA delivered $208 million of adjusted EBITDA in the first quarter. Moving to our second quarter outlook for Packaging Solutions EMEA on Slide 16. The key theme for the second quarter is peak margin compression as higher paper costs are realized ahead of pricing recovery. Energy-driven increases in paper prices are flowing through immediately while pricing actions and packaging lagged by roughly 3 to 6 months. This timing dynamic is pressuring margins in the near term before expanding as box pricing catches up. We expect pressure to moderate in the second half as prior paper price increases flow through our box contracts with margins progressively improving. Against that backdrop, price and mix are expected to be unfavorable for the second quarter. Volume is expected to be favorable sequentially primarily driven by recovery from the softness experienced in January and continuation of improving trends seen in March and April. We also expect incremental contributions from known customer wins secured in 2025 to build through the second quarter and into the second half. Operations and costs are expected to be unfavorable, primarily reflecting higher distribution costs flowing through the supply base as well as lower levels of energy subsidies. Finally, input costs are expected to be unfavorable driven by higher OCC and energy costs. These items result in an adjusted EBITDA outlook for Packaging Solutions EMEA of approximately $150 million to $170 million in the second quarter. Turning to Slide 17. I'd like to walk through what's changed since we originally set our 2026 outlook for Packaging Solutions EMEA and how that translates to the updated full year EBITDA target. Since we set our original 2026 outlook, the net impact of the change is approximately $100 million, lowering our adjusted EBITDA range from $1 billion to $1.1 billion to $900 million to $1 billion. The largest driver is on the commercial side, totaling approximately $100 million. This reflects a combination of lower expected sales volume and margin compression versus our original assumptions. In particular, as we moved into the year, volume was affected by deliberate trade-offs we made last year in our commercial approach. And we also saw pressure on contribution margins in parts of the portfolio. On costs, the net impact is flat. The continued pressure from higher oil prices impacting distribution costs is offset by favorable OCC costs and cost-out actions already underway across the business. Overall, outlook represents a cost volume squeeze in 2Q that eases in 3Q and 4Q with strong price momentum going into 2027, assuming price increases into the market stick. Turning to Slide 18. We outlined the key drivers behind the step change we expect in EMEA as we move from the first half into the second half of the year. The core of the second half improvement is margin recovery and commercial uplift. As discussed earlier, we saw energy and paper price increases in the first quarter. And given it takes 3 to 6 months for these increases to flow through to our box contracts, we expect packaging margins to expand in the second half of the year. On the volume side, the second half also benefits from 3 additional shipping days, normal seasonal improvement and the onboarding of new customer wins. Taken together, margin recovery and commercial volume uplift are expected to contribute approximately $110 million of incremental EBITDA in the second half. Beyond margin and volume, there are 2 additional contributors to the step up. First, we expect to realize $40 million of cost-out benefits in the second half primarily from footprint optimization actions that improve network efficiency, reduce fixed costs and support structural margin recovery. Second, we are assuming approximately $50 million of energy price improvement, reflecting anticipated cost normalization in the second half, assuming no further material escalation in the Middle East. Altogether, these factors result in second half adjusted EBITDA of $540 million to $620 million for EMEA. Combined with our first half outlook, this view supports our full year 2026 adjusted EBITDA target of $900 million to $1 billion for Packaging Solutions EMEA. With that, I'll turn the call back over to Andy. Andrew Silvernail: Thanks, Lance. I'm on Slide 19. Before we wrap up the EMEA discussion, I want to provide a brief update on our separation process. As we outlined on our January earnings call, we announced plans to create 2 separate publicly traded companies in North America and EMEA. Since then, a small core team has been working through the separation planning, and we've made meaningful progress over the past 3 months. Following the separation, International Paper expects to retain approximately a 20% ownership stake for roughly 12 to 18 months, and the EMEA packaging business is expected to be dual listed on both the LSE and NYSE. We also expect both companies to have investment-grade credit ratings. From a timing standpoint, we remain on track to complete the separation within the 12- to 15-month time frame we outlined in January, subject to customary approvals and conditions. This move is the right step to accelerate value creation for both businesses and will enable us to achieve best-in-class performance in each regional business. Let me close on Slide 20 by stepping back and reinforcing what matters most. At International Paper, our focus remains clear and consistent, driving long-term value creation. Our 80/20 approach continues to sharpen our attention on the most important value drivers, reducing complexity and improving execution across the company. Against the backdrop of a heightened macroeconomic uncertainty, including elevated input costs and ongoing pressures affecting consumer demand, we have updated our full year 2026 outlook for both businesses. In North America, we expect to deliver $2.35 billion to $2.5 billion of adjusted EBITDA. In EMEA, we are targeting $900 million to $1 billion of adjusted EBITDA. At the enterprise level, including corporate, that translates to $3.2 billion to $3.5 billion of adjusted EBITDA. Free cash flow of approximately $300 million to $500 million reinforces our commitment to disciplined capital allocation, a strong balance sheet and returning cash to shareholders. We are making real and meaningful progress in every part of our organization as we focus on controlling our own destiny while navigating the macro environment, we remain confident in our ability to drive long-term value creation at International Paper. With that, let's open it up for questions. Operator: [Operator Instructions] Our first question is going to come from the line of Mike Roxland with Truist Securities. Michael Roxland: Andy, I wanted to get a sense, with the revised guide, $3.2 billion, $3.5 billion this year. At the midpoint, the $250 million cut. Can you help us bridge how to get the 2027 EBITDA of $5 billion, particularly as -- is this cut, whatever incremental costs are set back to some degree? Andrew Silvernail: Yes, no problem. Thanks, Mike. So I think what I do is I focus on -- Lance took you through the bridge from the first half to the second half, which I think has been put through in a lot of detail there on kind of how that builds itself up, and the reliability of those elements and how they flow through the P&L. So if you look at the balance of that and then you add incremental price that will flow through in the year. So right now, in North America, you're talking about a net of $50 that's been published. So you'll get about half of that this year, you'll get half of that incrementally next year. And then in Europe, you have $100 -- EUR 100 price increase that's gone through. You'll get a piece of that this year and the bulk of that in the following year. And so you take those incremental items plus what was in our funnel relative to operating cost improvements and considered a very modest market growth kind of returning to overall normal market growth, about 1 point in the U.S. and 1 point to 2 points in Europe, plus share wins that we believe that we will have in the year. That all adds up right into the range that we're talking about. Michael Roxland: Got it. Just a quick follow-up. I mean, I don't believe the original guidance embedded much in the way of price. So really, the incremental here is you're going to be able to hit your guide because of the $50 per ton net in North America plus EUR 100 per metric ton as well. That's really what's going to help you get to those -- to hit your 2027 target. Andrew Silvernail: Yes. To be clear, Mike, this does not include any other pricing that may come through. So nothing that's been talked about in the market, this is -- the only thing that's included in there is what's been published so far. Michael Roxland: Got it. And then just quickly strategic customer wins, obviously, it's helping you drive your volume growth, pretty strong performance there. To the extent you can comment on what end markets do you see these gains? And can you also remind us how IP was able to secure these wins? I'm assuming that -- I don't think it was done on price given the company's refocused commercial mindset. Andrew Silvernail: Yes, a few things there, right? So we've seen pretty consistent wins here since the late part of 2024 and through 2025. And so it's been really a broad mix across end markets. So it's really across every product category that we've been in. We've won nationally and we've won locally in the U.S. And we've done a very nice job of what we call our central accounts in Europe. So think of pan-European accounts there. We haven't done as well locally in Europe as we have in the U.S. We need to get better from that regard. So it's broad-based, and it's national and it's local accounts that we've seen. To your point, we have not been aggressive on pricing. We have tried to really price to the market. I mean, as you know, with any large tender, right, price is a factor in there, but that comes after service and it comes after quality. That reliability of supply is the single most important factor for -- certainly for every customer, but as you're onboarding a large customer and we've done several here over the last year or so, that takes considerable time because they are exceptionally concerned about that cutover and not losing the ability to get their packaging supplies. So we've seen that very consistently. And we have, on purpose, very purposefully kept our discipline relative to market pricing. And I think that's very important. And we're starting to see those things play out in the marketplace as we're seeing inflation make its way through. So I feel really good about where we are commercially. As you know, we've radically restructured our sales force and our incentive system in the U.S. Europe is a little bit different model. We have -- there is a pan-European model and a local model that we're getting more synthesis from more synergy from, frankly, as those businesses come together, meaning the legacy IP and the legacy DS Smith EMEA, but it really is winning customer by customer. Operator: Your next question comes from the line of Mark Weintraub with Seaport Research Partners. Mark Weintraub: So for a while there, you were way behind [indiscernible] on market growth, you're losing a lot of share and you turned that around, and you saw it coming, and now we're seeing it. What we're not seeing is the reliability part of the equation playing out? Are you seeing things now that can give us confidence that, that's going to start showing up? And what are those things? Andrew Silvernail: Yes. I can, Mark. And if you go back to the slide -- sorry, I don't have the slide number right in front of me that shows the capacity utilization and the productivity improvements in the mill and the box plant. If you go back starting in the fall of 2024, when we really started to execute the overall changes, and that was a combination of starting to accelerate capital investment and the lighthouse approach. And the lighthouse approach is really a focused approach around how do you run a good system daily. How do you do that daily. If you've seen that, you see a 7% to 8% overall improvement in those systems, both the systems in North America, which I think is very, very important. Where we're missing, Mark, is in the transactional or transformation costs, think of things like network cost in terms of distribution and shipping, the cost of having assets on our books longer than expected and having to maintain them. We're eating some of that. We're also -- unfortunately, we're eating some contract cost of -- if you look back at the [indiscernible] contract, which ends this month. So in April, that ends, we'll eat about $20 million more than expected in that contract because of performance. So that's going to come out and those assets no longer need to perform. And so there are assets that, frankly, we're underinvested in and we're going to eat that. That's going to come out of the system. Our specialty business, think of it as bulk products and the like. That has missed our expectations, Mark. The market has been weaker. We've had some reliability issues. We've accelerated the investment in there. So the key to it -- and look, I'm in the same boat you are. It's -- you've got to see it to believe it. The key is that the core assets, the core large, CL assets that we are investing in, we are seeing the measurable changes in productivity that are driven by reliability. As you know, reliability is the underlying first step in productivity. Now we've got to drive down these ancillary costs that have been out there, and we have very good line of sight to that. So as an example, if you think of kind of cube utilization and transportation, we have driven that. We've gone very aggressively after that. We're still early in there, and we've driven huge improvements in the first stages of that. So that's an example of that across the system. So major improvements in the major assets, and now we've got to take care of the ancillary issues that are very solvable but they, frankly, are a pain in the butt and they're worse than our expectations. Mark Weintraub: Got you. So I do want to ask real quick -- I'm going to ask on NORPAC, just 1 real quick follow-up on this is, so it sounds like there's sort of a lot of quasi onetime stuff here that's like the transformation, the contract cost. Is there a ballpark number as to how much that might be impacting this year where, again, you can have a pretty high degree of confidence that it should show up next year because it's quasi onetime? Andrew Silvernail: Yes. It's at least $100 million. Lance Loeffler: That's right. Andrew Silvernail: Yes. Lance Loeffler: Correct. Mark Weintraub: Okay. Super. And then if I could quickly on NORPAC, $360 million. I mean, technically 3 big paper machines, so a lot of production capacity. So hard from the outside to square away all the numbers. And anything additionally you can tell us about EBITDA and what it can bring to you? Andrew Silvernail: Yes. So first of all, Mark, I am very excited about this. When I step back and if you think about our overall strategy around our mill network, right, which is to drive down the overall cost point, right, we want to drive to an advantaged cost position. That's one of our key pillars of our strategy. And second, as we're driving reliability throughout the system and then finally, driving overall returns. This is a great example of the kind of investments and changes we need to make. So if you kind of take a big step back for a second. We closed 3 North American mills last year, right, Savannah and Red River being the 2 big ones. In there. Both of those assets, we came to a conclusion after a lot of work that you were never going to earn an exciting return on investment or incremental investment in those assets. And so as we close those, we have fundamentally did 2 really big things. Number one, we moved a bunch of people and a bunch of investment to [ Mansfield. ] And if you recall, Mansfield was a huge bug [indiscernible] a year ago. and we have effectively eliminated that issue. I was at Mansfield very recently with the team they have just done a masterful job. And while certainly, it's not where we want it to be yet, if you compare that business that asset rather to where we were a year ago, it's pretty remarkable with what they've done with getting better capabilities overall, some new team members and a bunch of new investments. So that's kind of one big step going from an underperforming asset that's never going to return an attractive return to now to a really high-performing asset with a great team that can drive excellent returns. Second, you got NORPAC right? So NORPAC as you mentioned, it's on the West Coast. We're significantly short paper on the West Coast. We're shipping paper to the West Coast uneconomically. It allows us to go more towards the lightweight market that you know is critically important in that market. And to your point, it's a big asset with 3 paper machines, 2 in our core market. 1 that's not, it can be in the future if we choose to be. And so as I look at that trade of assets, it's exactly the kind of stuff we need to do. If you think of it kind of from a bell curve, you go from the left-hand side of the bell curve that's underperforming all the way to the right-hand side to high-performing with Mansfield and with NORPAC. In terms of returns, our belief on a full year basis as we get into '27, it's going to be high teens or better in terms of return on invested capital. So you can do your math out of that there. It's got solid EBITDA in its current system. But we've got some work to do, not on the asset itself. It's really a great asset, but really bringing it into our network. Operator: Your next question is going to come from the line of Anthony Pettinari with Citi. Unknown Analyst: This is actually [ Bryan Burgmeier ] on for Anthony. Just wondering if you could maybe share some high-level thoughts on sort of the supply-demand outlook in Europe. I think we've seen some closure announcements, maybe higher energy prices kind of pressure -- high-cost players. I'm not sure how you're thinking about just a broader supply demand outlook for the region. Andrew Silvernail: Yes. So it's -- I would say demand is modestly down compared to expectations. It's still growing in Europe modestly. We expect it to be about 1 point less than we came into the year when it's all said and done. I think that's a fair assessment, really driven from the consumer side is the consumers being overall more hesitant, and we all know the reasons behind that relative to the most recent impacts of the conflict in Iran. And so we expect that to continue for a little bit of time as the uncertainty is out there economically, kind of broad-based uncertainty that was first driven by trade and tariffs and now the conflict in the Middle East. So I think it will be a little bit weaker than expected but still positive. On the energy side, as we mentioned -- as Lance mentioned in his comments, we have a very effective hedging strategy that's in place that assuming that price sticks will buy us time to pass through into the marketplace, the EUR 100 that's gone through. That EUR 100 is worth about [ $300 million ] on an annualized basis in Europe, and it will obviously overcome the issues that we're facing in the short term. So if you look at our P&L, we're getting that kind of profit accordion squeeze in the short term, specifically in the second quarter until pricing starts to make its way through the system. Very specifically relative to kind of the marketplace and high-cost producers. I think one of the things that's very interesting and important as we look at what's happening in EMEA relative to the energy shock that the world is experiencing right now is when you look at the bottom quartile assets in the marketplace, there are 2 things that this -- makes their life very, very difficult. The first one is they tend to be older assets generally that have just more reliability problems and tend to struggle in terms of their overall cost position. They also are fossil fuel dependent much more so than the newer assets. And so when you combine those 2 things together, this situation right now is very, very painful. As best as we can tell, and it's our own analytics and the analytics that we use from the outside -- from outside experts. That fourth quartile is very likely under cash cost right now, right? So you're actually -- you're seeing that -- you've seen small pieces of action relative to that, whether it's temporary shutdowns, furloughs, you're seeing a few closures that have happened modestly. And I also think we've got to be realistic. Historically, people have looked at some kind of panacea, like all of a sudden, the fourth quartile will wake up and close itself. It's not going to happen. They're going to hold on as long as they possibly can, hoping that the price comes through the market. So we shouldn't expect this to be like a mass pivot point in the marketplace. That's really never happened. That being said, capacity is slowly coming out of the system as you see folks being under cash cost. So this is a very, very difficult time if you are a fourth quartile producer. Unknown Analyst: Got it. Really appreciate all that detail. Just one quick follow-up for me, and then I can turn it over. Just curious if there was any change in demand kind of throughout the quarter into April, just following the kind of cost spike that took place in March. Yes, I can go ahead and turn it over. Andrew Silvernail: Yes. So not really. It's actually -- we have not seen a major change. I think that from a pattern standpoint, as we all talked about, January in the U.S. was really strong, right? It popped up as I expressed very openly in our quarterly calls and in the one-on-ones I've had since then, we really believe that a big piece of that was the drawdown of inventory that happened in the fourth quarter, and that was a snapback and that proved to be accurate. And so folks who may have gotten over their skis about that, I think we're seeing kind of the normalization of that. And now we're kind of seeing the market in the U.S. is basically flat. The marketplace, it was down 0.3% overall in the first quarter that you saw. And I think what's important here is you got to look at it on a daily basis, right? So if you look at the market data, the industry data that comes out, the really important thing is looking at it on a daily basis. And that net down 0.3%. We think the second quarter is basically flat. The balance of the year is effectively flat for the industry in North America, and we'll outpace that. As we get into the second half, we'll start to comp -- we'll have a lot more difficult comps, so that will come down. Overall, we believe will beat the market by about 2 points. In Europe, I think you're going to see basically 0.5 point to 1 point of market growth. That's what it's feeling like right now. We were a little bit behind the market in the first quarter. And as we have been holding on price to value, we'll be targeted where we need to be to make sure we don't lose important business on price where we should get there. That being said, we are going to be very discerning on pricing to value, right? It's important that we keep that discipline for ourselves as we look at the marketplace. So Lance, anything you'd add there? All right. Operator: Your next question is going to come from the line of George Staphos with Bank of America. George Staphos: A lot of my questions have already been answered, but I want to ask a couple of things. First, a top-down, so if we sit back and look at 80/20, what have you achieved cumulatively across the enterprise in terms of cost out and commercial? And what's left to go through 2027. So through first quarter of '26, what have you gotten? And what is left to go that will help you build towards the ultimate '27 goal, I guess, if -- then I had a question, a 2-parter on Slides 13 and 14. Andrew Silvernail: Yes. George, I'm going to answer, and this is not going to be exact. I can put the pieces together for you and we can certainly get back to you on it, but I'll take you through in rough math, and Lance keep me honest. Lance Loeffler: I will. Andrew Silvernail: So in terms of total cost out, if you recall, in the last quarter, we talked about $700 million total that has come out of the system when it's all said -- thus far. When it's all said and done, we will take out more than $1 billion of cost in the system. So if you see -- if you look at in the U.S. I still think we've got $200 million or $300 million of cost that is latent within the system at normal operating rates. And so if I just kind of look at that, that's -- and where is that? That's sitting principally in those ancillary costs that we talked about, that $100 million that we're eating this year, and another couple of hundred million dollars of efficiency as you drive productivity through the mill system. That's how I look at the U.S., principally. You've also got some costs that haven't come out yet. As you know, we've outsourced IT. That process unfolds throughout this year, mostly in the first half. So you'll see some incremental costs come from there. Frankly, while you save a little bit of money on there, that's really a capability play more than anything else. In Europe, if you flip over to Europe, and I think this is really important. If you look at that -- go to that one slide in the deck that talks about what we have done so far. We have announced 31 facilities closures, an impact to 2,800 people that's unfortunate for them, but really critical to be done to rightsize the competitiveness of the company. That has about $200 million of annualized impact, and I would argue that there's probably another $100 million after that to go after. So as I break it down from -- just from a cost-out perspective, that's how I get to over $1 billion. Now you have some offsets to that, right? You've got we -- the shutdown of Savannah was basically a 1 for 1, call it, about $300 million of cost savings and EBITDA loss on the marginal piece. But on a return on capital basis, it's a home run for us. So that's how I break that out, George. Hopefully, that's effective. George Staphos: Yes. That's helpful. We appreciate it, Andy. The other question I had is a 2-parter on Slides 13 and 14. So in particular, I want to spend time on 14, the year is the year you're making progress. You're pretty candid about what's been not going the way you'd like. This step up -- to the second half of '26 in North America, you lay it out, but it's quite large. Of the items that you have in that $650 million, let's hold the macro to the side because you're not going to control that. Which of those line items do you feel least comfortable about? Said differently, why do you feel comfortable that you can see a 75% step-up in first half to second half EBITDA. The related question, when I do the math on your pricing on Slide 13, the $175 million, I get -- even if I adjust for half a year, I guess something less than $50 per ton across the system. Is that mix? Is that timing? What else is going on there, if you could help us bridge that. Andrew Silvernail: Yes, no problem. Thanks, George. So to answer your first question, on the step-up here, I think from a price, volume, mix seasonality feel very comfortable there unless something lackey happens in the world, right? So if you look at the world as it is today, I feel very reliable that, that part takes place on a half-over-half basis. The other thing -- the other part, obviously, that you feel really good about is the $150 million of timing of planned maintenance, right? We control that very, very well. So you've got $450 million of the $650 million that you feel really good about. The $100 million of the Riverdale conversion, that feels really good because that's cost that you're spending in the first half that you're not spending in the second half. The risk of that, right, is the ramp-up, right? That's -- any risk to that is a ramp-up. And we've tried to be conservative in the planning that's built into that $100 million. So I really think that the 2 big pieces that you say, hey, there's risk there, the $150 million of basically the stuff we're taking out of the system and the [ $50 million ] of the macro -- incremental macro, principally is tied to diesel early. I mean, when it's all said and done. So I think those are the 2 big things. So let's talk -- the [ $50 million, ] I can't control, right? I don't have really any control over that. So we'll see where that plays out. So it's the $150 million that really is -- if I were in your shoes, that's where I'm drilling into. And frankly, from an operating basis, that's where I'm drilling in -- that's what we're spending our time on. Yes. And so that's a bunch of things in there. But really, the few big things are executing the open items on footprint rationalization, right? So you've got to nail those. You've got the continuing to drive that capacity utilization in the mill system where if you look at post the ice storm. So if you look at post the ice storm, our mill system in North America is running the best it's run in at least a half a decade and maybe more than that. And so we're seeing the gains there. And then supply chain and procurement. Procurement is really supplier by supplier. And these are the things where we have negotiated contracts and you're seeing how those contracts flow through. And then on supply chain, in particular, it's really around cube utilization. So if you think of as we are moving, as we are shutting down capacity, both on the box system and in the mill system, right? You're having to reroute a lot of that. That has been more inefficient than I would like. And so there's an awful lot of focus there on driving cube utilization and planning of freight. And just to add a little bit of color. I mean we're seeing -- when we talk about those cost-out initiatives, that's about, I guess, in the first quarter, it represented about $20 million of benefit. Lance Loeffler: Correct. Andrew Silvernail: So we're watching it. We're counting it, and we're seeing it, George. To your other question on price on Slide 13, I mean, I think it's simply that. I think it's simply just the timing and the flow through of how all the volatility and the pricing publications have come through over the last 3 months. Yes. So that's nothing beyond that. But that's really, George, that's counted contract by contract, right, kind of when that price comes through and you have -- as you know, there are 2 things that happen. You have noncontract business which you can move -- you're moving on price immediately negative and positive, unfortunately, right? You're trying to hold on when it's negative, like that $20 pop down, you're trying to hold on. Thank goodness. We got -- that was rectified. But -- and then as the contracts come through, that really is a timing thing built in the mechanics of the contract, right? And so that $175 million that's in there, that is netting out the down [ $20 million ] and the plus -- now plus [ $70 million, ] so you can get the net [ $50 million. ] How that timing flows through contract by contract. Operator: We have time for 1 more question, and that question is going to come from the line of Phil Ng with Jefferies. Philip Ng: Despite the uncertain macro backdrop, encouraging here, I mean, your box shipments in North America pretty strong and you're expecting a pretty stable environment at large for the broader industry. If I heard you correctly earlier, you mentioned you were short on paper. So just curious, what are you seeing in the marketplace from a supply-demand standpoint. One of your bigger competitors talked about really tight market conditions, it led a price increase in June. So kind of help us tease that out just because we've been all anticipating this capacity closure, hasn't felt tight yet, but what do you think now as we head into a busier time. . Andrew Silvernail: Yes. I think what we should do is just focus on the facts -- what the mechanics are of the market, actually, what's really happening. So we are modestly short on paper ourselves, right? So we're in the market buying some paper. What you just said, we've heard the same things, but I can't really comment on that. The other thing that I think is noticeable is what's happening in the export markets because if you think about the export markets tend to be more volatile and they tend to be a leading indicator of what's happening in the marketplace. And the export market, you can see the facts, right? It's been really tight the way to say it. So we never comment on future pricing, things that haven't happened. But our view is that the market -- the paper market in the U.S. is very tight. Philip Ng: Okay. And you could confirm you haven't announced an increase yet for June in North America? Andrew Silvernail: We have not announced increase yet, but we don't really talk about future stuff, and we don't -- we avoid that. Philip Ng: Okay. Fair enough. And then the [indiscernible] here, Andy, and Lance, you guys have made a lot of tough decisions, and I respect what you guys are doing, but it's anything but easy from a macro standpoint, right? You've had a lot of [indiscernible] last year with tariffs and the Middle East war. And with that backdrop, you've had to revise your outlook a few times, right? So I guess in terms of your approach going forward, just from a philosophy standpoint, how are you taking things? Are you giving yourself a little more cushion for some of the choppiness that most of us didn't expect? And then you called out reliability issues. I understand long term, you guys are making the investments to be more reliable and put up good results. But how do you hold your people accountable in the very short term to execute better? . Andrew Silvernail: Well, let's talk about holding ourselves accountable first, right? So holding me accountable first. And I can't ask anybody else to do that unless I'm doing that to myself. And I think the really important thing here, right, is yes, Phil. If you'd asked me 2 years ago, I'm coming up on my 2-year anniversary, if on my bingo card was a global trade war, and bombing Iran, I would not have had those on the bingo card, right? And so -- but that's life. I get paid to deal with these realities. And frankly, I think in terms of the magnitude of what our teams have done in Europe and the U.S. It's pretty awesome. And I give them a lot of credit in a really tough environment, right? Because with all that hard work that's happening with 20% of the paper capacity coming out -- our paper capacity coming out in North America, 10% to 15% of our box capacity coming out in North -- box footprint coming out of North America, redesigning the entire corporate structure changing IT infrastructure, changing the commercial aspects, the massive restructuring in Europe, right? If you just kind of look at that, it's a huge amount of work that has happened that has been eaten up by the macro pressures. And the key thing here is to not lose focus on the strategy, right? We have 3 strategic pillars in this business. The first 1 is to drive an advantaged cost position, a superior customer experience is number two, and our relative market position is number three. And the great work that we're doing of the tough decisions on assets and unfortunately, how it impacts people's lives, we've had to do that for a singular reason, and that is to reinvest back in the business. And if you look at the reinvestments that we're doing back into the strategic assets of the business, I'll take the punches in the face that we've taken. What I'm not going to do is I am not going to back down on the strategy. And the reason I'm not going to back down the strategy is that the core of this business is a good structural business that can earn attractive returns on capital. It's d*** messy as we've gone through this, but we're doing the absolute right things. And so I'm going to stick with this, and we're going to drive through it. And I believe that the economics are there, and that's what we're working to. So that's the accountability that fundamentally sits with me and it sits throughout the entire organization. And the bottom line is this, is if you don't want to do it, if you don't want to be part of it, this isn't a place for you, right? This is a place that we are here to win. We are here to win to drive returns on these assets, to have a great place to work, which starts with being a safe place to work and invest in this business throughout. And then -- but the bottom line is we haven't given ourselves enough breathing room on this with the macro. I mean, look, I couldn't have called the macro -- and I'll be the first one to say that our performance on a quarterly basis, I'm disappointed in the fact that we have missed numbers. That is not something I am used to doing, and it's not something I like doing. And so yes, we're trying to give ourselves more cushion. We're trying to give ourselves more cushion in there with what we have. But I'll admit, right, it is a tough macro environment that we're out against, but the plan that we have that we put in place, I believe in 100%, and I am 100% committed to it. Thank you. Well, look, to close, I don't think I can say much more than I just said. So I want to thank everybody for your time and attention to IP. I want to thank our employees who are working their tails off to build a great business, and that's exactly what we're going to do. Thank you. Operator: Once again, we'd like to thank you for participating in International Paper's First Quarter 2026 Earnings Call. You may now disconnect.
Operator: Thank you for standing by. Welcome to the Merck & Co., Inc. Rahway, New Jersey, USA, First Quarter Sales and Earnings Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Mr. Peter Dannenbaum, Senior Vice President, Investor Relations. Sir, you may begin. Peter Dannenbaum: Thank you, Julie, and good morning, everyone. Welcome to the First Quarter 2026 Conference Call for Merck & Co, inc. Rahway, New Jersey, USA. Speaking on today's call will be Rob Davis, Chairman and Chief Executive Officer; Caroline Litchfield, Chief Financial Officer; and Dr. Dean Li, President of Research Labs. Before we get started, I'd like to point out that we have items in our GAAP results such as acquisition-related charges, restructuring costs and certain other items that we have excluded from our non-GAAP results. There is a reconciliation in our press release. I will also remind you that some of the statements that we make today may be considered forward-looking statements within the meaning of the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are made based on the current beliefs of our company's management and are subject to significant risks and uncertainties. If our underlying assumptions prove inaccurate or uncertainties materialize, actual results may differ materially from those set forth in the forward-looking statements. Our SEC filings, including Item 1A in the 2025 10-K, identify certain risk factors and cautionary statements that could cause the company's actual results to differ materially from those projected in any of our forward-looking statements made this morning. Merck & Co., Inc., Rahway, New Jersey USA, undertakes no obligation to publicly update any forward-looking statements. During today's call, a slide presentation will accompany our speakers' prepared remarks. These slides, along with the earnings release, today's prepared remarks and our SEC filings are all posted to the Investor Relations section of our company's website. With that, I'd like to turn the call over to Rob. Robert Davis: Thank you, Peter. Good morning, and thank you for joining today's call. Advancing and delivering breakthrough science to address unmet medical needs remains the foundation of our strategy to create sustainable value for patients and shareholders. We continue to make tangible progress in accelerating and augmenting our pipeline. And with the recent new product launches, the transformation of our portfolio to a far more diversified set of commercial drivers is now well underway. Turning to our first quarter results. We delivered year-over-year growth with revenue of $16.3 billion, driven by continued strength in oncology, animal health and growing contributions from new products. We remain confident in our outlook for 2026, which Caroline will speak to in a moment. We also achieved several important pipeline milestones, the FDA approved IDVYNSO as a new treatment option for adults with virologically suppressed HIV-1, reflecting our ongoing commitment to innovation to address the evolving needs of people living with HIV. Additionally, the FDA granted priority review for I-DXd, our antibody drug conjugate being developed in collaboration with Daiichi Sankyo for adult patients with previously treated extensive stage small cell lung cancer. In ophthalmology, we initiated Phase IIb/III studies in neovascular age-related macular degeneration for MK-8748, our TIE-2/VEGF bispecific antibody. The second candidate from our acquisition of iBio. We also presented important Phase III results across multiple other therapeutic areas. Finally, in our Animal Health business, we have high expectations for long-term growth, driven by new and ongoing product launches. We're pleased to have introduced NUMELVI to the U.S. market, the first and only second-generation JAK inhibitor for allergic dermatitis in dogs. Our planned acquisition of Terns Pharmaceuticals with its promising candidate for certain patients with chronic myeloid leukemia is another example of our science-led business development strategy in action. TERN-701 has the potential to be a best-in-class therapy in a disease where there is an opportunity to further improve depth and duration of response for patients. Given the substantial unmet need for additional options, we believe TERN-701 has multibillion-dollar commercial potential and will be a significant driver of growth in the next decade. This transaction demonstrates our disciplined approach to pursuing business development when compelling science and value align. And we are confident in our belief that TERN-701 can benefit patients while generating value for our shareholders. Looking ahead, we continue to expect a particularly robust period of Phase III data readouts from novel candidates over the next 18 months. Our portfolio is undergoing a meaningful transformation to one with a rapidly expanding and diversified set of growth drivers. We're in the midst of initial launches of over 20 new products, almost all of which have blockbuster potential across a broad set of therapeutic areas. To move with the speed and precision this opportunity demands, we announced an evolution of our commercial operating structure. Our new business unit model, organized around products in therapeutic areas is built to drive accountability, sharpen focus and increase agility, ensuring that every part of our commercial organization delivers on the promise of our pipeline for patients. We're pleased to welcome Brian Ford to our executive team to lead our new specialty, pharma and infectious diseases business unit. While Yani Ushausen has been appointed to lead our new global oncology and MSD International business unit. Corp Guindo has taken leadership of a newly formed strategic access policy and communications unit. Each of these individuals brings deep experience to these important roles. Together, this leadership team and structure will enable strong execution of our strategy, which includes extending our leadership in oncology while building a powerful, diversified portfolio across a range of therapeutic areas. We're confident that this change will best position us to deliver on a potential commercial opportunity of over $70 billion by the mid-2030s from these 20-plus anticipated new growth drivers alone. We're also taking important additional steps to accelerate our ongoing transformation as it relates to artificial intelligence. Last week, we announced a multiyear partnership with Google Cloud to scale advanced AI, data and agentic capabilities across our company. This complements our recently expanded collaboration with Tempus AI designed to advance our precision oncology strategy as well as a recent agreement with the Mayo Clinic that will allow us to leverage Mayo's clinical insights and genomic data sets at scale. Together, these efforts support improved productivity across our organization and create a real opportunity to advance the innovation in our pipeline with greater speed and with a higher likelihood of ultimately reaching patients. As we look forward, we continue to see robust demand for our innovative medicines and vaccines around the world. We're investing behind our pipeline, optimizing our operating structure and are fully committed to our purpose of using leading-edge science to save and improve lives. We're encouraged by the progress we're making and look forward to the many significant milestones coming in the months ahead. In summary, we remain confident in our strategy and in our ability to deliver sustained growth and value for our shareholders. Before I turn the call over to Caroline, I want to recognize Sanat Chattopadhyay and Joe Romanelli, both of whom have announced the retirements from Merck. Sanat and Joe have made lasting contributions to our company and to the patients we serve, and I want to thank them for their many years of impact. And now to Caroline. Caroline Litchfield: Thank you, Rob. Good morning. As Rob noted, we delivered growth in the quarter driven by continued strength in Oncology and Animal Health as well as increasing contributions from our many compelling product launches. Our commercial and operational execution continues to enable us to generate strong results in the short term while we advance our broad and deep pipeline and invest in innovation to deliver long-term value for patients, customers and shareholders. Now turning to our first quarter results. Total company revenues were $16.3 billion, an increase of 5% or 3% excluding the impact of foreign exchange. The following revenue comments will be on an ex exchange basis. In Oncology, sales of the KEYTRUDA family of products which includes KEYTRUDA and KEYTRUDA QLEX, increased 8% to $8 billion, with global growth driven by continued strong demand from metastatic indications and robust uptake in earlier-stage cancers. Strong utilization in tumors that primarily affect women, including breast and cervical cancer, continues to be a key contributor to growth. In addition, we saw increased use of KEYTRUDA in combination with Padcev in locally advanced or metastatic urothelial cancer. In the U.S. growth benefited by approximately $250 million from the timing of purchases. We are pleased with the positive feedback following the recent launch of KEYTRUDA QLEX, Sales in the quarter were $128 million. On April the 1st, we received the permanent J code, and we look forward to having an even greater impact on patients and health care systems. Our broader oncology portfolio achieved another quarter of strong growth. Notably, WELIREG sales increased 43% to $199 million driven by continued uptake from ongoing launches in international markets and increased use in certain patients with previously treated advanced renal cell carcinoma in the U.S. We look forward to potentially reaching more patients with renal cell carcinoma, following positive results from the LITESPARK-011 and -022 studies. In Vaccines and Infectious Diseases, GARDASIL sales were $1.1 billion, a decrease of 22%, driven by lower demand in China and Japan, consistent with our expectations. In the U.S., sales declined 10%, primarily due to timing of CDC purchases, which was partially offset by price. In pneumococcal, CAPVAXIVE continues to progress well, with sales of $142 million, an increase of 31%. Outside of the U.S., sales were driven by uptake from ongoing launches in certain markets. In the U.S., growth was driven by increased demand from both retail pharmacies and nonretail customers, partially offset by a reduction in wholesaler inventory. In Cardiometabolic and Respiratory, WINREVAIR continues to have a positive impact on patients with pulmonary arterial hypertension. Global sales were $525 million, a reflection of the continued strong demand for this important therapy. In the U.S., we continued to see steady progress with more than 1,600 new patients having received a prescription and an increase in usage by patients with background therapies do not include a prostacyclin. Outside the U.S., we continue to progress with securing reimbursement and ongoing launches. Sales of OHTUVAYRE, a novel maintenance treatment for adults with COPD, were $131 million. As expected, sales were adversely impacted by the CMS reimbursement change as well as Medicare deductible resets. We are encouraged by the prescription trends, which began to recover in March. Consistent with our strategy to maximize OHTUVAYRE's strong potential, we are making investments to reach more patients and physicians, which we expect will accelerate growth in the second half of the year and beyond. Our Animal Health business delivered another quarter of strong growth, with sales increasing 6%. Livestock sales grew 8%, driven primarily by higher demand for ruminants and poultry products as well as price. Companion animal sales increased 4% due to new product launches and price, partially offset by a reduction in vet visits. I will now walk you through the remainder of our P&L, and my comments will be on a non-GAAP basis. Gross margin was 81.9%, a decrease of 0.3 percentage points. Operating expenses increased to $15.2 billion, including a $9 billion onetime charge related to the acquisition of Cidara Therapeutics. Excluding this charge, operating expenses grew 2%, reflecting increased investments in support of our key growth drivers, partially offset by benefits of our multiyear optimization effort and recognition of a portion of the external funding for sac-TMT. Other expense increased to $318 million, primarily reflecting financing related to recent business development transactions. Our tax provision was $957 million. As a result of the nontax deductible onetime charge for Cidara, we had a pretax loss this quarter resulting in a tax rate of negative 43.5%. Taken together, we reported a loss of $1.28 per share. which includes a negative impact of $3.62 per share from the onetime charge related to Cidara. Now turning to our 2026 non-GAAP guidance. We have narrowed the range and raised the midpoint of both our full year revenue and EPS guidance. We now expect revenue to be between $65.8 billion and $67 billion, representing growth of 1% to 3%, including a positive impact from foreign exchange of approximately 1 percentage point using mid-April rates. Our gross margin assumption remains approximately 82%. Operating expenses are assumed to be between $36 billion and $36.8 billion. This range does not include the proposed acquisition of Terns or any additional significant potential business development transactions. Other expense is expected to be approximately $1.3 billion. We assume a full year tax rate between 23.5% and 24.5%, which reflects the nontax deductible onetime charge for Cidara. We assume approximately 2.48 billion shares outstanding. Taken together, we expect EPS of $5.04 to $5.16, including a positive impact from foreign exchange of approximately $0.10 using mid-April rates. It is important to note that this guidance does not include the impact of the proposed acquisition of Terns, which is expected to close soon. We expect the transaction will result in a onetime charge that will increase research and development expense by approximately $5.8 billion or approximately $2.35 per share. In addition, ongoing investment to advance TERN-701 and the assumed cost of financing will negatively impact EPS by approximately $0.12 this year. As you consider your models, there are a few items to keep in mind. For KEYTRUDA, recall that while growth benefited from the timing of wholesaler purchases in the first quarter, we will face a corresponding headwind in the third quarter. For ENFLONSIA, consistent with the first quarter, we expect minimal sales in the second quarter, given the seasonal nature of the product and continued high levels of RSV monoclonal antibody inventory in the market. We are actively engaging customers in advance of the RSV season and remain focused on educating health care professionals and parents on the importance of protecting infants from this potentially serious disease and expect shipments to increase in the second half of the year. Lastly, we expect SG&A expenses to increase over the remainder of the year as we invest to maximize the impact of our recent and upcoming launches. Now turning to capital allocation, where our strategy remains unchanged. We will prioritize investments in our business to drive near- and long-term growth, including new product launches and a robust pipeline. We remain committed to the dividend with the goal of increasing it over time. Business development remains a high priority as evidenced by our recently announced acquisition of Terns. We maintain the ability within a strong investment-grade credit rating to pursue additional, science-driven, value-enhancing transactions going forward. We are on pace for approximately $3 billion of share repurchases this year, as previously communicated. To conclude, we are confident in the outlook for our business driven by global demand for our innovative medicines and vaccines, including our many new product launches. We remain committed to bringing forward medically significant innovations that will enable us to deliver value to patients, customers and shareholders well into the future. With that, I'd now like to turn the call over to Dean. Dean Li: Thank you, Caroline. Good morning. Progress continued with a steady cadence of clinical and regulatory development. Today, I will provide updates in cardiometabolic and respiratory, oncology, infectious diseases and ophthalmology then conclude with key upcoming milestones. Starting with cardiometabolic and respiratory. The global burden of atherosclerotic cardiovascular disease remains significant. And with recently updated clinical guidelines recommending lower LDL-cholesterol thresholds, there remains a need for innovation that is broadly accessible. At the American College of Cardiology Congress last month, additional Phase III data were presented for enlicitide, our investigational oral PCSK9 inhibitor. Enlicitide is designed to reduce LDL cholesterol in a similar manner to PCSK9 antibody therapies with the simplicity of a daily pill. The Phase III CORALreefAddOn study demonstrated statistically significant and clinically meaningful greater reductions in LDL-cholesterol at 8 weeks compared to other oral add-on lipid-lowering therapies when added to background statin therapy. Of note, enlicitide also showed statistically significant greater reductions across key secondary endpoints, including apolipoprotein B and non-high-density lipoprotein cholesterol. The CORALreef program has generated compelling evidence for the efficacy and safety of enlicitide As a pill, enlicitide has the potential to democratize access to a potent lipid-lowering therapy. With clinical guidelines targeting lower LDL-cholesterol targets, the field of preventive cardiology is increasingly energized and focused on early, aggressive LDL-cholesterol reduction. Also at ACC, we showed full results from the Phase II CADENCE trial, evaluating WINREVAIR in adults with combined post- and pre-capillary pulmonary hypertension and heart failure with preserved ejection fraction. WINREVAIR met the primary endpoint of reduction from baseline in pulmonary vascular resistance compared to placebo. At the 0.3 milligram per kilogram dose, WINREVAIR prolonged the time to first occurrence of a clinical worsening event, which was an exploratory secondary endpoint with a hazard ratio of 0.18. Results provide compelling proof-of-concept and warrant further evaluation in Phase III. This is an underdiagnosed condition with an extremely poor prognosis. There are currently no approved therapies. Moving to Oncology, KEYTRUDA now has 44 FDA-approved indications across 19 tumor types as well as 2 tumor-agnostic approvals and continues to generate evidence further transforming cancer care. In the first quarter, the FDA and European Commission approved KEYTRUDA in combination with paclitaxel, with or without bevacizumab, for the treatment of certain patients with platinum-resistant ovarian cancer based on the findings of KEYNOTE-B96. This is the first PD-1 inhibitor based regimen to show a statistically significant improvement in both progression-free survival and overall survival versus paclitaxel with or without bevacizumab for these patients. We also announced findings from the KEYNOTE-B15 study demonstrated KEYTRUDA plus Padcev reduced the risk of event-free survival related events by 47% and risk of death by 35% for cisplatin eligible patients with muscle invasive bladder cancer. This is the first and only perioperative immunotherapy plus ADC regimen to extend survival for these patients. Based on these data, the FDA has accepted supplemental BLA filings for KEYTRUDA and KEYTRUDA QLEX under priority review and is targeting an action date of August 17. KEYNOTE-B15 is the sixth study of a KEYTRUDA-based regimen to demonstrate overall survival in an earlier stage cancer and, if approved, would mark the 12th earlier-stage indication for KEYTRUDA. We also continue to make progress across the broader oncology portfolio. WELIREG, our first-in-class oral HIF-2-alpha inhibitor initially approved for the treatment of certain patients with von Hippel-Lindau syndrome has now shown additional clinical data for patients with renal cell carcinoma across multiple stages of disease. The LITESPARK-022 study evaluating WELIREG plus KEYTRUDA in the adjuvant setting, demonstrated a 28% reduction in the risk of disease recurrence or death compared to KEYTRUDA alone. In addition, the LITESPARK-011 study, evaluating WELIREG plus Lenvima, demonstrated a 30% reduction in the risk of disease progression or death in certain patients with advanced RCC and versus cabozantinib. Supplemental applications for WELIREG in combination with KEYTRUDA or KEYTRUDA QLEX based on LITESPARK-022 were granted priority review by the FDA with the PDUFA date of June 19. The FDA also set a PDUFA date of October 4 for WELIREG in combination with Lenvima based on the LITESPARK-011 study. As announced last week with our partner, Eisai, the combination regimens from the LITESPARK-012 study did not meet the dual primary end point of progression-free survival and overall survival for the first-line treatment of patients with RCC and compared to KEYTRUDA plus Lenvima. The data from the study provides learnings to the broader program. Studies from the LITESPARK clinical program, including LITESPARK-033 and 034, evaluating WELIREG in combination with zanzalintinib, are ongoing. Together with our partner, Daiichi Sankyo, we announced that the biologic license application for ifinatamab, deruxtecan, or I-DXd, for the treatment of extensive-stage small cell lung cancer in certain patients with disease progression has been granted priority review by the FDA. This was based on results from the Phase 2 IDeate-Lung01 trial, and the Phase 1/2 IDeate-PanTumor01 trial. The FDA has set a PDUFA date of October 10. As Rob mentioned, we continue to identify external opportunities to strengthen and diversify our pipeline, most recently with the proposed acquisition of Terns Pharmaceutical. TERN-701, a novel oral allosteric inhibitor of the BCR::ABL oncogene is being evaluated for the treatment of certain patients with chronic myeloid leukemia and has the potential to be an important addition to our growing hematology pipeline. Clinical data has shown encouraging activity with promising rates of major molecular response and deep molecular response by week 24. Importantly, this includes responses in patients with high disease burden, who previously received multiple lines of therapy. We are eager to get to work with the talented Terns team to advance this program in a timely fashion. Turning to HIV. Last week, the FDA approved IDVYNSO, our once-daily, single-tablet 2-drug regimen of doravirine and islatravir, a next-generation nucleoside reverse transcriptase inhibitor that blocks translocation, indicated for the treatment of certain adults whose HIV-1 is virologically suppressed based on 2 Phase III SWITCH study. Approval was previously granted in Japan. IDVYNSO is the first approved 2-drug regimen that does not include an integrase strand transfer inhibitor. At CROI, additional data was presented demonstrating noninferiority and a similar safety profile at week 48 versus the 3 drug, INSTI-based regimen, Biktarvy, in adults who had not previously received antiretroviral treatment. In addition, IDVYNSO was shown to maintain virologic suppression at week 96 in adults who switched some other oral antiretroviral therapies, including Biktarvy. Islatravir, a potent long-acting antiviral that forms an anchor for additional regimen is currently being evaluated in late-phase trials as a once-weekly combination with Gilead s lenacapavir, an HIV capsid inhibitor, and separately in combination with ulonivirine, an internally developed non-nucleoside reverse transcriptase inhibitor. We plan to present data from our HIV pipeline at an upcoming medical meeting. Next to RSV. In February, positive new data were presented for ENFLONSIA for the prevention of RSV lower respiratory tract disease in infants and children under 2 years of age at increased risk for severe disease over 2 seasons from the Phase III SMART study. These findings will be shared with global regulatory authorities with the intent to obtain an expanded indication. RSV is a leading cause of infant hospitalization globally and is especially serious for children under 2 years of age at high risk for severe disease. These data provide additional evidence for ENFLONSIA for the prevention of RSV in younger children who remain at risk entering their second season. Earlier this month, the European Commission approved ENFLONSIA for the prevention of RSV lower respiratory tract disease in newborns and infants during their first season, based on the Phase IIb/III CLEVER and Phase III SMART trial. Next, in ophthalmology. We remain focused on retinal diseases associated with vascular leakage and neovascularization, with emphasis on improving structural and functional outcomes for patients and helping reduce the burden of certain retinal diseases. This month, we initiated 2 pivotal Phase IIb/III trials evaluating MK-8748, an investigational bispecific Tie-2 agonist/VEGF inhibitor for the treatment of neovascular age-related macular degeneration. The MALBEC and TORRONTES studies are the first trials in a broader late-phase development program for MK-8748. The decision to advance development is based on promising results from the Phase I/IIa RIOJA trial. In closing, we anticipate multiple events and milestones across therapeutic areas in the coming months, including, in oncology, please mark your calendars for our annual investor event at the ASCO Annual Meeting in Chicago on the evening of Monday, June 1, where we will outline progress on our oncology pipeline and strategy. On the regulatory front, as noted, potential approvals for KEYTRUDA plus Padcev in MIBC, WELIREG in expanded RCC settings and for I-DXd in extensive stage small cell lung cancer. In HIV, data from the Phase III ISLEND-1 and 2 trials evaluating islatravir and lenacapavir, a once-weekly oral 2-drug treatment regimen in collaboration with Gilead. In cardiometabolic and respiratory, the September 21 PDUFA date for WINREVAIR for the label update based on the Phase III HYPERION study and the Commissioner's National priority Voucher Process for enlicitide is progressing. In immunology, data for tulisokibart, our TL1A inhibitor, based on the Phase III ATLAS-UC trial in ulcerative colitis and Phase II ATHENA study in SSc-ILD. Finally, in ophthalmology data from the Phase III BRUNELLO study of MK-3000, our novel Wnt agonist, being evaluated in patients with diabetic macular edema and the Phase II portion of the RIOJA study of MK-8748 being evaluated for the treatment of patients with certain retinal diseases. I look forward to providing further updates throughout the year. And now I will turn the call back to Peter. Peter Dannenbaum: Thanks, Dean. Julie, we're ready to start the Q&A now. We'd appreciate if analysts would limit themselves to a single question today so we can conclude the call at the top of the hour. Thank you. Operator: [Operator Instructions] Our first question comes from Carter Gould with Cantor. Carter Gould: Maybe we'll start on the pipeline on MK-3000. How are you thinking ultimately about dosing the 1-year BRUNELLO data is likely not going to inform much on duration interval and the Lucentis comparison is going to leave lots of questions unresolved. I fully appreciate that 40% have suboptimal responses to VEGF, but can this reach your targets if it ultimately requires every 4-week dosing? Or put differently, are there reasons you have conviction about every week or every 12-week dosing? Dean Li: Thank you very much. So just stepping back, MK-3000 is our potential first-in-class novel candidate targeting Wnt pathway. -- for retinal vascular disease. Almost all the other mechanisms are based on VEGF. And as you've highlighted, up to 40% have suboptimal response to VEGF. In terms of dosing, frequency, when one sort of does these trials once start at every 24 weeks and upon doing that, then you go further from that. So we believe that one should focus on Q4 weeks, but one should not only focus on Q4 weeks. So your question, which I think alludes to, are we considering other frequencies, the answer is absolutely yes. But the initial focus is on 4 weeks because that is very important to get into the label. I just want to also highlight really quickly that it's not just MK-3000, it's MK-8748, which is the novel bispecific directly agonizing Tie-2 that we're also excited about, and that as well is advancing in Phase IIb/III trials in retinal vascular disease. Operator: Our next question comes from Jason Gerberry with Bank of America. Jason Gerberry: Had an update or a question on the WELIREG clinical update on LITESPARK-012 recently provided. And I wanted to get your sense, does this provide any concerning read-through to some of the ongoing readouts for LITESPARK-022 and the ability to see OS benefit there? And also, you have another frontline study with WELIREG, albeit in a post-PD-1 setting. So just kind of curious if you can speak to some of the read-throughs to some of the ongoing trials. Robert Davis: We were having a hard time hearing you, Jason. Let me restate the question. And then I think I'll get it. I think what you're asking, given the LITESPARK-12 outcome, how does that make us think about getting OS in some of the upcoming LITESPARK studies and what's our overall view as it relates to WELIREG. I think that's the way I was trying to ask. Dean Li: Thanks because I could not hear quite well. In relationship to the other ones like LITESPARK-022, LITESPARK-011, which have PDUFA date in June and October. I think we're very bullish in relationship to how those will turn out. And also in relationship to the question that you have of how -- what's the readout of this trial that had 3 agents involved, which is a PD-1, VEGF TKI and a HIF-2-alpha, I think we are studying that data, but I would be very cautious to sit there and say that has any negative implication to other trials where, for example, we have a VEGF TKI and WELIREG or a PD-1 and WELIREG. Operator: Our next question comes from Michael Yee with UBS Securities. Unknown Analyst: As we think about coming up to ASCO, where you will obviously have your SAC PMT featured in lung cancer, of course, obviously, PD-1 VEGF also featured in a plenary as well from a competitor, how are you thinking about the dynamic of a sac-TMT in the context of PD-1 VEGFs and your own Lenova asset and perhaps accelerating that? And maybe just give us a snapshot being as to where we stand on these 2 types of programs. Dean Li: Yes. So I'll answer the question too individually, but I will also answer what I think you're alluding to is the possibility of combinations of that. So in relationship to the PD-1 VEGF, we're very interested in the space. We shared some encouraging early data at AACR. And our construct of the leading PD-1 VEGF is most similar to ours. And so we're looking at our own data. But to be frank, we're also looking at the broader field as well. And so we're eager to move PD-1 VEGF Ford in our trials. And one of the issues that we think in our hands, a PD-1 VEGF, if it should be better than KEYTRUDA, we have a plethora of agents that would benefit from a combination with either KEYTRUDA or a KEYTRUDA plus or a PD-1 VEGF. So we're advancing that. In relationship to sac-TMT, I believe that at the ASCO, our strong partner and collaborator Kelen will provide optotroplung-05 in first-line non-small cell lung cancer. And I think people will look at that data very carefully because it may reflect on our global trials, which are not just within China but throughout the globe. In relationship to the question that you said is, is there any possibility of thinking about combining those to -- the answer is absolutely yes. And we're developing the information and also taking a scan to the outside world as to where and when to best combine a PD-1 VEGF with the rest of our portfolio. Operator: Our next question comes from Asad Haier with Goldman Sachs. Asad Haider: Congrats on all the progress. Maybe just a high-level one back to BD, you've been fairly active across a number of different areas, and you're saying you're ready to pursue additional transactions. So just level set us on where you still see the biggest gaps in your portfolio that could benefit from more BD as you scan the therapeutic landscape? What's the sweet spot now in terms of deal size? And is there a point at which the BD lever starts to diminish in importance just given your growing confidence in the growth trajectory out of the mid part of the next decade with the portfolio transformation that's already underway? Robert Davis: Yes. Asad, I appreciate the question. I would just start by saying we are very confident in the assets we have, the new assets we bought in through business development as well as the continuing progress we're making with our pipeline. So that continues and that grows. That said, we also continue to focus on business development. And as we've said in the past, we don't necessarily target specific therapeutic areas as the first question we ask. We always ask the first question, which is where do we see a significant unmet scientific opportunity where the science is compelling and can address. And in doing that, that allows us to think about where to focus. So we start with the science. We then asked the question, how does it fit strategically and then move to the value question and where we see science and value in line we move. So that has not changed. Our approach remains to be that as our focus. From a size perspective, we continue to look anywhere in the $1 billion to $15 billion range with that kind of being the sweet spot. But as we've consistently said, we have the capacity to go beyond that for the right strategic deal. And we will, if and when we see that. So that is where we're looking as far as the therapeutic areas where we do continue to see interesting science, obviously, oncology continues to be an area where there's a lot going on. We continue to look. Immunology is an area where we continue to see interesting opportunities as well as cardiometabolic is probably the 3 most likely areas, but we are willing to be opportunistic beyond that as well. And I guess, Peter, did remind me one part. When will we have less urgency to do a deal. My view is we can always do better. We can always grow stronger. And if we have the capacity, we will continue to invest. As Dean has said, we think in terms of one pipeline, whether it's internal or external. And so that mix of internal plus external will be an ongoing part of our strategy, you will not see that change. Operator: Our next question comes from Vamil Divan with Guggenheim Securities. Vamil Divan: I just had going back to Win Revere. I appreciate your comments about the cadence data in ACC. Just curious if you could provide any updated thoughts on how the discussions with the FDA are going on moving forward the Phase II program there, you remain confident on the clinical listening being can be the primary endpoint of the Phase III? And then just maybe any sort of rough estimate on how long you think you would actually take to execute a Phase III program in this indication. Dean Li: Yes. Thank you very much. So in relationship to Wind River, I mean it's reshaping the standard of care in PAH. And now the question is whether or not we can move it to a different segment of pulmonary hypertension, those people with heart disease. The patient population that we pick is a relatively small patient population of those patients who have pulmonary hypertension and heart disease. But it's probably one of the biggest unmet needs that I know of in this patient population, who at least the way that I would describe it is a very different patient population than that of PAH. And one could actually say is more complicated, is older and has more comorbidity. We think that the cadence gives that proof of concept -- as I had said previously, it's fine to talk about the primary end point reductions in PVR. But at least for me, in this patient population, it will be very important to have the endpoints that allow someone and when I mean someone, I mean patients, providers and payers to really see a compelling conglomerate of endpoints in the time to clinical worsening. And -- and that's where we will be having our discussions with the FDA. I think the other one that will be important is defining the inclusion criteria in relationship with the FDA and also the broader community in relationship to how do you actually operationalize the clinical trial, but also for everyone to be very clear that in our minds, this is a patient population that is an orphan patient population. Operator: Our next question comes from Daina Graybosch with Leerink. Daina Graybosch: Yes. I want to go back to ASCO and the data we're going to see from Kalon on OptiTROP-Breast05. That's a China study. And I wonder what should we keep in mind as we look at those outcomes on how it could or could not translate globally any differences in what you're doing globally? Or any other things to keep in mind. Dean Li: Yes. Thank you very much for that question. So just stepping up at a higher level, we think sac-TMT, it is a coke to ADC, but we think that it has some important differentiation. And we believe that the sac-TMT has a potential to be I think Elliot has often said a cornerstone and Margaria said a workhorse ADC. And we have 17 Phase III studies, 13 are in first movers. We have an in blast, non-small cell lung cancer, gyn, gastric and bladder. When we do our trials and when we speak to our close partner, Kalon, we use the fact that they are, in some sense, doing signal finding in registrational trials in China. And we recognize China is different, but these are important data for us. In relationship to the exact details of the sac-TMT and the Kian, I would just remind you that the OptiTROP-Breast05, they will have data. But I think it's very important to sit there and go, if -- how one thinks through that in terms of how that would read out. We are following their data very much. But I think that we are guided we are guided by the results. I do want to emphasize that in their OptiTROP, it's sac-TMT plus KEYTRUDA versus KEYTRUDA in PD-L1 positive first-line non-small cell lung cancer. And it's very important that if one wants to do an ADC plus KEYTRUDA versus KEYTRUDA in the United States, ex China, one has to look at where a PD-1 and what's the range with which the PD-L1 cut-off is. And so for us, this is the first Phase III combination study of sac-TMT and KEYTRUDA to read out. We have 50% of our Trou studies are evaluating KEYTRUDA combos in our TrophUse-007, our global study at ACTMTand KEYTRUDA versus KEYTRUDA in TPS greater than 50% in first-line non-small cell lung cancer. And I emphasize that simply because in the United States and ex China, TPS greater than 50% is where KEYTRUDA has an indication. Operator: Our next question comes from Steve Scala with TD Cowen. Steve Scala: What are the gating factors for FDA acceptance of the enlicotide application? And Dean, can you speak to the changes that you're pursuing on titration? What shorter durations are you pursuing? And is the 15 minutes you spoke to previously before or after administration of the drug? Dean Li: Yes. So I would just say that the enlicitide, as we've said out is we want to have the first and best-in-class potent oral PCSK9. It's designed in a very similar manner to antibody. And the data from the Phase III as a as we have discussed, I think lay out the value statement and relationship to its potency in terms of all the important by proteins. In relationship to the CNPV, the issue in relationship with the CNP is just for all of us to understand that the NPD process is a little bit different, which is we -- it's almost like a rolling submission, sort of way to think about it. And through that rolling ambition, at the end of that sort of rolling submission, that's when the FDA sits there and gives you a letter and a PDUFA date. And so we are actively in those discussions with the FDA. And then as we normally do when we get formal acceptance of the complete file, which is a little bit different in the CMPB we'll make an announcement. I will emphasize that in our discussion with the FDA, -- what is very important to them is us really showing them that the CMPD program is important that we're addressing an important U.S. public health crisis that we're delivering innovative cures and we're increasing domestic drug manufacturer and supply chain resilient. So those are all important to the FDA, and we are in really good conversations with them. And so I think that is going quite well, and it's progressing well. I would imagine that our estimation that we could get an approval at the second half of this year I see no reason to doubt that at this moment in time. In relationship to what you said in relationship to this issue of how you would take it -- we're also in the discussion with the FDA as to what the exact label is in relationship to how they will talk about prescriptions and when to take it and how to take it. And I don't want to get ahead of that conversation because those are extremely active conversations as we speak. Operator: Our next question comes from Chris Schott with JPMorgan. Christopher Schott: I just wanted to touch base on TL1A I think this one's got maybe a little bit less attention than some of your other late-stage readouts this year. But can you just talk a little bit about the role you're seeing TL1A playing in the IBD space? And maybe more broadly, when we think about immunology and IBD, there does seem to be more discussions about combination therapy as maybe the next step for the market. I'm just interested in Merck's approach here kind of building on the TL1A as I think about a broader pipeline? Dean Li: Yes. So I would begin to say that throughout the immunology sort of field, there are certain nodes that are really important 23 is an important note. TNF is an important note. And that's how the field is set up. We wonder whether TL1A is such a node and that -- and our hope is to laSocobar could be 1 of the first and best-in-class TO1As. So that's in that sort of framework. The other thing that you've just said, I think is really important is that there is increasing interest in combining different these nodes. This is something that was tried 10, 15, 20 years ago, and it didn't turn out well. But now the data suggests that in certain cases, you could begin to combine. When you look at the AE profile of tubasocopart, it's if you take the Phase II data, not just our Phase II data, but across the Phase II data. It is a member of the TNF superfamily, but from an AE profile, I might describe it as a kinder gentler AE profile than other NOTO-TNFs and with profound efficacy. So I think combinations will be employing. -- in relationship to what we hope to see in relationship to Phase III ulcerative colitis and chronic and Crohn's disease, we have readouts coming out we hope to be first mover, but I also want to emphasize that we also think that TL1A may be also distinguished not just to be an important note, but it may be important for not just inflammation or dampening but also for fibrosis. And we have Phase II data in SSC ILD and in HS that's coming in 2026. And that hopefully will define the unique role or the unique position that T1 has with all the other major notes. Operator: Our next question comes from Louise Chen with Scotiabank. Louise Chen: I wanted to ask you about the CADENCE study. There was some debate on the results that you recently presented at a medical meeting. And I'm wondering what you think the Street may be missing about the competitiveness of your product. Dean Li: So I'm not sure I know everything that you're referencing. In terms of the competitiveness of our product, I don't know how else to answer it is, I don't know from a competitive standpoint that there's any treatment for this patient population. And when I look out, I'm not so sure that I see something that, that will break that barrier. In terms of whether or not you can make a Phase III, but sort of models what happens in the Phase II. I think that's where the focus is. And that's been the focus in our conversations with KOLs, but also the FDA. And there is a clear understanding that this patient population, this patient population is 1 with a tremendous unmet need. And so I don't know that I would call it competitive sort of dynamic sort of thing. It's whether someone for the first time can have a compelling treatment for a patient population that is in dire need. Operator: Our next question comes from Omar Raffat with Evercore. Umer Raffat: I wanted to touch up on some incremental information that came out on your turns deal, which I don't think we discussed on the call you as did earlier. And by my math, it looks like the incremental patients may have had an MMR achievement rate of something like 2 out of 10 or something along those lines. Could you just speak to the -- that drop and how does that change or not change your overall thoughts about the drug's profile? Because presumably, that's like the real target population early in the launch? Dean Li: Yes. Thank you so much for that. So I would just say that in this -- in CML, there's multiple approved therapies, and it appears that there is significant unmet need. And the value proposition for us for turns to 101 is whether or not it has the potential to be a best-in-class Alister TKI with high selectivity and improved therapeutic index. When data is presented at some of these meetings initially when they're early, Oftentimes, they're stated in 1 way. But for us, it's really important to always look at that data, whether it's especially when you go to ASCO, AACR or ASH, we look at it immediately in the eyes of how do you think in terms of registration. And it's very important to translate whatever the abstract says to, what I would say, a more conservative ITT population consistent with regulatory standards. Given that, what was laid out at these public congresses is turn stated to 75% MMR and 36% DMR achievement rate. As the data evolved and we were looking at very specific patient-level data we believe that the MMR will be north of 50%. And within the confidence interval as had been publicly stated. And we think that in MMR in that sort of range is extremely compelling. And then the other point that I would just highlight is we also think that the DMR rate is also very interesting to look at and whether or not this drug could not only create a best-in-class in relationship to MMR, but whether it could catalyze the field to increasingly think of DMR as a treatment goal. Operator: Our next question comes from James Shin with Deutsche Bank. James Shin: Dean, have a question. Can you help us distinguish MK-6837 from sac-TMT? And then just going back to the TL1A question, is there a view within Merck that TL1A could stand alone in immunology because from a market or commercial perspective, immunogy seems to be very much a portfolio-driven strategy. Some of your peers have large portfolios, and there's a very competitive remote that's built with that? Dean Li: Okay. So let me ask -- let me tackle the immunology question really clearly. We're very focused on TL1A, but if you ask me is TL1A is our ambition to stop at TL1A, -- would we use TL1A as a beach at to expand and extend. The answer is we would undoubtedly move it to expand and to extend -- we had expanded from IBD to other conditions, and we would advance it to conditions where the combination of immunofibrosis would be really important. In relationship to other molecules, of course, if one had a leading TL1A that could advance through the series of different indications that we have, then in each 1 of those indications, you would immediately think of what's the combinatorial partner whether it be in IBD or HS or in SSC IOD. So we would immediately think about doing that as well. So we are focused on TL1A, but that focus does not create a situation where we're not thinking about not just whether we can be first and best, but what's next as well. And I think the other question was related to MK-6837. Is that correct? I didn't catch the other one. MK-6837 is another ADC, which had a unique payload, and we have discontinued that especially when you see the profound impact of sac-TMT and also in relationship to -- we've always said that we're very interested in the ADC field in changing the target but also changing the payload and thinking about combinatory or cycling different payloads as the field moves on in the antibody drug conjugate. Robert Davis: Maybe I could just add 1 little bit as a teaser, maybe to what you'll see as we go into next year and beyond. In our invisible pipeline we often refer to we have other assets in the immunology space that you're not seeing right now. So just to reinforce Dean's point, we aren't just a TL1A company. We have other things in development beyond that. And as we move forward in time, you'll start to get a better sense of that as we unleash that as it moves into Phase I. All right. Thanks, James. We'll squeeze one last question in before we end the call. Operator: Our last question comes from Geoff Meacham with Citibank. Geoffrey Meacham: All right. Dean, in HIV, just given the recent approval of Avito, can you talk about how you guys see the competitive setup and related, I know you have prep coming up, but how much of a strategic priority is HIV and infectious disease when thinking about the overall BD strategy. Dean Li: So in terms of our interest in HIV, there is a profound interest in really in our HIV program. And for those of you who've talked to Eliot Bar, the Chief Medical Officer, I think you can feel that just in his presence. Islatravir is a next-generation nucleoside reverse transcriptase inhibitor. It blocks translocation, and we have the daily program -- and increasingly, there is interest in going from a 3-drug daily program to a 2 drug. And of the 2 drug daily programs, I think we're the only ones without an entity backbone. So I think that's very important. -- critically also important is that we believe ezlotivir can anchor to weekly, and you see it in later lenacapavir, which is a 2-drug combo, which hopefully will be the first Q week and then loci with UL, which is in development, and there will be data being presented, I think, in due course, it could be the smallest pill could be favorable DDI profile and be extremely effective. And then as you said, to me, the monthly, if you could have 12 pills and protect people with MK 852 I think that would just be such an important contribution as a commercial product, but also as a global product for public health throughout the world. So if the question is, are we committed? And are we passionate about our HIV program? I hope that you heard from the tenor of my response, the answer is unequivocally yes. Peter Dannenbaum: Great. Thanks, Geoff, and thanks, everybody. Apologies for going over a few minutes. Give us a call if you have any follow-up questions. Thank you. Operator: Thank you for your participation. Participants, you may disconnect at this time.
Operator: Greetings, and welcome to the Floor & Decor Holdings, Inc. First Quarter 2026 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Wayne Hood, Senior Vice President of Investor Relations. Thank you. You may begin. Wayne Hood: Thank you, operator, and good afternoon, everyone. Welcome to Floor & Decor's Fiscal 2026 First Quarter Earnings Conference Call. Joining me today are Brad Paulsen, Chief Executive Officer; and Bryan Langley, Executive Vice President and Chief Financial Officer. Before we begin, I want to remind everyone of the company's safe harbor language. Comments made during this call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions is a forward-looking statement. These statements are subject to risks and uncertainties that could cause actual future results to differ materially from those expressed in these forward-looking statements for any reason, including those listed at the end of the earnings release and the company's SEC filings. Floor & Decor assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company will discuss certain GAAP financial measures. We believe these measures enable investors to understand better our core operating performance on a comparable basis between periods. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in the earnings press release, which is available on our Investor Relations website at ir.flooranddecor.com. A recorded replay of this call and related materials will be available on our Investor Relations website. Let me now turn the call over to Brad. Bradley Paulsen: Thank you, Wayne, and thanks to everyone for joining us on our 2026 first quarter earnings conference call. During today's call, I will walk through the key drivers of our performance this quarter, including the operational progress that continues to reinforce our long-term strategy. After that, Bryan will discuss our updated outlook for the remainder of 2026 and how we are positioning the company to advance our strategic priorities, remain resilient in a dynamic environment and deliver sustained long-term shareholder value. Before I turn to our first quarter earnings, I'd like to discuss our capital allocation framework and the actions we announced today. Consistent with our disciplined capital allocation framework, we announced that our Board of Directors has authorized a share repurchase program for up to $400 million of the company's outstanding common stock. This action reflects the continued strength of our operating model, the durability of our cash flows and the increasing efficiency of our new store investment. As we continue to expand our store base, we are optimizing our capital spend per location, which should drive strong returns, enabling us to both fund growth and generate meaningful excess cash flow. This positions us to flex our pace of openings over time while returning capital to shareholders, all while supporting our long-term opportunity to operate 500 warehouse format stores across the United States. The repurchase program is a natural extension of our capital allocation philosophy, which prioritizes capital allocation based on returns that exceed our weighted average cost of capital. First, we prioritize opening new stores and investing in our existing stores with initiatives that are expected to grow and support our core business. Second, we continue to invest in our commercial flooring platforms and new growth concepts, including our outdoor and unfinished flooring offerings. Once these priorities are met, we intend to return excess capital to shareholders in ways that are designed to enhance long-term value while maintaining a strong balance sheet. We do not expect to use incremental debt to support the share repurchase program, and there is no defined time line for the share repurchase program's completion. Guided by this disciplined framework, we believe the current uncertainty across the broader economic and capital markets landscape, particularly within home improvement, has created a clear disconnect between our long-term intrinsic value and our share price. This dislocation provides us with an attractive opportunity to repurchase our shares at valuations we view as compelling. That opportunity is underscored by the strength of our business model as we are uniquely positioned in the marketplace as the only national pure-play hard surface flooring retailer with a warehouse format model that delivers the broadest in-stock job lot assortment, everyday low prices through direct global sourcing and industry-leading customer service. Our differentiated business model resonates with both Pros and homeowners, driving consistent market share gains in a highly fragmented category. With just over 55% of our U.S. store opportunity built out and a large underpenetrated opportunity in commercial flooring, we believe we have a substantial runway for growth ahead. As we scale, we believe our model becomes more efficient, our value proposition strengthens and our competitive advantages deepen, creating what we believe is a durable foundation for long-term value creation and making us an attractive investment for shareholders with a multiyear horizon. Turning to our fiscal 2026 first quarter results. I want to begin by thanking our more than 14,000 associates across the company. We are proud of how our teams executed our strategy in a challenging demand environment for big-ticket discretionary purchases amid adverse weather mid-quarter, elevated 30-year mortgage rates, geopolitical tensions in the Middle East that contributed to higher gas prices and a further decline in consumer sentiment. These dynamics resulted in first quarter earnings coming in weaker than we anticipated. For the quarter, we delivered diluted earnings per share of $0.37 compared to $0.45 in the same period last year. Total sales decreased 0.7% to $1.152 billion from $1.161 billion last year, and comparable store sales declined 3.7%. On a monthly basis, comparable store sales increased 0.4% in January, declined 6.9% in February and declined 4% in March. Our second quarter-to-date comparable store sales declined 4.5%. The decline in our first quarter comparable store sales was driven by a 5.5% decrease in transactions due in part to adverse weather, which accounted for 150 to 200 basis points of pressure, partially offset by a 1.9% increase in average ticket. Our average ticket was negatively impacted by the decline in the laminate and vinyl sales mix as well as customers taking on smaller projects, resulting in meaningfully lower square footage purchases. We continue to see strong sales growth when the designer was involved, which reinforces the value of this free design service and its ability to drive higher quality customer engagements and average ticket growth. From a geographic standpoint, our West region continued to outperform the company and delivered positive comparable store sales, excluding the impact of new store cannibalization. Our East region, followed closely by the South region was the weakest, reflecting adverse weather and broader softening demand. As a reminder, the South region is comparing against Hurricanes Helene and Milton, which benefited sales by approximately 100 basis points in the first quarter of last year. From a merchandise category standpoint, 4 departments outperformed the company's comparable store sales, including installation materials, tile, decorative accessories and wood. Insulation materials continued to generate year-over-year growth as we expand our share of wallet and market share with Pros. That momentum translated into a 1.4% increase in first quarter Pro sales, supported by our supply house merchandising strategies. Tile also remained a consistently strong performer, supported by the continued success of our new Vetta collection. In the vinyl flooring category, we introduced a series of straightforward value-driven offers, including special buys and enhanced in-store displays that group more than 20 in-stock styles priced under $2 per square foot. These additions, coupled with refinements to our price bands are designed to meet Pros where the demand is shifting and to position us to capture market share in a category that continues to contract. Although still early, results from our price band refinements are encouraging with positive elasticity and improving square footage purchase trends. We have plans to expand this to additional stores in the second quarter. That said, we do expect the category to be under pressure for the remainder of 2026. Turning to our connected customer performance. First quarter sales grew 5.4% year-over-year, representing approximately 19% of total sales. Connected customer remains one of our highest priority strategic growth initiatives, and we are investing accordingly in talent, technology and process enhancements. With a defined road map in place and a new digital leader who has successfully executed similar transformations, we are laying the groundwork for a differentiated and more personalized online experience. Our goal is to build a platform that complements our store experience and drive stronger customer engagement and conversion. Let me now turn to our new warehouse store expansion. In the first quarter, we opened 6 new warehouse-format stores compared with 4 stores last year, including Staten Island, New York; Dallas, Texas; Detroit, Michigan; Pittsburgh, Pennsylvania; Vacaville, California; and Fayetteville, North Carolina. These locations strengthen our presence in several large Tier 1 markets where household formation, population growth and home improvement activity remain attractive over the long term. We are encouraged by the early sales performance of these new stores, which reflects both our focus on opening in Tier 1 and Tier 2 markets and the benefits of our improved new store operating processes and consistent execution. We remain on track to open 20 new stores in fiscal 2026, with development primarily concentrated in Tier 1 and Tier 2 markets where we already have a presence. We expect approximately 50% of 2026 openings to occur in the first half of the year compared with 35% last year, providing more operating weeks and further supporting stronger first year productivity. We expect the class of 2026 new stores to average approximately 55,000 square feet. And while smaller in size, we believe this format allows us to enter more dense markets without sacrificing sales productivity. Looking ahead, our teams are aligned around the opportunities with the greatest potential to drive growth. We are focused on improving new store productivity and investing in initiatives that strengthen customer loyalty and expand wallet share with our Pro customers. Our team continues to be excited about the development work being done on our new Pro loyalty program and remain on track to launch this new program in the first quarter of 2027. We are also building a scalable, strategic account-driven B2B platform that supports the phased expansion of our regional commercial account managers. We were pleased with the first quarter sales performance of our regional account managers, which number 76 today, and we are continuing to expand our presence in large strategic markets with additional hires. These multiyear asset-light investments are delivering early results and position us to win in this segment of the commercial market. Turning to Spartan Surfaces. Spartan's first quarter sales and earnings performance reflect the ongoing difficult conditions in the commercial market. And while we anticipated a soft start to the year, results were weaker than expected. That said, customer engagement remains solid, supported by rising quoting activity and stable sample volume. As these opportunities convert and the solid backlog begins to be released, the business is positioned for gradual improvement over the coming quarters. As Brian will discuss, we are committed to maintaining disciplined cost management while continuing to invest in the highest return growth opportunities. This includes aligning store labor hours with sales trends, managing distribution and call center expenses with greater precision and tightening discretionary spending across the organization. Together, these actions are designed to ensure we remain agile, protect profitability and position the company to drive stronger performance. Even in a challenging hard surface flooring market, we do believe we continue to take market share based on all publicly available data, third-party industry sources and feedback from our vendor partners. We remain confident in the resilience of our business model and firmly focused on our core business. That focus is reflected in the commitment we see across our stores where morale remains strong and our culture continues to differentiate us. I'm confident this environment creates an opportunity for us to accelerate market share gains through world-class leadership and disciplined execution. With that, I'll turn the call over to Brian. Bryan Langley: Thanks, Brad. Before we discuss the first quarter results, I want to begin by thanking each and every one of our associates across the company. Their commitment to serving our customers, focusing on execution and staying resilient in this dynamic environment continues to be the foundation of our performance. We continue to achieve all-time high service scores, thanks to what they do every day in our stores to better serve our customers. Now let me discuss our first quarter income statement, balance sheet and statement of cash flows as well as our outlook for the remainder of 2026. We continue to effectively manage our gross margin with our first quarter performance exceeding our expectations. Gross profit decreased $0.7 million or 0.1% compared to the same period last year. The decline was driven by the 0.7% decrease in sales, partially offset by 20 basis points improvement in gross margin, which increased to 44.0% from 43.8% in the prior year period. Our gross margin expansion primarily reflects the timing benefit of our strategic pricing initiatives, partially offset by higher supply chain costs that continue to work their way through our system. The growth in our distribution center network in Seattle and Baltimore was a headwind to gross margin of approximately 60 basis points year-over-year, in line with our expectations. SG&A expenses for the first quarter increased $11.1 million or 2.5% compared to the same period last year. The primary driver of the increase was the 22 new stores we've opened since the first quarter of 2025, which increased personnel and occupancy costs. SG&A for noncomparable stores increased $21.4 million, while SG&A for comparable stores decreased $9.0 million as we continue to tightly manage expenses. As a percentage of sales, SG&A delevered (sic) [ increased ] by approximately 120 basis points to 39.5% from 38.3% in the same period last year. This was mainly due to the impact of new store openings and the decline in comparable store sales. I am pleased to share that we successfully completed portions of our ERP implementation and are now live with financial systems and certain merchandising portions in the first quarter, which is a clear example of the investments we are making to enhance productivity and build a more scalable platform to support future growth. We will still incur implementation costs throughout 2026 as we continue to implement other merchandising portions that will go live later this year or early next year. Our first quarter operating income declined 18.4% to $52.4 million from the same period last year, reflecting the impact of new stores and expense deleverage driven by the 3.7% decline in comp sales. Adjusted EBITDA declined 6.4% to $121.5 million from the same period last year. Our first quarter adjusted EBITDA margin was 10.5% compared with 11.2% in the prior year period. Our first quarter net interest expense decreased $0.4 million or 26.8% to $1.1 million compared to the same period last year, primarily due to higher interest income as a result of higher cash balances. Our first quarter income tax expense was $11.6 million compared to $13.8 million during the same period last year. The effective tax rate was 22.5% for the first quarter compared to 22.0% in the same period last year. The year-over-year effective tax rate increase was primarily due to a decrease in excess tax benefits related to stock-based compensation awards. Turning to the balance sheet. Our financial position remains a core strength of the company. In the first quarter, we generated $109.2 million in cash from operating activities compared with $71.2 million in the same period last year, primarily driven by changes in inventory and trade accounts payable. We ended the quarter with $1,007.2 million in unrestricted liquidity, consisting of $293.6 million in cash and cash equivalents and $713.6 million available under our ABL Facility. This level of liquidity provides meaningful flexibility to navigate the current environment, support working capital needs, invest in other growth initiatives. And as we announced today, our Board of Directors has authorized a share repurchase program for up to $400 million. As Brad mentioned, our capital allocation framework priorities remain intact. First, we will continue to invest in new stores and reinvest in our existing stores. Second, we will continue to invest in commercial flooring platforms and new growth concepts. And lastly, we will utilize excess free cash flows to repurchase common shares while maintaining sufficient liquidity and a healthy lease-adjusted leverage ratio. Our repurchase program is discretionary and how we execute will be dependent upon the environment through both programmatic and opportunistic purchases. As of March 26, 2026, inventory increased 1.4% to $1.1 billion compared to December 25, 2025. This increase reflects store growth and our proactive efforts to stay ahead of demand and ensure we're well stocked to serve our customers. We closed the quarter with $198 million in debt associated with our term loan. Before I walk through our fiscal 2026 earnings guidance, I want to frame the dynamic macro environment our teams continue to navigate and how it informs our updated earnings guidance. Consumers remain cautious about big-ticket discretionary purchases, a trend reinforced by an increase in 30-year mortgage rates, higher gas prices, persistent housing affordability challenges and unexpected geopolitical tensions in the Middle East that have all further weighed on consumer sentiment. The University of Michigan's Consumer Sentiment Index declined sharply to 53.3 in March 2026, near all-time lows. In Housing, the National Association of Realtors reported March existing home sales were $3.98 million, down 3.6% sequentially and 1% year-over-year, which continues to pressure demand for hard surface flooring. Against this backdrop, our teams remain agile and are proactively mitigating portions of both direct and indirect cost pressures stemming from the recent tensions in the Middle East while continuing to strengthen our ability to gain market share. We are seeing rising energy costs and domestic logistics expenses. However, we believe we can effectively mitigate some of the increases and manage the residual through our disciplined approach. This positions us to navigate the uncertainty with confidence while continuing to deliver value to our customers and shareholders. Given the unexpected events that emerged following our fourth quarter earnings release, we believe it is prudent to reflect a wider range of potential outcomes in our fiscal 2026 guidance. If existing home sales further deteriorate and consumer reluctance towards big-ticket discretionary purchases persist longer than previously expected, we would expect to be at the low end of our updated guidance range. At the same time, we remain focused on the elements within our control, executing with discipline, managing expenses thoughtfully and prioritizing investments that will support profitable growth while maintaining the agility needed as conditions evolve. We are confident in our ability to continue gaining market share, effectively managing expenses and generating strong cash flows. I want to remind everyone that fiscal 2026 includes a 53rd week, which will be reported in the fourth quarter. I will highlight the expected contribution from the 53rd week as part of our guidance. Sales are expected to be in the range of $4.770 billion to $4.990 billion or increase by 1.8% to 6.5% from fiscal 2025. The 53rd week is expected to contribute approximately $65 million to sales. Comparable store sales are estimated to be flat to down 4%. Comp average ticket is estimated to be flat to up low single digits and comp transactions is estimated to be down low to mid-single digits. Gross margin is expected to be approximately 43.6% to 43.8%. The first quarter gross margin of 44.0% is likely to represent a high point for the year. From there, we anticipate slight to modest sequential pressure as we move through the remainder of the year, driven by tariff-related costs, the approximately 25 basis points incremental wraparound effect from our distribution center openings and reinvesting into value-driven pricing strategies. SG&A as a percentage of sales is estimated to be approximately 38.0% with the first and fourth quarters being the most pressured from new stores. Interest expense net is expected to be approximately $4 million. Tax rate is expected to be approximately 22.5% to 23.0%. Depreciation and amortization is expected to be approximately $250 million. Adjusted EBITDA is expected to be approximately $545 million to $580 million. The 53rd week is expected to contribute approximately $11 million to adjusted EBITDA. Diluted earnings per share is estimated to be approximately $1.83 to $2.08. The 53rd week is expected to contribute approximately $0.08 to diluted EPS, which implies our 52-week diluted EPS to be approximately $1.75 to $2. Diluted weighted average shares outstanding are estimated to be approximately 109 million shares. CapEx is estimated to be approximately $250 million to $300 million, unchanged from our prior guidance. Operator, we would like to now take questions. Operator: [Operator Instructions] Our first question comes from the line of Seth Sigman with Barclays. Seth Sigman: When you look at the category trends, it's been fairly mixed, but it does seem like laminate and vinyl, it's probably been the biggest problem and continues to underperform the rest of the store. This was one of the best categories for many years, although obviously, in a very different housing backdrop. So I'm just wondering, do you think the issue is still housing? Is there something else going on with the product? Is it innovation? Is it sourcing? Just any more perspective on that because that does seem like it's still one of the biggest holes. Bradley Paulsen: Thanks for the question. And you're right. I mean that category for us is our second largest category. When we look at the opportunity, it's really the vinyl part of laminate and vinyl. And we've seen pressure in this category really since the second half of last year. And the dynamics that we see, we talked a little bit about this in the last call, we saw a shift in consumer preference. A portion of our consumers started to trend down to a lower quality spec and a lower price point. And that price point is sub-$2. So we've taken really, really quick action. I think it's a reflection of how nimble we are. And we've been really open in saying that we're going to respond to those needs or those customer preferences, but we do expect that category to be under pressure. And the reason the category is going to be under pressure at some point, it becomes a math problem. Average selling price is going to be down. We don't see a meaningful lift in square footage coming. But our mindset is we're going to take share. We need that Pro in our store, and we're going to make sure as that shift continues to happen that we've got the product and price points they want. The flip side is we are pleased with performance in our other categories when you think about the other big categories inside of our business, tile, insulation materials, decorative accessories. Really pleased with how they're doing. Obviously, we want to see acceleration in the short term to offset the pressure that we're seeing in laminate and vinyl. But we are squarely focused on getting laminate and vinyl to a level that's much better than what we saw certainly in the first quarter. Seth Sigman: Okay. Great. And then my follow-up is for Bryan. Just thinking about the EPS sensitivity to the sales shortfall, you're lowering your EPS by $0.10 to $0.15, but I think there's about $0.05 below the line. So probably lowering more like $0.05 to $0.10. That's actually in line to a little bit better than the prior rule of thumb, which was $0.10 per comp point. So can you just discuss the extent that this includes the higher energy and logistic costs? And then where are you still finding some of the offsets? Bryan Langley: Thank you for the question. Yes. Look, it's something I'm most proud of with the company is just how we've reacted in this environment. We continue to pressure test the company and do the things, but we're not going to cut to the bone either. I mean you heard me say that our service scores are still the highest they've ever been. So when you think about it, I'll try to unbundle it multiple ways. So the higher energy costs are embedded in there. We do think that, that is going to have a modest impact to the gross margin rate. If the current elevated environment continues longer, we would trend towards the lower end of our guidance. But as you noticed in the call, we were able to actually raise the lower end of our gross margin guidance that I gave on the original call. So we're at 43.6% to 43.8% versus originally we were 43.5% to 43.8%. That allows us to take the low end up a little bit to offset some of the sales pressure. You're right. Historically, we've always said it's $0.10 per comp point. In this environment, again, we've taken a lot of actions. We continue to flex our labor hours to the transactions. 70% of our stores are able to move with the model and even above that a little bit, 30%, we always talk about those as being not able to move those, but we've been able to actually tweak a little bit in our lower volume stores just at a reduced kind of lower rate than we can move the other 70% of our fleet. We continue to push on discretionary spend within the 4-walls. We're managing our distribution center cost in this environment. And we've continued to align our general and administrative expenses to the current environment, and we'll continue to do that as we move along. Operator: Our next question comes from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: I wanted to ask about store opening. Can you talk about decision maybe not to slow down a little further? I realize the demand environment is a little weaker. I feel like the build-out environment is a little more costly even though you are making tweaks. So talk about that decision and relative to buying stock back or buying a higher percentage back even. Bradley Paulsen: Sure. So I might give you a little bit longer answer through that piece about capital allocation in there at the end. But you're right. In our prepared remarks, we said we remain committed to 20 stores. We've also been open, I think, for at least the last year saying that we view that kind of new store openings as an opportunity and something that we treat as a priority coming into the -- excuse me, 2026. And I would say it's still very early, but we're encouraged by the initial results that we're seeing in those 6 stores that we've opened, even in a really, really tough environment. In the script, we said we're very much focused on opening stores in Tier 1 and Tier 2 markets. I think the team has done a really nice job of refreshing our grand opening process. Ersan and the team serve a lot of credit for optimizing kind of a smaller store layout. You heard us say the average in '26 is going to be 55,000 square feet, which is a much smaller footprint than we've done in years past. Question I get a lot there is, are we sacrificing the experience? Are we sacrificing the assortment in a store that's 60,000 square foot or less? And we feel like the answer is no. So really pleased with what we're seeing. When we think about capital allocation, for us, we still feel like opening new stores is absolutely the best use of capital that we have. It's critical to our long-term strategy. So we're going to continue to lean into that. And that really has been our capital allocation strategy for quite some time. We are fortunate and we're fortunate that we're at a point in our company's history where as we look at forward projections, we see that we're going to generate enough cash to still fund those new store openings and the reinvestment into existing stores. We can also fund any type of new growth concepts inside or outside the store that would include M&A. And then any excess cash that we have -- I shouldn't say it that way. And then we have the opportunity with excess cash to return that to shareholders in the form of a share repurchase. So we feel really good about our balance sheet, feel good about the priorities that we have in our framework. And as a management team, we are laser-focused on growing the core business. Bryan Langley: Just as a follow-up, just to put in context on the amount of spend because what's helped us continue to open stores in this environment and have better returns is our average store cost is going to be this year approximately $7.5 million to $8 million. If you rewind the clock just a couple of years, we were as high as $11.7 million in 2023. So for all the reasons Brad talked about and what we've done within the box, that just kind of contextualizes it within the numbers for you. Simeon Gutman: A follow-up on value proposition. I think we talked about it a quarter ago. And can you focus especially on the lower end of the value segment, some of the lower-tier product? And I know you've been trying to reassort there, but can you assess how you sit versus the market? Bradley Paulsen: Well, one of the things that's been most surprising to me, and I think the rest of the team has been how resilient the better, best part of our business has held up. I think that's a testament again to the assortment that we have, the jobs that our team do in our stores and really explain the features and benefits of the product that we have. And we've always had a nice presence in the lower end of the spectrum. It hasn't been a high percentage of our sales. But when we do see customer preference shift, like I explained in laminate and vinyl, we can react quickly and get the share that's available in that space. So I don't think it's a huge opportunity for us to reinvent our assortment to push down to the lower end because we're really not seeing that type of preference with laminate and vinyl being the only exception. Operator: Our next question comes from the line of Steven Forbes with Guggenheim Securities. Simeon Gutman: Brad, maybe expanding on Simeon's question around the new stores averaging 55,000 square feet. I'd be curious if you can maybe take us to the box here and talk about some of the newer in-store merchandising initiatives. I know it maybe early, right, extended aisle, F&D Express, wood inspiration center. What are you sort of seeing around these new initiatives that gives you conviction that you're not going to sort of give up productivity or return sort of profiles with this migration. I'd love to hear just conviction behind those. Bradley Paulsen: Yes. So I'll try to hit the headlines. One of the things that I've shared pretty consistently is the team has done a nice job of optimizing the layout of the store. And for those of you that have been in our store, our store really has kind of 2 sections, if you will. We've got the selling floor and then we have the warehouse. So I'll start with the warehouse. I think we continue to get better and better in minimizing the amount of space that we need for warehouse so we can maximize the amount of sales floor that we have in a smaller box. And then when you come into the front of our stores, the first thing you're going to see is cash registers and you're going to see a design center. And when you think about optimizing that experience where it's a benefit to the customers and it's a benefit to our associates, I think we've hit a home run there. The example that I use, I know a lot of you are based in New York. If you get a chance to go out to Staten Island, I think it's the example of what we're talking about. And then from a design center perspective, which is really important to who we are and what we do every day. I think we've shrunk the experience without minimizing the experience, if that makes sense. Our designers still have the ability to drive inspiration with our customers out of the design center. As we said in the script, we've had a lot of effectiveness with our designers no matter the size of the store. So we feel good about that. And when we think about our core categories, and the emphasis that we have on Pro, our Pro desk and our installation assortment is not sacrificed at all. I mean it's, in some cases, as big, if not bigger than you'd see in the larger store. And then our core categories like tile, laminate and vinyl and decorative accessories, really no kind of sacrifice in those categories either. On the tile, tile does take a lot of space in our stores. We've got to be creative, and you'll see different pictures in smaller volume stores that allow us to display more SKUs than we normally would on the floor. And again, we're really excited about what we're seeing. And we don't believe that we're going to sacrifice any type of top line productivity. And that's because -- and I should have said this originally, one of the reasons we're pushing into smaller volume stores is we've got to densify urban markets. That's where a lot of the demand is. And the reality is the 75,000 to 80,000 square foot box isn't available in those markets. And if it is available, it's very, very expensive. So we've done this strategic pivot as an organization. And again, you can tell by my comments, we're optimistic on how it's playing out thus far. Operator: Our next question comes from the line of Steven Zaccone with Citigroup. Steven Zaccone: I wanted to follow up on the guidance change. I was hoping you could just elaborate a little bit more on why the decision to lower guidance at this point in the year. It seems a bit early, right? Because March and April sound pretty similar, and you actually saw somewhat of a 2-year stack acceleration in April. So help us understand what's changed from a cadence of the year? Is this more a function of weaker second half expectations just given some step down in the existing home sales backdrop? Bradley Paulsen: No, I certainly appreciate the question. And if you rewind the tape to our last call, what we communicated is that we came in from a planning perspective, assuming that 2026 was going to look a lot like 2025. We said if there's any level of stability when it comes to existing home sales or improvement, we felt like we had a path to delivering positive comp sales for the first time in a few years. Since that time, obviously, a number of things have occurred that we would consider unexpected. And I think that's how we described it in our script. I'm not going to list them because we listed them more than once in our prepared comments. But obviously, that's changed the demand environment for our business. And really, I assume any kind of high -- big-ticket discretionary item. So we thought it's prudent and responsible at this point in time to recalibrate given what we know now. When you think about the range that we provided, we'll be the first admit wider than we normally would give. But the reality is there's just uncertainty in how our demand drivers are going to play out for the rest of the year. If you look at our current run rate and assume no improvement, then we have a level of confidence that we can hit the midpoint of the guidance. If we see any type of improvement when it comes to those demand drivers, then we feel like we can get closer to the high end of the range. But as you would expect, this is a question that we wrestled with. And we felt like, again, it was just prudent and responsible for us to reset and recalibrate at this point in time. Operator: Our next question comes from the line of Michael Lasser with UBS. Michael Lasser: As outsiders, it is very difficult for us to have an accurate assessment of market share. We tend to look at the performance of the big box retailers, some of the vendors in this space. And it does seem on those metrics that Floor & Decor on a same-store basis is lagging behind the industry. It's hard to explain that given the value proposition, the customer experience and all the other facets of the model. So a, as you look either category by category, geography by geography, are you seeing evidence of market share gain? And, b, how would you explain that market share loss and what is being done to address it? And then I have a quick follow-up. Bradley Paulsen: So -- and probably worth a more in-depth conversation at some point in time, but we don't see that. We don't see that we're losing share. Even on a category like laminate and vinyl, where we admittedly say our performance has been below expectations, that market is under a lot of pressure. So I'm certainly not going to sign up and say that we're taking share in laminate and vinyl in a meaningful way. But I also don't think we're losing share in a meaningful way. And when I look at the other categories, insulation materials, tile, wood, deco, I feel really good about our position. And like we said, and this was part of my close in the comments, when we look at publicly available data, and that would be big box retail. When we look at other third-party data, that all of you look at and then certainly, the feedback from our vendor partners, we are not getting that same interpretation of the data. So we feel good about market share in a really tough environment. Do we want to have better sales performance? Absolutely, absolutely. And I would say our focus is on accelerating share gains. And as I've said kind of time and time again, if we can get any level of stability in our space, we're really, really committed to delivering positive comp sales in our business. Michael Lasser: Understood. My follow-up question is on some of the pricing actions that the corporation has tested, and it sounds like we'll deploy a bit further as the year progresses. Can you quantify what the impact has been from those actions? How have you embedded those in the guidance? And why wouldn't Floor & Decor take up prices more aggressively given that folks who are probably coming in at this point with a low level of overall traffic probably are just going to be inherently less price sensitive? Bradley Paulsen: Yes. The first thing that I would say is I can't compliment Ersan and his team enough and how they've executed through this environment, really performing at a high level and have kept us incredibly well positioned to take share in all of our categories. My general observations around the market and pricing, and I will answer your questions, just bear with me. I continue to see rational behavior, and I describe rational behavior from pricing, kind of low to mid-single-digit increases. We have shared that we've taken modest increases. And the good news is we've been able to pass that price on to customers. I mentioned that better and best penetration has held up, which has been a nice surprise. And for us, we continue to test our pricing strategy. One of the areas of investment that we've made is in our pricing team. We've hired new leadership there or a new pricing leader for our business. We're investing in tools. And even though we're pleased with the execution on our pricing, we know there's always more opportunity there. We're going to continue to test our price bands. For the first time in a long time as we've taken price down in the laminate and vinyl, we have seen that positive reaction to square footage. And we're going to run test to see if that takes place in other categories. And on the same token, take prices up to see what that impact is. We are very, very focused on taking market share and our pricing strategy is going to be reflective of that. Operator: Our next question comes from the line of Zack Fadem with Wells Fargo. Zachary Fadem: Could you remind us how your freight contracts renew and how we should think about how higher ocean and domestic freight flows through? And then for other input cost inflation like PVC, et cetera, any thoughts on exposure or impact there and what's embedded in the guide? Bryan Langley: Zack, this is Bryan. I'll take a stab at it and then Brad can jump in. Our ocean contracts, we typically renegotiate those through the spring and early summer. So we're going through that right now. Again, we typically are on multiyear contracts. I think this go around, we're on more interim contracts, 1-year kind of 2-year basis versus 3 historically that we've kind of blended in. So a lot of those will be renegotiated now. It will take a little bit of time. It will be probably the back half before we start seeing those price changes. And then it takes anywhere from 6 to 8 months depending on those international contracts to really kind of bleed fully through into the P&L just from a flow-through perspective. On the domestic side, it's a lot quicker than that. And so that's why we are starting to see some of the higher energy costs today. That's why I mentioned we are starting to see a modest impact today, and that will continue just depending on how long this environment continues. But for us, on that side, that's just a lot quicker because it's basically our domestic side post distribution center to our stores. So that flows through a lot quicker into what you see into our results. Zachary Fadem: And on the PVC, how that input cost inflation could impact the category? Bryan Langley: Yes. It's still early right now. I mean, look, Ersan's team, again, getting a lot of kudos today. They've done a great job of working with our vendor partners, long-term vendor partners that we've had there. So today, where we see just minimal exposure today, I think we'll always do what we do best, which is negotiate first and foremost, with our current vendor base. If we do see any big sort of pushes or anything else, we can always diversify out. And then whatever is left, we'll push through to our consumers to the extent that we can. Zachary Fadem: Got it. And then on the Pro loyalty revamp, any thoughts on new features you're exploring there? I know we've talked about Pro pricing. On that note, like any updated thoughts on options in terms of discounts versus rebates and how you would plan to balance gross margin versus volume improvement potential? Bradley Paulsen: I'd love to be able to share the details of that program. Unfortunately, I can't do it at this point. But as we said in the prepared remarks, really excited about the progress we're making there. That is an effort that is led by Krysta Zell, our new Chief Customer Officer. She's got deep, deep expertise in building loyalty programs. She's done that at more than one stop along her career. And what I would say is our aim here is to have a differentiated program that is really a comprehensive solution for our Pro customers. And I talk a lot about service assortment, price. It's going to touch on all those components, and it's going to be supported by the right technology. And for me, I think that's going to be a real -- a key piece to how we accelerate share gains from independents. We're really excited about the potential that it has and can't wait to roll it out in the first quarter of next year. Operator: Our next question comes from the line of David Bellinger with Mizuho Securities. David Bellinger: How aggressive could you be -- do you plan to be in the market immediately if shares are currently trading at [Audio Gap] could you be now and through the balance of the year? Bradley Paulsen: So I think the question was how aggressive do we plan to be with the share repurchase. Bryan, do you want to walk through the mechanics of how we're thinking about that program? Bryan Langley: Yes. David, I think this is you. But obviously, we said it on the call, but this will be a discretionary repurchase program, right? We'll purchase both through programmatic and opportunistic given the current dislocation within our stock. We have a healthy balance sheet, and we'll use the excess cash to fund this program as we see fit. So more to come on it. I don't want to commit to anything in the near term or long term. But just know that we'll do both programmatic and opportunistic. We're not trying to be stock pickers, right? So I mean we're going to use our advisers and go through it that way. So we do plan to start executing in the second quarter, but more to come on that kind of as we move forward. Operator: [Operator Instructions] Our next question comes from the line of Chuck Grom from Gordon Haskett. Charles Grom: Curious what you're seeing from independents recently. I would imagine they're under considerable pressure and how you're attacking that opportunity. And then, Bryan, how should we be thinking about the phasing of both comps and earnings over the balance of the year? Bradley Paulsen: Independents, as all of you know, we believe more than half of the market and very, very strong competitor in our local markets. I think I've been on record more than once saying, I think they've done a really nice job in this environment of taking care of their Pro customers, which reinforces the importance of us having a new Pro loyalty and Pro pricing program. I think the independents that cater to the more affluent customer are doing fine in this market. I'm certainly a believer in the K-shaped economy, and there's certainly a portion of that independent. I would say a small portion of the independents that cater to that audience and the higher-end designers, I think they're doing fine. I think everyone else is struggling. That is consistent with kind of the bottom-up feedback that we hear from our store partners and also our vendor partners. Our whole perspective, and you've heard me say it throughout the call is we want to play offense in this environment. We're going to make sure that we're positioned to take market share and really exceed our customers' expectations every single day. And we think that's going to be our path to success. Bryan Langley: And from a comp sequential nature, the biggest variation in the range is our transactions. I think as I alluded to on the prepared remarks, those would expect to be down low single digits to down mid-single digits, where our ticket will be somewhat consistent. but flat to up low single digits is how we would get there. And then from a cadence perspective, on the low end of guidance, Q3 is modeled to be kind of the high quarter for the year. And on the high end, it assumes sequential improvement as we move throughout the year. And then just as a point of reference for you guys, as we talked about quarter-to-date being down 4.5%, I think it is important to call out that last year, we are lapping a 1.7% increase in April, which had acceleration from the Liberation Day last year as we think about that. And then May was also 0.6%. Those are the 2 highest points of all of 2025, just to call that out as well. Operator: Our next question comes from the line of Peter Keith with Piper Sandler. Peter Keith: On the competitive front, to follow up on an earlier question, I want to focus on the big box stores. There is a narrative out there that some of your big box competitors are leaning in and investing more in the flooring category. And I guess maybe the weakness that you're seeing in laminate and vinyl could sort of feed into that narrative. So I'll just ask you directly, what are you seeing from the big box stores? Are you seeing any more competition or more investment on pricing? Bradley Paulsen: Yes. So I would say, just as a reminder for the folks on the call, where we compete with big box retail is an opening price point and the good part of our assortment plus installation materials. And big box retail, terrific companies. And I would say when we think about market share, it's a little bit of a street fight. When we think about our ability to take meaningful share, it's going to be from the independents. And the primary reason for that is a small -- a very, very small percentage of our sales comes from opening price point and good. That being said, I've heard a comment like this numerous times over the last 12 months. And actually, we don't see that. We don't see them leaning into the category. We see, in some cases, them leaning out of the category, and that's more recently than anything else. I don't see anything disruptive from any of the big box retail. But again, great companies, great competitors and companies that we watch very, very closely. But we don't feel like they are, again, having any disruptive impact on our business today. Operator: Our next question comes from the line of Kate McShane with Goldman Sachs. Katharine McShane: We wanted to ask about Spartan. You did mention that the results were weaker than expected, but also seem to indicate that there is an opportunity for better results in the coming quarters. I wondered if you could maybe contextualize the timing a little bit more and what would be driving that. Bradley Paulsen: Yes. So for Spartan, we came into the year, we knew that the first quarter was going to be a little bit softer, ended up being even softer than we expected. As we said, when we look at the leading indicators in that business, we've got a level of confidence that it's just a matter of time. So it's not an if, it's a when. When you think about their core customers, it's multifamily, hospitality, health care, education and senior living. The softness that we're seeing is coming out of multifamily. In some cases, it's timing. In some cases, it's projects getting delayed for an extended period of time. The great news is we've made investment, consistent investment in that business around new sales headcount. So when you talk about taking market share, we feel really good about our ability to rebound from the first quarter, have the gradual progress that we talked about in the script and deliver a nice year from that business. Operator: Our next question comes from the line of Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: Brad, I had a strategy question. You're evaluating Pro-specific pricing potentially, which maybe you haven't offered in the past. And you're also looking to some smaller format stores than historical standards. I guess, in the past, Floor & Decor has chosen to not offer installation services to avoid conflict with Pro customers. I'm curious if your stance is any different there. Any comment would be helpful. Bradley Paulsen: No, no. And I would say -- so no deviation from the previous strategy when it comes to how we think about installation. And even from a kind of smaller footprint store, I would say I'm building on a strategy that's already in place. One of the reasons we had confidence in our ability to deliver on a 60,000 square foot store in an urban market is because we have stores out there doing that today. Again, I think the team continues to refine that and optimize our experience. But short answer to your question is no, we're not going to deviate from the current strategy around installation services. Operator: Our next question comes from the line of Phillip Blee with William Blair. Phillip Blee: So you've spoken about revamping the Pro loyalty program next year. And I know you have your own internal design program, but same thing kind of a larger scale strategy question. Would you ever consider expanding a loyalty program to the external interior design trade to try and build a relationship with that end of the market and maybe expand your customer base to a little bit of a higher income? Bradley Paulsen: Wow, you're putting me in a tough spot to answer that question. Listen, I think when we look at our business today, I think we have a certain level of success with designer and that customer that really requires a trade discount. We view that as an opportunity. I'll position it that way. We view that as an opportunity that we can lean into more. Now what does that mean from our loyalty program? We're going to have to wait and see as we share that later in the year, what that framework looks like. But I think you're spot on with your observation as far as an opportunity for us to, like I said, lean into that customer segment a little bit more. Operator: Our next question comes from the line of Greg Melich with Evercore ISI. Gregory Melich: I wanted to follow up on the pricing actions and how it influences the ticket through the year that I think it was the flat to low single-digit ticket comp. Does that have 400 or 500 bps of same SKU inflation in it before? And is that still the same kind of number? And how do we think of that flowing through over the course of the year? Bryan Langley: Yes. I don't know if I'm going to quantify that for you on that perspective. But again, the low end of our ticket being flat, we assume continued pressure in laminate and vinyl kind of as Brad has mentioned, leading to smaller basket sizes and also some of the pricing pressures that we're talking about with value-driven options. Those are really kind of what's leading to the lower end of it versus the higher end. It's just the impact that those will have on the ticket itself. Operator: Our final question comes from the line of Peter Benedict with Baird. Peter Benedict: Just one more, I guess, on the buyback. Just a clarification. First, it doesn't look like any is assumed in the outlook, given the share count forecast didn't change. I just want to confirm that. And then just, Bryan, maybe just can you help us think about the minimum amount of cash kind of the business needs to operate on as we start to think about how aggressive you could potentially be in any given quarter with the buyback? Bryan Langley: Yes. I mean, look, it's -- from where we sit today, given where we are in the year, the impact of this year isn't going to be very material. So it's incorporated within the guidance range itself within the outcomes would be the share repurchase. We do think longer term, obviously, this is going to add value to shareholders and continue to grow as we move along and do the program consistently. So as far as -- yes. As far as minimum cash balances, yes, I mean, we think about it from cash, but it's really liquidity. I mean, for us, we've got an ABL out there that's $800 million accordion feature, we can get up to $1 billion. We've got sufficient liquidity over $1 billion today in combination with the two. I always think about it as a minimum cash or minimum liquidity that we need to make sure that the company is healthy and in a good position. For me, that's usually around $500 million, just minimum in liquidity, and that will be a balance of both cash and ABL. That's an absolute minimum. I don't think we'll get anywhere near that. But for me, that's just kind of a floor. And then on the flip side, you heard it in my prepared remarks, but we want to make sure also, Brad said it, we will not be using debt to fund this. And so for us, we'll maintain a very healthy lease-adjusted leverage ratio. Those are kind of the 2 financial guardrails that I look at as well as what we would do to our ROIC. And so we think about all 3 of those as a management team, just making sure that we don't overstretch or do those as we get into this. Bradley Paulsen: Okay. Thanks, Bryan. And thank you, everyone, for your time tonight and support. Have a great night. Operator: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.
Operator: Good morning, and welcome to American Water's First Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for 1 year on American Water's Investor Relations website. I would now like to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin. Aaron Musgrave: Good morning, everyone, and thank you for joining us for today's call. At the end of our prepared remarks, we will open the call for your questions. Let me first go over some safe harbor language. Today, we'll be making forward-looking statements that represent our expectations regarding our future performance or other future events. These statements are predictions based on our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties and factors as well as a more detailed analysis of our financials and other important information is provided in the first quarter earnings release and Form 10-Q, each filed yesterday with the SEC. This call will include a discussion of non-GAAP financial information. A reconciliation of our historical adjusted earnings per share to GAAP earnings per share and other disclosures related to our non-GAAP financial information can be found in the appendix of the slides for this call. And finally, all statements during this presentation related to earnings and earnings per share refer to diluted adjusted earnings and earnings per share. With that, I'll turn the call over to American Water's President and CEO, John Griffith. John Griffith: Thanks, Aaron, and good morning, everyone. As we announced yesterday, we started 2026 with financial results that were right on track to achieve our full year earnings guidance, which we are pleased to affirm again this quarter, along with our long-term targets. Adjusted earnings were $1.01 per share for the quarter and reflect a successful execution of our plan so far in 2026. We expect to again deliver 8% EPS growth in 2026, while continuing to provide high-quality, affordable service to our customers. We are well on our way to executing on our regulatory and capital plans for 2026 with rate cases completed in 2 states and investments in infrastructure progressing well. Our teams have also continued to advocate for our customers in various facets to start the year. For example, we've now secured approximately $185 million of net payments from PFAS manufacturers that will be passed on to customers or offset the cost of PFAS remediation. And in 2 more states, we've helped advance legislation in 2026 and that should set the foundation for expanded limited income customer bill assistance. These efforts align squarely with our mission to provide safe, clean, reliable and affordable service to our customers. In sum, for Slide 5, I am confident we'll successfully execute on our plans for 2026 and beyond. Moving on to Slide 6. As we announced yesterday, our Board of Directors approved an increase in the company's quarterly cash dividend of 8.2% to $0.8950 per share. We have grown our dividend consistently over the last decade, significantly outpacing virtually all of our utility peers. Looking ahead, we continue to expect to grow our dividend at 7% to 9% per year in line with our compelling 7% to 9% EPS growth target. Our Board and management team highly value our dividend and its contribution to our compelling total shareholder return for investors. In closing, on Slide 7, I'm pleased to share that we've achieved another milestone on the path to closing our proposed merger with the Essential Utilities. You may recall, as a part of the update I provided in February, we filed all of the required state regulatory approvals prior to the end of 2025. Last week, we received our first state approval for the merger in Kentucky. We expect to receive the next decision in Virginia in June. In other states, including in Pennsylvania and New Jersey, the cases are proceeding as planned with procedural schedules expected to continue through the summer and early fall. Also, late this summer, we plan to file the Hart-Scott-Rodino notification application related to the proposed Essential Utilities merger. Finally, we continue to expect the merger to close by the end of the first quarter 2027. With that, I'll hand it over to David to cover our financial and regulatory update in further detail. David? David Bowler: Thanks, John, and good morning, everyone. Starting on Slide 9, I'll provide some further insights into our financial results for the quarter. Consolidated earnings were $1.01 per share, which, as John noted, is in line with our expectations. Revenues were higher due to authorized rate increases to recover investments across our states, while O&M, depreciation and financing costs increased as expected. Our outlook for these categories for the year remains unchanged, which you can see from the full year waterfall included in the appendix. As you would expect, the majority of our EPS growth will occur in the second half of the year with revenue increases in key states expected to go into effect in Q3. Slide 10 provides a look at our balance sheet, and liquidity profile. Our total debt-to-capital ratio as of March 31 was 58% which has improved compared to our year-end following the repayment of the $795 million HOS note in February as we expected. On April 1, we completed a successful long-term debt issuance of $700 million at 5.2% that attracted strong demand. Our financing plan for 2026 also still contemplates settling the roughly $1 billion of proceeds from our equity forward in the middle of this year. Related to credit, we continue to have strong investment-grade credit ratings at S&P and Moody's. Both agencies note our trend of credit supportive regulatory outcomes and expect to sustain FFO-to-debt ratios that are well within the current ratings thresholds. Slide 11 covers the latest regulatory activity in our states. We received final orders in West Virginia and Maryland during the first quarter, both of which had reasonable outcomes in terms of revenues and ROEs balanced with our continued focus on affordability. West Virginia American Water now has over $1 billion of rate base and our team there continues to receive positive feedback from stakeholders in the state as a solution provider, which Cheryl will further talk about in a few minutes. On active cases, you can see we have general rate cases and progress in 5 jurisdictions. Our cases in Virginia, California and Illinois are progressing as expected and are just now entering key phases in their procedural schedules, as you can see on this slide. In New Jersey, our rate case is progressing with the next major step in the case in Rate Counsel and intervenor testimony due June 22. As a reminder, from our last case filed in 2024, we entered into a settlement agreement in August of that year, with rates effective in September of 2024. We expect new rates for the current case to go into effect later this fall. In Pennsylvania, briefs from all parties were filed earlier this month in line with the procedural schedule and a recommended decision from the administrative law judge is expected in May. We are encouraged by the tone of the case over the last several months. Prior to filing the case and through testimony filed, we have had the chance to highlight our numerous investments in water and wastewater systems for the benefit of our customers. And throughout this case, we believe our commitment to affordable service and our willingness to help our new communities in need of water quality and wastewater solutions has been recognized. While settlement wasn't reached before the procedural deadline of April 6, we feel confident in our filed positions and the investments we've made and plan to make to serve Pennsylvania American Water customers. We expect the final order from the commission in July and new rates effective in August. Turning to Slide 12. As John mentioned, yesterday, we affirmed our 2026 adjusted EPS guidance range of $6.02 to $6.12 per share. This represents our expectation of 8% EPS growth in 2026 compared to 2025, consistent with what we laid out last fall. We also continue to expect to achieve consistent EPS and dividend growth well within the 7% to 9% range through 2030 and beyond. With that, I'll turn it over to Cheryl to talk more about our capital program, legislative wins, and our recent acquisition activity. Cheryl Norton: Thank you, David, and good morning, everyone. Starting on Slide 14, we successfully invested in many important capital projects across our footprint in the first quarter of 2026. These projects are mostly focused on pipe replacement, aboveground treatment facilities, including PFAS remediation, removing lead service lines and investing in updated technologies like smart meters. These investments are crucial for us to deliver on our core mission of consistently providing safe, clean and reliable water and wastewater services, and we remain vigilant about utilizing our scale and expertise to control costs and keep bills affordable for our customers, which I'll speak more about in a minute. Slide 15 outlines 4 important pieces of priority legislation for us that were passed already in 2026. In Iowa, an infrastructure recovery mechanism is expected to go into effect on July 1 of this year that will allow us to recover certain investments more timely outside our general rate cases. In Indiana, we'll be able to adjust for power and chemical costs if they change by more than 3% during a certain period. This will become effective on July 1. These bills will help to reduce our overall regulatory lag and further demonstrate the constructive regulatory and legislative environments in these states. Additionally, as John mentioned, Maryland and Virginia both passed affordability-related bills that we pursued to benefit low-income customers. American Water continues to advocate for customer affordability legislation at the state and federal level. And lastly, on Slide 16, we continue to be well positioned for growth through acquisitions across many states with 105,000 customer connections currently under agreement from deals totaling $565 million. In order to meet our 2% goal for customer additions, we know that growth needs to come from multiple states. You can clearly see that our investment in dedicated originators who are focused on targeting and initiating acquisitions across our footprint is being reflected in deals under agreement in many states. In March, we completed the acquisition of the Nitro wastewater system in West Virginia for $20 million. This system, like many of those we acquire, needs extensive capital upgrades in the near future in order to remain in environmental compliance and would cause their citizens in the absence of a transaction to absorb the full rate impact of those investments. American Water plans on investing over $40 million in the next 5 years, and we look forward to serving the 4,600 customer connections in that community. And finally, the regulatory approval process for the Nexus Water Group Systems is progressing very well. We've received approval from the regulatory commissions in 7 of the 8 required states. Based on this progress, we now expect the closing to occur by June 30. With that, I'll turn it back over to our operator to begin Q&A and take any questions you may have. Operator: [Operator Instructions] The first question is from Jeremy Tonet with JPMorgan. Aidan Kelly: This is actually Aidan Kelly on for Jeremy today. Just wanted to touch on the 2026 guide. Clearly, you guys reaffirmed today and continue to message higher second half results from the upcoming new rates in Pennsylvania, New Jersey. I guess on that front, will be curious if you could provide any more insight on if you assume ROE increases, especially in PA, do you kind of expect that to bounce back a bit? John Griffith: Thanks for the question. We certainly feel good about the merits of our case in Pennsylvania and expect to see a recommended decision from the ALJ in May and certainly all of the fundamentals from when we go back to the filing of our last case and the environment in Pennsylvania, I think, is well recognized in terms of the types and amount of water and wastewater investment that are required in the state, including along the lines of PFAS remediation, lead and copper, et cetera. So I'd say we feel very good about the fundamentals of the Pennsylvania case and same in New Jersey where there's a meaningful amount of PFAS investment that's required. And I think there's broad understanding across administrations and other stakeholders for the need of those investments. Aidan Kelly: Great. And then just one separate -- simple question on the merger process. Could you just remind us like what is required to get it through? Do you need full approval across Pennsylvania, Texas, North Carolina, New Jersey, Illinois and Virginia? Or is there a scenario where it could go through if some states don't approve, I don't know, if Kentucky just had approved to get signed there, but just curious procedurally, how that's kind of going. John Griffith: Sure. We need approvals in all of the states where approvals are required. And so there are PUC approvals required in 7 states. As you noted, we've received approval in Kentucky, statutorily will receive decisions in Virginia and Illinois this calendar year. But yes, you need all of the required approvals before we can close the transaction. Operator: The next question is from Paul Zimbardo with Jefferies. Paul Zimbardo: I just wanted to focus also on Pennsylvania. Just there's been a lot of kind of comments from the Governor's office and just more focus on utility bills, again, more the electric side. But just curious kind of what the engagement's been from stakeholders. I know you said going to get the settlement in Pennsylvania. But just curious kind of what the conversations and tone have been in Pennsylvania broadly? John Griffith: Yes. I'd say, Paul, it's a good question. It's something that we're thinking about all the time and very active on with the Governor's office and with stakeholders. And we frankly see a lot of alignment in our position relative to what we think is necessary in Pennsylvania in terms of affordability and also investment, right, particularly in the era of increasing environmental investments and frankly, just the state of water and wastewater infrastructure in the state. And again, from our perspective, utilities need to remain transparent, accountable, responsive to customer needs and we strive to be all of those things. And we also see the state being very constructive on growth and the need for growth. And in order to have that good economic development and kind of growth-oriented environment in the state. That requires having good healthy infrastructure, and we think there's broad recognition of that. So we feel very good about the fundamentals of where we are and what we're doing in Pennsylvania. Paul Zimbardo: Okay. And one other small one, more of a technical one. I saw the corporate alternative minimum tax update in New Jersey and something in the Q. Just any impact we should be thinking about earnings, cash flow or otherwise from that new corporate alternative minimum tax guidance? David Bowler: Paul, this is David. So yes, I mean there is a cash benefit for us. We filed for a refund for the '24 returns, about $84 million that we expect to get sometime this year. And then going forward throughout our forecast period. Prior to this change, we had $100 million or thereabouts throughout the forecast period CAMT payments. So there will be a, I'd say, a meaningful cash benefit for us. Paul Zimbardo: Okay. Great. So that $100 million, that's a multiyear number, so whatever is $20 million, $30 million a year kind of say that... David Bowler: Sorry, it's about $100 million a year. It trails off towards the tail end, but about $100 million a year. Operator: [Operator Instructions] our next question comes from Shar Pourreza with Wells Fargo. Andrew Kadavy: Actually, this is Andrew Kadavy on for Shar. So with the Essential merger pending in Pennsylvania and New Jersey, both net benefit states. Can you give a sense of what kind of customer benefits from the merger that you're highlighting for the commissions? John Griffith: Yes, Andrew, I'd say we've made our filings in the states, and we're going through public hearing processes now. And certainly, it's still early days in those processes, but we do feel like there's good broad support for what we're trying to accomplish in the States. As you're aware, Pennsylvania is an affirmative public benefit state, and we look forward to demonstrating that, which we think is very consistent with everything that we're pushing for in Pennsylvania and in all of our states, which is affordability and top-tier customer service. So I think we feel really good about our position there. Andrew Kadavy: And then shifting gears a little bit to your financing plans. How should we think about the timing of the debt issuance for this year? Should we expect that in second quarter, third quarter? And then would it all be in one chunk or would it be spread out throughout the year? David Bowler: Andrew, this is David. So I'm sure you saw, we just issued $700 million of long-term debt -- 10-year debt on April 1. And then for the balance of the year, we've got our equity forward that we expect to take those proceeds at this point today as around midyear is what we've assumed for modeling purposes. And then in the latter half of the year, we have another debt issuance, long-term debt issuance in the plan. So you can think about Q3, early Q4 for that. Operator: The next question is from Aditya Gandhi with Wolfe Research. Aditya Gandhi: I wanted to start off in -- I wanted to start off in Pennsylvania. You mentioned you weren't able to settle this time before the procedural deadline. One of your electric peers in the States settled their rate case recently. Recognize each case has its own unique circumstances. But can you maybe just speak to sort of your approach to this case, just given the fact that historically, you've been able to settle in Pennsylvania except this one and the prior one. And then also speak to your level of confidence in being able to get a balanced outcome from the commission? John Griffith: Yes. Thanks for that, Aditya. And I'll go backwards. I think we do feel good about our prospects for getting a balanced outcome in Pennsylvania. Since our last case, we've worked very purposefully across the state to continue doing what we always try to do, which is really a prudent investment in the state to meet all of our system needs while recognizing the need for affordability across customer classes. And we do think that those efforts are recognized. And so we certainly feel good about our prospects there. In any rate case, there's always -- you go down a path and there are opportunities to settle and then you move forward from there. Rate cases are a combination of financial issues, policy issues, and it's just a process. We feel good about the process that we've gone through so far in Pennsylvania. And again, just look forward to hearing what -- from the ALJ with a recommended decision in May. Aditya Gandhi: Got it. That's helpful color. And maybe just one more question from me. Following up on a previous question about the CAMT. So in your current plan, if I understood David's comments correctly, you're embedding about $100 million of cash tax payments annually. When you do refresh your plan this year with Q3, will you incorporate that benefit into your plan? And could we see some sort of reduction in your equity needs? David Bowler: Well, we will incorporate the change into the plan when we refresh in Q3, and we'll evaluate the need at that time on equity. Operator: As there are no more questions in the queue, this concludes our question-and-answer session. And this also concludes the conference. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Altria Group 2026 First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations. Please go ahead, sir. Mac Livingston: Thanks, [ Alani ]. Good morning, and thank you for joining us. This morning, Billy Gifford, Altria's CEO; and Sal Mancuso, our CFO, will discuss Altria's 2026 first quarter business results. Earlier today, we issued a press release providing our results. The release, presentation and quarterly metrics are all available at altria.com. During our call today, unless otherwise stated, we're comparing results to the same period in 2025. Our remarks contain forward-looking statements, including projections of future results. Please review the forward-looking and cautionary statements section at the end of today's earnings release for various factors that could cause actual results to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of our Board of Directors. We will report our financial results in accordance with U.S. generally accepted accounting principles. Today's call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures are included in today's earnings release and on our website at altria.com. Finally, all references in today's remarks to nicotine consumers or consumers within a specific nicotine category or segment refer to existing adult nicotine consumers 21 years of age or older. With that, I'll turn the call over to Billy. William Gifford: Thanks, Mac. Good morning, and thank you for joining us. We delivered a strong start to the year, growing adjusted diluted EPS by 7.3% in the first quarter. Our highly cash-generative businesses supported significant returns to shareholders through dividends and share repurchases, while we continue to invest in support of our vision. Our smokeable products segment generated strong income growth. Marlboro strengthened its position in the premium segment and PM USA continued to execute its total portfolio strategy with discipline. In the oral tobacco products segment, on! performed well in a highly competitive marketplace and Helix expanded on! PLUS nationwide. My remarks this morning will focus on first quarter performance from on! and an update on the state of the e-vapor category. I'll then turn it over to Sal, who will provide further detail on our business results and financial outlook. Let's begin with on! and the nicotine pouch category. Over the past 6 months, oral nicotine pouches drove the estimated 9.5% increase in total oral tobacco industry volume. In the first quarter, the nicotine pouch category grew 9.1 share points and now represents more than 58% of total oral tobacco. Against this backdrop, Helix delivered solid results in a highly competitive environment. Reported shipment volume for the total on! portfolio grew nearly 18% and to over 46 million cans in the first quarter, reflecting continued demand for on! Classic and the pipeline shipments for the on! PLUS national expansion. At retail, on! and on! PLUS together represented 7.8% of the total oral tobacco category, down 0.8 share points year-over-year and up 0.2 share points sequentially. We began shipping on! PLUS nationwide in March. And at the end of the first quarter, it was available in approximately 100,000 stores, representing 85% of nicotine pouch category volume. On1 PLUS is the first and only product authorized under the FDA's pilot program, I think that streamlining PMTA reviews for certain oral nicotine pouches. The brand is currently available in 3 flavors across 2 nicotine strengths and features our proprietary NICOSILK technology. To support the on! PLUS expansion, Helix recently launched a new retail trade program to strengthen execution across the full on! portfolio. The program is focused on increasing visibility and securing incremental fixture space to support on! PLUS today and future innovations over time. Today, the Helix trade program has secured premium retail positioning in contracted stores, representing approximately 90% of Helix volume. Additionally, on! PLUS is prominently featured across key retail touch points with coordinated signage from curb to counter. On! PLUS is supported by marketing that highlights the product experience, including visuals that showcase the pouch itself, communicate comfort and reinforce its positioning as the softest pouch on the planet. These materials are designed to give nicotine consumers a clear understanding of how the pouch looks, feels and fits. This messaging is complemented by initiatives such as in-person events, brand partnerships, paid social media and streaming audio that aim to increase awareness, drive trial and further strengthen on! brand equity. Importantly, these efforts are grounded in responsibility with safeguards to limit reach to underage audiences and with a strong focus on regulatory compliance. Through these actions, we believe we can position on! PLUS as a differentiated offering for adult nicotine consumers and responsibly grow the brand over the long term. On the regulatory front, the FDA is reviewing applications for on! PLUS Mint, Wintergreen and Tobacco and 12-milligram strengths under its pilot program. And we have submitted applications for 6 additional varieties across 3 nicotine strengths. We believe the science and evidence supporting all of these applications is compelling and provides a basis for FDA authorization within the 180-day statutory time line. Let's now turn the e-vapor category. While illicit flavored disposable products remain prevalent, after several years of rapid growth, we began to see signs of moderation in the back half of 2025. We believe increased enforcement activity and supply-related marketplace disruption have slowed demand for these products, and those dynamics continued into the first quarter. At the end of March, we estimate there were approximately 20.5 million adult vapors in line with the year ago period. Over the same time frame, the estimated number of disposable e-vapor consumers declined modestly. Taken together, we believe these developments suggest early indications that the category's prior growth trajectory driven largely by illicit flavored disposable products may be evolving. From an enforcement perspective, we continue to see signs of a commitment from enforcement agencies and incremental progress. During the quarter, federal agencies worked alongside local law enforcement to combat illicit products, including a large-scale enforcement action in Northern Virginia supported by the Drug Enforcement Administration. In addition, in states where product directories are in place and properly enforced, we are seeing evidence that these frameworks are helping to reduce the presence of illicit products in tracked channels. In our view, consumer demand for e-vapor products demonstrates the potential for the category's role in tobacco harm reduction in the U.S. However, progress continues to be constrained by the limited number of FDA-authorized products. We see a clear pathway to restoring order and advancing harm reduction, anchored in a more efficient and predictable authorization process that supports reasonable responsible innovation and establishes a compliant legal marketplace of e-vapor products. When combined with sustained enforcement, we believe this would allow compliant manufacturers to provide adult nicotine consumers with authorized high-quality products that are appropriate for the protection of public health. Overall, we delivered a strong start to the year. Our results this quarter reflected disciplined execution across our businesses, continued smoke-free progress amid a dynamic regulatory and competitive environment and our commitment to returning substantial capital to shareholders. Lastly, as you know, this will be my final earnings call as CEO. It has been a privilege to lead this company alongside so many talented colleagues and friends. And I'm proud of the progress we've made together. I've also thoroughly enjoyed engaging with the investment community along the way, and I thank you for your trust and support. As I step away, I do so with full confidence in our leadership team and the strategy in place going forward. I'll now turn it over to Sal to provide additional details on our business and financial results. Salvatore Mancuso: Thanks, Billy. The smokeable products segment delivered strong financial performance in the first quarter, reflecting the continued resilience of our smokeable business. Segment adjusted OCI grew by 6.3% with adjusted OCI margins expanding to 65.1% and an increase of 0.7 percentage points. This performance was supported by solid net price realization of 6.3%. Additionally, we saw the decline in our smokeable volumes continue to moderate. In the first quarter, reported domestic cigarette volumes declined by 2.4%. When adjusted for trade inventory movements, we estimate domestic cigarette shipment volumes declined by 4%. At the industry level, when adjusted for trade inventory movements, we estimate domestic cigarette industry volumes declined by 5%, marking the fourth consecutive quarter of sequential year-over-year moderation. This trend was driven primarily by reduced cross-category movement between cigarettes and illicit flavored disposable e-vapor products for consumers, the macroeconomic environment remains challenging. Elevated everyday expenses and higher gas prices later in the quarter continued to weigh on discretionary income among more price-sensitive at the old smokers. Although higher-than-normal tax refunds provided some short-term relief, these pressures were primarily -- were the primary driver of year-over-year discount segment retail share growth of 2.4 share points. This trade down dynamic impacted Marlboro's overall retail share. which declined 1.4 share points versus the year ago period and 0.1 share point sequentially. However, in the highly profitable premium segment where smoker purchasing behavior reflects higher levels of brand loyalty, Marlboro will continue to demonstrate its competitive strength. In the first quarter, Marlboro expanded its share of the premium segment to 59.5%, up 0.1 share point versus the prior year and 0.2 share points sequentially. A expanding its long-standing leadership position. Basic continued to capture share in the discount segment, reflecting PM USA's data-driven total portfolio approach to meeting a broad set of consumer needs. Basics retail share grew 0.5 share points sequentially and 2.4 share points year-over-year. Total PM USA retail share grew 0.1 share point sequentially and 0.4 share points versus a year ago, demonstrating the strong execution of PM USA's total portfolio approach. In cigars, reported shipment volume was down slightly by 0.2%. The Middleton continued to outperform the large industry behind the strength of Black & Mild. Let's turn now to the oral tobacco products segment. which delivered over $400 million in total adjusted OCI in the first quarter. Adjusted OCI margins remained strong at 67.4% and down 1.8 percentage points from a year ago and were impacted by Helix marketing investments for in-person events and digital advertising as well as product mix between traditional MST and nicotine pouches. Total segment reported shipment volume decreased 3.1% as growth in on was more than offset by lower MST volumes. When adjusted for trade inventory movements, we estimate that first quarter Oral Tobacco Products segment volumes declined by approximately 8.5%. Year-over-year trade inventory comparisons were impacted primarily by on plus pipeline volume in the first quarter and elevated competitor volume in 2025. Oral Tobacco Products segment retail share declined by 5.5 percentage points. Overall, we remain encouraged by the performance of our oral tobacco businesses. as Copenhagen continued to lead in MST and Helix expanded its portfolio in the growing nicotine pouch category. Turning to our investment in ABI -- we recorded $160 million in adjusted equity earnings in the quarter, up 9.6% versus the prior year. We continue to view our ABI stake as a financial investment and our goal remains to maximize the long-term value of the investment for our shareholders. We remain committed to returning significant value to shareholders and maintaining a strong balance sheet. In the first quarter, we paid approximately $1.8 billion in dividends and repurchased 4.5 million shares for $280 million. At the end of the quarter, we had $72 million remaining under our current share repurchase program, which expires at the end of the year. In addition, our balance sheet remains strong. We retired just over $1 billion of debt that matured in February and our total debt-to-EBITDA ratio as of March 31 and was 1.9x, in line with our target. Finally, on guidance. We reaffirm our expectation to deliver 2026 full year adjusted diluted EPS and in a range of $5.56 to $5.72, representing a growth rate of 2.5% to 5.5% and from a base of $5.42 in 2025. As a result of the strong first quarter performance, we now expect 2026 adjusted diluted EPS growth to be more balanced between the first half and the second half of the year. Our reaffirmed guidance range now contemplates the impact of moderated labor industry growth on combustible and e-vapor product volumes and increased macroeconomic uncertainty facing adult nicotine consumers. Before we wrap up, I'd like to thank Billy for his leadership over his decades of service to Altria. I have enjoyed the privilege of working closely with Billy for many years, and he has positioned us well to succeed in the future. We are committed to building upon the strong foundation he's fostered and accelerating progress toward our vision. With that, Bill and I will be happy to take your questions. While the calls are being compiled, I'll remind you that today's earnings release and our non-GAAP reconciliations are available on altria.com. We've also posted our usual quarterly metrics, which include pricing, inventory and other items. Operator, let's open the question-and-answer period. Operator: [Operator Instructions] Our first question comes from Faham Baig with UBS. Mirza Faham Baig: Brilliant. I have 2, please. The first one, I guess, is on your performance. At the full year stage, you spoke about a second half weighted performance this year, but Q1 came in seemingly stronger than expected. What were the areas that surprised you positively relative to the guidance in February. And I guess given the stronger-than-expected quarter, why have you chosen not to raise or narrow the guidance for the full year? So that's the first question. And the second question is on cigarette volumes. Clearly, over the last 6 months, there has been an improvement in volumes. But it seems to be entirely driven by the deep discount segment. So I guess what are the key drivers that are helping this particular segment? And why may not be sort of supporting the premium segment too? Salvatore Mancuso: Yes. So thank you for the questions. So look, we do a terrific job of forecasting the year I would say, though, is the first quarter played out, what you saw was stronger volume performance, and that's primarily driven in the smokeable category by a moderation of the cross-category movement that I talked about in my opening remarks. So as the year plays out, we see growth being more balanced between the first half and the in the second half of the year. So that was the primary driver that we're seeing. We thought it was prudent to reaffirm guidance. We're a quarter into the year. Obviously, the macroeconomic environment remains challenging and uncertain. Gas prices have increased at the end of the quarter significantly. There's been some maybe short-term offsets to that as we've seen tax refunds higher than we have seen in the -- in past years, and that may be somewhat short term if you think about it. So we'll see how the rest of the year plays out. Obviously, if there's any updates as the year progresses to our guidance, we would communicate that. But we feel really good about our ability to reaffirm guidance for the year. As far as cigarette volumes go, again, I mentioned the cross-category moderation that we've seen played out, but the consumer does remain under pressure, and that's been a driver of the growth in the discount category. We are really happy with PM USA's total portfolio strategy, which allows Basic to capture share of that discount category. So we feel really good about PM USA's performance for the quarter and very pleased with Marlboro's performance where it grew its share of premium sequentially and year-over-year. Operator: Our next question comes from Matt Smith with Stifel. Matthew Smith: And Billy, first off, I just want to wish you well in your retirement in the upcoming weeks here. Just wanted to dig into smokeable OCI a bit. The performance was quite strong in the quarter. And on a per pack basis, operating costs were below the level from the second half of last year. I think less volume deleverage was likely a benefit. But can you provide some more color on the other factors in smokable seems like double the duty drawback grew in size? And did you see that drop through profit more efficiently in the quarter? . Salvatore Mancuso: Yes. So as you stated, we had really strong first quarter performance from our smokeable segment. So just a great job by PM USA and John Middleton in that segment. As far as spending goes, as we've stated earlier, we do have some investments in our import export business. which are more weighted to the first half. So I wouldn't overread a particular quarter, but the per pack controllable costs, obviously, were -- they did receive a benefit from the higher volume as well as the export volume that we've broken out for you in our financial statements. So -- but I would say the overall OCI was driven primarily through pricing and the stronger cigarette volume performance that you saw play out through the year. And again, that's primarily driven by the moderation of the cross-category movement between vapor and the cigarette category. Matthew Smith: And as a follow-up to the full year guidance question, there's a lot of reinvestment this year, whether it's behind on us or the carryover from basic repositioning and some other upcoming activities in smokeable. If you continue to see resiliency in the consumer, how do you balance the earnings growth potential against leaning more heavily into reinvestment this year given some of the flexibility you have. William Gifford: Yes. I think you have to think about it in totality, Matt. When you think about investment, we don't feel like we're under-investing in any of our growing categories. And so we'll continue to invest appropriately with those I think from the strength of the consumer, it's the wild card with the economic outlook, the way it is with higher gas prices and stuff. And as Sal mentioned, there were certainly offsets. We'll see as those offsets play out throughout the year. and how gas prices continue to trend and we'll make any changes when it's appropriate. Operator: Our next question comes from Bonnie Herzog of Goldman Sachs. Please go ahead. Bonnie Herzog: All right. And congratulations again, Billy and Sal, and Billy, I also wish you all the best in your retirement, and it's really been great working with you. I -- some of you guys can hear me. I have a question on the double Okay, good. I have a question on the double duty drawback. I guess I was hoping for some more color on the expected phasing of the benefits you now expect this year? I believe you did start to import in the quarter, and I do see the stepped-up benefit in Q1 versus Q4. And -- so just curious, should we expect a steady increase in the benefit each quarter as the year progresses? And then did this activity play a role in any way in your updated guidance phasing to be more evenly split between 1H and 2H. I guess I'm just trying to think if there was any type of pull forward in the quarter that we should be aware of? Salvatore Mancuso: Bonnie, thank you for the question. You will see increases in the export volume and the benefit of the duty drawback as the year progresses. So you are right in your assumption. I would tell you that the more balanced growth -- diluted EPS growth first half to second half is more driven by the fact that you've seen this moderation in cross-category movement and the benefit of the volume in the smokeable segment. And then, of course, we're paying close attention to the economic conditions that our consumers are facing -- they are under significant economic pressure, again, from the cumulative impact of inflation, rising costs of everyday items, including gas. So we'll pay close attention to that. But I would say that's the main driver of the balance between first half and second half. William Gifford: Yes. Thanks for the kind words, Bonnie. The only thing I would add is I think it's important to Think about the 2 drivers that are driving that interaction between smokeable and e-vapor. If you think about the 2 drivers, 1 is certainly enforcement. So as the product is not available for the consumer, they go back to their total considerations make tisions. But it's also -- and you heard in my remarks, saturation of the marketplace with e-vapor products and a slowdown in that transition over. And so it's hard to predict exactly when that saturation point is going to hit, and we think we're starting to see signs that we hit that. That's why we've been after and really pushing the FDA to think of not only enforcement but authorization, and we think they can achieve much faster authorization by publishing product. Bonnie Herzog: Okay. That's helpful. And then just 1 other question, if I may, on Marlboro. You're rolling out cabo cuts soon. So maybe hoping for a little color on the rollout and maybe expected state allegations. And then could you provide a little color on how you're going to manage Kiboycut relative to say Marlboro Black in terms of pricing? And ultimately, I guess, how we should think about the contribution to profitability, how you're going to manage versus Marble Black, et cetera. Salvatore Mancuso: Sure, Bonnie. Yes, Cow Boyd Cut, we will expand distribution later in the year, specifically later in the second quarter. You should think of a cowboy cut a couple of ways. One is it's a tool within our RGM toolbox. It provides price-sensitive Marlboro consumers with an option, and we believe that's important. So you should expect it to be competitively priced. But of course, with RGM, you may see different price points depending on what where you're going. And also Cowboy Cut allows us to build on Marlboro's heritage during a time when the country celebrating its 250th anniversary. So it's also a benefit to Marvell's overall equity strength that you see in the marketplace. So we're really excited about. It's a terrific product, and you will see broader distribution as the quarter plays out. Operator: Next question comes from Andrei Andon with Jefferies. Andrei Andon-Ionita: Three for me, please. Number one, could you please tell us a bit more about the factors that drove the improvement for Marlboro within the premium combustible segment? And then 2 questions on oral nicotine purchase, please. I know it's early days for on! PLUS. There's been a shipment benefit -- shipment benefit for Q1 volumes. But is there any color you could give us around the consumer, the early consumer offtake for the new product for on! PLUS? And perhaps, finally, just a clarification, the 6 new flavors that you've submitted applications for with the FDA? Are they also part of the Fast Track nicotine pouch pilot program? William Gifford: Yes. I'll try to unpack those 3 questions, if I miss any, please follow up. I think when you think about the Marlboro brand within the premium segment, I think there are really 2 factors there. Marlboro still the aspirational brand in the cigarette category. And so with the tools that we have in data analytics with revenue growth management, it allows us to, on a store-by-store basis, make it very competitive, but remain very profitable. And I think that's what's really driving the Marlboro growth in premium. I think when you think about oral nicotine pouches, early on, it is very, very early. You remember that we went national towards the end of March. And so we're excited about that. But we know that flavors are going to play an important role in the future of the nicotine pouch category, and that ties into your third question about flavors. And they are not part of the pilot program at this point. But this is why we believe that it's very easy for the FDA to go through the authorization process. The science is the same in those pouches as what they've already authorized. It's from moving a grass, which stands for in the FDA lingo, generally recognized as safe. So you're removing 1 grass flavor and putting in a new grass flavor. And so they've already reviewed the science on everything else related to the product. Their only focus would really be the flavors. And that's why we believe that it can be achieved within the 180-day statutory requirement. Operator: Our next question is from Eric Serotta with Morgan Stanley. Eric Serotta: Great. Can you give us a little bit of color of how you're thinking about the potential macro impact from the low end -- from the low-end consumer. Since the conflict began, we're now, call it, 8 weeks or so into it, a lot of noise with weak consumer confidence overall, but higher tax refunds -- what are you seeing? And I guess, in past times of sharp spikes in gas prices, what has sort of been the typical lag based on your research for an impact on your takeaway? And then second question, you certainly see understandably more favorable about the e-vapor elicit vapor enforcement. How is that impacting your thinking about your broader e-vapor strategy -- for the past year or so, you seem to be working behind the scenes on resolving the IP issues, but sort of not going to rush to get into -- get back on to a market that was clearly had its challenges. Is that evolving with the improved enforcement that you're an improved performance of the market that you're talking about? William Gifford: Yes. I'll let Sal kick us off with the macroeconomic and then I'll take e-vapor. Salvatore Mancuso: Sure. Eric, I think you framed a macroeconomic situation quite well in your question, right? So later in the quarter, you did see a significant increase in gas prices. And obviously, that has an impact on discretionary spending that the consumer does have and been under pressure for quite a while, just as everyday items continue to be at elevated prices. But there are some shorter-term tailwinds, I guess, you would call it, related to some of the higher levels of tax refunds that we are seeing based on the data coming out of the IRS. So obviously, we have to pay close attention to that. You are seeing a growth in the discount category within the cigarette business or cigarette segment. and that is driven by the macroeconomic difficulties that the consumer is facing. And you've seen us using the RGM, the revenue growth management, data analytics and tool set that we do have. And that's why you see basic in heavily discounted stores where we can capture consumer purchases that may have gone to other discount brands and we can capture those purchases in basic. And then we talked earlier about Cowoboy cut being a competitively priced product that will engage with Marlboro that are under economic pressure. So we believe we have the tools to manage through this situation. But obviously, we're going to pay close attention to the consumers' economic condition as the year progresses. William Gifford: And I think related to e-vapor, while we were just as excited as you are, some of the green shoots you're seeing in enforcement, I think it's important to can still look at the context, the e-vapor category in total. So it's very large, but it's still, call it, approximately 70% of the volume is illicit flavor disposables. And so it's still upside down in the marketplace. Now we're excited. We're making significant progress on the ITC issue that you described related to the patent infringements. We feel good about that. We're excited to be able to bring that product back to the marketplace at the appropriate time, but we'll still do it in a disciplined fashion while the marketplace is still upside down. And that's, again, going back to our earlier point, it's why we are really pushing the FDA. They think about both enforcement, but authorizations so that we can keep those consumers in the e-vapor category with products that are authorized. Operator: [Operator Instructions] Our next question comes from Damian McNeela of Deutsche Bank. Damian McNeela: Just 1 question for me. I think in your prepared remarks, you mentioned that on! PLUS was getting allocated additional shelf space in the 100,000 or so stores that it's got listings in. Can you just sort of give an indication of where that shelf space is coming from? Is it -- are you winning it back off of the nicotine pouch brands? Or is it coming from traditional oil tobacco products, please? William Gifford: Yes, it's a good question. We feel very excited about what our sales force was able to achieve. You can think of that category primarily as its own category within the retail space. And so that is achieving that outlook within the nicotine pouch space. Operator: Our next question comes from Callum Elliott of Bernstein. . Callum Elliott: Hopefully, you can hear me and just adding my congratulations on the World as a retirement believe best of luck with the endeavors? So my first question is on your nicotine pouch strategy. One of your tobacco peers has been rolling out a nicotine pouch product under a legacy world tobacco brand -- so my question is, do you have any thoughts about maybe trying to do the same thing with Copenhagen or Skol? Or do you think that your initiatives with on are sufficient to get the sort of the consumer response that you're hoping for? Then my second question is about ASIC and its interaction with Marlboro. I think the data you showed shows discount share gain of 240 basis points year-on-year in Q1 and basic is also going 340 basis points. So it seems like all of the discount sector share gain is coming from basic -- and as we all know, we sort of annualize the repositioning quite soon. So should we be expecting that discount share gains slow as a whole as basic starts to slow and maybe Marlboro can start doing a bit better. Would you expect other discount brands to start doing better once basically annualizes the launch? William Gifford: Yes. I'll take the first question and then pass it on to Sal for the basic question. In the nicotine oral category, USSTC was the only smokeless company to have signed a master settlement agreement. So that prevents us from using those tobacco brands in a product that does not contain tobacco. So we feel very good about on! and on! PLUS and the way it's positioned from an equity standpoint. We feel like we can compete very well in the nicotine pouch space. Salvatore Mancuso: And Callum,we're very pleased with basics performance. Remember, basics, promotions were in limited retail distribution. And it's really being driven, that distribution is being driven by the data analytics that we have so that basic is being promoted in stores that over-index discount. And that allows PMUSA to capture consumer purchases that would have otherwise gone to other discount brands and not having an overnet impact on Marlboro. So that's why we believe you're seeing Marlboro continue to grow share in the premium category and performed quite well there. Basic is able to capture the discount share that it's been able to capture. So we feel really good with the strategy. It's really driven by data analytics and it allows us to use the revenue growth management tools across the PM USA's portfolio. Callum Elliott: Maybe I can just ask a follow-up, if that's okay, Sal the sort of stronger-than-expected performance in Q1. Does that give you the possibly to sort of further extend distribution for basic beyond the sort of the plateau that we seem to have originally found given that you seem to have this sort of increased flexibility now within the 2026 guidance? Or is that not something that we should be expecting? Salvatore Mancuso: Well, I don't think the strong performance is what drives that. It really is the data. And if there's opportunistic retail locations to promote basic and limit the impact on Marlboro, then that decision, but it's not driven by the financial performance necessarily. It's being driven by the data analytics Sure. Operator: Our next question comes from Dave with Richmond Times Dispatch. Unknown Analyst: I was hoping you could talk a little bit more about the enforcement for the disposable vapes. You probably know that here in Virginia, the legislature has passed the new permitting and enforcement legislation for vape shops. And I'm wondering if this is something that brings enforcement to a new front? Is it something that might be significant in terms of other states being interested in this kind of thing. Have you been monitoring that? William Gifford: We have been. I think when you think about it, all the efforts that we try to get both at the state level and the federal level, or exactly what you're after is making sure that the consumer in the vape category has authorized products that the FDA, an independent party has looked at what's in them and what comes from them. And so that's what we're driving. I think when you look across the U.S., you see a number of tools available at the state level. You've mentioned the permitting in Virginia. Other states have directories. It all is driven by how well they enforce it. Where we see enforcement take place, we see that the consumer goes back to their total consideration set. So we've seen some go to nicotine pounds. We've seen some come back in cigarettes. And then we've seen in some states where I'll call it a gray area where their vape products that have applications in front of the FDA and are awaiting a decision. So they're able to stay in the marketplace. So Again, that's why we've been really pushing the FDA to think about both enforcement but also making authorization more readily available. Unknown Analyst: Could the Virginia legislation be a model for other states? William Gifford: We've seen that across states. Some states have used model legislation that drives more, if you will, enforcement and have only authorized products in the marketplace, but it's really driven by how well it's enforced. Operator: There appears to be no further questions at this time. I would like to turn the call back over to Mac Livingston for any closing remarks. Mac Livingston: Thanks, everybody, for joining today's call. Please reach out to Investor Relations if you have further questions. Have a great day. Operator: This concludes today's call. Thank you for your participation. You may disconnect at any time.
Operator: Hello, everyone. Thank you for joining us, and welcome to Southside Bancshares, Inc. First Quarter 2026 Earnings Call. 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 Lindsey Bailes, Senior Vice President, Investor Relations. Lindsey, please go ahead. Lindsey Bailes: Thank you, Rebecca. Good morning, everyone, and welcome to Southside Bancshares, Inc. First Quarter 2026 Earnings Call. A transcript of today's call will be posted on southside.com under 10-K. Joining me today are President and CEO, Keith Donahoe; CFO, Julie N. Shamburger; and Chief Treasury Officer, Sunny Davis. Keith will start us off with his comments on the quarter, then Julie will give an overview of our financial results, and Sunny will end with comments on securities and funding. We will have a Q&A session following Sunny's remarks. I will now turn the call over to Keith. Keith Donahoe: Thank you, Lindsey, and welcome to today's call. We are pleased to report solid financial results for the first quarter of 2026. Highlights include strong linked-quarter loan growth of 2.7%, increased earnings per share of $0.78, improved annualized return on average assets of 1.10%, and an annualized return on average tangible common equity of 14.39%. Lower funding costs resulted in a $441,000 linked-quarter increase in net interest income and an improved NIM of 3.01%. Our funding costs benefited from the February 15 redemption of $93 million of subordinated debt which had an interest rate of 7.51%. Second quarter funding costs will also benefit from this redemption. First quarter loan growth was driven by strong new loan production combined with lower than expected payoffs. Although we experienced strong first quarter loan growth, we continue to target mid-single-digits for 2026 loan growth due to an expected return to elevated payoffs for the remainder of the year. New loan production of approximately $431 million compared to $327 million in the prior quarter. Of the new loan production, approximately $240 million funded during the quarter with the unfunded portion of this quarter's production expected to fund over the next six to nine quarters. Excluding regular amortization and line of credit activity, first quarter payoffs totaled approximately $113 million and represent the lowest payoff amount during the past four quarters. The single largest payoff during the quarter was the $27.5 million multifamily loan previously included in our nonperforming asset category. In mid-February, the borrower successfully refinanced the loan balance with a life insurance company. Additional payoffs during the quarter included an office building, several small retail centers, an industrial warehouse, a skilled nursing facility, and several commercial land loans. Our loan pipeline today totals approximately $1.3 billion, down from a mid-quarter peak of about $2 billion. Despite the reduction, our won-but-not-closed category remains healthy at just over $331 million. The pipeline remains well balanced with approximately 44% term loans and 56% construction and/or commercial lines of credit. This is relatively unchanged from the fourth quarter mix. C&I-related opportunities represent approximately 24% of today's total pipeline, up slightly from year-end’s total of 20%. During the quarter, we migrated four multifamily loans and one office loan to substandard. The two multifamily loans originated as construction loans and are currently experiencing slower lease-up and lower rents than originally underwritten. The remaining two multifamily projects originated as term loans and have experienced a decline in occupancy and reduced rental rates. All four credits are supported by experienced real estate borrowers, including equity partners providing financial support. Over the next six to twelve months, we expect successful resolutions either through open market sales or refinances. Despite this substandard increase, credit quality remained strong. During the first quarter, nonperforming assets totaled $9.7 million, a decrease of $28.5 million from December 2025; the reduction was primarily related to the previously mentioned $27.5 million multifamily loan which paid off in February. As a percentage of total assets, nonperforming assets remain low at 0.11%. Other first quarter activities included replacing our Woodlands loan production office with a full-service branch, and a new branch in our fast-growing home market of Tyler. Additionally, we are particularly excited to report the hiring of a 30-year wealth management veteran charged with building out our wealth management team and expanding our platform throughout the Dallas–Fort Worth market. When considering our net income, earnings per share, expanded footprint, and a key hire in our wealth management group, we had an excellent quarter. Overall, the markets we serve remain healthy, and the Texas economy is anticipated to grow at a faster pace than the overall projected U.S. growth rate. With that, I will now turn the call over to Julie. Julie N. Shamburger: Thank you, Keith. Good morning, everyone, and welcome to our first quarter earnings call. We are pleased to report a solid start to 2026. For the first quarter, we reported net income of $23.3 million, an increase of $2.3 million or 10.8%. Diluted earnings per share were $0.78 for the first quarter, an increase of $0.08 per share linked-quarter or 11.4%. As of March 31, loans were $4.95 billion, a linked-quarter increase of $128.2 million or 2.7%. The linked-quarter increase was driven by increases of $93.2 million in construction loans, $40.6 million in commercial real estate loans, and $12.2 million in the commercial portfolio, partially offset by decreases of $9.6 million in municipal loans and $7.1 million in one-to-four family residential loans. The average rate of loans funded during the first quarter was approximately 6.3%. As of March 31, our loans with oil and gas industry exposure were $72.1 million or 1.5% of total loans, a slight increase compared to $71 million linked-quarter. Nonperforming assets decreased to 0.11% of total assets at quarter end, a result of the payoff of the $27.5 million commercial real estate loan restructured in 2025, and to a lesser extent, a decrease in our nonaccrual loans. Our allowance for credit losses increased to $49 million for the linked-quarter from $48.3 million on December 31. Linked-quarter, our allowance for loan losses as a percentage of total loans decreased one basis point to 0.93% at March 31. The securities portfolio increased $164.3 million or 6.1% to $2.87 billion on March 31 when compared to $2.7 billion at year-end. The increase was driven by purchases of $313.5 million in mortgage-backed securities during the first quarter. As of March 31, we had a net unrealized loss in the AFS securities portfolio of $16.3 million, an increase of $15.5 million compared to $767,000 last quarter. There were no transfers of AFS securities during the first quarter. On March 31, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $1.95 million compared to $788,000 linked-quarter. As of March 31, the duration of the total securities portfolio was 7.4 years compared to 7.6 at December 31, and the duration on the AFS portfolio was 4.7 compared to 4.8 years on December 31. At quarter end, our mix of loans and securities was 63%/37%, respectively, a slight shift compared to 64%/36%, respectively, at year-end. Deposits increased slightly by $9.3 million or 0.1% on a linked-quarter basis. Brokered deposits increased $110.7 million, however, partially offset by a decrease of $82 million in retail deposits and $19.4 million in public fund deposits. We redeemed our $93 million of subordinated notes due in 2030 during February. At the time of the redemption, the notes had an interest rate of 7.51%, and we recorded a loss of $791,000 on the redemption of the notes. We expect to see further savings in our funding costs during the second quarter as a result of the redemption. Our capital ratios remained strong with all capital ratios well above the threshold for well-capitalized. Liquidity resources remained solid with $2.68 billion in liquidity lines available as of March 31. We did not repurchase any common stock during the first quarter, and we have approximately 762,000 shares remaining that are authorized for repurchase. Our tax-equivalent net interest margin was 3.01%, an increase of three basis points on a linked-quarter basis, up from 2.98% for 2025 Q4. Our tax-equivalent net interest spread for the same period was 2.38%, an increase of seven basis points from 2.31%. The increase in the net interest margin and net interest income is primarily due to lower funding cost. For the three months ended March 31, we had an increase in net interest income of $441,000 or 0.8% compared to the linked quarter. Noninterest income, excluding the net loss on sale of AFS securities, decreased $303,000 or 2.3% for the linked quarter due to a decrease in deposit services income and a decrease in BOLI income, partially offset by an increase in other noninterest income. Other noninterest income increased primarily due to an increase in swap fee income. Noninterest expense was $40.6 million for the first quarter, an increase of $3.1 million or 8.3% compared to the linked quarter. The increase was largely driven by an increase in salaries and employee benefits, the loss on the redemption of sub debt, software and data processing, and other noninterest expense. Salary and employee benefits increased due to normal salary and employment tax increases at the beginning of the new year, additional stock compensation, and a one-time retirement expense related to a new split-dollar agreement of approximately $420,000. Other noninterest expense increased primarily due to an increase in non-service cost of retirement expense and a nonrecurring credit received in the fourth quarter. I mentioned during the last call that our budget indicated an increase of approximately 7%. Absent the loss on redemption and the one-time retirement expense of $420,000, the linked-quarter increase would have been a little over 5%. Our fully taxable equivalent efficiency ratio increased to 54.98% as of March 31, from 52.28% as of December 31, primarily due to the increase in noninterest expense. For 2026, we anticipate noninterest expense of approximately $40.5 million for the remaining quarters. We recorded income tax expense of $5 million compared to $3.8 million in the prior quarter, an increase of $1.25 million. Our effective tax rate was 17.8% for the first quarter, an increase compared to 15.3% last quarter, and we are currently estimating an annual effective tax rate of 17.8% for 2026. At this time, I will turn the call over to Sunny. Thank you. Sunny Davis: Thank you, Julie. The MBS purchases in the first quarter have coupons ranging from 4.5% to 5.5%, a duration of seven years, and a yield of 5.24%. Approximately one-third of the purchases occurred late in the quarter and were essentially pre-purchases of April and May cash flows due to an opportunity in the market. These were purchased at discounts, which will act as a hedge to the earlier purchases should prepay speeds increase. This one-third, or approximately $106.6 million at a rate of 5.44%, was not reflected in the yield of the securities portfolio in the first quarter. We expect to reinvest future cash flows from the securities portfolio into AFS MBS and maintain the balance of securities at approximately $2.7 billion to $2.8 billion. If presented with an opportunity similar to the one in March, we may pre-purchase again. The principal cash flows we received during the quarter were $127 million, or an average of $42.3 million per month, which includes $20 million from the maturity of two MBS balloons held in HTM. I anticipate a pickup in prepays in the second quarter due to a higher MBS balance, lower mortgage rates through early March, and lower spreads. The spot rate on our CDs was 3.74% at quarter end compared to the average rate of 3.79% for the first quarter. CDs totaling $568 million with an average rate of 3.83% will reprice this quarter. We expect to retain most of these deposits and estimate an interest savings of roughly 10 basis points. Additionally, $1.06 billion with an average rate of 3.79% will reprice by year end. As Julie mentioned in her comments, our public funds decreased. There was some seasonality to this decrease. In Texas, various public fund entities collect ad valorem taxes in the fourth quarter through January of the following year, then disburse some of those funds prior to the end of the first quarter. There were also construction draws from bond funds we hold for a couple of public funds as well as February debt service payments. I expect public funds in the second quarter to increase from the March 31 balance. Many of our public fund non-maturity accounts have floating rates that adjust as frequently as weekly. We have certain non-maturity deposit accounts with exception pricing, and the last adjustment made to the exception priced accounts was 12/11/2025, following the FOMC's 25 basis point Fed funds reduction on December 10. The beta was 69% on the exception priced accounts, and the beta on all noninterest-bearing, non-maturity deposit accounts net brokered and public funds was approximately 25%. I estimate using the same beta if there is a short-term rate cut in 2026. We have seen a higher cost on recently acquired deposit accounts versus existing account balances. In the first quarter, new deposit accounts, excluding brokered and public funds, had an average rate of 2.37% versus existing accounts averaging 1.58%. However, the rate on the new accounts in March showed a downward trend to 2.06%. Reciprocal deposits were $363 million at quarter end, a decrease of $13.9 million linked-quarter, primarily due to a reduction in one relationship. Many of these accounts are included in the exception pricing. 84% of reciprocal deposits are commercial, and 16% are consumer. Our wholesale funding increased $370.5 million linked-quarter to $1.4 billion due primarily to fund the $128.2 million increase in loans and the $164.3 million increase in securities. The increase in wholesale funding includes increases in FHLB advances of $104.8 million, $110.7 million in brokered deposits, and $155 million in Fed discount window borrowings. We utilize a mix of wholesale funding sources and navigate between them based on rate and term offered and the current ALCO strategy. We have increased our collateral at the discount window and will continue to utilize this source of short-term funding due to rate and prepayability. During the first quarter, $245 million of cash flow swaps at a rate of 2.7% matured. It was, however, necessary to retain the funding, and the rate on the new borrowings is approximately 3.75%. We have another $25 million in cash flow swaps maturing in November at a current rate of 4.62%. After this maturity and some amortization related to past unwinds is fully expensed in October, the rate on our cash flow swaps will drop to approximately 3.53%, assuming SOFR is unchanged. We unwound $155 million in municipal loan swaps during the quarter, creating a small gain that will be accreted over the life of the previously hedged items. This slightly improves our interest rate risk position in rates-down scenarios. We no longer have any municipal loan swaps. We have a notional of $258.1 million in fair value hedges on municipal and MBS securities. Approximately 38% of our loans have fixed rates and 62% have a floating rate, and approximately 81% of the floating rate loans have floors. We have $344.2 million in fixed rate loans that mature or reprice in the next twelve months. Approximately $209 million of these loans have rates at or below 4%. Approximately $44 million of the loans with rates at or below 4% reprice or mature in the second quarter. We estimate a lift in the NIM as these loans reprice throughout 2026 and during 2027. Our budget included two short-term rate cuts of 25 basis points—one in June and another in September. Should rates remain at quarter-end levels through year end, we expect a positive impact on the NIM versus budget as we are asset sensitive. Thank you for joining us today. This concludes our comments. We will now open the line for your questions. Operator: We will now begin the 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. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from Brett Rabatin from Stonex Group. Please go ahead. Brett Rabatin: Hey, good morning, everyone. Wanted to start on the loan growth outlook and the mid-single-digit guide. Solid production in the quarter and lower payoffs aided the first quarter. I think I heard the number of $113 million for payoffs, but that number is expected to go higher. Can you give us any color around what you are expecting for payoffs in 2Q or 3Q? And then on production pace, do you expect that to continue at the current level from 1Q? Keith Donahoe: Yes. I will start with the production side. We anticipate continuing to produce new loans at a similar rate. We have talked about it internally. We are seeing good activity. The pipeline is down a little bit, but I think that has more to do with the loan officers being hunkered down closing new transactions in the first quarter. They are coming up for air and will rebuild that pipeline. We were fortunate we did not see as many payoffs in the first quarter, but we do know we have a number of real estate assets that are individually rather large that are going through the normal cycle. We were predominantly a construction lender for a long time, and those have a finite life—they build, lease up, and then move into either a sale in the open market or refinance with other lenders on a permanent basis. We know we have some of that coming. It is too early to call a change in our loan growth at this point because we do know we have a number of projects that our team has to get refinanced or sold. Brett Rabatin: Okay. Great. Appreciate all the color. Operator: Your next question comes from Steven Scouten with Piper Sandler. Please go ahead. Analyst: Thanks, appreciate it. Sticking on that NIM conversation, can you quantify what the expected benefit is in the second quarter on a basis point level from the sub debt? And then what you think you could see from just asset repricing and the CD benefits? Julie N. Shamburger: On the sub debt, for the three-month quarter it was in the 7.41% range. In the second quarter, the average balance will be about $147 million, and the effective rate will be just over 7% with the amortization of the discount. I have not calculated the precise basis point impact yet, but that 7.41% you see for the first quarter will come down into the low 7s on roughly a $147 million average balance. Analyst: Okay, that is really helpful. Thank you. And then on the expense front, I think you said $40.5 million per quarter, which probably still keeps you in that 7% range. Would you expect that would allow you to deliver year-over-year operating leverage at this point in time? Is that at least the minimum goal as you think about the progress for the year? Julie N. Shamburger: Yes. I believe we are going to be at the 7%, hopefully under, but I do not expect us to go over that 7%. A couple of the larger items were front-loaded into the first quarter by the nature of timing. The $40.5 million may be a little heavy for the second quarter, but on average that is probably where we will end up. I am still expecting the 7% annually. Analyst: And from an operating leverage perspective—thinking about the efficiency ratio and how that all comes together—would you expect that on a year-over-year basis to decline for the full year of 2026? Julie N. Shamburger: I expect some improvement in the efficiency ratio in the second quarter for sure. The $791,000 loss on redemption was excluded in the calculation of the efficiency ratio, as we have always excluded a one-time loss on redemption. But, for example, the $420,000 that I mentioned was not excluded—appropriately not—and that will not occur again in the second, third, and fourth quarters. So I expect an improvement in the efficiency ratio for the second quarter. Analyst: Okay. Thanks for the color. Julie N. Shamburger: Appreciate it. Operator: Your next question comes from Michael Rose with Raymond James. Please go ahead. Michael Edward Rose: Hey, good morning, everyone. Thanks for taking my questions. From a capital standpoint, ratios are still really good. I noticed you did not buy back any stock in the quarter. I assume some of that was related to the redemption of the sub debt and some of the other actions in terms of buying securities. Any outlook for what we might expect for repurchases as we move forward? Keith Donahoe: Yes, we will continue to be opportunistic in that regard. Our stock is doing pretty well right now. Historically, when we have repurchased shares, it is usually when we are seeing some downward pressure. From a capital deployment standpoint, there is a close first and second opportunity—M&A is definitely part of our strategy, and stock buyback is a close second. We are also organically growing, so we are being judicious and will continue to deploy capital where we think we are going to get the fairest return. Michael Edward Rose: Helpful. Maybe switching gears to fees—nice step-up this quarter, still some good momentum in the trust business, which I know you have invested in. Any updated expectations from last quarter? And was there anything in the other expense line, because that was up both year-over-year and sequentially? Keith Donahoe: On the trust side, we are really excited that we were able to pick up an individual in the Fort Worth market who has a tremendous amount of experience and a network that I think we will benefit from. I cannot guarantee we will see that lift this year, but it would not surprise me to get a little lift through the rest of the year. She is just getting her feet underneath her, but I am excited and look forward to strong growth in the Fort Worth market. I think we also picked up some fees from swap income. Julie N. Shamburger: Our trust fees and our brokerage services were both up slightly from the fourth quarter but significantly over 2025. You mentioned year-over-year—those two categories had a really nice increase year-over-year, as well as the swap fee income, as I mentioned earlier. Keith Donahoe: That is intentional. We have made an intentional approach to continue to generate swap income—granted, that is somewhat market driven—but every relationship manager, with the appropriate customer, is talking to them about swaps. Julie N. Shamburger: As Sunny mentioned, I think 38% is— Keith Donahoe: —what our loan book is that is fixed on our balance sheet. That is a significant decline over the last two years, and that was intentional because we wanted to get to a point that we could manage our NIM a little bit better. You have two sides of the equation working at the same time from a funding cost and from a lending perspective, but we are becoming more disciplined in that. Michael Edward Rose: Alright, very helpful. I will step back. Thanks for taking my questions. Operator: Your next question comes from Woody Lay with KBW. Please go ahead. Wood Lay: Hey, thanks for taking my questions. Wanted to start on credit. It was great to see NPAs improve quarter-over-quarter with that restructured loan paying off. You mentioned a couple downgrades in the multifamily book. Given some of the moving pieces, what is your perspective on the local multifamily market and how it is performing? Is it certain markets showing weakness, or individual projects? Keith Donahoe: To give you a little color, the four multifamily projects that we downgraded—two are in the Houston market, one is in Dallas–Fort Worth, and one is in Austin. We are not unique—any Texas-based lender doing multifamily construction and term loans has seen weakness. I am not concerned about these. They average about $33 million each. We have new appraisals on three of the four assets, and we are sub-60% loan-to-value on those. The real issue is supply. Across the state’s metro markets, there has been a ton of supply. We continue to see concessions offered on rental rates. The good news is, in several markets we believe vacancy has peaked, so it is a matter of time for these assets to stabilize. We expect one of these will get refinanced by a debt fund before the end of the second quarter—there is a written term sheet. Another borrower is running a sale process now; they started early enough that if they do not get a number they like, they will still have the ability to refinance before maturity. Demand is still there. Each project continues to lease up month-to-month. In three of these projects, if you just let the concessions burn, they are in a more traditional 1.10x to 1.20x DSCR. Given the borrowers and their equity partners—folks with long track records—we are not overly concerned. Wood Lay: Each. Wood Lay: That is really helpful. As you mentioned, oversupply is not new. How has that impacted the loan pipeline and new multifamily projects? Is there less these days, or has underwriting shifted? Keith Donahoe: We have not modified our underwriting standards, but it has made it more difficult to originate new multifamily projects. I anticipate that to change some toward the end of the year, but right now the vast majority of new opportunities we are seeing are in retail and industrial warehouse. There is a lot of opportunity there, and those underwrite easier in today’s market. Retail across Texas is incredibly strong, driven by continued population in-migration and historically limited new retail development across the state. Wood Lay: Got it. Appreciate you taking my questions. Keith Donahoe: Thank you. Operator: The next question comes from Matt Olney with Stephens. Please go ahead. Matthew Covington Olney: Good morning. Most of my questions have been addressed. I want to go back to deposit growth. You mentioned some seasonal headwinds for deposit growth in the first quarter. What about the remainder of the year? Do you expect deposit growth to match the loan growth in that mid-single-digit range? Any more color there? Julie N. Shamburger: I do expect a little bit of deposit growth but believe we are going to be funding at least half of the loan growth with wholesale. Matthew Covington Olney: Is that a full-year comment, or more near term? What is the timing? Julie N. Shamburger: We are over budget right now with wholesale because loan growth has exceeded expectations. I expect deposits to pick up in Q2. We will have some more seasonality in Q2 with one particular customer. We are targeting to meet our budgeted deposit growth, and we are looking closer at our strategy to ensure that happens. Keith Donahoe: We are spending a lot of time on deposit strategy and growth. It is key to what we do, and we are getting everybody focused on it. Matthew Covington Olney: Appreciate that. On the net interest margin this past quarter, the loan yields looked exceptionally strong. I know you have some nice loan repricing tailwinds. Anything else unusual on that loan yield number this quarter? Keith Donahoe: No. We are still seeing fierce competition on quality real estate assets. What helped us in the first quarter was a number of closings in areas where we tend to see a little higher spread—some in our homebuilding book and some in lot development. Both categories tend to get a little better spread. I cannot tell you that will continue all year, but one of our specialties is homebuilding activity, and it has been good for us. We bank some of the premier builders in the state. Generally, you get better pricing there. Lot development is similar, though we are being very selective adding new lot developers because it is very submarket specific today, especially in Dallas–Fort Worth. There are still strong pockets, but five miles down the road you might not want to touch a project. These are developers with deep equity and a lot of experience. Matthew Covington Olney: Thanks for that. Lastly on credit, I think you addressed multifamily, but we also got that paydown of the $27 million restructured credit from previous quarters. Any more color on the resolution? Keith Donahoe: Especially given we migrated four other multifamily projects, that one was in the nonperforming asset category, but we felt pretty good about it given the project dynamics. It was refinanced by a life company, and they actually added an additional $1 million in loan proceeds as an earn-out. That gives you some indication of the type of projects we typically finance. Even though it was in the NPA bucket, we were never overly concerned. We obviously watched it closely. I think you can expect similar results from the other four we downgraded—we are not overly concerned with them either. Matthew Covington Olney: That is helpful. Thanks for all the color. Operator: The next question comes from Brett Rabatin with Stonex Group. Please go ahead. Brett Rabatin: A follow-up on the Texas markets. There have been a couple of deals in the market the past few quarters. Are you able to take advantage of the disruption from some of those transactions? How do you view disruption in the Texas markets? And might M&A be a strategy from here—are you actively looking for other partners? Any thoughts on your growth plans in the Texas markets? Keith Donahoe: In general, there has been disruption in the market, from both a customer standpoint and an employee base. We have been having conversations with prospective employees from larger banks that could be beneficial to us as we cross the $10 billion mark. We will be opportunistic. In addition, one of the C&I customers we picked up in the first quarter came out of a displacement related to an acquisition by an out-of-state organization. The customer had a strong desire to bank with a Texas-based bank. We had been calling on them, and it made for a fairly easy transition. So we are seeing opportunities from both employee and customer standpoints. Brett Rabatin: And any thoughts on M&A—your appetite, and what you are seeing? Keith Donahoe: We are continuing to talk. We are open to acquisitions, and that has always been our strategy. Today there is a higher probability of something occurring because of the market dynamics. That will continue to be part of our strategy. Brett Rabatin: Great. Appreciate the color. Operator: There are no further questions at this time. I will now turn the call back to Keith Donahoe, President and CEO, for closing remarks. Keith Donahoe: Thank you everyone for joining us today. We appreciate your interest in Southside Bancshares, Inc. We are optimistic about 2026 and look forward to reporting second quarter earnings during our next call in July. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the MAA First Quarter 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded today, April 30, 2026. [Operator Instructions]. I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets at MAA for opening comments. Andrew Schaeffer: Thank you, Regina, and good morning, everyone. This is Andrew Schaeffer, Treasurer and Director of Capital Markets for MAA. Members of the management team participating on the call this morning are Brad Hill, Tim Argo, Clay holder and Rob DelPriore. Before we begin with prepared comments this morning, I want to point out that as part of this discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the forward-looking statements section in yesterday's earnings release and our '34 Act filings with the SEC, which describe risk factors that may impact future results. During this call, we will also discuss certain non-GAAP financial measures and presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial data. Our earnings release and supplement are currently available on the -- for Investors page of our website at www.maac.com. A copy of our prepared comments and an audio recording of this call will also be available on our website later today. After some brief prepared comments, the management team will be available to answer questions. [Operator Instructions]. I will now turn the call over to Brad. Brad Hill: Well, thanks, Andrew, and good morning, everyone. As highlighted in our release, we delivered first quarter results that exceeded our expectations, driven by the resilient demand in our footprint strong resident retention as well as our focus on expense management and some timing-related items. New lease pricing continued to reflect supply pressure in several markets, but despite this pressure, new lease pricing improved sequentially and supported by our continued strong renewal performance, blended lease-over-lease pricing improved 140 basis points from the fourth quarter. With the bulk of the leasing season ahead, we like our positioning and momentum going into summer with stable occupancy and better 60-day exposure than a year ago. Our high-growth markets are producing solid demand to absorb the new supply in a steady manner that we believe will enable continued stable occupancy, favorable renewal pricing, strong collections and overall earnings performance in line with the outlook we provided in our prior guidance. Our leasing traffic remains strong and positive migration trends, strong wage growth and stable employment conditions across our diversified portfolio and markets combined to drive solid demand. as evidenced by first quarter absorption exceeding new supply deliveries in our footprint. Operationally, our on-site teams actively supported by our asset management team continue to execute at a high level, controlling expenses while delivering an excellent resident experience as reflected in our sector-leading Google scores. As a result of our strong customer service and the ongoing single-family affordability challenges, renewals remain consistent, helping to deliver year-over-year blended lease improvement for 5 consecutive quarters. We continue to allocate capital in a balanced and disciplined manner, taking advantage of the current pricing dislocation of our existing portfolio in the public market to buy back shares as well as executing on initiatives to deliver long-term earnings growth while protecting our strong balance sheet. With acquisition cap rates around 4.5% for high-quality properties in our footprint, our excel growth efforts are predominantly focused on new development through our existing pipeline of owned and controlled land sites, representing over 4,300 units of future growth. We started construction on our first project for the year in April, a 286 unit community in the Kansas City market. Based on our current approval and construction time lines, we now expect to start construction on 4 projects this year, reducing our expected development spend for the year to $350 million. While this is down from the $400 million in our original forecast, it's up from the $315 million we invested in the 2 projects we started in 2025. The projects we expect to start this year will deliver in 2028 and 2029 during what we believe will be a more favorable supply-demand environment. As we look forward, we remain encouraged by underlying demand across our markets declining new deliveries and the strength of our resident base with continued strong collections and affordable rents at a 20% rent to income ratio. Our high-growth markets continue to offer attractive long-term appeal for employers, households and investors. With positive absorption, stable demand and market level occupancy is improving, we are optimistic we will continue to build momentum through the spring and summer, supporting improved new lease pricing as the year progresses. In addition to capturing increased organic growth from our existing asset base through the year, we expect a growing NOI contribution from a number of areas, including new initiatives to drive efficiencies and higher operating margin from our existing portfolio, our growing redevelopment opportunities as well as a growing development pipeline that continues to lease up. Today, we believe our more diversified and higher quality portfolio, our stronger operating platform and our stronger balance sheet position us to capture improving performance and to deliver meaningful shareholder value over the approaching recovery cycle. We're excited about the outlook over the next few years to all our associates across our properties and corporate offices, thank you for your continued dedication and focus. And with that, I'll turn the call over to Tim. Tim Argo: Thank you, Brad, and good morning, everyone. For the first quarter, same-store NOI beat our expectations with in-line same-store revenue, combining with lower same-store expenses to drive the favorability. From a pricing standpoint, new lease-over-lease growth improved 110 basis points sequentially from the fourth quarter, but continues to be under pressure due to elevated, but moderating new supply combined with more macro level economic uncertainty. On the renewal side, similar to the last several quarters, retention rates and lease rates remain strong. Renewal lease-over-lease growth improved 70 basis points sequentially from the fourth quarter driving blended lease-over-lease growth up 140 basis points from the fourth quarter. Average physical occupancy remained strong at 95.5% for the quarter. Additionally, we had another quarter of strong collections with net delinquency representing to 0.3% of bill grants in line with the last several quarters. From a market standpoint, many of the markets where we saw a strong performance in the fourth quarter and most of last year continued to show strength in the first quarter. We have noted on several occasions the performance of our mid-tier markets particularly in Virginia and South Carolina, Richmond, Greenville, the D.C. area markets and Charleston all demonstrated strong pricing power and strong occupancy in the quarter. Encouragingly, our 3 largest markets in terms of same-store NOI contribution, Atlanta, Dallas and Orlando, all outperformed the portfolio in the first quarter and blended lease underlease pricing. Austin, though improving, is still a challenge, particularly on the new lease pricing side. Charlotte, and Savannah are 2 other markets facing challenges in the wake of heavy supply pressure. In our lease-up portfolio, MAA, Liberty Row in Charlotte and MAA breakwater and Tampa completed construction in the fourth quarter and moved into our lease-up portfolio. We now have 5 properties in lease-up with a combined occupancy of 68.3% as of the end of the first quarter and an additional 2 development properties that are actively leasing units. Elevated concessions remain the case for some of these lease-up properties with up to 8 weeks of certain floor plans. However, these projects are still expected to achieve our underwritten yields as markets continue to improve and, therefore, retain their long-term value creation opportunity. We're off to a quick start in the first quarter on our various targeted redevelopment and repositioning initiatives. During the first quarter of 2026, we completed 1,386 interior unit upgrades, up from just over 1,100 units that we renovated in the first quarter of 2025. We achieved rent increases of $104 about non-upgraded units on average unit level spend of $7,349, representing a cash-on-cash return of approximately 17%. These units continue to lease faster than nonrenovated units when adjusted for the additional turn time, averaging about 9 days quicker. For our common area and amenity repositioning program, we are over 90% repriced at 6 recent projects with an average NOI yield above 10% and rent growth for exceeding peer MAA properties. Five additional projects were nearing construction and completion and will begin repricing between May and August. And then 6 additional properties are in the planning phase with expectations to be complete in time for repricing in the spring of 2027. Our WiFi retrofit initiative that began in 2024 and expanded in 2025 continues to grow. We have 27 live properties where the service is rolling out to residents as leases are signed. We are further expanding this initiative in 2026 to an additional 35-plus properties. As we head into the busier part of the leasing season, we are well positioned. Average physical occupancy for April is 95.5%, in line with April 2025 and 60-day exposure is currently 8.3%, 20 basis points better than where we ended April 2025. With increased absorption in our markets in the first quarter where the number of incrementally occupied units exceeded new deliveries, supply pressure continues to moderate. And despite the previously mentioned economic uncertainty, feed volume remained strong and ahead of last year. Strong renewal performance continued in the second quarter with retention rates and lease-over-lease growth rates on renewals accepted remaining consistent with what we have seen in the last few quarters. With an assumed backdrop of steady demand, we expect gradual seasonal improvement in new lease rates through the second and early third quarters along with consistent renewal growth and retention. As we get later in the year, improving fundamentals will become even more impactful to setting up a stronger 2027. That's all I have in the way of prepared comments. Now I'll turn the call over to Clay. A. Holder: Thank you, Tim, and good morning, everyone. We reported core FFO for the quarter of $2.13 per diluted share, which was $0.02 ahead of our first quarter guidance. For the quarter, same-store expenses were favorable to our guidance by $0.015 along with non-same-store NOI favorable by $0.01, offset by unfavorable interest expense of $0.005. Same-store repair and maintenance expenses personnel costs and marketing costs were all below our expectations and were reflected by our disciplined expense control along with expense timing. During the quarter, we funded approximately $100 million in development cost. At quarter end, our development pipeline was at $623 million, leaving an expected $234 million to be funded on the current pipeline over the next 3 years. As previously discussed, we did adjust the number of development starts from our initial guidance and accordingly lowered our development spend for the year by $50 million. While the size of our pipeline at a point in time can vary based on starts and deliveries during the quarter, we expect the pipeline to grow throughout the year as we begin construction on new projects. Our balance sheet remains in great shape to support this and other growth initiatives. At the end of the quarter, we had nearly $840 million in combined cash and borrowing capacity under our revolving credit facility, and our net debt-to-EBITDA ratio was 4.5x. At quarter end, our outstanding debt had an average maturity of 6.1 years at an effective rate of 3.9%. During February, we issued $200 million of 7-year public bonds at an effective rate of just over 4.6% using proceeds to repay borrowings under our commercial payment program. Also during the quarter, we repurchased 558,000 shares of our common stock at a weighted average share price of $130.46 for a total of $73 million. As for our full year outlook with the bulk of the leasing season ahead of us, we are reaffirming the midpoint of our same-store and core FFO guidance for the year while tackling the core FFO range. For the quarter, we expect core FFO to be in the range of $2 and $2.12 per diluted share or $2.06 per share at the midpoint. Our second quarter guidance reflects the typical seasonal increase in leasing as well as higher maintenance-related operating costs. The increase in interest expense from first to second quarter is largely attributable to the delivery of additional developed units and incremental borrowings associated with share repurchases and the litigation settlement. These impacts on interest expense are expected to be partially offset by proceeds from property dispositions. That is all that we have in the way of prepared comments. So Virginia, we will now turn the call back to you for questions. Operator: [Operator Instructions]. Our first question will come from the line of Eric Wolfe with Citi. Eric Wolfe: Based on your guidance, you're expecting blended rates to ramp through the year, I think you just said a moment ago that you're expecting sort of a typical seasonal impact in the second quarter. Could you just talk about sort of specifically what you expect to see over the next couple of months. I think last quarter, you actually gave sort of the guidance for first quarter blends. So I was hoping you could do the same for the second quarter blends and talk about whether you're finally starting to see some of the supply impact easing in some of your markets? Tim Argo: Yes, Eric, this is Tim. I'll answer that. And I'll walk you through kind of how we're thinking about our blended guidance for the year. So guidance remains 1% to 1.5% blended for the full year. As we reported, we did negative 0.3% landed in Q1, but we are starting to see some steady incremental improvement on the new lease side and then continue to see the steady renewals. So as we think about the rest of the year, to your point, like we expect new lease pricing to continue to accelerate through to about July and then start to moderate seasonally. Though we expect that seasonal moderation to be less so in the back part of the year and it typically is, as we continue to see the supply impact moderate, continue to think that renewals will be in that 5-plus range and stay pretty consistent. So if you see through all that, get to our 1% to 1.5%, you're kind of 1.3% to 1.8% blended for the last 3 quarters of the year. So you can kind of think about how that trajectory will work out from where we are here and using that seasonal curve that I've talked about. Operator: Our next question will come from the line of Jana Galan with Bank of America. Jana Galan: Sorry, Tim, a question for you again. Can you maybe speak to performance on both the concessions and supply absorption in Atlanta and in Dallas. Tim Argo: Yes. So Atlanta and Dallas, we continue to see some pretty solid performance, particularly in Dallas. If I look at ballast for a moment and you look at where we are from a pricing standpoint right now on an occupancy standpoint compared to, say, this time last year, we saw about a a 240 basis point improvement in blended pricing from Q1 '25 to Q1 '26 and steady occupancy along with that. Similarly, in Atlanta, we saw about a a 50 basis point increase from winded pricing last year to this year and about a 20 basis point increase in occupancy. So Atlanta probably started to recover for us a little bit early, and we've seen that continue to stabilize and move forward on Dallas was a little bit later, but we're seeing some good strength out of that. As I just mentioned and expect Dallas to be one of our stronger performing markets this year. We're seeing it pretty broad-based. There's still some pressure in all and McKinney areas, but towns performing well, some of the other suburban markets. And then similar Atlanta way, we're seeing still some of the the in-town and Downtown, Midtown, Buckhead submarket outperformed some of the suburbs, delis and smarter are still a little bit weaker, still seeing high concessions that for now, we're seeing consensus come down a little bit. They're not as broad-based in Dallas in some of the other markets. So we have seen some relief there, particularly in the urban areas, and then we talked about Atlanta, the concessions were coming down a little bit last quarter, and they may pretty consistent with where they were last quarter. You still had a month or so out there on average, but the submargins that I've talked about have come down quite a bit. Operator: Our next question comes from the line of Austin Wurschmidt with KeyBanc. Austin Wurschmidt: Kind of sticking with Tim here. One on new lease rate growth. I know you had some weather disruption in the first quarter I guess, were you surprised though at the pace of improvement in new lease rate growth versus the fourth quarter? And are you seeing that pace improve or accelerate, I guess, into the second quarter? Or is it more similar from what you saw from the fourth quarter of last year into the first quarter of this year? Tim Argo: Yes. I mean if you remember last year, we were seeing some some strong acceleration in new lease rates through about April and then it really kind of plateaued with ration day, and we saw it sort of peak there and not really get momentum past May. I think what we're seeing this year is more of a steady acceleration. To your point, February kind of stalled out for a little bit and brought Q1, new lease pricing a little bit down from where we expected, but then we saw it quickly return in March and then we're seeing some momentum place play out in April as well. And then we think about where we are with exposure and occupancy I would expect May to outperform where we were in May last year, where we, again, were kind of stalled out. So I would say we're seeing a more seasonal or more normal acceleration of new lease rates this year, last year, it was a little quicker, but then it slowed to a complete halt. I think we would expect that not to continue in all the steps we look at, where we are with exposure, where we are with lead volume, where we are with occupancy and kind of seeing what's out there with pre-leasing, we would expect that momentum to continue beyond May, unlike it did last year. Brad Hill: Yes. And I would just add a couple of points to what Tim is saying. Just speaking more broadly. I mean, I think one of the things that gives us encouragement about the trajectory, as Tim was mentioned a moment ago,as we go throughout the balance of the year. first, if you look at just the broad demand fundamentals in our region of the country, continue to to screened quite well really across the board. Job growth continues to be resilient. The other demand factors migration trends, population growth, all continue to be very resilient within our region of the country. And then if you look at just the momentum that Tim was just talking about, market-level occupancies in the first quarter continue to firm up. You look at absorption numbers exceeding deliveries in the first quarter with the renewal positioning that we have right now, as Tim mentioned, our occupancy is stable and our exposure is in a better position than it was this time last year, puts us in a really good position to continue the momentum that we've seen in April as we get into May and June. And so we feel like the momentum is building from the dashboards that we have to date. That momentum continues to build in the second quarter, which is what we need to see in order to continue to see new lease progression throughout the year, which aligns with what our expectations are for the year. Operator: Our next question will come from the line of Haendel St. Juste with Mizuho. Haendel St. Juste: Maybe a question on capital deployment. I understand the decision to lower the acquisition guide given market pricing and your cost of capital, but maybe expound a bit more on the decision to pull back on some of the new development starts. And with that lower use of capital, I guess, lower capital deployment overall suggest you might be more open to doing more stock buybacks here in the near term given the compelling yield on that side. Brad Hill: Yes. Haendel, this is Brad. Well, as I mentioned in my opening comments, the pullback in development spend, just development is a little bit fluid with timing of when deals can start approvals. Can take a little bit longer than you think things of that nature. So that's the nature of the reduction from -- as we mentioned in the prior call, we could start between 5 and 7 deals this year, just based on where we are in the approval cycle of those, it looks like be closer to 4%. But you never know, some of those could get approvals earlier and if the economics make sense, we could start those towards the back part of the year, but that's where we certainly expect to to be in terms of development for the year. And we continue to believe that's one of the best uses of our capital to deliver long-term value for shareholders. So we'll continue to focus on that. As Clay mentioned in his comments, we expect that size of that pipeline to continue to grow our spend for the year is down from what we originally expected, but still up from where it was last year, and we expect that on an ongoing basis to be into that $300 million to $400 million range. So no real change in terms of that. But I think in terms of share repurchases, as we think about really how best to allocate capital, we're really focused on generating high-quality compounding earnings growth that supports a steady and growing dividend. We really think that's the best way to to drive TSR performance over the full cycle. And when we do that, there are 3 things that we're considering when we decide where do we put our capital and the first is we want to take a very balanced approach. And that balanced approach really helps us take advantage of near-term opportunities, which right now just happens to be the share buybacks. And so you've seen us be active in that space. But we also want to be able to take advantage of opportunities that we think again, contribute to that long-term TSR performance. And that's where development comes in. We still think that's the best opportunity for us to drive long-term TSR performance. We're getting accretive returns. And today, those are in the mid-6s. And our development importantly has been able to deliver higher NOI growth about 50 to 100 basis points on a long-term basis versus our existing portfolio. So we want to be balanced in terms of what we're doing. The second thing is we want to protect our balance sheet capacity. And so you're not going to see us go out and leverage up our balance sheet because we want to protect what we're able to do with our balance sheet. And then the third thing really is -- we like our portfolio. We like where we're located. We like the markets we're in. So we don't have a need to go and really materially reallocate capital amongst our markets, which can drive certainly higher dispositions and capital redeployment. So that's really how we're looking at our various opportunities for capital allocation and where share repurchases falls within that. Operator: Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Just a question on the guidance. You guys talked pretty optimistically about the balance of the year, acceleration. You're talking about this year's leasing trends not not looking to scale like last year did, but yet you adjusted guidance, you basically tightened the range. A lot of your peers sort of left it open ended to revisit guidance in the second quarter. So based on your commentary, it would sound like you think there's potential for upside, but yet you trimmed the top end and tightened the range. So can you just talk a little bit more about your decision to revisit guidance now versus waiting to the second quarter? A. Holder: Yes, Alex, this is Clay. Just the real reason that we kind of brought down the guidance there, at least a range, keeping our midpoint the same as we came out with our initial guidance. But we were a little wider in our range as we started the year than what we would typically do. And we did that because of the macro uncertainty that Tim mentioned earlier, some of the demand concerns that were out there at that time. As we sit here today, that's lesson we've gotten 1 quarter behind us. And so we tightened that range down to a range that we would typically go out the year with. And so that's really all that we were reflecting by tightening the range. Still feel very confident in our overall guidance as we move in throughout the year, though. Operator: Our next question comes from the line of Adam Kramer with Morgan Stanley. Adam Kramer: Just wanted to ask a little bit about sort of the renewal growth with regards to concessions. And if there's any way to sort of maybe disaggregate or break down what sort of percentage of the renewal growth that you guys are able to sort of get each quarter comes from concession burn-off versus sort of gross rent increases? And then maybe just a second part there with regards to concessions and I think you mentioned it for some specific markets, but just maybe across the portfolio, what are you offering today in terms of concessions? And how does that compare for the same period a year ago. Tim Argo: Yes. This is Tim. So for the first part of your question, there's not a lot there. I mean, with our portfolio, we don't use a ton of concessions. We're were mostly in net effective pricing. If you look at our financial concessions represent about 0.6% of our net potential rent. So for us, the burn-off of concessions in our same-store renewal base is very minimal, probably maybe 10 basis points or something like that. It's more impactful in our lease-up properties. We're getting 8%, 9%, 10% renewals on lease-ups where there is some burn off concessions that is driving part of that, so you can kind of distinguish between those 2 there. As far as the concession market across our portfolio, across our markets, I would say, for Q1, pretty consistent with what it was in Q4. We're seeing 60%, 65% of our competitors offering some level of concession somewhere between 4 and 5 weeks is sort of a standard and so that's broadly across the portfolio. We have seen it tick down just ever so slightly as we got into April. Where not only the percent of competitors offer concessions come down a little bit and then a little bit decrease in the overall average concession. So I think that's perhaps a sign some of the momentum to come. absorption was positive this quarter. So fewer lease-up units out there. So we are starting to see it take down just a little bit. Operator: Our next question will come from the line of Michael Goldsmith with UBS. Ami Probandt: This is Ami on with Michael. We were wondering how much of an impact does hiring from new college grads have on your peak leasing season? Do you tend to see more people trading up into MAA units? Or are they more first-time renters? Tim Argo: It's pretty consistent at you. We've been looking at some of that, our younger age demographic with all the talk around some of the unemployment rates for that group in particular. And so if we look at Q1, for example, about 20% of our move-ins are 25 or under in age. And that's been really consistent over the last several years, that hasn't really picked up or down. And then we look at also to try to gauge some of that pressure? Are there more of of our residents needing a guarantor, indicating perhaps that their economic situation is great, and that's actually come down a little bit. So -- but I would say, on average, it's about 20-ish percent of our move-ins are in that 25 age group or under, but we're not seeing really any pressure or any changes in that as of yet. Operator: Our next question will come from the line of Jamie Feldman with Wells Fargo. James Feldman: Great. I think you had mentioned pulling back on development starts this year. Obviously, supply has come down in a pretty meaningful way, and some of your competitors are actually talking about ramping up into '28 and '29. Can you talk about that decision and how we should be thinking about development going forward? Is it more project specific? Or is there a bigger picture story we should be thinking about? Brad Hill: Jamie, this is Brad. Yes, I mean, again, the development of reduction for the year of $50 million really is just a couple of months delay on average in terms of starts for deals, and that's really deal specific to your point. That does not signal in any way a change in our posture toward development. We still continue to believe in the merits of developing in particular, the benefits of that for long-term TSR performance. So you'll continue to see us focus on development. I mean we own or control, I think, 16 sites with approvals for over 4,000 units. So that will be a continued focus of us. We'll continue to focus on spending $300 million to $400 million a year. The start level numbers for each year can vary a little bit as it can be a little bit lumpy. You've got to go through approved the approval process, which can take a little longer than you expect sometimes. So -- but -- our strategy and focus on development is the same as it has, and we'll continue to expand that pipeline to the $1 billion, $1.2 billion range that we've talked about previously. Operator: Our next question will come from the line of Steve Sakwa with Evercore ISI. Steve Sakwa: I guess kind of a big picture question. If I told you that you could double the size of your portfolio today, I guess, what are the pluses and minuses of managing a substantially large or larger portfolio than what you currently have. Is the data flow that much better that gives you better insight on pricing? Are there just more operational challenges? Like how do you sort of think about size and and whether you need to be much bigger than you currently are? Brad Hill: Well, I think certainly, size isn't everything. We have been through, obviously, to significant events in our recent history as an organization and those events are very, very difficult to do. And take a lot of time, and there's risk associated with them, but there certainly could be a lot of upside if they're done right, and the cultures align well between the organizations. I would say at the scale that we are today to double our portfolio size, I wouldn't think there's a material improvement in information flow, data flow and things of that nature that you mentioned. Cost of capital is probably very similar. It really is going to depend on, I would say, what we can get operational efficiency wise. Some of the things that we're doing on the operating side from centralization and specialization and how we're approaching podding properties and things of that nature. Having scale near to one another within a particular market is very meaningful in that process. So certainly, you could see some ability to drive some level of operating efficiencies depending on where the properties are located. Operator: Our next question will come from the line of Rich Anderson with Cantor Fitzgerald. Richard Anderson: So about a year ago, Brad, we had a dinner with the group, and there was some at least some indication from my perspective that this time a year later, we would be talking about a lot more in the way of stabilized new lease rate growth and so on. And obviously, it hasn't quite happened yet. I'm curious, in your mind, taking over CEO around that time 13 months ago, are you surprised by the tail of supply impacting that line item in particular? Or is everything kind of lining up the way you thought? We all know the biblical nature of the supply that came online in your markets over the past couple of years. I'm just curious if all this is coming as more of a surprise and not necessarily in alignment with past cycles of supply that you guys have been through. I just wanted to get your -- take your temperature on that topic. Brad Hill: No, thanks. Yes, I recall our dinner. And certainly, at that time, believe that we would certainly see better improvement on new lease rate side over the past year, which is what our expectations have been as related to our forecast for last year and going into this year. And I think it's also you mentioned the biblical size of supply, but I do think it's important to put that in perspective. in a 3-year period, we had 5 years' worth of supply delivered into our markets. And so there is a level of lingering impact associated with that supply. The good news is, though, that absorption is happening. Market level occupancies are improving. When we had that dinner, I didn't think that new lease rates would take as long as they have to see improvement that we've seen. But the good news is we are seeing improvement. The other positives are that the demand within our region continues to hold in there quite well. outperforming other regions of the country, sometimes a factor of 2 to 3. The other good news is that supply pipeline is significantly declining. If you look at the size of what's being delivered in our region this year, it's down 40% from last year. So while it is taking a little bit longer, if you keep in perspective, just the size and the magnitude of the decline that we're seeing in supply in our region of the country, which is declining to a larger degree than it is in other regions of the country, balanced with the fact that demand continues to be resilient. We're pretty excited about what the trajectory looks like for here. from here. Yes, last year, I would have hoped that it would have improved a little bit quicker, but that's not where we are. And certainly, I think as we look forward, based on supply and demand fundamentals, we're pretty excited. Operator: Our next question comes from the line of Mason Guell with Baird. Mason P. Guell: Do you expect to continue buying additional land parcels for the balance of the year? Brad Hill: Well, this is Brad. I think it depends. We will likely have additional land parcels that we purchase later in the year. But the way that we are approaching buying land at this point is we are not looking to land bank various sites. We do not want to buy land that is speculative. We want to buy land that we have a clear and near-term path to being able to put that land into production. So you could -- based on timing, you can see us buy a piece of land at some point this year that maybe starts construction next year. But and certainly not with the intent to buy it and hold it for a few years before we're able to start construction on it. That's not what we're looking to do. We want to keep the balance sheet very efficient and be able to put land into production pretty quickly after we buy it. Operator: SP1 Our next question comes from the line of Julien Blouin with Goldman Sachs. Julien Blouin: Maybe following on from Steve's question. I mean, you guys are probably the best authorities in the space on public to public apartment deals, just given the post and Colonial deals. Obviously, there's the initial G&A and overhead benefit that can be realized. But I guess you mentioned the podding benefit. How long does that sort of take to realize and then if we think about what's different today versus when you did the post and Colonial transactions, are there any additional benefits today, whether it's on, I don't know, the technology front, the AI front, WiFi rollout and scale with vendors that would maybe make a deal make even more sense today. Brad Hill: Julien, this is Brad. I think in terms of podding, that's more related to the quality of the property managers that you have and just opportunities that present themselves in terms of how quickly those can manifest themselves. Those can be relatively quick endeavors. But you got to make sure you have the right people. As you know, this is a very -- in any merger, this is a very people-intensive business. And so they can quickly determine whether or not you have success or not at a property level. So you've got to be really careful with what you're doing there. And I'm sorry, on the second part of his question. Julien Blouin: Any additional benefit on work there... Brad Hill: Yes. In terms of the other benefits, they're different than executed the post and Colonial merger is on the technology front, like you talk about, I think the cost of technology today continues to increase. But I also think the ability to spread that cost across obviously, a bigger footprint, bigger platform. One of the things that we've been focused on as an organization is continuing to improve our platform capabilities and be able to drive more out of our portfolio than what others are able to do. And part of that is the technology. Part of that is the centralization of specialization that we have and that we're focused on so that the marginal G&A cost associated and technology costs associated with adding additional units is less. So I do think that's a different difference today versus what it was 10 or so years ago when we've gone through mergers. Operator: Our next question will come from the line of Alex Kim with Zelman & Associates. Alex Kim: I wanted to ask about how lease-up velocity has trended so far year-to-date and kind of fitting that into the context of acquiring projects that are in lease up. Is that still a strategy that you maintain on a go-forward basis? Tim Argo: Yes, Alex, this is Tim. I answer the first part of that question. We have seen the lease on velocity pick up, particularly as we got into late Q1 and into April. Obviously, it's a little bit slower in Q1 -- Q4 and Q1, just with traffic patterns, seasonal patterns. But if we look at April, for example, the properties that are in our lease-up bucket averaged about 23 move-ins in the -- on average in the month of April. So we're starting to see that momentum pick up. We got a really good lead volume. We're starting we're not seeing things that get slower. We're not seeing concessions go up anything like that. We're starting to see the momentum there. And I think as we get into the spring and summer, much like we've talked about with our same-store portfolio, we would expect to continue to see some momentum in that group. Brad Hill: In terms of acquisitions, I think you asked if we're focused on buying properties and lease-up. I mean I think at this point, the best use of our capital is not acquiring. So we're not active in that market today. We continue to evaluate projects. I would also say we haven't seen as many lease-up trades lease-ups coming to market to trade as we have historically. I think the if a seller is bringing a property to market today, they want it is leased up and occupied as they get so that there's less risk out there for the buyer so that they can get better pricing at the moment. So we'll continue to look at lease-ups as they come to market. And if we find an opportunity that that makes sense, we certainly wouldn't -- for the right price, we wouldn't hesitate to execute there, but we're just not seeing a lot of opportunities in that front that makes sense today. Operator: Next question will come from the line of Ann Chan with Green Street. Ann Chan: So going back to other income, were there any unusual or nonrecurring items that caused a drag or a boost on other income in first quarter? And related, when do you expect the benefit from the delayed WiFi rollout in the '25 to start flowing to '26, if not already? A. Holder: And just to confirm, are you referring to same-store other income? Ann Chan: Correct. A. Holder: Yes. So in Q1 -- this is Clay, by the way. So in Q1, we have seen -- to your point, we have seen the continued rollout of WiFi that we saw a little bit there, but not much, not really driving that in the quarter itself. What we would expect again to really begin to see that benefit showing itself in the numbers would be as we move into the spring and summer leasing seasons, and we start having those leases turn and that would be the time that we would push the Wi-Fi revenue to the residents and along with the expense that we have for that as well. So that should come forward in the middle towards the latter part of the year. Tim Argo: Yes. I'll just add one point to that, it's Tim. We're expecting somewhere in the neighborhood of or so of revenue in 2026 related to those WiFi projects, which is certainly backloaded. As Clay mentioned, most of these projects got completed late Q4, early Q1, and we price those out the leases expire in the units turn. So expect a lot more impact from those as we get through the year, and then it will compound certainly in 2027 and beyond. Operator: Our next question will come from the line of Nick Yulico with Scotiabank. Unknown Analyst: This is Elemer Chang on with Nick. I just wanted to go back on the concession topic. And just ask, how is concession burn-off trending in some of your maybe underperforming markets of late, like Charlotte, Austin, Nashville, et cetera? And when do you expect you'll reach a normalized level of concessions in those markets this year? I know you mentioned concession usage ticking down through April and that you expect new lease rates will improve throughout the year. But I was just wondering whether that outlook is mostly driven by your stronger markets like Atlanta, Dallas, Orlando. Tim Argo: Yes, Elmer, this is Tim. I mean, we have started to see in some of those weaker markets, concessions come down a little bit. I've talked a few times about some of the more urban submarkets where -- and that have a lot of lease-up where they were averaging closer to 3 months. And I would say now that's more in the 8- to 10-week type of concession environments have come down a little bit there. Market like Austin, we have started to see it come down a little bit. We were pushing across the entire market, close to almost 2 months broadly, and that started to tick down slowly. We're particularly seeing better performance in the southern part of also Northern Austin, Georgetown and that area is still seeing a lot of pressure not seeing much lead there. Phoenix is probably another one where -- we started to see concessions come down a little bit. Occupancy in that market stabilized, at least for us over the last couple of quarters and now starting to see still underperforming broadly, but starting to see some good momentum out of Phoenix. You mentioned Charlotte, that's one that -- it's still right in the mix of it. It got double-digit percent of inventory delivered over the last couple of years. I think that one's going to be a struggle, I think, through 2026, and that 1 is probably more of 2027 recovery story in Charlotte, but feel great about that market long term, tons in demand terms coming there, but just a whole lot of supply there right now. Operator: We have no further questions. I'll return the call to MAA for closing comments. Brad Hill: All right. We appreciate everyone joining, and we'll see you soon in various conferences. Thank you. Operator: This concludes today's program. Thank you for your participation. You may disconnect at any time.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 Labcorp Holdings Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Dewey Steadman, Senior Vice President, Investor Relations. Please go ahead. Dewey Steadman: Thank you, Didi. Good morning, and welcome to Labcorp's First Quarter 2026 Financial Results Webcast. With me today are Adam Schechter, our Chairman and Chief Executive Officer; and Julia Wang, our Executive Vice President and Chief Financial Officer. This morning, in the Events section of the Labcorp Investor Relations website at ir.labcorp.com, we posted both our press release and a supplemental financial presentation with additional information on our business and operations. We will also post a replay of this webcast on the IR website for 1 year. On today's webcast, we will focus on our adjusted non-GAAP results for the first quarter of 2026, our capital allocation strategy and our updated financial guidance for the full year 2026. Our GAAP results and a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measures are available in today's earnings release and the supplemental financial presentation. Please see the Use of Adjusted Measures section in the supplemental presentation for more information regarding our use of non-GAAP financial measures. In today's remarks, the term organic growth excludes the impact from acquisitions, divestitures and currency as well as other strategic actions taken in our early development business. Our remarks will also include forward-looking statements, including, but not limited to, statements about our updated 2026 financial guidance and the assumptions underlying that guidance, the expected impact of various factors on our business, operating and financial results, cash flows and financial condition, global economic and market conditions, our future business strategies, the expected savings, benefits and synergies from acquisitions, strategic actions and partnerships and our potential opportunities for future growth. Each of these forward-looking statements is subject to change based upon various factors, many of which are beyond our control. More information is included in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and the company's other filings with the SEC. We have no obligation to provide any updates to these forward-looking statements even if our expectations change. Now I'll turn the call over to Labcorp's Chairman and CEO, Adam Schechter. Adam? Adam Schechter: Thank you, Dewey. Good morning, everyone. We appreciate you joining us to review our first quarter 2026 financial results and progress on our growth strategy. Before we begin, I'd like to officially welcome Dewey Steadman to Labcorp. Dewey joined us in March as Senior Vice President of Investor Relations and is a seasoned Investor Relations and Capital Markets leader across health care and finance. I'd also like to thank Christin O'Donnell for her leadership of Investor Relations function, and I wish her well as she takes on an important senior role in finance as part of our precision oncology and health systems division, both of which are strategic to our growth. Turning to our results. We are off to a strong start in 2026 with continued momentum in both our Diagnostics and Central Laboratory businesses and significant progress across our strategic growth priorities. Our businesses remain strong due to our critical role in improving health and improving lives for people around the world. Our financial results were strong in the first quarter. At an enterprise level, revenue reached $3.5 billion, increasing 6%. Margins improved more than 30 basis points and adjusted earnings per share grew 11%. Looking at our segments, Diagnostics revenue increased 5%. Biopharma Laboratory Services revenue increased 8%, driven by strong growth in central labs of 11% or 5%, excluding foreign exchange. And our BLS trailing 12-month book-to-bill remains healthy at 1.04. In the quarter, we advanced our strategic priorities, starting with being a partner of choice for health systems and regional local laboratories. These partnerships and acquisitions enable us to expand our patient and provider networks, increase access to our broad test portfolio, including leading specialty diagnostics and to drive volume growth. We recently announced a nationwide strategic collaboration with Children's Hospital of Philadelphia to expand access to cutting-edge diagnostics for pediatric patients. By combining CHOP's renowned pediatric research and clinical expertise with Labcorp's scientific capabilities and extensive reach of physicians and patients, this partnership will help bring advanced diagnostic tests to more children who need them. We also completed our acquisition of select assets of Crouse Health's Laboratory Alliance of Central New York, a clinical anatomic pathology laboratory. And we executed an agreement with Crouse Health to manage their inpatient laboratories. We remain on track to close our acquisition of select outreach laboratory services across Indiana and Northwest Ohio from Parkview Health in the very near future. We continue to have an active pipeline of hospitals and regional local laboratory deals to support our long-term growth strategy. Next, we continue to progress on our strategic priority to lead in specialty testing across our key focus areas of oncology, women's health, neurology and autoimmune disease. These specialty areas are important growth drivers in both Diagnostics and Central Laboratories, with significant scientific overlap across the businesses. In fact, Labcorp supported the development of more than 85% of new drugs approved by the FDA last year, including in these important specialty areas. In the Diagnostic business, we expect these specialty areas to grow 2 to 3x faster than the broader diagnostics market. In neurology, we experienced double-digit growth, driven by our market-leading portfolio in Alzheimer's testing. Oncology also achieved double-digit growth, supported by the launch of several liquid biopsy tests and expanded access to MRD solutions over the past year. Additionally, when providers choose Labcorp for specialty testing, we see them consolidating a greater share of their patients testing needs with Labcorp. As part of our growth in specialty areas, we're collaborating with Illumina to broaden access to advanced genomic testing in oncology, particularly in community care settings. We expanded nationwide access to the first FDA-approved companion diagnostics that helps identify platinum-resistant ovarian cancer patients who may benefit from Merck's KEYTRUDA, which can reduce the risk of disease progression and improve overall survival. In addition to these specialty areas, we continue to increase our portfolio with tests that address pressing clinical needs. Recently, we launched the Labcorp Fentanyl Urine Visual Test, an FDA-cleared rapid screening test that delivers results in just 10 minutes and assesses possible fentanyl exposure for up to 48 hours. Moving to Consumer Health, where we continue to deliver double-digit growth. Labcorp OnDemand launched new tests in the quarter for insulin resistance and pancreatic function. We also introduced unique customizable men's and women's health tests, enabling consumers to design panels tailored to their needs. We are also expanding how consumers engage with Labcorp through MyLabcorp, our secure mobile app launching in May when it will be available to tens of millions of customers. MyLabcorp brings an individual test results and health data together with clinical guidance into a personalized experience to help consumers better understand their test results. MyLabcorp's AI assistant will also help simplify appointment scheduling and payments. Additionally, we continue to make significant progress on our strategic priority to utilize advanced technologies, including AI and robotics to enhance customer experiences and to improve operational efficiency and productivity. Our recent progress includes an expansion of our collaboration with PathAI to deploy an FDA-cleared digital pathology platform across our national anatomic pathology labs and hospital laboratory collaboration. This platform embeds AI into everyday clinical decision-making by enabling pathologists to review and manage cases digitally, improve turnaround times and increase consistency of results. A new AI-powered real-world data platform being developed in partnership with Amazon Web Services and Datavant to accelerate Alzheimer's research. By combining agentic AI with Labcorp's diagnostic and real world data, the goal is to improve patient recruitment for clinical trials and ultimately shorten drug development time lines. A strategic collaboration with Optum.ai to apply AI capabilities to streamline laboratory operations, improve efficiency and enhance the patient and provider experience, providing clear insights to patients about their health, test progress and next steps in care. For physicians, it will help in ordering clinically appropriate tests upfront, reduce administration delays and speed patient access to results. This work builds on a more than 20-year strategic relationship between Optum and Labcorp. This work showcases our culture of innovation and the commitment of our employees. Their impact was recently recognized by Fortune, which named Labcorp to the list of most innovative companies for the fourth year in a row, highlighting our track record of scientific product and process innovations. We were also recognized as one of the 2026 World's Most Ethical Companies by Ethisphere, reinforcing our commitment to operate with the highest standards of ethics and integrity. With that, I'll turn the call over to Julia to discuss our financial results in greater detail. Julia Wang: Thank you, Adam. We are off to a strong start in 2026. In the first quarter, enterprise revenue grew 5.8% and enterprise adjusted operating margin expanded more than 30 basis points to 14.4%. The majority of enterprise revenue growth was driven by organic growth in Diagnostics and central labs. The increase in adjusted operating margin was primarily driven by organic revenue growth. Adjusted earnings per share grew 10.6%, and we generated $71 million in free cash flow. Additionally, we remained active on capital deployment, investing $202 million in acquisitions as well as returning capital to shareholders through $98 million of share repurchases and $61 million of dividends. We ended the quarter with $981 million in cash, $6.3 billion of total debt and $700 million share repurchase authorization outstanding. Our cash balance and debt position included closing on a $750 million term loan, prefunding the retirement of $500 million senior notes in June of this year. Moving to the specifics for the quarter. Enterprise revenue was $3.5 billion, up 5.8% from the first quarter of 2025, with 3.1% organic growth, 1.4% growth from net acquisitions and 1.3% from foreign currency translation. Adjusted operating income was $508 million or 14.4% of revenue versus $469 million or 14% of revenue last year. The adjusted tax rate was 21.7%, lower than the 22.5% tax rate last year, driven primarily by benefits associated with equity-based compensation during the quarter. Despite this benefit, we continue to expect our full year adjusted tax rate to be around 23%. Adjusted EPS was $4.25, up 10.6% from last year. Free cash flow was $71 million compared to a use of cash of $108 million last year. The increase in free cash flow was primarily due to higher cash earnings. As a reminder, our first quarter is typically our lowest quarter for free cash flow. We continue to expect free cash flow in the range of $1.24 billion to $1.36 billion for full year 2026. Looking into the segments, Diagnostic Laboratories delivered another strong quarter with 5% revenue growth to $2.8 billion. With that, we have 2.9% organic growth, 2% acquisition-driven growth and 0.2% contribution from foreign currency translation. Total volume growth was 2.5%, with 1.1% organic growth and 1.4% acquisition-driven growth. Volume was constrained by the impact from adverse weather, excluding which organic volume growth would have been closer to 2%. Price/mix increased 2.6%, with organic price/mix contributing 1.8%, primarily due to an increase in test per assessment. Acquisitions grew 0.6% and foreign currency translation contributed 0.2%. Diagnostics adjusted operating income was $459 million or 16.6% of segment revenue compared to $428 million or 16.3% of revenue last year. Adjusted operating margin expanded 30 basis points, primarily driven by organic growth despite the impact from adverse weather. Biopharma Laboratory Services revenue grew to $781 million, up 8.2% compared to last year, which includes a 5.5% benefit from foreign currency translation. We delivered organic growth of 3.7%, partially offset by our Early Development strategic actions of 1%. In organic constant currency, Central Labs revenue grew 4.9% and Early Development revenue grew 0.7%. BLS segment adjusted operating income increased to $121 million or 15.5% of revenue compared to $107 million or 14.8% of revenue last year. Adjusted operating margin was up 60 basis points, driven by growth in Central Labs. We continue to make progress on strategic actions in Early Development, which will be largely complete by the end of the second quarter. Our BLS segment ended the quarter with a backlog of $8.6 billion, and we expect approximately $2.7 billion to convert into revenue over the next 12 months. Our segment quarterly book-to-bill was 0.94 and is expected to improve sequentially in the second quarter versus the first quarter. Our trailing 12-month book-to-bill remains healthy at 1.04. Turning to our expectations for 2026. Our full year guidance assumes foreign exchange rates as of March 31, 2026. The guidance also reflects our current capital allocation assumptions, including the use of free cash flow for acquisitions, share repurchases and dividends. We are raising the midpoint of the enterprise revenue range by approximately $30 million and the midpoint of the EPS range by $0.13. Looking at revenue, we expect enterprise revenue to grow 5% to 6.1%. This includes a tailwind from foreign currency translation of approximately 40 basis points. We expect Diagnostics segment revenue to grow 5.1% to 5.9%. This guidance assumes the majority of revenue growth comes from organic growth. We expect BLS segment revenue to grow 3.8% to 5.4%. This guidance incorporates the actions in Early Development and the tailwind from foreign currency translation of 150 basis points. For the full year, on an organic constant currency basis, we continue to expect the Central Labs revenue to grow in the mid-single digits and for Early Development revenue to be relatively flat, with the second half being stronger than the first half. We continue to expect enterprise margin expansion with margins improving in both Diagnostics and BLS in 2026 versus 2025. BLS margin is expected to expand more than Diagnostics, reflecting continued strong top line growth in Central Labs and operating efficiencies in Early Development as we streamline the business. As an enterprise, we continue to benefit from our launchpad initiatives, which remains on track. Our adjusted EPS guidance range is $17.70 to $18.35 with an implied growth rate at the midpoint of approximately 10%. As compared to prior guidance, we have narrowed the range and raised the midpoint by $0.13. Our free cash flow guidance range remains $1.24 billion to $1.36 billion, weighted towards the second half of the year, and we continue to expect capital expenditures to be approximately 4% of revenue as we are investing in the new strategic facility to support long-term growth in our Central Labs Services operations. We expect to continue delivering profitable growth and strong free cash flow and drive disciplined capital deployment across acquisitions that support our strategy and complement organic growth while also returning capital to shareholders through share repurchases and dividends. We remain confident in our ability to deliver durable growth and long-term value for our shareholders. Now I'd like to turn the call back over to Adam for closing remarks. Adam Schechter: Thank you, Julia. I'm pleased to announce that we'll be holding an Investor Day in New York City on September 10. We'll share more details as we get closer to the day. In summary, we had a very strong quarter. Our performance is the result of disciplined execution of our strategy, which positions us to deliver long-term sustainable growth, margin expansion and value for our customers and shareholders. Ultimately, our performance is a result of our employees' commitment, compassion and innovation, which continue to accelerate our mission to improve health and improve lives around the world. We'll now take questions. Operator: [Operator Instructions] And our first question comes from Lisa Gill of JPMorgan. Lisa Gill: I just want to go back here to the first quarter. Can you discuss the impact of weather in the quarter? And then thoughts around the ACA exchange and potential changes that are coming back there. I believe that you put a number around that previously. And so should I just think that -- what did we see in the first quarter? If we didn't see anything, are you still expecting that there could be some headwinds from those volumes as we move towards the rest of the calendar year? Adam Schechter: Yes. Thanks for the question, Lisa. So if you look at weather in the first quarter, we estimate it was about a $15 million impact for the quarter. In general, if you look at that, it would impact the Diagnostics business, obviously, more so than the central laboratory business. We would expect that the organic volume growth would have been approximately 2% if it wasn't for the impact of weather. Julia Wang: Yes, Lisa, in terms of your question, as it relates to the ACA impact, previously, we provided an estimate of 30 basis points to the diagnostic volume this year. Now the impact that we saw in the first quarter was really immaterial, although it is perhaps too early to be able to draw any firm conclusion. As we know, the year-to-date enrollment is slightly better than expectations. What we do continue to monitor is if the enrolled participants are indeed paying the premiums, and equally importantly, if that has been translating into the testing utilization by this insured group. Now at this point, we continue to believe that the 30 basis point volume impact is a good estimate to work with, which is reflected in our full year revenue guidance for Diagnostics for 2026. Operator: And our next question comes from Jack Meehan of Nephron Research. Jack Meehan: I wanted to ask you about one of the big policy questions we've been getting at the moment, which is the new one that's related to the CRUSH initiative. Adam, what do you think this means for Labcorp in the lab industry broadly speaking? And is it possible you can share any color around any exposure to some of the codes that have been highlighted? Adam Schechter: Yes. Thanks, Jack. So if you look at CRUSH, what CMS is attempting to do is to reduce fraud, to reduce waste and to reduce abuse. The process has been going on, frankly, for several months now. And we're supportive of any initiative that can create a level playing field within the industry and support what's right for patients. I mean nobody wants there to be abuse in the system. Health care costs are high, and we've got to find ways collectively to reduce those. And a good way to do it is to reduce any type of waste, fraud and abuse. Now we worked with our trade organization, ACLA, we submitted a comment letter in March. And the letter encourages CMS to kind of be thoughtful in their efforts so that they can avoid unintended consequences such as impeding Medicare patient access to medically necessary laboratory testing, to prevent them from potentially punishing legitimate providers. So when I think about it, it makes sense to try to reduce the fraud and abuse, but we have to find the appropriate way to do that and not get in the way of what we're really trying to do, which is to improve patients' health and lives. Operator: And our next question comes from Michael Cherny of Leerink Partners. Michael Cherny: Maybe if I can go back to the volume side on Dx. Obviously, you mentioned some of the mix dynamics on test per requisition. As you think about the trajectory and what's embedded in guidance, what are the moving pieces that you see around that number against the backdrop of how share is progressing relative to just broader volumes? Any thoughts would be great. Adam Schechter: Sure. And let me give some context, and I'll answer the question directly. So if you look at Diagnostics revenue, we had a 5% increase over last year, reached $2.8 billion. If you look at the organic growth, it was about 3%. Acquisitions were about 2%, and there's just a slight, slight impact from foreign currency. So if you go to volume growth, it was 2.5%. 1.5% was organic growth. That would have been higher, about 2% if it wasn't for the weather and about 1.4% was acquisition-driven. If you look at the price/mix, there was a good increase of 2.6% with organic price/mix being about 1.8% of that. As I think about it, you are seeing substantial growth in the specialty areas like neurology, oncology, autoimmune disease and other areas that we're focused on. In those areas, you tend to see less accessions, but more test per accession and a higher price per test, particularly in areas like oncology. So I feel good about where we are. I feel like we've got momentum as we move into the second quarter and the rest of the year. I feel good about the mix of the business that we're seeing. We're focused on the higher-margin business where we can continue to get good volume but also at a good price and good margin. And I think that's why you're seeing such good improvement in our margins as well. So net-net, I feel confident in the guidance that we've provided, and I feel good about the momentum to get there. Julia Wang: And Michael, maybe to just build on what Adam just shared, if you look at our updated guidance for the Diagnostics revenue for full year 2026, the midpoint growth is 5.5%, and we continue to expect the majority of that revenue growth to be coming from organically. Operator: And our next question comes from Patrick Donnelly of Citi. Patrick Donnelly: Can you talk a bit more about the bookings trends you're seeing in BLS? If you guys can break down what you're seeing in ED versus central lab in the quarter, that would be helpful. And then you commented that quarterly book-to-bill, you're expecting it to be up sequentially 2Q versus 1Q. Can you just talk about what's driving that confidence? Is that improved conversations with customers recently? And any color there would be helpful. Adam Schechter: Yes, absolutely. So I feel very good about the progress and the momentum that we have in our BLS business. We had an 8% growth over last year, and it was about 4% from organic revenue. If you kind of look at the 2 businesses, you see the BLS segment is going well, but the Central Labs are actually driving the growth. Central Labs grew 11% or 5% if you look at it on an organic constant currency basis. And then the Early Development business was relatively flat. We still make a lot -- we made a lot of progress on our strategic actions in Early Development, and those will be completed by the end of the second quarter. So I feel good about the momentum. It enabled us to raise the midpoint of the guidance for our BLS segment. As I look at the quarterly book-to-bill, we had a very strong quarter in fourth quarter last year. If you look at our trailing 12 months right now, it's at 1.04. The quarter was about 0.96, but we stated that -- 0.94, but we stated that we expect sequential growth in the second quarter. That's based upon the 0.94 being mostly driven by timing. Some of that fell into fourth quarter versus first quarter, some of that fell from first quarter into second quarter. We are having a good RFPs. We have a good win rate. And as I look at the rest of the year, I expect to have a book-to-bill that will remain above 1. I've always said you want to have a book-to-bill above 1. But then it's also a tale of 2 cities. If you look at Early Development, you'd expect that book-to-bill to be below 1 because a lot of the business can be gotten and then actually occur within the same year. The CLS business is typically above a 1.0. If you look at the trailing 12 months, that's what you would see if you look at the 2 separate businesses. And the CLS business is mostly longer-term, larger-scale trials. Those trials are continuing to come to RFP, and I feel very good about our ability to win those trials. So I have confidence in the book-to-bill as we move through the rest of the year. That's what made me feel confident to raise the midpoint of the BLS guidance. Operator: And our next question comes from Tycho Peterson of Jefferies. Tycho Peterson: Wondering if you could just touch a little bit more on esoteric testing. I think MRD, you've obviously expanded the indication portfolio in breast, lung, Stage III colon. So maybe just touch on the reimbursement pathway there for the different buckets. And then Alzheimer's, I know you did the Roche deal for the primary care market. How are you thinking about that versus specialists? Adam Schechter: Yes. Thanks, Tycho. So as I look at the specialty areas, I feel very good about our momentum. I feel good about our scientific leadership, and I feel good about the trends moving into the future. We focus on 4 key areas: neurology, oncology, autoimmune disease and women's health. And in each of those areas, we're continuing to lead with the types of tests that we're bringing into the marketplace. You specifically mentioned neurology. Neurology is growing, particularly in Alzheimer's disease, all of neurology is growing, but it's being driven by our success in Alzheimer's disease. We don't yet break out the individual segments, but it's getting to be at a point where at some point, we will break it out because it is growing so quickly. If you look at the tests, we are a leader in that field, in the number of tests, the types of tests and our ability to have large scale to bring those tests to a primary care setting. As you mentioned, in oncology, we continue to bring new tests to market. We continue to feel good about our science. When we think about liquid biopsies and solid tumors in oncology and tissue test, we remain a leader. And in those areas, the reimbursement aren't necessarily quite where we'd like them to be at the moment. But I think over time, as we collect more data, we run more trials, the reimbursement will get there. But what's important to note is when you win in these areas, many of these patients require a lot of tests outside of just the specialty tests. So an oncology patient that is being treated for cancer, they get tests for their white blood cells, red blood cells, their liver, their kidneys. So when we tend to win the specialty tests, we also tend to get all the other tests that a physician might want for that patient and find appropriate for that patient. So our success in the specialty areas also leads to additional success in the overall marketplace. Operator: And our next question comes from Elizabeth Anderson of Evercore ISI. Elizabeth Anderson: I was wondering if you could update us on your thoughts about the PAMA survey that starts tomorrow. What are you hearing in terms of hospital participation? And how do you sort of see that impacting potential updates to PAMA later in the year for next year? And then also, any updates you have on the RESULTS Act progress? Adam Schechter: Absolutely. And obviously, this is something we spend a lot of time thinking about. We spent a lot of time with our trade organization, and we spent a lot of time in Washington talking about the importance of the RESULTS Act. And we continue to push for the implementation of the RESULTS Act. We think that is the right appropriate best path forward. Our trade group, ACLA, has been doing a lot of advocacy. And I can tell you, there is an understanding across the Senate, across Congress that a long-term permanent fix needs to be enacted. In terms of what we're waiting for results, we're really waiting for a CBO score, which could give us a sense of the likelihood of approval. We're waiting for CMS to do the technical assistance on the bill. So there are several steps that we're still waiting for. So in the meantime, we continue to make sure that we submit the data according to the law, which we will do. And the impact of PAMA of the RESULTS Act does not go through this year and PAMA actually comes to fruition next year, the impact to Labcorp will be highly dependent upon the number of other laboratories, including hospital laboratories that report their data. The more that report, the lower the impact will be for Labcorp because we are a very high quality but lower cost with broad reach laboratory. So there's a lot of work being done to encourage laboratories in hospitals and other settings to report their data, we just don't have any insight yet. As you mentioned, the reporting is just about to begin as to how many people may or may not report the data. But of course, Labcorp will. Operator: And our next question comes from David Westenberg of Piper Sandler. David Westenberg: So I wanted to talk on the consumer testing environment with Labcorp OnDemand. And of course, you're launching the MyLabcorp app in May with the AI assistant. So just given the fact that this has been growing double digits in Consumer Health, and it is a strategic priority, could we see some investments from you over the next couple of years and some DTC efforts? And how should we think about the magnitude of that growth and the expenses there? And how should we think about ROI? Adam Schechter: No, absolutely. It's an important question, and we spend a lot of time looking at the consumer market. As you mentioned, Labcorp OnDemand continues to expand, continues to grow, and it's growing strong double digits. And we continue to bring new tests to marketplace through OnDemand. We now have over 200 biomarkers in categories like men's and women's health and cancer screening, sexual health, longevity, and those are all available as we speak today. We already do some advertising to consumers, particularly through social media and other areas for OnDemand. And I would expect that business to continue to show good strong growth, and we will continue to invest in bringing new products to market and into the appropriate advertising to consumers where it makes sense. We also continue to look at the other parts of the consumer business. We've decided at this moment, there are some parts of it that although there is strong volume at the current pricing and not knowing the floor of the pricing that we're not necessarily going to compete at this time. We'll continue to evaluate that. But we see so much growth opportunities in the specialty areas, in the areas where there's significant medical unmet need, where we can win scientifically with what we can bring to market with new tests and in those areas where they have great reimbursement but also have higher prices and margins that we continue to focus in those areas. We continue to focus on the business development pipeline that we have and the hospital deals that we're doing, and we have a very long, broad pipeline of those types of deals. So as I think about the future, I am optimistic about our growth prospects before us and the strategic priorities that we've put in place. Operator: And our next question comes from Michael Ryskin of Bank of America. Michael Ryskin: I want to ask on LaunchPad initiative and just sort of margins throughout the year. Can you just give us an update on progress there? And you saw 40 bps of margin expansion in the first quarter, continue to point to expansion throughout the year, I think, across both segments. We would just love to hear your comments on pacing through the year, ability to take cost versus just top line volume benefits. Adam Schechter: Sure. I'll start with giving you a sense of LaunchPad, and then I'll ask Julia to talk a bit about the margins. If you look at LaunchPad, we're on track. We continue to make strong progress. And a lot of what we're doing right now is thinking how do we use technology, including artificial intelligence, robotics and computation to help us reduce costs but also to improve the customer experience, things like MyLabcorp that we're launching to help patients understand their lab results better, their health better and so forth. So as I start to think about AI, I think about it in multiple ways. One, what can we do to improve customer experience? What can we do in order to try to drive revenue? The second thing is how do we drive operational efficiency from it? Or how do we change processes? And you've seen us talk about certain things that we're doing with digital pathology and microbiology and things that we're doing in cytology, all these things will help to reduce costs over time. We've talked about things that we're doing with billing using artificial intelligence in order to reduce bad debt. And I think all of those things will help us with things over time. That's a revenue generator. So as I look at the future, a lot of the costs coming out will be driven by technology, and then I'll ask Julia to give you a little more information about the margins. Julia Wang: Yes. Michael, we are really pleased with our margin progression. Over the past few quarters, we have been disciplined and consistent in driving margin expansion across the entire enterprise, including both segments. As you can see in the release this morning, in the first quarter, our Diagnostics segment margin was improved by 30 basis points versus prior year, primarily driven by organic growth despite the impact from adverse weather. As we look to the full year 2026, we continue to expect another year of margin improvement in Diagnostics, supported by strong revenue growth as well as operating efficiencies, including LaunchPad initiatives that Adam just shared. Now as you move to the BLS segment, in the first quarter, the margin was improved by 60 basis points versus a year ago. And this improvement was primarily benefiting from the strong top line growth in Central Labs, which, as you may know, is the more profitable business within the segment. Now on a full year basis, we continue to expect the BLS margin to improve more than that for Diagnostics as we continue to benefit from organic growth in Central Labs and the strategic actions that we are taking in ED. All in all, I would say that the margin expansion across the enterprise inclusive of the 2 operating segments is expected to contribute to the double-digit EPS growth guidance at the midpoint for full year 2026 that we just updated this morning. Operator: And our next question comes from Luke Sergott of Barclays. Anna Kruszenski: This is actually Anna Kruszenski on for Luke. I wanted to go back to margins actually. If you could talk about maybe what you have baked in, in terms of potential inflation on fuel costs and if you have anything baked in on additional weather headwinds for later in the year? And then lastly, on that weather point, curious if you could talk about how -- like what percentage of appointments that had to be canceled you were able to recapture like later in the quarter or in 2Q? Adam Schechter: Okay. I'll start with the last one first, and then I'll ask Julia to talk a bit more about the margins. If you look at the weather impact, the way I think about that is approximately 20% to 25% of our business goes through our service centers. And we know who has appointments, we know who has requisitions, and we get the vast majority of those patients back over time because we know who they are. But the other 70% to 75% goes through physicians' offices. There, we don't necessarily know who has appointments. We don't necessarily know the doctor's availability to take on those additional patients. So that's a bit harder to go after until those requisitions are available within the system. Julia Wang: Yes. Let me start with the fuel cost. So obviously, we've been closely monitoring the situation, and we currently actually expect a minimal impact to our business. Of course, the oil and gas prices have been dynamic. And our diagnostic logistics network does include a fleet of vehicles and [indiscernible], but we have been shifting to hybrid vehicles over time, which helps us mitigate this risk to a certain degree. And if you just look at the fuel prices in early April, the estimated AOI impact is approximately $5 million to $10 million this year. We believe this impact is manageable, and we have reflected that in our updated guidance. I think the other question you had is really related to weather assumption for the balance of the year. Now just as a practice, we generally do not bake in explicit assumption for weather for our forecast simply because it's something a little bit difficult to really project. But with that being said, as you heard us sharing earlier, if you look at our full year revenue guidance for our Diagnostics business segment, we are looking at revenue growth of anywhere between 5.1% to 5.9% with a midpoint of 5.5%. So I think when you think about certain factors that could potentially move us within that range, weather could be one of the factors. With that being said, of course, we continue to have a very robust M&A pipeline. And to the extent that we continue to make progress and depending upon the timing, that could actually be another factor that moves us a little bit towards the high end of the range. So all in all, I would say that at this point in time, we are comfortable with the range that we are providing, and we are encouraged to head into the second quarter of this year. Operator: And our next question comes from Erin Wright of Morgan Stanley. Erin Wilson Wright: So how would you describe the deal pipeline right now? Like what are you seeing in terms of the pipeline, both in terms of acquisitions as well as partnerships, outreach deals otherwise? Like given just the landscape that we're in, the uncertainties and seeing -- are you seeing an acceleration or building pipeline of these types of deals with health systems or otherwise? And how does it maybe compare to this time last year? Adam Schechter: Yes. Thanks for the question. Our pipeline remains very strong. And I wouldn't say it's accelerated versus this time last year. It was strong this time last year. I've spent quite a bit of time talking with different folks in health systems across the country. And I think you're right, they are struggling right now, and they are looking for ways to partner and for ways for us to work with them. And I don't think that is going to stop anytime soon. In fact, if PAMA is implemented in January, although there will be a short-term impact during the year to us, I think over time, it actually will increase the pipeline of deals because these local regional laboratories are under a lot of stress already. The hospital system laboratories are under stress already, and I think that would just make it more difficult. So stay tuned. I expect we'll have some more deals that we'll be talking about in the future, and I look forward to talking about those. Operator: This concludes our question-and-answer session and today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good day, and welcome to the CRH First Quarter 2026 Results Presentation. My name is Krista, and I will be your operator today. [Operator Instructions] At this time, I'd like to turn the conference over to Jim Mintern, CRH Chief Executive Officer, to begin the conference. Please go ahead, sir. Jim Mintern: Hello, everyone. Jim Mintern here, CEO of CRH, and you're all very welcome to our Q1 2026 results presentation and conference call. Joining me on the call is Nancy Buese, our CFO; Randy Lake, our COO; and Tom Holmes, our Head of Investor Relations. Before we get started, I'll hand over to Tom for some brief opening remarks. Tom Holmes: Thanks, Jim. Hello, everyone. I'd like to draw your attention to Slide 2, shown here on screen. During our presentation, we'll be making some forward-looking statements relating to our future plans and expectations. These are subject to certain risks and uncertainties, and actual results and outcomes could differ materially due to the factors outlined on this slide. For more details, please refer to our annual report and other SEC filings, which are available on our website. I'll now hand you back to Jim, Nancy and Randy. Jim Mintern: Thanks, Tom. Over the next 20 minutes or so, we will take you through a brief presentation of our first quarter results, highlighting the key components of our performance for the first 3 months of the year as well as providing you with an update on our expectations for the year as a whole. We are also going to discuss our recent portfolio management and capital allocation activities and why we believe our superior strategy will continue to deliver industry-leading growth and value creation for our shareholders. First, on Slide 4, some key messages from our results announcement. I am pleased to report a strong first quarter performance backed by our superior strategy, unmatched scale and connected portfolio of businesses. Overall, we delivered further growth in revenues, adjusted EBITDA and margin compared to the prior year period, reflecting good momentum from early season project activity, disciplined commercial execution and positive contributions from acquisitions. We remain focused on allocating and reallocating capital for higher growth as we continue to build a connected portfolio. In the year-to-date, we have agreed to divest of 3 noncore businesses for a total consideration of $1.9 billion, reflecting our relentless focus on the active management of our portfolio to maximize shareholder value. We have also announced that we are investing approximately $900 million in 9 value-accretive acquisitions. The largest of these is an agreement to acquire Axius Water, further strengthening our position as a leading U.S. water infrastructure player, and I will take you through that in further detail later in the presentation. We also continue to return significant amounts of cash to our shareholders. Our ongoing share buyback program has returned approximately $400 million so far this year. And today, we are commencing a further quarterly tranche of $300 million to be completed no later than the 28th of July. I am also pleased to report that the Board has declared a quarterly dividend of $0.39 per share, representing an increase of 5% on the prior year, in line with our strong financial position and policy of consistent long-term dividend growth. Notwithstanding the current macroeconomic uncertainty, the underlying demand environment across our key markets remains positive, and we are pleased to reaffirm our financial guidance for 2026, reflecting a strong start to the year as well as the net impact of divestitures and acquisitions agreed in the year-to-date. Assuming normal seasonal weather patterns for the remainder of the year and no further major dislocations in the geopolitical or macroeconomic environment, we expect full year adjusted EBITDA to be between $8.1 billion and $8.5 billion, representing another strong year of growth and value creation for CRH. Turning now to Slide 5 and our financial highlights for the first 3 months of the year. Overall, a robust performance and a good start to the season with revenues, adjusted EBITDA and margin all well ahead of the prior year period. Total revenues of $7.4 billion were 9% ahead, supported by good underlying demand, disciplined commercial execution and contributions from acquisitions. This translated into adjusted EBITDA of $586 million, 18% ahead and a further 70 basis points of margin expansion, reflecting continued operational improvements and strong cost discipline across our businesses. Turning now to Slide 6. And here, you can see our growth algorithm, which drives our performance year after year. As the leading infrastructure player in North America, we are uniquely positioned to capitalize on 3 large and growing megatrends: transportation, water and reindustrialization, which we believe will support significant growth and value creation for our business going forward. Next, the CRH Winning Way, the force multiplier that enables us to capitalize on these growing infrastructure megatrends. This is what really sets CRH apart. Through our Winning Way, we execute our superior strategy with discipline and focus, driving leading performance across 4,000 locations through a culture of continuous improvement. As responsible stewards of our shareholders' capital, we leverage our proven growth capabilities to build leadership positions of scale in attractive high-growth markets. All of this is supported by 4 key enablers: customer centricity, empowered teams, unmatched scale and our connected portfolio of businesses. Overall, our growth algorithm underpins our proven track record of consistent long-term delivery and our position as the leading compounder of capital in our industry. Now at this point, I will ask Randy to take you through the performance of each of our businesses. Randy Lake: Thanks, Jim. Hello, everyone. Turning to Slide 8 and starting with Americas Materials Solutions, which is supported by our strategic alignment with growing infrastructure megatrends. Overall, our business had a strong start to the year. Total revenues were 21% ahead of the prior year period, with robust volumes across all product lines, reflecting good early season project activity, strong commercial execution and contributions from acquisitions. In Essential Materials, first quarter revenues were 31% ahead. Our aggregates volumes increased by 14%, while pricing was 1% behind, reflecting geographic and project-related mix effects. On a mix-adjusted basis, our aggregate pricing was 5% ahead. Cement volumes were 10% ahead, while pricing declined by 1%, reflecting regional variances across our operating footprint. In Road Solutions, growth in both asphalt and ready-mixed concrete volumes, along with increased paving activity, resulted in Q1 revenues 16% ahead of the prior year period. Now let me take you through some examples of the projects that have been really driving good early season activity across our business, leveraging our scale, capabilities and connected portfolio. In our Road Solutions business, we're involved in the widening and reconstruction of I-95 in South Carolina, supplying over 0.5 million tons of asphalt and 250,000 tons of aggregates. In the reindustrialization space, we're active in the construction of a large chip plant in Boise, Idaho, where we're supplying over 0.5 million tons of aggregates and cementitious materials through our fully connected offering. We're also participating in the construction of a large data center facility in Michigan, delivering over 1.2 million tons of aggregates in the first quarter alone. Of course, it's worth noting that this is the seasonally less significant quarter for our Americas Materials Solutions business. But looking ahead and as the construction season gets fully underway across many of our markets, I'm encouraged by the positive momentum we're seeing in our bidding activity and our backlogs. Next to Americas Building Solutions on Slide 9, where our business delivered a solid performance in the first quarter despite contending with adverse weather conditions in many regions and subdued new-build residential activity. Revenues in our Building & Infrastructure Solutions business were 4% ahead of the prior year, supported by positive data center and utility infrastructure demand. In Outdoor Living Solutions, while the underlying demand environment for residential repair and remodel activity remains resilient, a delayed start to the season due to adverse weather resulted in Q1 revenues 3% behind the prior year. Moving to International Solutions now on Slide 10, where our business delivered a strong first quarter performance, supported by good pricing momentum and disciplined cost control. Total revenue growth of 5% translated into 32% increase in adjusted EBITDA and a further 130 basis points of margin expansion, reflecting improved operational efficiencies and contributions from acquisitions. In Western Europe, activity levels were supported by infrastructure and reindustrialization demand, while in Central and Eastern Europe, activity levels are recovering following adverse winter weather across the region. In Australia, our business continues to perform very well, benefiting from positive underlying demand, operational improvements and synergy delivery from recent acquisitions. So overall, a strong start to the year for our business. And at this point, I'll hand you over to Jim to take you through our recent capital allocation activities in further detail. Jim Mintern: Thanks, Randy. Active portfolio management is a continuous process in CRH. We are constantly allocating and reallocating our capital to maximize value for our shareholders. As you can see here on Slide 12, in the year-to-date, we have agreed 3 strategic divestitures of noncore businesses for a total consideration of $1.9 billion. In addition to the previously announced divestiture of Construction Accessories, we have reached agreements to divest of our Lawn & Garden business, a manufacturer and supplier of mulch, soil and decorative stone, for $1.1 billion and also MoistureShield, a manufacturer of composite decking. The divestiture of MoistureShield closed in early April, while the Construction Accessories and Lawn & Garden transactions are expected to close in the second quarter of 2026, subject to customary closing conditions and regulatory approvals. Together, these transactions demonstrate our commitment to the active management of our portfolio and the reallocation of capital into higher growth, more connected businesses to maximize value for our shareholders. At this point, on Slide 13, I would like to provide an overview of our U.S. water infrastructure platform, 1 of our 4 key growth platforms, which we highlighted during last year's Investor Day. We are a leading player in this attractive high-growth market, benefiting from resilient public funding and nondiscretionary investment. Reindustrialization and an aging water infrastructure network with significant investment needs are the key drivers of demand. And with approximately 1/3 of the U.S. water infrastructure more than 50 years old, the need to upgrade the systems that collect, transport and treat water is critical. Our national reach and expertise give us a significant advantage as investment in this area accelerates. And as you can see on the slide, we have strategically focused on 2 key areas: water transmission and water quality, the fastest-growing segments of the over $100 billion U.S. water ecosystem. In addition to a robust funding backdrop, the market also remains very fragmented with significant runway for further growth through value-accretive acquisitions, enabling us to leverage our unmatched scale, connected portfolio and proven growth capabilities. Our water infrastructure platform is also closely connected to our leading aggregates, cementitious and road platforms. Over 80% of the products we produce in our water business consume aggregates and cementitious materials. And since over 85% of roads require water management systems, the strength of our water platform reinforces the benefits of our connected portfolio and shared customer base. Turning now to Slide 14. In the water quality space, we are pleased to announce the expansion of our existing water infrastructure offering with an agreement to acquire Axius Water, a leading provider of water quality and nutrient removal solutions in North America for approximately $700 million. This acquisition will further strengthen our existing position as a leading water infrastructure player in the United States. With a strong, experienced management team and best-in-class customer-centric design and engineering capabilities, it is an excellent fit and highly complementary to our existing water platform. Integrating Axius into our connected portfolio will enhance our customer offering and drive significant commercial, operational and self-supply synergies. It will also strengthen our IP portfolio across the water value chain through its extensive R&D capabilities. Subject to customary closing conditions and regulatory approvals, the transaction is expected to complete in the second quarter of the year, and we will keep you updated as that progresses. Overall, our agreement to acquire Axius, along with a further 8 value-accretive acquisitions completed in the year-to-date, demonstrates the continued build-out of our connected portfolio and our commitment to allocating capital into attractive high-growth markets. I will now ask Nancy to take you through why we believe our superior strategy will continue to deliver industry-leading growth and value creation for our shareholders. Nancy Buese: Thanks, Jim. Hello, everyone. As you can see here on Slide 16, we believe our unmatched scale and connected portfolio delivers higher and more consistent long-term growth. As the #1 infrastructure play in North America, we benefit from increased exposure to publicly funded construction, which is less volatile and more predictable compared to other areas of construction. We've built leading positions in attractive high-growth markets aligned with 3 secular megatrends: transportation, water and reindustrialization, which together represent one of the most compelling growth opportunities in decades. We drive performance excellence through a culture of continuous improvement, replicated at scale across each of our 4,000 locations. You can see this in our first quarter performance with further margin expansion driven by the operational improvements and strategic growth CapEx investments we've made across our business. Supported by our strong balance sheet and cash generation capabilities, we expect to have approximately $40 billion of financial capacity over the next 5 years to invest for future growth and deliver further returns to our shareholders. Our fully connected offering across aggregates, cementitious, roads and water also enables us to become more deeply embedded with our customers, driving higher pull-through demand for our Essential Materials and capturing a greater share of wallet on construction projects. It also results in lower capital intensity and a more variable cost base, enabling us to adapt quickly to any challenges that come our way while maximizing growth, cash generation and return on capital. Combined with our unmatched scale, the connected nature of our portfolio provides us with superior growth opportunities, multiple avenues to grow both organically and through acquisitions. We have a strong recurring M&A pipeline and the ability to deliver enhanced synergies supported by our proven growth capabilities. In fact, when we look at our track record of synergy delivery in recent years, we typically achieve a 2 to 2.5x reduction in our entry multiple, which really highlights the value we can create for our shareholders. A recent example of this is our 2024 acquisition of the Hunter cement plant in Texas, which has delivered synergies well ahead of our original expectations and our typical run rate. This was driven by operational improvements, increased self-supply and logistics optimization. Similarly, although earlier in the integration process, our 2025 acquisition of Eco Material is also performing strongly with some good early wins on synergy delivery. Overall, our unmatched scale and connected portfolio enables us to deliver higher and more consistent long-term growth. On Slide 17, you can see the consistency of our performance over the last decade. In addition to growing our top line, we have delivered 15% compound annual growth in adjusted EBITDA, approximately 110 basis points of average annual margin expansion and 18% compound annual growth in diluted earnings per share. Our track record across each of these financial metrics demonstrates our ability to deliver consistent long-term growth and performance. And as you can see, from a total shareholder return perspective, the story is just as compelling. Over the same time frame, we've generated a compound annual total shareholder return of 19%, highlighting our position as a leading compounder of capital and a powerful platform for shareholder value creation. Jim Mintern: Thanks, Nancy. Now before I provide an update on our financial expectations for the full year, let me share our latest thoughts on the outlook across our markets. On to Slide 19 and first to transportation, where the demand backdrop is robust, supported by the continued rollout of federal funding through the IIJA, where approximately 50% of highway funds are yet to be deployed. State-level funding is also strong with 2026 DOT budgets up 6% on the prior year. In fact, 2026 is expected to be a record year for investment in transportation infrastructure, which bodes well for our business given our unmatched scale and market-leading position. We remain encouraged by the progress being made in Congress regarding a multiyear reauthorization of highway funding with continued bipartisan support for increased infrastructure investment in the years ahead. In our International business, we expect robust demand in infrastructure to continue, supported by significant investment from government and EU funding programs. We also expect to see continued demand for water infrastructure with strong growth projected in the areas of transmission and water quality. In reindustrialization, we expect continued strong demand for our large-scale manufacturing and data center investment in both the U.S. and our international markets. And with the benefits of our unmatched scale and connected customer offering, we are well positioned for growth in this area going forward. In the residential sector, we expect repair and remodel demand in the U.S. to remain resilient, while new-build activity remains subdued as a result of ongoing affordability challenges. As we have said in the past, this is not a demand issue, and we believe the long-term fundamentals in this market remain very attractive, supported by favorable demographics and significant levels of underbuild. In summary, the overall trend is positive for our business with our strategic focus on growing infrastructure megatrends and the benefits of the CRH Winning Way, leaving us uniquely positioned to capitalize on the strong growth opportunities that lie ahead. Turning now to Slide 20. And against that backdrop, we have reaffirmed our financial guidance for 2026, reflecting a strong start to the year as well as the net impact of divestitures and acquisitions agreed in the year-to-date. Assuming normal seasonal weather patterns for the remainder of the year and no further major dislocations in the geopolitical or macroeconomic environment, we expect full year adjusted EBITDA to be between $8.1 billion and $8.5 billion, net income between $3.9 billion and $4.1 billion and diluted earnings per share between $5.60 and $6.05, representing another strong year of growth and value creation for CRH. It's still very early in the construction season, but we will update you on our expectations as the year unfolds and as the season gets fully underway across our markets. So that concludes our presentation today. I will now hand you back to the moderator to coordinate the Q&A session of our call. Operator: [Operator Instructions] We'll take our first question from Adrian Huerta with JPMorgan. Adrian Huerta: Congrats on the results. My question is just if you can provide further color on your guidance for this year, especially after these transactions that you did and the underlying assumptions that you have. Jim Mintern: Good to hear you. I might ask Nancy maybe to come back at the end just on some of the detail, the puts and takes in terms of the full year guidance, but very pleased this morning to be reaffirming our full year guidance, which is really reflecting the strong start we've had to the year in Q1. And at this stage of the year, what we look for is that all the key building blocks are really in place early in the season to deliver on the guidance. And what we're actually seeing across our markets right now is a positive demand backdrop. We've seen it in the Q1 performance and into March and April with strong early season project activity. And we're seeing good growth across areas such as our roads and reindustrialization, which are performing well. I think, again, the guidance is supported by the continued rollout of the IIJA and very strong local state funding. And that's providing us with really good backlogs at this point of the year, which are nicely up year-on-year. In addition, we've had a really good start from a pricing perspective. Pricing momentum across all our businesses has been good in the first quarter with really strong execution across our commercial teams. And we've had a very good winter maintenance program as well this season. And that kind of gives us the confidence in terms of giving the guidance today and for another year of margin expansion. So putting all that together, pleased to reiterate the guidance for the year with adjusted EBITDA between $8.1 billion and $8.5 billion. Nancy? Nancy Buese: As Jim said, it's been a really busy start from a portfolio perspective. We've had $1.9 billion of divestments announced and about $900 million of acquisitions. So when you think about the scope impact for 2026, we would expect about $200 million of net incremental EBITDA contribution. And just as a reminder, that's unchanged from our previous guidance. So with all the ins and outs, the previous guidance had already included the divestment of the Construction Accessories business. So now that's also reflecting the impact of the further acquisitions and divestments that we announced today. Operator: Your next question comes from the line of David MacGregor with Longbow Research. David S. MacGregor: I wanted to ask you about just what we're seeing in energy costs. And with the energy price spike, how are you thinking about the impact on your vertically integrated business model and the extent to which your hedging programs allow you to mitigate that impact? Jim Mintern: David, yes, clearly, we've seen a lot of volatility and spikes in energy in recent months. But maybe first to kind of contextualize it and kind of size it, for us, energy is approximately about 5% of our total annual revenues. And as we would have said on kind of previous earnings calls, we have a very well managed, well -- kind of, very mature hedging policy in place, and we typically cover out on a kind of rolling 9-month basis. And that -- what that gives us is really good visibility for our energy costs for the year ahead. And right now, we're kind of focusing on our guidance, that we just reaffirmed this morning, and really looking for another year of margin expansion. I might ask Randy, though, maybe just to give a bit of a flavor as to how the teams -- the commercial teams are responding in the field to this recent energy spike. Randy Lake: Yes. I'd say the team, certainly, we do this on a market-by-market basis, but really experienced commercial teams who focus certainly on value delivery, and we've dealt with periods of volatility before where we've seen significant spikes and shocks. But our focus really is on a market-by-market basis, making sure that we recover the increases, any increase we would experience in input costs, and fundamentally protecting margins. It's about advancing those to our expectations that we're calling out even today in terms of growing margins. Additionally, I'd say we have already started kind of midyear price increases in a very targeted way. If that uncertainty continues, we'll continue to evolve that strategy. But we're playing off the front foot, being very proactive in the area, and the teams have done a terrific job, again, about protecting those margins. Operator: Your next question comes from the line of Anthony Pettinari with Citi. Anthony Pettinari: Jim, just circling back to your full year guidance, could you talk a little bit more about sort of the underlying assumptions for aggs and cement volume and price assumptions for the year? Jim Mintern: Sure. Absolutely, Anthony. Good to hear from you. Listen, I'll ask Randy maybe to give you the specifics by market and volume and prices. But as I said kind of in the opening question, a really good start to the year, with overall strong underlying demand. We see it in our backlogs and a really good start to the year across all the businesses from a pricing perspective. But maybe, Randy? Randy Lake: Yes. I think we called it out in the presentation. Certainly, Q1 is off to a really good start. So volumes up on agg, 14%; cement, 10%. I think Jim mentioned it, the volume within the context of our backlog, that really gives us that 6- to 9-month window in terms of underlying activity levels. And we continue to see both bidding activity, importantly, what we're winning, both on a revenue and then volume standpoint, improve year-over-year. So it really reaffirms kind of what we called out at the beginning of the year, which we anticipated from an agg standpoint, low single-digit improvement in volume and supported by mid-single digit in pricing. And maybe just calling out the price on the agg side. I think for me and our commercial teams, the most important metric in Q1, because you can get some volatility, is really around the adjusted -- mix-adjusted pricing, and we see that at 5%. That's indicative of what we should expect to see for the full year. So that -- the teams have done a terrific job. It's a metric we lean heavily on at this time of year. So good to see the progress there and really supports our midyear single-digit price expectations for the full year. Looking at cement in the Americas, in particular, again, good momentum, good backlog, good early start to the season. Certainly, you saw the pricing move back a bit in totality. You're going to see regional differences. We're coming off 3 exceptional years, strong years in terms of pricing. But when we look at the backlogs, again, I'd say we would expect low single-digit improvement in volumes and low single-digit improvement in pricing as well. So teams are doing a nice job there. On an international basis, Europe and Australia, the weather certainly impacted our business in Europe, in particular, in January and February, but it's recovered very nicely in March and April, reflecting good project backlog and underlying demand that really gives us visibility in terms of the full year, again, low single-digit volume improvement in our International platform and mid-single-digit improvement in pricing. And you can see that coming through in Q1, a 3% improvement from last year. So all the signals are strong and really does iterate -- and reiterate kind of our focus and the guidance we gave in terms of the demand picture. Operator: Your next question comes from the line of Trey Grooms with Stephens. Trey Grooms: As typical, you guys continue to be very active in portfolio optimization. Jim, maybe you could give us maybe a little additional color on the year-to-date divestments? And then also, how should we be thinking about divestitures or divestments going forward? Jim Mintern: Sure, Trey. Good to hear you. Yes. Listen, a very good first quarter in terms of portfolio activity, right? We're very pleased with it. And when we look at portfolio activity in CRH, it's a continuous process. It's not a one-off event. It's something we continuously do. And we announced this morning that 3 strategic divestitures of noncore businesses for a total consideration of $1.9 billion. Now every capital allocation decision, whether it's on the investment side or the divestment side or growth CapEx, in CRH is always looked at through the lens of trying to maximize shareholder value. Now these were good businesses that we're divesting of, but we really had the opportunity, we took the opportunity, to recycle the proceeds into faster-growing and connected platforms. And in this case, taking the opportunity to increase our exposure to the kind of faster-growing water infrastructure sector. And I think going forward, it should be more of the same, Trey. You should expect us to continue to look for opportunities to optimize our portfolio. Operator: Your next question comes from the line of Michael Dudas with Vertical Research Partners. Michael Dudas: You mentioned -- Jim, I think as you mentioned in your prepared remarks, a positive outlook on the next reauthorization of IIJA. Maybe you could share -- you or Randy can share a little bit of view on what you're hearing from your contacts, size of what will be provided, maybe timing? Would there be any issues you think that would disrupt later this year into early next, any project bidding if there's a continuing resolution, or Congress doesn't get its act together before September 30? Randy Lake: Yes. Good question. I guess maybe take a step back first. Jim called it out in the opening remarks in terms of the underlying funding with IIJA yet to be deployed, almost 50% has yet to hit the street. And you combine that with really the proactive measures that the states have taken over the last number of years, and you have a really strong view in terms of not only short-term but long-term funding and the demand environment. I mentioned on the pricing side, what gives us the optimism around the ability to deliver is certainly our backlogs. We are seeing, and we track this every week, kind of the quantum that we're bidding continue to grow. We're winning our fair share. Revenues and overall volumes are improving year-over-year. So you're seeing the benefits of both IIJA and the states coming through nicely. I think what we're hearing is, there's positive conversations, both from the administration and from Congress, both in the House and the Senate. I think fundamentally, there's this understanding and appreciation of the need for the investment. It's historically been bipartisan. There's no change in terms of the conversations that are happening today in and around that. I think there's also an understanding that there needs to be a meaningful step-up in the investment in core infrastructure, which is great for us when we talk about roads and bridges and highways, that's core infrastructure. And so there's alignment both in the administration and Congress around that. So I think we're optimistic that a bill will get passed in the second half of the year. In terms of the quantum, I mean, there's numbers all over the place. I think fundamentally, what we believe and what we hear is that it will be a step-up, certainly a meaningful step-up from what we have today. And I think more importantly is the underlying understanding that we need to have that kind of level of investment. I guess, to your question, if they can't reach a new piece of legislation? We've been here before, we call -- go into what they call continuing resolution. I think what would be interesting about that is that we're coming off peak levels of investment in terms of the IIJA, a significant step-up in '26 from '25. So you're coming from record levels that will continue into '27. That gives us a lot of surety -- and more importantly, our customers, the states, a lot of surety in terms of not only volume and demand in '26, but into '27 as well. So again, I think there's great support, good momentum and conversations. All those things will lead one way or the other to higher level of investment and good outlook for our business. Operator: Your next question comes from the line of Colin Sheridan with Davy. Colin Sheridan: You had covered off the energy side pretty well on the cost front. I was just wondering if you could maybe give us an update on the more general cost environment and maybe an update on the winter-fill program as well. Jim Mintern: Yes. Sure, Colin. Listen, as we said in February and really seen us continue to see it, we're seeing inflation in other cost items beyond energy also. And it's mainly in the same areas, again, in terms of labor, raw materials, maintenance and subcontractors. And again, overall, we're continuing to expect kind of mid-single-digit inflation in 2026 across those categories. Now that really highlights the importance of the continued price momentum that we've been touching on earlier in the call as well. And that together gives us that outlook of margin expansion for the year. Now in terms of the winter-fill program this year, in 2026, yes, if you take a step back first, it is one of our key competitive advantages that we have as part of our Roads business. And it is unique to CRH, our off-season storage capability at scale. We have the ability and we do -- we store about half our annual liquid requirement we accumulated off-season. And we've built up that capacity over several decades at this point in time. And it really is one of the benefits of having that scale in our Road business and our connected portfolio. Now what does it give us? It gives us kind of 2 key strategic advantages, right? First is on the procurement side, right? We have the ability to acquire at scale, off-season with good procurement advantages, and we will get certainty of cost before we head into the season. And it also gives us security of supply, right? In certain parts of our business, you have a kind of limited enough paving season that runs from about now to Thanksgiving. So it's important that we have the product available to meet the kind of backlogs and demand we have. So this year, we've had a very well-executed winter-fill program. We are exactly where we want to be right now as the season kind of shifts into top gear, and we're well positioned for another strong year of growth in our Roads business in 2026. Operator: We have time for one more question, and that question comes from Kathryn Thompson with Thompson Research Group. Kathryn Thompson: As we close today's call, just one follow-up really more on getting further clarification and color, more importantly, on your acquisitions year-to-date. And as you think about the divestitures, which were, as you said, noncore and then the addition of Axius, how does the current pipeline of acquisitions look? And maybe give a little bit more color of how that fits into the broad strategy that you outlined in your Investor Day last September. Jim Mintern: Sure, Kathryn, absolutely. Yes, listen, we've had a good start to the year in Q1, right, from an M&A perspective with 9 acquisitions announced for a total consideration of $900 million. And really, they're spread across the 4 connected platforms, across aggregates, cementitious, roads and water. And all of these platforms, they're beneficiaries of large and growing infrastructure megatrends that we called out on our Investor Day. Now maybe first, just before we talk about Axius, just briefly to give an overview of our kind of water infrastructure platform. For us, it's a highly attractive and a core growth platform. And it operates in high-growth markets, which are supported by very strong secular tailwinds. It's also a sector with very significant investment needs, particularly in the U.S. after decades of underinvestment in this particular space. And it's a sector which has robust public funding backdrop. Now over the last 50 years, we've been building out a leading position in the water infrastructure place, primarily for us, focusing on 2 key areas around transmission and water quality. Now this morning, we announced the acquisition of Axius, so maybe looking at that. It's an excellent fit for existing water infrastructure business, and it's really consistent with our connected water strategy and kind of strengthens our customer offering in the water quality area in particular. What it does is making us more deeply embedded with our customers. It's increasing our share of wallet on water infrastructure projects and particularly on Axius, from a synergy perspective, Kathryn, there's really good opportunity primarily from the commercial side, but also on the operational and in terms of self-supply synergies across our connected portfolio by being able to supply across some of the other platforms into Axius as well. Now maybe the last part of the question. I think the pipeline right now. It's strong, Kathryn, right? I think, again, with our unmatched scale and the connected portfolio, we have significant optionality for where we deploy capital. And you've seen that over the last 12 months, right, where we've continued to invest across each of the 4 platforms. In the U.S., in terms of aggregates, we announced a deal of North American Aggregates last year. The deal last year was Eco Material, cementitious deal towards that in September 2025. Talley Construction in the Roads business last year. And in terms of the water platform, we did the investment in VODA.ai and now the Axius deal. So the pipeline is strong right now. What we're doing consistently is that we're continuing to build backlogs of optionality across each of those 4 platforms. But again, every capital allocation decision will be looked at through the lens of maximizing shareholder value. And over the next 5 years, with an estimated $40 billion of the financial capacity, we're really well positioned to continue to deliver growth and value creation by continuing to deploy that capital across those 4 growth platforms and regions. Well, that is all we have time for today. Thank you for all your attention. And as always, if you have any follow-up questions, please feel free to contact our Investor Relations team. We look forward to updating you again in July when we will report our results for the second quarter of 2026. Thank you, and have a good day and stay safe. Thank you. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good day, and welcome to the Flowserve First Quarter 2026 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brian Ezzell, VP of Investor Relations. Please go ahead, sir. Brian Ezzell: Thank you, and good morning, everyone. Welcome to Flowserve's First Quarter 2026 Business Update. I'm joined by Scott Rowe, Flowserve's President and Chief Executive Officer; and Flowserve Chief Financial Officer, Amy Schwetz. Following Scott Rowe prepared remarks, we'll open the call for questions. Turning to Slide 2. Our discussion will contain forward-looking statements that are based upon information available as of today. Actual results may differ due to risks and uncertainties. I refer to additional information, including our note on non-GAAP measures in our press release, earnings presentation and SEC filings, which are available on our website. With that, I'll turn the call over to Scott. Robert Rowe: Thank you, Brian, and good morning, everyone. I'd like to begin by thanking our associates around the world for their hard work, disciplined execution and resilience in a highly dynamic environment. Our first quarter results reflect their continued focus on execution as we delivered strong adjusted operating margin expansion of 230 basis points and adjusted earnings per share growth of 18% and including the net benefit of tariffs and other unanticipated items in the quarter that Amy will discuss in more detail. While bookings and sales were impacted by events in the Middle East, we maintain our full year adjusted EPS outlook of $4 to $4.20, which at the midpoint represents 13% growth over 2025. We continue to advance our strategy and leverage the Flowserve Business System to unlock greater potential across the company. As we announced in late March, Matt Copper, who formally led our Industrial pumps business unit has been promoted to lead the FPD division. I'm excited to have Matt in this role where he can leverage his customer relationships, knowledge of the business system and international experience to continue driving strong performance for the division. Let's turn to bookings on Slide 4. Bookings in the first quarter were $1.15 billion, down 6% from the prior year period. Our first quarter book-to-bill was 1.07x. We delivered healthy aftermarket bookings of $680 million in the quarter. As anticipated, aftermarket was down modestly on a year-over-year basis against a very strong prior year comparison that included a large nuclear order. On a sequential basis, aftermarket bookings were in line and represented the eighth consecutive quarter above $600 million. Our focus on expanding the aftermarket business continues to deliver results. as we drive higher capture rates across our installed base. Within our original equipment business, January and February started with softer-than-expected bookings largely related to our run rate MRO business and some smaller projects pushing out to later in the year. We saw these trends improve in March back to levels we anticipated, with strong commercial activity in the market. The softer start to the quarter, coupled with dynamics in the Middle East resulted in lower original equipment bookings in the quarter. I'll provide more insight on the Middle East in a moment, though it's important to note that absent the estimated $50 million headwind related to customer delays in the region, bookings for the quarter were largely in line with our expectations. Our focus on diversification within the 3D strategy has positioned Flowserve to manage through a dynamic market conditions better than ever. In the quarter, we received more than $110 million of nuclear awards including 2 projects larger than $20 million each. Nuclear and traditional power continue to represent attractive strategic growth markets for us. Turning to Slide 5. I'll provide an update on how we have been responding to the situation in the Middle East. Our #1 priority is employee safety and supporting our roughly 800 associates across manufacturing facilities and QRC locations in the region. I'm proud of the resilience and focus our teams have displayed as they continue to deliver for our customers. We are taking the necessary actions to manage through the near-term disruption, while positioning the business to respond effectively as we see incremental demand. First quarter sales and earnings were negatively impacted by disruptions in the region, largely driven by the shutdown of the logistics system and the inability to get to customer sites at the height of the conflict. Though conditions in the region remain dynamic, our ability to operate has improved under the recent ceasefire with temporary work positives implemented as needed based on safety considerations. We are proactively adapting our supply chain to address transportation delays, inflationary pressures and the potential for broader disruption. The progress we have made through the Flowserve Business System over the past several years has enabled us to operate with greater discipline, better visibility and more flexibility across our global network. We are dynamically repositioning the supply chain, leveraging our broader supply base and utilizing our regional and global footprint to respond quickly as conditions evolve. As we look forward, we have assumed that these disruptions seen in the first quarter continue for some period. Over time, we see significant opportunity to support our customers' critical infrastructure needs. We have a large installed base across the region and a legacy of strong customer relationships. We anticipate that asset restarts and rebuilding activity will begin later in the year with accelerated opportunities for additional infrastructure investment across the region. Energy security is also expected to be of increasing importance across the globe, and our teams are working diligently to assist customers as they plan for these incremental investments. Turning to Slide 6. I'll provide some perspective on the broader market outlook. Despite the disruption in the Mideast, the underlying fundamentals across our end markets remain healthy, and we continue to see meaningful growth opportunities for near and longer term. The outlook for power remains very favorable with global electricity demand continuing to support significant investment in both traditional power and nuclear generation. In general industries, ongoing developments in sectors such as mining, pharmaceuticals, food and beverage and water continue to represent a meaningful opportunity for growth. Within energy, utilization rates and maintenance activity across large process facilities have remained strong, with North American utilization increasing in March due to higher crack spreads. Our large installed base and ability to increase capture rates continues to support a constructive outlook for Flowserve, even as some larger project work has been slower to materialize given the geopolitical uncertainty. And while chemical remains our lowest growth end market, we continue to expect modest improvement over the course of the year. Looking ahead, our 12-month project funnel remains robust and expanded across all end markets, both sequentially and year-over-year. We are encouraged by bookings trends exiting the first quarter and by the awards we received in April. We have good visibility in the commercial opportunities and believe mid-single-digit bookings growth remains achievable for the full year. We also believe the current geopolitical environment could drive increased investment in energy security and diversification globally, providing another long-term tailwind for Flowserve. In addition, as one of the leading suppliers of flow control solutions in the Middle East, we expect to play an important role in reconstruction activities across industrial complexes as stability returns to the region. We are prepared to respond quickly and support our customers as these opportunities develop. Turning to Slide 7. The Flowserve business system continues to be a key driver of our performance. The progress we have made across operational excellence in 80/20 has helped us improve how we run the business, reduce complexity and driven steady, sustainable margin expansion. Operational excellence continues to strengthen our core execution capabilities and improved performance across the organization. We have improved data and material flow, optimized inventory and unlock significant cash for the business. increased supply chain reliability and enhanced delivery performance are also helping us better serve our customers. Furthermore, we continue to execute our footprint rationalization program. With further support -- which further supports our efforts to reduce fixed costs, improve operational performance and deliver further value for our customers. As we move into the third year of the 80/20 program, we continue to simplify our product offering across the business, including meaningful SKU and model reductions, we believe these actions will further sharpen our focus, improve efficiency and strengthen our operating model. While we continue to advance our commercial excellence initiatives, we have now trained hundreds of employees and provided them with the tools and processes to build greater capability and consistency across our commercial organization. which we believe is creating the foundation for long-term sustainable growth. The business system is the key to delivering on our long-term financial targets and I couldn't be more pleased with the progress that we are making and the impact it is having on growth and margin expansion. In summary, the fundamentals of our business and end markets remain robust, and I am pleased with our execution and the progress we made during the quarter. We are taking the necessary actions to successfully navigate the current environment. and we remain confident in the near- and longer-term growth opportunities we see across the business. As we move through the year, we anticipate even stronger opportunities to deliver value for our customers and our shareholders supported by our integral role in building and maintaining critical infrastructure around the world. With that, I'll turn the call over to Amy. Amy Schwetz: Thank you, Scott, and good morning, everyone. Turning to Slide 8. We delivered a solid first quarter performance in a complex operating environment. Our results demonstrate Flowserve's durable business model and the disciplined execution of our associates. We continue to make progress on our stated margin expansion objectives. Adjusted gross margin increased 370 basis points to 37.2% and marking our 13th consecutive quarter of year-over-year adjusted gross margin expansion. Adjusted operating margin was 15.1%, up 230 basis points from the prior year period. with positive incrementals on lower sales. These results drove adjusted EPS of $0.85, an 18% increase versus the first quarter of 2025. First quarter results, both reported and adjusted were impacted by 3 items not originally anticipated when we provided guidance in February. First, EPS included a $0.19 benefit from AEFA tariffs for which we have filed for refunds following the U.S. Supreme Court's decision in February. This benefit was partially offset by the $0.06 negative impact of an item arising from a taxing authority in Latin America related to prior years. In addition, we estimate that the disruption in the Middle East negatively impacted reported and adjusted EPS by approximately $0.06. Altogether, these unanticipated items resulted in a net $0.07 benefit included in the first quarter results. Turning to sales. First quarter revenue was $1.1 billion, down 7% versus the prior year period with a 360 basis point foreign currency translation benefit and a 20 basis point contribution from acquisitions. We anticipated a modest sales decline in the quarter, which was further hampered by an estimated 200 basis points from the disruption in the Middle East. Sales were also impacted by the slower start in January and February run rate bookings that Scott mentioned earlier. Aftermarket sales grew 4% in the quarter, driven by the continued momentum in capturing more business from our large installed base. The aftermarket strength was offset by an 18% decline in original equipment revenue, which was largely expected given the difficult year-over-year comparison in the first quarter as well as slower backlog conversion as nuclear becomes a larger mix of our portfolio. Turning to Slide 9. Both segments benefited from strong execution under the Flowserve business system and we continue to see tangible improvement from our 80/20 and operational excellence initiatives. In FPD, we delivered another quarter of strong margin expansion with adjusted gross margin up 300 basis points year-over-year to 37.7%, and and adjusted operating margin up 140 basis points to 19.1%. FPD bookings were $774 million, down 9% versus the prior year. Revenue was $745 million, down 5% as lower shippable original equipment backlog more than offset the 5% growth in aftermarket. FPD exited the quarter with a book-to-bill of 1.04x. In FCD, adjusted gross margin was 35.2%, and up 480 basis points year-over-year and adjusted operating margin was 15.9%, an increase of 370 basis points. FCD remains focused on margin improvement with the first quarter profitability highlighting continued progress. FCD bookings were $374 million, roughly flat with the prior year as 10% growth in aftermarket bookings was offset by declining -- by a decline in original equipment awards. FCD revenue was $328 million, down 10% versus the prior year period, with the majority driven by 80/20 activities. FCD ended the quarter with a book-to-bill of 1.4x. Turning to cash flow on Slide 10. Cash from operations was a use of $43 million in the first quarter. This result was in line with our expectations and consistent with 2025 performance and was primarily driven by temporary seasonal working capital requirements, along with modest headwinds from the Middle East. First quarter cash flow is typically our lowest quarter of the year, and we expect improvement through the balance of 2026. We remain focused on working capital management and expect full year free cash flow conversion of 90% or more of adjusted net earnings. Our balance sheet remains very healthy with net leverage of approximately 1.2x at quarter end, an improvement versus the year ago comparison, providing significant flexibility for capital allocation. In addition, in April, we amended our credit agreement, extending the maturity by 5 years and increasing revolver capacity to further enhance our financial flexibility. Turning to Slide 11. We remain confident in our ability to expand profits and create value for our shareholders in an evolving environment. Our end markets remain robust overall. And while the Middle East conflict may cause some short-term fluctuations ongoing investment in the region, along with rebuild activity creates meaningful opportunity. As it relates to our full year outlook, our guidance assumes the current Middle East situation continues. With the key assumptions, including that military operations do not materially escalate that we are able to maintain operations and that the flow of materials into our Middle East operations continues albeit with some delays, and that secondary supply chain disruptions do not materialize. We recognize the potential for a much wider range of outcomes from the conflict that could have implications on our business and our organization expects to remain nimble as we navigate the coming weeks and months. With this backdrop, we now expect organic sales to range from a 1% decline to a 2% increase, resulting in our total sales growth outlook of 3% to 6%. As a reminder, total sales growth includes approximately 300 basis points of benefit from acquisitions, including the anticipated midyear closure of the Trillium Valves acquisition. At the same time, despite a more challenging Middle East outlook, we are reaffirming our expectation for approximately 100 basis points of adjusted operating margin expansion as well as our adjusted EPS guidance of $4 to $4.20 per share for the full year. Our EPS guidance reflects the net impact of the first quarter unanticipated items that I referenced earlier, in addition, our outlook for the balance of the year also includes roughly $0.07 of expected impact from the ongoing conflict in the Middle East, contemplating modestly lower bookings, while the conflict continues and some modest delay in logistics time lines potentially offset by rebuild activity. At the midpoint, our guidance represents another year of double-digit growth versus prior year's adjusted EPS. In terms of quarterly phasing, we expect original equipment bookings to accelerate in the second half of the year, driven by increased project activity and rising nuclear investment and the potential for rebuild activity in the Middle East, and we remain confident in our ability to expand the aftermarket capture. As Scott noted, we came into the year anticipating increased Middle East project bookings in the second half of 2026. It's too early to know exactly how the conflict in the Middle East could impact these assumptions. To date, customers have indicated projects are expected to move forward, but we know some projects could slip to 2027. That said, we believe rebuild activity could provide more momentum through the balance of the year. Importantly, we view any disruption as relatively short term in nature with no anticipated impact to the underlying demand environment or the opportunity to deliver on our 2030 growth and earnings targets. Quarterly, year-over-year performance will accelerate as we move through the year, and we estimate the previously announced Trillium acquisition will close near midyear. We continue to anticipate first half revenue will be more impacted by headwinds from 80/20 and backlog composition, each of which will begin to abate in the second half. Given the headwind from the Middle East, Q2 sales are expected to be down low to mid-single digits in comparison to prior year. And second quarter earnings are expected to be similar to the first quarter. Let's turn to Slide 12 to close out the prepared remarks. We delivered strong execution in the first quarter in a dynamic operating environment. We are continuing to build on the momentum of the Flowserve business system with a growth strategy aligned to powerful global megatrends that we believe support long-term demand for our products and solutions. At the same time, we are proactively managing the situation in the Middle East while remaining focused on serving our customers and executing with discipline across the business. Looking ahead, our 2026 outlook calls for double-digit adjusted EPS growth, and we are continuing to make meaningful progress towards our 2030 financial targets. With that, I'll turn the call back to the operator for Q&A. Operator: [Operator Instructions] We'll take our first question from Mike Halloran with Baird. Michael Halloran: So a couple of ones. First, the wholesale channel versus retail channel. Maybe talk a little bit about the dynamic, a little more detail about the dynamic going on there. how you feel you're positioned? And I know you referenced potentially doing a little bit more work on that side. What does that entail? And how do you think you can make sure you're capitalizing on the ongoing trend? Robert Rowe: Yes, Mike, I think you broke up at the beginning of that question. Can you say that again? Michael Halloran: Yes. Sorry. Apologies. Apologies. Let me reframe the question. Orders mid-single digit for the year -- how do you get comfortable with that uptick in the back half of the year all else equal. Robert Rowe: That's a really good question. Michael Halloran: And more importantly, is it as simple as if you strip out first quarter, second quarter -- first 2 months of the year just strip those out, you're kind of on trend outside of Middle East, given what you saw in [indiscernible] Robert Rowe: Yes. So I can absolutely talk through that, and it's a great question. And we talked about January and February being a little bit soft on the book and ship. But I think on a very positive note, our March numbers were in line in expectations. And in the prepared remarks, I talked about that we had a nice -- we're seeing nice activity in that kind of in and out business in April. And so that gives us a lot of confidence as we kind of continue through the year here that we think we have slightly elevated bookings. And then the other aspect here that's super important is our project funnel. And in my prepared remarks, I talked about the project funnel being up year-on-year and sequentially, and that project funnels across all of our end markets. Now obviously, it is an incredibly dynamic situation. And I would say on the project timing, there is so much uncertainty in terms of what could happen here. But I would say we're seeing projects move forward. We're not seeing them get canceled. And we're -- our teams, when we talk about a bottoms-up roll-up are very confident and the customer discussions that these go forward at some point in the year. And so I would expect more of a back-half-weighted project year for us, which is what we talked about in the fourth quarter earnings call. But overall, today, we continue to feel confident in the mid-single-digit bookings growth year-over-year. Michael Halloran: So the follow-up is maybe frame that in terms of next year. Now obviously, it's still early. I'm not trying to give guidance for next year. But I think the loose question is, when you sit here today and you compare yourself to 3 months ago, 4 months ago, how do you feel about '27, '28 today relative to before? I mean it seems like you were thinking about this as maybe some incremental opportunity once the dust settles plus incremental confidence in what you're doing internally. But I'd like to understand because, obviously, they'll have to puts and takes this here, lots of moving pieces. As we get through this, how does this all bounce out. Robert Rowe: Yes, sure. It was obviously a very noisy quarter with the Middle East disruption and some of the geopolitical activities. With that said, resolution in the Middle East is important to all of my comments here. And so Amy talked about our assumption that will be impacted in Q2, but at some point, we returned to somewhat of a more normal environment. When and if that happens, then we feel really good about our continued progress toward our long-term 2030 targets that we put out at the end of Q4. And that included mid-single-digit growth and included continued margin expansion every year. And so today, despite all of the dynamics in Q1, I would say we're -- the year is shaping up to position us very nicely into 2027 and on a nice trajectory and path to achieve our 2030 goals.. Amy Schwetz: Yes. And the other thing, just to add to that, Mike, a little bit, is muted in the numbers because of original equipment in the first quarter, we saw really nice bookings growth in both segments on the aftermarket side. And are continuing to push that aftermarket business and gaining strength there only serves us as we look out into future years. Operator: We'll now take our next question from Andy Kaplowitz with Citi Unknown Analyst: This is Jose on for Andy. Maybe to start with the 10% organic revenue decline in the quarter. That was a larger drop than we were forecasting. On the slides, you mentioned that Middle East disruptions impacted Q1 sales by 2% and I think, Amy, you talked about some lower book-to-ship impacts in January, February as well as an 80/20 walkaway impacts. But it'd be helpful if you guys could walk through each of those to bridge the decline in the quarter as well as how you're thinking about those dynamics can over into Q2? Amy Schwetz: Yes. So maybe just to start, a modest decline was expected for us in the quarter. We knew that kind of coming into the year. But we were further impacted by the couple of things that you mentioned, the Middle East disruption and a softer start to our run rate MRO business that was -- that occurred in January and February, primarily in North America. And so the Middle East disruption was approximately 2% or 200 basis points year-over-year. And I'll just comment that as we look at the North American MRO run rate, we normalized in the month of March, which gives us some comfort going into the second quarter. that we're better positioned. And original equipment was also up against a pretty strong comp, particularly if you look at the large engineered-to-order projects that we had included in the first quarter of last year. So backlog conversion was lower because of the nuclear component of the business. And as a reminder, conversion of our year-end backlog was expected to be around 76%, entering the year versus historical levels in the mid- or higher due to that nuclear component. So I think we're feeling good about the way we ended the quarter and about the opportunities that are out there on the book-to-ship business, which gives us some comfort going into the second quarter. Robert Rowe: And I'll just add that the teams are incredibly focused on winning work that can ship in a relatively shorter period of time. And you know, those nuclear awards are fantastic, and we'll get great revenue and margin on those. But typically, they won't show up in the first year. And so -- the teams are really focused through the commercial excellence process of winning work that drives revenue and continues our progress towards growth. Unknown Analyst: Very helpful. I appreciate the color there. And then maybe as a follow-up, maybe we can spend a couple of minutes on FCD think if we remove the tariff recovery from the quarter, it does seem like margins were weaker year-over-year. I understand there's elements of fixed price and lower volumes in the quarter. But was there anything else in the quarter that you'd call out? Or maybe you can also give some more color on what 80/20 actions you guys are implementing and how you're expecting that to show up? For the FTD margin? Amy Schwetz: Yes. So Jose, you hit on it with respect to the volumes, which were expected to be lower in Q1 due to 80/20 impacts. And if you'll recall, started the journey on 80/20 a little bit later. And so we anticipated seeing some headwinds in the first half of the year from 80/20. Gross margins were basically flat with lower volume in the first quarter of the year, which we took as a very positive sign given the impact of the reduced volume. I think that if we look at where bookings were in the quarter, sequentially stronger than Q4. And so we feel good about that volume challenge abating as we go into the second quarter of the year and we're confident for the full year that we'll be at 100 basis points or more in terms of margin expansion at the operating margin line. So the business is fundamentally healthy. We're continuing to improve efficiency and reduce complexity and we think there's further opportunity with operational excellence and roofline consolidation. And I'll say that these actions related to operational excellence and roofline have only accelerated since the beginning of the year. Operator: we'll now take our next question from Nathan Jones with Stifel. Nathan Jones: I guess I'll start by following up on the margin side of it. It looks like if you take out the IPA recoveries, FPD down 20 basis points on a 10% revenue decline, which is really very good, I think. And the FCD margins down 110 basis points and over 10% revenue decline, which is probably also pretty good. So maybe you can talk about the impacts on margins. What was the volume impact the deleveraging that you would have got from lower volume on that versus the improvements that you've made to get to that if we exclude the IE per tariff recoveries, which are really a onetime item. Robert Rowe: Yes, I would say I'll start and Amy can jump in here. I think it will exclude tariffs. I think the Mexico tax thing because it wasn't in the years also excluded there. And if you take both of those out and but keep the Middle East disruption in there and what I'll call the things that the team is working on, right? Your FPD margins actually expand in the year versus last year to roughly kind of 70 to 100 basis points. And then as we talked about with FCD, you're a little bit lower on the decline of about 100 basis points. But if you take that to the gross margin line, like we're very confident on the 80/20 and the operational excellence coming through and continuing to drive margin expansion. And so in the organic business, we're not backing away from our ability to expand margins at that 100 basis points this year. And I'll say that's organically, excluding those kind of onetime items. And Amy hit this with the FCD side, but it's really the whole business right. We've got the operational excellence moving. We're driving great results from just a productivity standpoint and how we're running the different manufacturing sites, but it's also allowing us to move quicker to our roofline consolidation program. And so we've got several activities that happened last year and some that are in progress this year as well, and those activities continue to accelerate. And then the 80/20 program is now in the third year, and we're seeing tremendous results there. And so there's definitely tailwinds from the 80/20 program as we continue to work through that methodology and do the right things on SKU reduction, but also on the pricing side. And so we've been very selective on where do we price and making sure that we're pricing in accordance with that philosophy and driving the right things to expand margins. So I'd just say net-net, we feel we feel good about our margin progression, the continuation here as we go throughout the year. Amy Schwetz: Yes. And the only thing I'll add there, Nathan, is that FPD was more impacted by by the Middle East conflict in terms of revenues and operating income. And although the run rate business was a little bit softer to begin the year, I think that the team was anticipating the lower volume just based on the shippable backlog. And so I think had planned really well to adapt to that situation and be in a position to maintain or grow margins in the first quarter, as Scott indicated. Nathan Jones: Just to confirm, you said the tax item is actually in the segment income. Amy Schwetz: It is. Robert Rowe: It is. It's in the FPD segment. And again, kind of an out of period and something the FPD team really doesn't control. Nathan Jones: Got it. Can you talk about the potential here for improving demand in the Middle East from the reconstruction of things whenever we get around to that. And if you have any ideas or thoughts on when we might see that demand begin to impact Flowserve results? Robert Rowe: Absolutely. I can talk about the first part of the question. The second part is a little bit harder on timing. On the first part, as you know, Nathan, we have an unbelievable installed base in the Middle East. And so we've got probably more pumps than any other provider in the world that across the various countries in the region, including pumps installed in Iran. And then on the valve side, a massive presence across the facilities there. And so Inevitably, anything that you see on the news in terms of damaged equipment and assets, Flowserve has been impacted or involved in that. And so the teams are working incredibly closely with our customers. And I said in the prepared remarks, I'd say first and foremost is making sure our associates are safe, and we're keeping them out of harmed way. But the second priority is making sure that our customers can continue to operate. And we're involved in critical infrastructure that's supporting their economy and supporting commodity prices, and we're doing some things that would be a little bit different than the normal day-to-day business to make sure that we're 100% supporting that work. And so right now, it's about emergencies, it's about call-offs. It's being incredibly responsive. At some point, you move to reconstruction activities. And today, I would say the damage assessments are different depending on the level of damage we're already preparing some quotes to help customers on rebuild activities. The timing of that is just not known right now. And it depends on when they get comfortable to bring people back into the region. When do they get comfortable about bringing people on to site. And then, again, everyone is concerned about your individual safety. And so I think if the ceasefire prevails and things start to settle down, then that rebuilding activity obviously happens a little bit sooner. And then there's a third category here on just what's the future of the Middle East and the role of the different countries there providing further energy assurance around the world, but also assurance and security within their country. And so I believe that you'll see more projects ultimately come into the Middle East and -- as we talked about in the fourth quarter, we thought the Middle East bookings were going to be a very positive year for us, mostly back half weighted I still think that is the case. I think we're going to get some restoration activity, we'll get some of the work that we had planned on, I think some of that may get reprioritized. But I think net-net, Middle East is a benefit for us for the full year bookings. Operator: We'll now take our next question from Joe Giordano with TD Cowen. Joseph Giordano: Before I get into like real questions, just a quick confirmation clarification type stuff. When you say mid-single-digit bookings growth, I just want to understand, you're not adjusting for like Mid East headwinds, right? That's like inclusive of [indiscernible], we still think that. And when you talk about margins up 100 bps, that's stripping out the tariff benefit and the tax thing and not adjusting for mix, right? So that's inclusive of mine. Just want to confirm those. Robert Rowe: Correct. We'll confirm both. So the Middle East disruption would be in my comments on mid-single digit growth. So year-on-year, without all things in, we still believe that we can grow those bookings -- on the margin side, 100 basis points, excluding the one-offs of tariffs in Mexico. Joseph Giordano: Okay. Good. Starting with the January, February kind of air pocket there in the business, I'm just a little I guess surprised like when we did the fourth quarter call, that was February, and you guys definitely had a pretty positive confidence tone there. Like was that not evident at the time when we had that last call that this business in January was like way under where you're targeting? Robert Rowe: Yes. Joe, I'll start with look, we've got much better visibility in our business than ever before with the system upgrades, and we can see weekly bookings and activity and when we did the call, we basically had a month of January numbers, and we had some positive indicators that, that would start to improve, and we just didn't see that pick up in February. And so we didn't feel it was prudent to kind of sound the alarm just given one data point from the month of January. And unfortunately, it didn't pick up in February, but we did see that increase back to what I'd call our normal run rate in March, and we've confirmed that again in April. And so right now, that run rate activity looks pretty robust and kind of on our planning levels. Joseph Giordano: Okay. Fair enough. And then if I think about the second half, is there anything in the full year guide at this point kind of hedging [indiscernible] being potentially. Now we're talking about extended blockades and maybe targeted strikes again. So curious, like you have the impact in 2Q kind of message here. Is 3Q just assume that we're back at like full run rate in that region? Amy Schwetz: So I don't know that it assumes that we're back at full run rate, Joe. But I think that what it does allow for is, one, giving us more time to react to the situation and address supply chain and customer relationships and get back to the new normal. And it also allows for some opportunities that we might see around the rebuild. So at this point in time, there are a lot of different outcomes we can't predict geopolitical events. And so we felt best to go kind of quarter-by-quarter here. But I do think that we have more levers to pull from a mitigation factor in the second half of the year as we adapt to the changes. Robert Rowe: I'll just reiterate, Joe. It's a dynamic time. We get different viewpoints almost on a daily basis, and we're trying to give our best view for the back half of the year given what we know today. Operator: We will now take our next question from Deane Dray with RBC Capital Markets. Unknown Analyst: [indiscernible] on for Deane Dray. In terms of -- it's been another great quarter in terms of bookings in terms of nuclear. I was just wondering, how do you -- could you give us some more detail on your nuclear backlog at this stage? And I guess, I would assume the project funnel is also increasing in terms of nuclear opportunities. Robert Rowe: Yes. I'll let Amy talk about the backlog and kind of how that converts, and then I can talk about the funnel and the forward look. Amy Schwetz: Yes. So I would say, if you look at kind of going back to where we were at to start the year at about $2.9 billion of backlog with with 76% of that shippable over the next 12 months, it's safe to assume that the lion's share of that 24% of backlog is nuclear. And so that only grows with what we saw in the first quarter bookings at, call it, 10 -- about $110 million of nuclear backlog. Robert Rowe: Yes. And then on the forward look, we're booking roughly $100 million a quarter. A lot of that is on the back of kind of what I'll call supporting the existing assets. So rates, life extensions of those assets and really making sure that the nuclear plants will be around and productive for years to come-- As we've stated before, we've got an unbelievable installed base and entitlement in those existing assets. And so that work is relatively steady, and we're seeing more and more of these rerates and life extensions as we go forward. And then the other category is the new traditional reactors, and we still are incredibly optimistic that traditional nuclear reactors continue to move forward, both in Europe and the United States in parts of Asia and maybe a little bit slowdown in the Middle East, but ultimately will come there. And so we're incredibly well positioned with the customers to make sure that our content is on those new builds. And I'd say, certainly for the United States, there are -- there's a lot of stakeholders, and you've got the U.S. government. You've got local state governments. We've got EPCs and then we've got the utilities themselves. And so it's a little bit of a complex equation in terms of getting all of the parties to agree on some of the timing. But I would say in the last quarter, we've seen advancements in terms of those discussions, and we're getting more and more optimistic that the U.S. moves forward with a new nuclear program build-out. And then in Europe, we're actively in pursuit of several new reactors in Europe. And I'd say we're more optimistic that, that does happen within the year. there's more certainty there. And so I feel pretty comfortable that we'll get awards on new reactors in Europe as we move through 2026. And then finally, on the SMRs. We're working with a select group of SMR providers and the technology -- we continue to win awards on what I'll call it, on the prototype side and some of the engineering contract to help them with design and making sure that they've got a solution that can work for the long run. And I remain incredibly optimistic that SMRs are part of the equation in the future. I just think the timing on winning real work that can be scaled into multiple sites is still a couple of years away. Unknown Analyst: Got it. I really appreciate the color. I guess, the follow-up for me would be in terms of Trillium, you mentioned the timing closing around towards the half year. Any additional insight on synergy opportunities you're seeing? I know it's still early days of the transaction. Amy Schwetz: Yes. So early days. The teams have met a couple of times to sit down and one, just go through day 1 actions, but also think about synergies, but I think we're probably a couple of months out before we're confident talking about what those synergies will be as we move forward. But I will say, just based on those conversations and our knowledge of their product and the industries they've served. We were even more excited today than we were 2 or 3 months ago about this acquisition, and we're looking forward to welcoming them to our team. Operator: We'll take our next question from Joe Ritchie with Goldman Sachs. Joseph Ritchie: So look, I fully recognize that for refining specifically, like crack spreads are long-term positive when they start to widen. I guess just from a near-term perspective, how are you -- how is that potentially going to change your customer behavior? And I'm really thinking about your aftermarket business. Could they run their refineries a little bit longer. Does that create any type of like, I don't know, air pocket in growth in like the coming quarters? Like what are your customers saying about maintenance on their refineries today? Robert Rowe: Yes. So that's a good question. And again, a very dynamic environment. But right now, certainly, the North American refiners are doing really well. And so there's higher utilization, there's higher crack spreads driving high profitability. And so typically, when you see work like that, they don't want to do an extended turnaround. And so they want to delay their maintenance and maximize profits. And so we're seeing some turnarounds that were scheduled in the spring, get moved out into probably the fall -- and so we'll have a little bit of headwind on the turnaround season. With that said, we're seeing an increase or an uptick in what I'll call emergency or kind of call off work for a pump or a valve or a mechanical seal that's necessary to keep their operations running. And I'd say our view today is that's probably neutral as we kind of work through the year. And we'll have a better understanding here in the next month or 2 because we're really only kind of 2 months into this. But I would say that we've got great relationships with the North American refiners. We're watching this closely, and we're committed to making sure that they stay up and run at a high level. And then in Europe, you've got a similar dynamic there. I'd say they're a little bit more on the schedule-driven maintenance is happening. And so I'd say less of an impact in the European theater. Joseph Ritchie: Got it. That's super helpful, Scott. And I guess my second question is just on the organic growth ramp into the second half of the year. So I know you built a little bit of backlog in the first quarter, some of that being nuclear. But the ramp probably implies a little over $100 million in organic revenue growth in the second half of the year. And I guess I'm just -- as we sit here today, maybe some of the answer is some of the refinery business being pushed out into the second half. But how do we kind of square the ramp into the second half of the year to feel good about kind of like that mid-single-digit organic number that you have embedded in the guide. Amy Schwetz: Yes. So we still have a lot of confidence in the setup for the second half of the year. And just as a reminder, as we think about what the first half of the year, last year looked like versus the second half, we did see a more normalized level of OE equipment revenue in the second half of the year than what we saw in the first half. And so our confidence is is driven by that dynamic, but it's also supported by the funnel, our customer discussions, the run rate that we saw in March, some encouraging April awards that we've seen and a higher backlog at the end of Q1. And so -- it's going to be important that we continue to accelerate the nuclear and the broader project activity in the second half of the year without a doubt. But we think that the fundamentals are there to drive that type of revenue expansion. Operator: We'll now take our next question from Steve Volkmann with Jefferies. Unknown Analyst: Business started out the year as weak as it did. Was it sort of related to weather or specific projects? Or just maybe a little more color on that. Robert Rowe: Yes. I think, again, this is mostly a North America phenomenon. And it really depends on buying behaviors and budgets and January is always a little bit like an interesting time for us in terms of will the customers start to spend money straight out of the gate or not. And so I don't think it's highly unusual, but it lasted a little bit longer than what we were anticipating and expected. And so this is -- think of like the large installations around the U.S. and just not spending that amount of money that we were expecting in the Jan-Feb time frame. And again, we saw that start to pick up in February, and we're at a healthy level and expectations and then in April, we had -- we're continuing in April, but so far, we've seen some really good numbers with our April to date -- month to date. Unknown Analyst: Okay. All right. And then maybe switching maybe my question, but how should we think about the opportunities for SG&A leverage? Is there anything you can do to reduce SG&A, maybe specifically in FCD, but more broadly, if appropriate? Amy Schwetz: Yes. So certainly, as we took a look at volumes coming into the year, we're focused on making sure SG&A is scalable. We think that we've got the right organizational structure with that. But certainly, the start of the year has made us sharpen our pencils to make sure that we're doing all that we need to do from an SG&A perspective. I would expect sort of flat as we make our way into the second quarter of the year with volumes coming up slightly from a revenue perspective, which will improve our leverage from an SG&A perspective and continue to improve over the course of the year. Robert Rowe: I'd say, look, we're always looking at ways to drive -- we're always looking at ways to drive efficiency and cost reduction and this year is no different, and we'll continue to make sure that we're driving our SG&A as efficiently as possible as we think about what's in front of us in 2026 and beyond. Operator: We will now take our last question from Amit Mehrotra with UBS. Unknown Analyst: This is actually [indiscernible] on for Amit. Just one quick question on margins. the adjusted gross margins, how much of that maybe was benefit from the onetime versus the 80/20 just trying to kind of parse that through to. And then -- so we talk about the MRO, what about -- has any of your customers maybe changed any total shifts on maybe like new capacity and new additions like any kind of tangible examples or anything you kind of speak to. Robert Rowe: Yes. I'll hit the second part first, and Amy, you can hit the margins. And I'd say if we think about a global basis, we operate around the globe and have customers in all different parts of the region. And with the dynamics in the Middle East, we're seeing some really interesting times in terms of folks trying to think about expanding capacity or doing things a little bit differently or potentially accelerating projects, and a lot of this is around energy security and making sure that, that country has the energy that they need to move forward. And so I think, again, incredibly dynamic time, but we're seeing things that we weren't expecting in the year. And customers talking about doing things differently about increasing capacity or actual expansions and even new projects. And so again, we're early days in terms of the conflict and what that means for the rest of the world. But right now, we're pretty optimistic that we'll start to see some different types of work that we weren't expecting at the beginning of 2026. Amy Schwetz: Yes. So Zack, excluding tariffs and the tax authority item that we discussed. We -- gross margins were above 35%, so 35.1%. So expansion of about 160 basis points year-over-year. I will just say that as we look at the impacts by segment and look at the 3 big items that we talked about, EPA tariffs, the tax authority impact and the Middle East disruption. Those items pretty much offset in FPD. So the FPD margin, absent those 3 items is kind of what we reported from an FCD perspective, there was benefit from the tariff that is baked into those numbers on a net basis. Operator: It appears there are no further telephone questions. I'd like to turn the conference back to our presenters for any additional or closing comments. Robert Rowe: Thanks for your time this morning. As always, the Investor Relations team is available to discuss if you have more questions. And if not, we will look forward to speaking with you again following our second quarter. Operator: And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.
Operator: Good morning, and welcome to Brunswick Corporation’s First Quarter 2026 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer period. Today’s meeting will be recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Stephen P. Weiland, Senior Vice President and Deputy CFO, Brunswick Corporation. Stephen P. Weiland: Good morning and thank you for joining us. With me on the call this morning are David M. Foulkes, Brunswick Chairman and CEO, and Ryan M. Gwillim, Brunswick’s CFO. Before we begin with our prepared remarks, I would like to remind everyone that during this call, comments will include certain forward-looking statements about future results. Please keep in mind that our actual results could differ materially from these expectations. For details on the factors to consider, please refer to our recent SEC filings and today’s press release. All of these documents are available on our website at brunswick.com. During our presentation, we will be referring to certain non-GAAP financial information. Reconciliations of GAAP to non-GAAP financial measures are provided in the appendix to this presentation and the reconciliation sections of the unaudited consolidated financial statements accompanying today’s results. I will now turn the call over to David M. Foulkes. David M. Foulkes: Thank you, Stephen. We delivered an excellent start to the year, building on the market recovery in 2025, with first quarter results significantly ahead of expectations despite the dynamic geopolitical and tariff environment. Global and U.S. boat retail were approximately flat on a unit basis compared to the relatively strong first quarter of last year, and premium sales were up. Q1 was the third consecutive quarter of improved relative retail performance, building confidence in our retail forecast for the year as we move into the core selling season in our largest markets. Strong OEM order patterns drove gains for Mercury Marine and Navico Group, while solid boating participation benefited our recurring revenue, parts and accessories, aftermarket, and subscription boating businesses. From an inventory perspective, boats and engine pipelines remain healthy and lean, well aligned with demand. Global boat pipelines are down approximately 2,000 units versus last year and flat sequentially versus 2025, reflecting our deliberate actions to closely match wholesale with retail. Our overall net sales of $1.4 billion increased 13% year over year with growth across all segments, driven by continued market share gains, strong OEM demand, accelerated new product and technology introductions, and disciplined operational execution across the enterprise. Our adjusted earnings per share of $0.70 increased 25% versus last year, with strong operating leverage from higher sales more than offsetting the impacts of the tariffs implemented after the first quarter of last year. We continue to execute our disciplined capital allocation strategy, repurchasing $20 million of shares year to date, and delivered our fourteenth consecutive annual dividend increase, underscoring our commitment to returning capital to shareholders while maintaining a strong balance sheet. In our core U.S. market, product demand and boating participation remain relatively unaffected by the conflict in the Middle East, although the health of the value consumer remains a focus. We have a relatively small direct exposure to Middle East markets, but are monitoring trends in Australia, New Zealand, and other more exposed markets as oil supply tightens. Our high exposure to the most insulated markets, particularly the U.S. and Canada, which account for more than 70% of total sales, balanced portfolio, lean channel inventories, and operational discipline position us strongly to effectively navigate the volatility. Turning to segment performance, for the third consecutive quarter, all segments delivered year-over-year sales growth. Operating margin expanded across the portfolio, except for Propulsion, which absorbed the majority of first quarter incremental tariffs. The strong performance reflected improving retail and wholesale trends, sustained boater participation, and disciplined operational execution across the organization. Propulsion sales increased significantly versus last year, with Mercury’s global and U.S. outboard unit orders increasing more than 15% over the prior year period, and record Mercury outboard share at recent boat shows, including 60% overall and 80% on-the-water share at Miami, and 70% share at Palm Beach, signaling the potential for further high-horsepower share gains. Overall, R12 share remains steady at 47%, with year-to-date retail share up 200 basis points, along with strong wholesale share gains. Our accelerated investments in future high-horsepower outboard platforms and all-new mid-range high-volume models will reinforce our long-term competitive advantage. Healthy boater participation and continued distribution gains drove higher sales and margin year over year in our Engine P&A business, with Land ’N’ Sea again increasing U.S. distribution share by 150 basis points. Navico Group delivered revenue growth and margin improvement, supported by new product launches and operational improvement actions. We introduced the SIMRAD NSO4 and B&G’s ZEUS SRX multifunction displays; at the Miami Boat Show, we received an innovation award for the Lowrance ActiveTarget 2XL fishfinder and continue to execute SIMRAD AutoPilot implementation plans with a range of OEM customers. Finally, our Boat Group segment grew sales and margin as wholesale shipments aligned with stable retail. Boat show revenue increased year over year despite weather impacts at some Upper Midwest and Northern market events. At the Palm Beach premium saltwater show, Boston Whaler and Sea Ray delivered high unit sales and a substantial 40% revenue increase versus last year. Freedom Boat Club added four new locations in the quarter, increased member trips by 20%, improved same-store sales by 10%, and earlier this month completed the acquisition of the largest remaining franchise club in the Freedom network, which serves the Boston and Cape Cod region. Moving on to external conditions, rate cuts enacted late in 2025 are a continuing tailwind for retail and floor plan financing as we enter the peak selling season. Our expectations for incremental rate relief have moderated; our forecast does not rely on additional cuts. Fuel prices have risen recently due to geopolitical events, but generally remain within historical bounds, and we are not experiencing any clearly discernible direct impact on retailer or OEM demand or on boating participation in our largest markets. The tariff environment remains dynamic, and Ryan will discuss the specific impact to our guidance later on the call. The tariff on Mercury Marine’s Japanese competitors remains in place, representing a potential structural advantage for Brunswick Corporation. Refunds related to previously paid IEPA tariffs are not yet factored into our outlook. Current dealer sentiment is improved overall, but still cautious, supported by healthy and fresh inventories and lower pre-owned boat supply, which supports new boat demand. While incentives remain elevated versus historical norms, they improved approximately 100 basis points last year and we are forecasting further modest improvement in 2026. Looking now at industry retail performance, the latest SSI data for March shows U.S. industry main powerboat retail down approximately 5% year to date. Against this backdrop, SSI reported that Brunswick Corporation outperformed the industry. Our global and U.S. internal retail unit sales were approximately flat year over year compared with the relatively strong 2025, prior to the impact of tariffs, with premium and core again outperforming value. From a pipeline standpoint, conditions remain very healthy. Global boat pipelines are down approximately 2,000 units versus last year, but flat sequentially versus the fourth quarter, and benefiting from wholesale-to-retail alignment consistent with our plan. In addition, our global boat order backlog at the end of the first quarter represented 71% of our second quarter wholesale forecast, up six percentage points from last year, providing improved near-term visibility. Turning to engines, U.S. outboard engine industry grew 6% in the first quarter, with Mercury retail units up approximately 11%. With a similar dynamic to boats, U.S. outboard pipelines were down approximately 10% versus last year, but flat sequentially versus the fourth quarter, reflecting wholesale-to-retail matching. Overall, the combination of sustained share gains, disciplined pipeline management, and improving wholesale-to-retail alignment gives us confidence in our outlook for 2026 and supports our expectation of a flat to improving market as we enter the peak boating season. Finally, I want to address the impacts of recent oil price volatility, which has been a frequent topic in recent investor discussions. From the boat buyer or boater’s perspective, historically there has not been a correlation between oil price spikes and boat sales or boating participation. A primary driver of this low correlation is that fuel costs represent a relatively small portion of total boat ownership expense, because on an annual basis, the typical recreational boat only uses about 20% to 30% of the fuel of a comparable passenger vehicle. From a Boat Group perspective, exposure to oil-linked materials is relatively small, representing a combined 2% of total cost of goods sold, and with the relevant materials being under long-term supply agreements. Our scale and sophistication also enable hedging programs for other key commodities, such as aluminum, further reducing exposure to spot price volatility. However, aluminum prices do remain elevated. Diesel prices have impacted boat and other transportation costs; we have implemented some surcharges. I will now turn the call over to Ryan M. Gwillim to discuss our first quarter financial performance and updated guidance. Ryan M. Gwillim: Thank you, Dave, and good morning, everyone. Brunswick Corporation’s outstanding first quarter performance came in ahead of expectations, with strong sales and earnings growth versus the first quarter of last year. On a consolidated basis, sales were up 13%, reflecting improved wholesale and retail trends, continued market share gains in propulsion and several boat categories, strong OEM demand for propulsion, components, and electronics, favorable changes in foreign currency exchange rates, pricing actions in each segment commencing in 2025, and solid boating participation driving aftermarket performance. Adjusted operating earnings were up 15%, supported by the increased sales, favorable mix, improved absorption, and disciplined cost management more than offsetting the impact of incremental tariffs implemented after the first quarter of last year. Absent the year-over-year enterprise impact from incremental tariffs, adjusted operating leverage was approaching 30%, driving adjusted EPS of $0.70 for the quarter. Free cash flow was negative in the quarter, consistent with seasonal and historical patterns, reflecting higher production levels and working capital investment ahead of the peak selling season. Compared to the prior year, free cash flow was down solely due to reinstated variable compensation paid in the quarter. Moving to our segments, Propulsion delivered a very strong start to the year with sales increasing 17% versus the prior year, driven by an improved market, global share gains, and strong OEM demand heading into the selling season. Adjusted operating earnings declined year over year solely due to the planned accelerated investments in product development and incremental tariff impact, which slightly more than offset the benefits of higher sales and improved absorption. Absent the incremental tariffs, pro forma adjusted operating leverage for Propulsion was north of 20% in the quarter, even after accounting for the high-single-digit millions of additional product development spend in the quarter. Moving to Engine Parts and Accessories, this segment once again delivered growth from its aftermarket, high-margin recurring revenue portfolio with sales up 14% versus the prior year, with significant growth across both products and distribution. Healthy early season boating participation, even with the recent increase in fuel prices, and continued market share gains in global distribution drove growth in the quarter. The higher sales and robust adjusted operating leverage at 27% led to a 24% increase in adjusted operating earnings, with a 140 basis point improvement in adjusted operating margin. Navico Group had another great quarter, transitioning from stability to growth, with sales up 7% over prior year and up across all business lines, supported by improving OEM demand, steady aftermarket performance, and operational efficiency. More importantly, adjusted operating earnings increased 64%, with adjusted operating margin expanding 280 basis points, reflecting the early benefits of product portfolio optimization, operational improvements, and disciplined cost control actions which more than offset incremental tariffs. We also discussed the inherent operating leverage in this high gross margin business, so it is fantastic to see 47% adjusted operating leverage in the quarter as our actions bear fruit. We continue to see encouraging traction from recent product launches, including SIMRAD NSO4 and B&G ZEUS SRX, and recognition for innovation with Lowrance ActiveTarget 2XL. While there is still work ahead, the results this quarter reinforce our confidence that Navico Group is on a sustainable path towards improved profitability. Finally, our Boat segment also had a strong quarter, with sales up 6% over prior year, driven by higher wholesale shipments matching stabilized retail conditions, favorable mix, and continued momentum in the Business Acceleration portfolio. Boat growth was led by our aluminum fish and pontoon brands, while Freedom Boat Club continued to deliver strong increases in members, trips, and locations as mentioned earlier. Adjusted operating earnings increased 63%, and adjusted operating margin expanded 130 basis points, reflecting healthy adjusted operating leverage of 25%, primarily driven by the higher sales and favorable mix. Dealer pipelines remain very lean with mostly current model year product, well positioning the business heading into the prime retail season. Lastly, I will discuss our updated outlook for 2026. As we enter the core retail selling season in the U.S., we are encouraged by the stable market conditions and the strength of our first quarter performance. Steady dealer and customer sentiment, exceptionally healthy and lean pipelines, disciplined wholesale-to-retail alignment, and sustained boating participation are sources of confidence as we move through the remainder of 2026. However, while direct sales and operational impacts remain limited, heightened geopolitical volatility has introduced new uncertainties. Earlier, Dave discussed the muted impacts to date caused by fluctuations in interest rates and fuel prices, but we remain cognizant of the potential impact on the health of our consumer, especially outside the U.S., from a prolonged conflict in the Middle East. Finally, the tariff environment remains dynamic and, during the quarter, IEPA tariffs were repealed and replaced with Section 122, and more recently, Section 232 tariffs on steel and aluminum were amended. The net impact of these changes is positive; we now believe our full-year incremental net tariff impact will ultimately land near the lower end of our original $35 million to $45 million estimate shared at the beginning of the year. Also, as Dave mentioned, refunds related to previously paid IEPA tariffs are not yet factored into our outlook or recognized in our financial statements. The result is materially unchanged guidance on the sales, margin, and free cash flow lines, but an increase to adjusted EPS guidance to $4.00 to $4.50, reflecting the lower full-year expected incremental net tariff impacts I just discussed as well as the first quarter overdrive, while also factoring in some cautiousness given the current dynamic macroeconomic environment. Overall, we believe our guidance reflects confidence in our operating plan, the resilience of our portfolio, and our ability to generate strong financial performance in a flat to slightly up retail environment. I will now pass it back to Dave for concluding remarks. David M. Foulkes: Thanks, Ryan. I want to highlight some exciting recent developments in one of our fastest growing businesses, Freedom Boat Club. As you know, Freedom is a profitable, high-growth recurring revenue business that continues to expand boating participation by making boating more accessible to a broader demographic. The model drives extensive synergy sales across the Brunswick Corporation portfolio, including through the purchase of Brunswick boats, Mercury Marine engines, parts and accessories, and Navico Group products, resulting in approximately $300 million of enterprise synergies since the 2019 acquisition. Since the acquisition, we have also grown the location count from 170 locations to 446 global corporate-owned and franchise locations, adding four more locations in the quarter. Last year, Freedom members made 640,000 trips in the U.S. Earlier this month, we announced the acquisition of the largest remaining franchise club in the Freedom network, serving the Greater Boston and Cape Cod region. This acquisition adds 21 locations to our corporate-owned total, as well as a strategic maintenance operations center that will drive synergies with other nearby corporate locations. It is also day-one accretive to earnings. Innovative new products and advanced technologies are central to Brunswick Corporation’s long-term value creation, differentiation, and share gain strategy, and during the quarter, we introduced many exciting new products across our portfolio, including the all-new Sea Ray SLX 360, and Boston Whaler Outrage 330 and 290 models, with Mercury power and Navico Group electronics; SIMRAD’s NSO4 multifunction display with Neon Android operating system; Mercury’s advanced keyless engine start system; an innovative Boost over-the-air outboard performance upgrade; and FLITEBOARD’s Race ultra high-performance model. All these products illustrate our commitment to constantly pushing the boundaries of marine innovation. Finally, I want to highlight the continued recognition our teams and brands are receiving across our enterprise. Through the first quarter, Brunswick Corporation has already secured nearly 50 awards and remains on track to surpass 100 awards again in 2026. This recognition spans product innovation, workplace culture, leadership, and corporate reputation, and reflects the strength and consistency of our operating model and values. We are appreciative of having received many national awards now for multiple years, but notably, for the first time in 2026, Brunswick Corporation was named to Fast Company’s Most Innovative Companies list, reflecting the wide recognition for our industry-leading innovation. Thank you again to all our talented Brunswick employees who make this recognition possible. Before we open the line for questions, I want to close by thanking our customers, channel partners, employees, and shareholders for their continued strong support. We are also excited to announce our Brunswick Investor Day will be held on August 11 at Mercury Marine’s global headquarters in Fond du Lac, Wisconsin. The event will include a facility tour, on-water product experiences, and live Q&A with Brunswick senior leaders. In advance of the event, a prerecorded video strategy presentation will be published to our website. For planning purposes, I kindly ask that you register your interest in attending using the contact information on this slide. Thank you for your attention. We will now open the call for questions. Operator: Thank you. We will now be conducting a question-and-answer session. The first question is from Craig R. Kennison from Baird. Please go ahead. Craig R. Kennison: Good morning. Thank you for taking my question. It really involves Mercury. You continue to pick up market share in a soft market, which could lead to record volume in a cyclical recovery. And then you also appear to have a winning product cycle and some tariff-related tailwinds. So I am just thinking with all of that in mind, you could give us an update on your capacity utilization and your ability to handle additional volume if there were to be a surge, and then provide a framework for thinking about incremental margin in that business? Thanks. David M. Foulkes: Thanks, Craig. Great question. Yes, Mercury is continuing, as you said, to gain share, and we have fantastic product. There was some belief a year or two ago that some of the share gain was temporary because of supply constraints and other things, but clearly it is not. It is very structural. We have the best product line, and as you have heard, we are investing even more in five new outboard platforms from mid-range up to new extensions to the high-horsepower range. So it is very exciting. We are well capacitized after the investments that we made in 2019, 2020, and 2021 to support all of the foreseeable volume. We do not anticipate any major additional investments to be able to support volume, certainly in the next year or so. As you heard from Ryan, Mercury is leveraging up very nicely, and absent the tariffs, we would have been approaching a 30% number in the quarter. Ryan, maybe you want to take over the leverage numbers. Ryan M. Gwillim: Yes. We always quote more than 20% operating leverage. Obviously, with tariffs, that number gets skewed a bit, but we would have been approaching 30% in the quarter had we not had the tariff impact, and that is not even encompassing the additional spend that Dave mentioned, where we were up high-single-digit millions quarter over quarter versus 2025 to really supercharge those engine programs. Operator: The next question is from James Lloyd Hardiman from Citi. Please go ahead. James Lloyd Hardiman: Hey, good morning. Thanks for taking my questions. I was wondering if you could walk us through demand trends that you have seen to start the year. Last time you reported, it sounded like January was off to a really strong start, and I think you have spoken to continuation of that in February. As I think about a flattish first quarter, I think that means that March must have been down. What have you seen in April? More broadly, how are you thinking about month-to-month trends given the conflict that started in late February and March? David M. Foulkes: Thank you, James. Monthly volumes are different as we go through the year, with March volumes being higher than January and February. We did see some high early volumes in January, which then stabilized over the balance of the quarter. Whether there was any real impact from the conflict is very difficult for us to determine, but the quarter ended effectively flat both globally and domestically. I would also note we continue to see premium outperforming value, and if there was some additional pressure in the quarter or hesitation caused by the conflict, it likely impacted the value buyer more than the premium buyer. As we have gone into April, we are up year over year versus April last year, which is what we would have expected given the Liberation Day pause that happened last year. We are encouraged by the start to the second quarter, and at the moment that trend seems to be continuing week over week, with continued strength on the premium side. We also saw good sales in our aluminum products, our premium aluminum products. SSI data showed some dips in the first couple of months of the year and is now converging back to a flat market, and we would expect that to continue. James Lloyd Hardiman: Got it. And then the outboard engine market continues to grow faster than the boat market itself. Higher attach rates and multi-engine configurations seem to be a driver, along with your share gains. In the context of your outlook, if the boat industry is flat to slightly up, how are you thinking about the outboard industry, and Mercury relative to that? David M. Foulkes: Almost all recreational boats are now effectively powered by outboards, so we are getting more volume that way. Multiple engines are also a driver. You do not necessarily see the offsets in our financials because some of the offsets are between our 400-, 500-, 600-horsepower outboards and other people’s diesel engines. There never was a 500- or 600-horsepower outboard alternative historically. We did not sell many sterndrive gas engines in that high power range; most sterndrive gas engines we sold were typically in the 200 to 400 horsepower range. So we are grabbing share away from some traditional propulsion like diesel in bigger boats. We continue to outperform the market for the reasons discussed. I am excited about new programs coming to market over the next couple of years which will extend the range upwards and refresh mid-range product. We must ensure our mid-range remains contemporary and outperforms competitors, so we continue to invest across the product line. Overall market conditions support our flat to slightly up scenario. We expect more Mercury share gain, a higher outboard attachment rate, and more multi-engine products since premium is growing faster than value. Value product tends to be single engine; premium is frequently multi-engine. Profitability is also driven by what we sell with engines—controls and rigging. We are selling more sophisticated controls, joysticks, and autopilots, all of which increase share of wallet and attachment for sophisticated controls. Ryan M. Gwillim: The larger portion of the boat market now being outboard also increases the TAM for repower. We are seeing more repower simply because there are more outboard-powered boats to repower over time. That also contributes to engine retail outpacing pure boat retail. Operator: The next question is from Xian Siew from BNP Paribas. Please go ahead. Xian Siew: Hi, thanks for the question. On the competitive landscape, you mentioned competitors may be having tariffs. Could you elaborate on pricing and offering dynamics and how that could evolve and support further share gains? David M. Foulkes: Pricing is pretty muted in outboards at the moment. Mercury put in place a 2% price increase at the beginning of this year. Our Japanese competitors are in that range as well. Pricing is constrained by the market and nobody really wants to take price even though there is margin pressure—some for us, but even more, I think, for our Japanese competitors. As the market normalizes over time, we will see how that goes. It is important for us to continue to gain share given the attachment rate for P&A that we get over time. There are fairly acute margin pressures among some competitors, based on commentary and announcements last year, but they are better to speak to their own positions. Xian Siew: And on the repower market, could you update us on its size for you? Previously, you mentioned maybe 20% of engine sales were repower. Has that grown? Ryan M. Gwillim: It is still about 15% to 20% of units sold. That has not changed materially. It differs by jurisdiction; some markets outside the U.S., like Australia and New Zealand, are very high repower. We are just seeing good volume throughout all channels. David M. Foulkes: Our share of repower is lower than our share of OEM. One reason is that repower is typically higher in saltwater markets where corrosion and higher performance take more of a toll. Saltwater is a market we have been expanding into more strongly over the last five to six years. We would expect a higher right to win in that market as our OEM share becomes more reflected overall. Over the next three to five years, we would expect share gains in repower as more of our product comes up to be in the repower cycle of about eight to ten years. Operator: The next question is from Anna Glaessgen from B. Riley Securities. Please go ahead. Anna Glaessgen: Good morning. On guidance, you mentioned lower tariffs flowing through the 1Q beat while also balancing with conservative macro assumptions. Could you provide more perspective on how that is informing guidance and, if we do not see disruption, what that could look like for the year? Thanks. Ryan M. Gwillim: We are three months into the year, and the first quarter is generally one of the smallest. We had a really nice start, and we did get a little bit of tariff goodness. IEPA going away and being replaced by Section 122 was a positive, but changes to Section 232 were a slight negative. Net, it did not take us outside our initial tariff range for the year; it moved us from the high end down toward the low end of the $35 million to $45 million range. The Q1 beat is a positive, and tariffs are another small positive. We are balancing that with caution regarding the consumer and global events as we enter the core selling season, where we make roughly 55% to 60% of our sales and profit. If the world stays where it is today, and the other shoe does not drop, we think we can get to the high end of the range or better. The point on guidance was to move up the bottom end and take some risk off the table, being prudent given world activities. Anna Glaessgen: Thanks. And on 1Q EPS upside versus initial expectations, to what extent were lower tariffs contributing? Were there any expenses shifted into 2Q? David M. Foulkes: No on both. Tariffs came in pretty much as we expected, and we did not push any expenses out of the quarter. It was a straight beat based on improved revenues and really nice leverage. We do have some additional tariff headwind in Q2 that informs Q2 guidance. We would prefer to be in a beat-and-raise cycle than take everything to the bank this early in the year. Ryan M. Gwillim: To be very clear on Q2, the only real disconnect between our guidance and what the Street was modeling was the tariff impact, and it is rather material. We said on the January call that Q1 was about two-thirds or 60% of our tariff impact for the year and the remainder is in Q2, and that holds true. There are mechanics—balance sheet, LIFO, cap variances—but the upshot is the first half is a “bad guy” outside the $35 million to $45 million range, and the second half is a “good guy” that brings us back down into the range. If you normalize Q2 just for the anticipated tariff impact, your EPS growth would be very similar to what we delivered in Q1. That is why the Q2 guide is just slightly down from what the Street anticipated—they had not fully caught up to all the tariff movements yet. Operator: The next question is from Gerrick Johnson from Seaport. Please go ahead. David M. Foulkes: Morning, Gerrick. Operator: Gerrick, your line is open. We will move on to the next question. The next question is from Joseph Nicholas Altobello from Raymond James. Please go ahead. Joseph Nicholas Altobello: First, on the industry outlook, you are still calling for flat to up for the year. Are you assuming any underlying fundamental improvement over the balance of the year, or does that just extrapolate current trends and then you are lapping the post–Liberation Day slowdown last spring? You also mentioned you are not anticipating any additional rate cuts. David M. Foulkes: Hi, Joe. We certainly are anticipating that at least early Q2 will be up over last year, and that is what we are seeing as we head into the second quarter. Dealers are pretty optimistic, and they have their ear to the ground. We are continuing to get good order patterns; show sales were good. The back half of last year was okay as well. We just need to get through Q2—particularly early Q2—with a bit of overperformance to realize a flat-to-up market. Premium continues to outperform value. Loan rates are still about 200 basis points down from the peak, around 7.5%. Dealers are still getting flow-through from last year’s cuts into floor plan financing, so that tailwind is present. We are also seeing a slightly improved discount environment, which is a good indicator of retail strength. Joseph Nicholas Altobello: Last year, inventories were a bit heavier across the industry than they are today, and there was a lot of promotional spending. How much benefit will you get this year from lower promotional spending? David M. Foulkes: We still think our estimate of about 40 basis points is a good one. We got about 100 basis points of benefit last year. Even with another 40 basis points, we will still be a couple of points above historical norms looking back to 2018 or 2019. There is room to run in a more normalized market as we move forward. Operator: The next question is from Gerrick Johnson from Seaport. Please go ahead. Gerrick Johnson: Great, thanks. I am back. I wanted to dive deeper into trends in your Boat Group—better sales growth in aluminum, rec was okay, and down in saltwater. Saltwater has been down for a number of quarters. Can you talk about what is going on within Boat Group and the segments there? David M. Foulkes: We are seeing particular strength in our Lund brand, our premium freshwater brand, driving a lot of the increase. We are also seeing really good performance with our Harris pontoon boats, which are outperforming the market. In both cases, we have strong premium ends of aluminum brands with a lot of recent investment in new products. Freshwater markets are typically dedicated to fishing, not highly leveraged to fuel prices; they do not go a long way—go to a spot and fish—or on a pontoon, something similar. On rec fiberglass, we rationalized our value portfolio, so that is really a product of our Sea Ray brand and, to some extent, the Bayliner brand being up—both premium brands. In saltwater, Boston Whaler, our premium saltwater brand, is actually up year over year. The softness is more on the value side of saltwater. Operator: Next question is from Molly Baum from Morgan Stanley. Molly Baum: Hi. Thanks for taking our question. First, on operational efficiencies you saw in the quarter—where do you see the most room to take cost out? Have you seen any benefit from the footprint rationalization on the value side of the boat business, and if not, when should we expect to see that? David M. Foulkes: The biggest efficiency benefits at the moment from footprint and other actions are in Navico Group and Boat Group. On Boat Group, the process of rationalizing those facilities is on track, but directly it is a headwind to us from a cost basis this year. It will flow through to more than $10 million of efficiencies next year, and we would expect to see the majority then. We continue consolidating production lines and introducing more operational efficiencies. There is notable work on value engineering across product lines—ensuring we put in what consumers want and deliver it efficiently. Navico Group continues to rationalize footprint and closed two smaller facilities at the end of Q4 or early this year. We are seeing benefits from that and other operational efficiencies. Navico Group’s footprint is now about right, investments in new products are coming through strongly with market share gains, and we saw a nice pop in margins that we believe is sustainable and will continue to grow. We will get some Boat Group benefit in the second half; Navico continues on its journey and has done a lot of work in recent quarters. Molly Baum: Got it, thanks. A follow-up: Can you remind us what level of IEPA tariffs you have actually paid on an annualized basis, and if all of those are eligible for refunds? You noted it is not included in guidance, but if you do get a payout, would all of those qualify? David M. Foulkes: Yes. We have begun the process of applying for IEPA tariff refunds. It is happening in phases; we have made our first applications. The total value of IEPA refunds we now estimate is about $50 million. We plan to recognize it as we receive the cash. We would expect some over the balance of this year and some next year. Operator: The next question is from Thomas Martin from BMO Capital Markets. Please go ahead. Thomas Martin: Good morning. On the value boater, removing macro pressures, what do you think it takes for them to come back to market? Or is it truly just the macro pressures keeping them out? David M. Foulkes: We are trying to meet them where they want to be met. I would differentiate between fishing-related boating and general-purpose boating. Fishing, including aluminum boats, is up—certainly at the premium end but also strong at the value end. If it is part of your lifestyle, you keep doing it. On the fiberglass side, on the value end, it tends to be more general-purpose runabout-type boating. There is more fungibility between spending on boating and other leisure alternatives, and potentially more pressure on discretionary spending. That is where Freedom Boat Club can play a big role in changing spending patterns—replacing a large capital outlay with a joining fee and monthly dues that provide access to a wide variety of boats with convenience. We have rationalized our product line in that area and are investing more in Freedom Boat Club. Thomas Martin: Thanks. And could you provide an update on how you are thinking about normalized boat demand? David M. Foulkes: In the short term, our expectations remain a flat to slightly up market. We believe there has been an inflection and the market is stabilizing after declines from 2020 through about 2024. We still see stratification between premium and value, but absent some major external change, we see no reason the market cannot return to growth as the causes of caution alleviate. We would anticipate modest regrowth of the market in the low- to mid-single-digit range in subsequent years. Ryan M. Gwillim: Supported by two factors: the used market is in really good shape, with relatively light gently used product on dealer lots, which supports trade-up and trade-in values. People who bought around COVID have more equity and can get more for trade-ins, improving dynamics and getting folks off the sidelines. Lastly, even in a very conservative U.S. boat market, new boat sales are at about half to 60% of replacement value, so there is a lot of room to run. We will discuss this further at our Investor Day in August. Operator: The next question is from Noah Seth Zatzkin from KeyBanc Capital Markets. Please go ahead. Noah Seth Zatzkin: Hi, thanks for taking my questions. On the guidance range, what are the differences between the $4.00 and $4.50? Is it fair to say retail environment expectations are consistent on both ends of the range? Relatedly, what shipment tailwind do you expect in a flat to slightly up retail environment this year? David M. Foulkes: On the range, as Ryan said earlier, if no other shoe drops, the top end—or better—is achievable. We are overlaying some caution based on external volatility, which could create additional caution, not necessarily in the U.S. market, but in some international markets. That overlay of caution gets you to the bottom end. Ryan M. Gwillim: On balancing retail and wholesale, if you assume a flat boat market, then wholesale is up mid-single digits on a unit basis—just to match retail, given lower wholesale to start last year. On engines, it is a little greater—probably up mid- to high-single digits on units—given engine pipelines continue to be lower, certainly in high horsepower. We have taken out 10% of the 175-horsepower-and-above pipeline each of the last two years. The balancing of retail to wholesale there is a good dynamic even in a flat market. Operator: Thank you. This concludes the question-and-answer session. At this time, we would like to turn the call back over to Dave for some concluding remarks. David M. Foulkes: Thank you, everyone, for your questions. A very encouraging quarter for us: solid retail, revenue up substantially across all of our businesses, margin expansion, really good earnings leverage, and continued really solid free cash flow. We continue to outperform the market. We are clearly firing on all cylinders now—all parts of our businesses are doing well. I am excited about both this year and the future in general. Our recurring revenue businesses are doing great, providing extremely strong earnings and free cash flow. As we said, setting guidance in this environment is trickier than normal, but we prefer to be in a beat-and-raise cycle than take everything to the bank right now given how early we are in the year. Finally, please reserve a spot at our investor event in August at our Mercury Marine headquarters in Fond du Lac. You will see the production of those fantastic engines that are leading the market right now, meet the leadership team, and experience some of our latest products on the water. Ryan M. Gwillim: Thank you very much. Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning. At this time, I would like to welcome everyone to the Royal Caribbean Group First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Blake Vanier, Vice President, Investor Relations. The floor is yours. Blake Vanier: Good morning, everyone, and thank you for joining us today for our first quarter 2026 earnings call. Joining me here in Miami are Jason Liberty, our Chairman and Chief Executive Officer; Naftali Holtz, our Chief Financial Officer; and Michael Bayley, President and CEO of the Royal Caribbean brand. Before we get started, I would like to note that we will be making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning as well as our filings with the SEC for a description of these factors, we do not undertake to update any forward-looking statements as circumstances change. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, and a reconciliation of all non-GAAP items can be found on our investor website and in our earnings release. Unless we state otherwise, all metrics are on a constant currency adjusted basis. Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our first quarter, the current booking environment and our outlook for 2026. We will then open the call for your questions. With that, I'm pleased to turn the call over to Jason. Jason Liberty: Thank you, Blake, and good morning, everyone. This morning, we reported first quarter results that exceeded our expectations, along with a record WAVE season that reinforced the continued strength in demand for our leading vacation brands. Revenue grew 11% year-over-year, earnings were 11% higher than guidance, and we returned $1.1 billion of capital through dividends and share buybacks. Our performance reflects consistently strong execution by our teams and the compelling value proposition and differentiated experiences, our brands offer consumers who continue to prioritize experiences. The consumer backdrop remains healthy, and demand for our vacation experiences continue to be strong. Across our portfolio, we see consistent engagement from guests, strong booking volumes and onboard spending that remains well above prior years. Before diving into the first quarter results, I want to briefly touch on recent geopolitical developments, starting with the Middle East. From an operational standpoint, two of our TUI Cruise ships sailing in the Middle East region were directly impacted by the conflict and therefore, had to temporarily pause operations. Both ships have since safely repositioned out of the area and are heading to the Mediterranean where they will welcome guests beginning in the middle of May. The most notable financial impact from the Middle East conflict has been on fuel costs. While we are approximately 60% hedged for 2026, fuel prices at current spot levels are expected to increase costs by roughly $0.62 per share this year. In addition to fuel, we saw a short-term moderation in demand trends for 2026 for high-yielding Mediterranean sailings, which modestly impacted our outlook for the upcoming summer season. The softer booking trends lasted for a few weeks, but we have now turned a corner and are experiencing improved demand for the limited inventory we have remaining for Q2 and Q3 sailings. Lastly, we experienced some disruption in demand for select West Coast of Mexico itineraries, driven by travel disruption concerns during the quarter. Demand trends for other products remain largely consistent with our expectations. Overall, our diversified portfolio and disciplined operating model position us well to manage through these dynamics, while remaining focused on delivering exceptional vacation experiences accelerating growth and executing our long-term strategy with conviction. We expect to drive another year of double-digit revenue and earnings growth, supported by a strong book position fortified balance sheet and robust cash flow generation. I want to thank our crew members and shoreside teams around the world. Their passion, focus and commitment to our guests are the foundation of our success and continue to set our company apart. Now turning to the results. We experienced another record WAVE season, highlighting the continued strong demand environment for our leading and trusted brands. Our book position is strong and remains within optimal prior year ranges at record prices. During the quarter, we delivered over 2.5 million unforgettable vacations at industry-leading guest satisfaction scores. Revenue grew 11% year-over-year and net yields grew 2%. Costs came in very favorably, and we saw better-than-expected performance from our joint ventures. As a result, adjusted earnings per share was $0.37 higher than our guidance. These results reflect the continued appeal of our vacation experiences, diversified portfolio and disciplined execution. Naftali will elaborate on Q1 results shortly. We closely monitor consumer behavior through millions of daily interactions on our commercial platform and with 170,000-plus guests on our ships every day. What we see is a consistently engaged consumer who prioritizes vacations and seeks quality, variety and value, which is exactly what we deliver. Based on our most recent research, our consumers remain very healthy, supported by excess cash, strong employment trends and a continued preference for consuming experiences over purchasing things. Travel remains a top priority, ranking as the #1 leisure category, where consumers intend to spend more. 31% of consumers say traveling more is a top priority for the next year, breaking behind only physical health and finances. Our vacation offer compelling value, flexibility and choice relative to alternatives. This continues to be reflected in the level of interest and engagement we see across our brands and the continued strength in onboard spending. Now let me provide an updated outlook for 2026. Revenue is expected to grow roughly double digits year-over-year, and net yield is expected to grow 1.5% to 2.5%. We continue to expect yield growth across our key products, including the Caribbean. As we enter the year, we saw strong demand for Europe, which are high-yielding itineraries, and that strength was embedded in the outlook we provided in January. Due to the geopolitical events affecting itineraries in the Mediterranean and the West Coast of Mexico, we've adjusted our full year net yield expectations. Our overall outlook for the itineraries remains largely aligned with our January guidance. We also remain committed to enhancing margins through rigorous cost discipline, continuously identifying efficiencies across operations, by prioritizing spend and utilizing technology and AI without compromising the quality of the guest experience. We are expecting another year of strong earnings growth and cash flow generation. Full year adjusted earnings per share is expected to grow double digits and be in the range of $17.10 to $17.50. This includes $0.74 per share from fuel headwinds, as well as lower income from joint ventures. We are also on track on our Perfecta performance program, targeting a 20% compound annual growth rate in adjusted earnings per share through 2027 and a ROIC in the high teens. Our large-scale leading margin profile and strong cash flow generation allow us to continue advancing strategic investments into our future while enhancing growth with capital return through competitive dividends and opportunistic share repurchases. Our vacation ecosystem integrates the best brands and ships unique destination experiences, and technology platforms wrapped around a loyalty program that connects it all. I want to spend a moment on how technology and AI are shaping the way we operate and how guests experience our vacations. Disruptive technology and AI have been embedded in our business for years, particularly in the area that require complex real-time decision-making at scale. As these technologies advance rapidly, we are continually discovering new ways to accelerate their integration throughout our ecosystem, making it easier for us to deliver amazing experiences and for guests to keep vacationing with us. Across our digital booking channels, guest engagement has undergone a fundamental shift since 2019. Digital penetration of bookings has more than doubled over that period with most of that growth coming through our app. Monthly active users for the app are 5x higher than 2019 levels, with adoption over 90%, confirming mobile as a way guests increasingly plan and manage their vacation. Today, more than half of onboard revenue is booked before guests ever step on board with the vast majority of those purchases made digitally. Guests are engaging earlier, planning more intentionally, and personalizing their vacations in ways that were simply not possible a few years ago. Our focus is on a unified intelligence layer that delivers seamless, relevant experiences and supports meaningful enhancements throughout the vacation journey from dreaming and booking to onboard experiences and service to post-cruise engagement. What differentiates us in this space is not access to tools, but the combination of a deep understanding of our guests, a fully integrated digital ecosystem the ability to deploy these capabilities across a multi-day end-to-end vacation experience and the commitment to excellence and innovation. Our ships are floating cities where we design and operate every guest touch point across numerous activities for a prolonged vacation period. That level of integration creates conditions where disruptive technology and AI enhance our moat in ways that are very difficult to replicate. We are deploying these capabilities in a disciplined manner, measuring performance, reacting to guest feedback and then scaling what works. We are in the early innings. And as we develop the capabilities further, it reinforces a flywheel that compounds over time. We also continue to make meaningful progress in other strategic initiatives. Our loyalty program is designed to better recognize and reward our guests, driving higher engagement, increased frequency and repeat travel. Since launching initiatives to drive cross-brand awareness in 2023, including our industry-first status match program in 2024, which allows guests to enjoy equivalent status across our brands, cross-brand bookings have increased significantly reinforcing the strength of our connected ecosystem. We recently launched our new Royal ONE co-branded credit cards, which further expand and strengthen our loyalty ecosystem, building our recent enhancements like Points Choice and Status Match. The Royal ONE, credit card is the most powerful way for our guests to earn rewards across our brands, allowing them to accumulate points faster and to redeem those points seamlessly across our ecosystem. Since 2019, cardholder accounts more than doubled, and as we continue to enhance the value proposition and deepen integration across brands, we believe there's an opportunity to double it again. We also recently announced orders for Icon VI and Icon VII, reflecting the success of the Icon platform and our confidence in its ability to consistently deliver industry-leading guest experiences and returns. We continue to innovate the Icon series to maintain high satisfaction scores and superior economics. Following the launch of Royal Beach Club Paradise Island last year, we recently opened the Royal Beach Club Santorini. Demand for the Beach Club has been very strong. developed with local stakeholders, it's the centerpiece of our ultimate Santorini Day, offering guests an elevated way to experience the island. We are also advancing the Royal Beach Club in Cozumel, now expected to open in early 2028. And are actively progressing Perfect Day Mexico and Costa Maya expected to open in late 2027 and ramp up in early 2028. Together, these initiatives are differentiating our experiences and are nicely accretive to yield growth. Finally, the upcoming delivery of Legend of the Seas, our third Icon class ship, is another exciting opportunity for us. Consumer receptivity is remarkable, it is in a very strong book position with prices higher than those that we saw for Icon and Star. In summary, demand for our brands continues to be very strong, and we expect another year of double-digit revenue and earnings growth. We are executing decisively key initiatives as we look to win a greater share of the large and growing vacation market. With that, I will turn it over to Naftali. Naf? Naftali Holtz: Thank you, Jason, and good morning, everyone. I will start by reviewing first quarter results. Adjusted earnings per share were $3.60, $0.37 higher than the midpoint of our guidance and 33% higher compared to last year. The outperformance was driven by better-than-expected revenue, lower costs and better performance from our joint ventures. In the first quarter, we delivered 12% more vacations than last year. Notably, we observed an increase in number of young guests, mainly Millennials and younger demographics as well as an increase in repeat guests compared to the previous year. We finished the quarter with net yield growth of 2%, which was above the high end of our guidance range. Yield performance was supported by all key itineraries and improvements in gross margin. Net cruise costs, excluding fuel, performed better than expected, driven primarily by continued cost discipline as we find more efficient ways to deliver the vacation experience without compromising the product. Adjusted EBITDA was approximately $1.7 billion, representing an EBITDA margin of 38%, an increase of more than 300 basis points year-over-year. Operating cash was $1.8 billion, an increase of 13%. As Jason mentioned, we had a record WAVE season, and our booked load factor is within historical ranges and at record APDs, reflecting strong demand for our vacation experiences and a healthy consumer. The Caribbean represents 57% of our deployment this year, and 50% of capacity in the second quarter. Caribbean yields are expected to be positive for the year even with elevated industry capacity reflecting the continued strength of demand and the differentiation of our product. Our competitive position in the region is further supported by our industry-leading hardware and destinations including the introduction of Legend of the Seas into the Caribbean in November following its redeployment from Europe as well as the continued benefit from the new Royal Beach Club at Paradise Island. Europe will account for 14% of capacity for the year and 18% of capacity in the second quarter. Bookings for the high-yielding Mediterranean itineraries, which began the year on an exceptionally strong trajectory moderated following recent geopolitical developments late in the first quarter, partially driven by increased air travel cost, airline capacity reductions and flight disruptions. These factors mainly affect the second and third quarters, when these high-yielding itineraries represent a larger share of deployment. In recent weeks, bookings from Mediterranean itineraries have been rebounding. Bookings for West Coast of Mexico itineraries, which represent 5% of capacity also moderated during the quarter, reflecting geopolitical-related considerations specific to that region. Lastly, Alaska is expected to account for 5% of total capacity and 9% in the second quarter. Now let me talk about our guidance for 2026. Our proven formula for success, moderate capacity growth, moderate yield growth and strong cost discipline is expected to drive significant earnings growth and higher cash flow generation this year. Capacity is expected to grow 6.7% for the year, with first and third quarters growing at a higher rate than the second and the fourth. Net yield is expected to grow 1.5% to 2.5%. Our yield guidance compared to January is influenced by region-specific geopolitical developments affecting the Mediterranean and West Coast of Mexico, which are mostly pronounced for the second and third quarters. Otherwise, expectations for the rest of the portfolio remained similar to January. As Jason noted, we continue to see very engaged consumer, which supports strong quality demand for both ticket and onboard. Furthermore, we have been investing in enhancing our commercial capabilities to remove friction and enable guests to book the best experiences for the vacation needs. As a result, we continue to see over 70% penetration in our pre-cruise booking engines with over 5 items purchased per booking and a year-over-year increase in spend per night. For the full year, net cruise costs, excluding fuel, are expected to be approximately flat, or 50 basis points better than our prior guidance, reflecting ongoing efficiency improvements and prudent cost management without impacting the guest experience. While we manage our costs more on an annual basis, the cadence of our cost growth varies throughout the year. As I mentioned on our last call, the first half cost growth is expected to be higher than second half, driven mainly by timing of dry docks and other year-over-year comparison factors. The most notable impact from recent geopolitical events is on our fuel costs. We expect fuel expense to be $1.35 billion for the year, and our forward consumption for the remainder of 2026 is 59% hedged at significantly below market rates. Our guidance is based on spot rates as we always do. However, fuel expense would be approximately 4% lower if rates were based on the forward curve. Based on current fuel prices, currency exchange rate and interest expense, we expect adjusted earnings per share between $17.10 and $17.50. Our earnings guidance includes a $0.62 headwind from fuel rates for the remaining of the year, as well as a $0.12 headwind from lower expected earnings contribution from TUI Cruises. We expect to continue to increase cash flow generation, allowing us to grow margins, continue investing in our strategic initiatives maintaining solid investment-grade balance sheet metrics and expanding capital return to shareholders. Now I will discuss our second quarter guidance. In the second quarter, capacity will be up 4.9% year-over-year. Net yields are expected to be up approximately 0.2% in constant currency. Year-over-year comparison elements, including increased dry dock days and impact from geopolitical events contribute almost 200 basis point headwind to yields in the quarter. We also expect a similar impact from these factors on third quarter yields. Net cruise costs, excluding fuel, are expected to be up in the range of 4.6% to 5.1% in constant currency. This quarter has almost 400 basis points of cost headwinds related to additional dry dock days and year-over-year comparisons as well as increased costs mostly related to crew travel resulting from air travel disruptions and reduce capacity. Taking all this into account, we expect adjusted earnings per share for the quarter to be $3.83 to $3.93. Earnings are impacted by almost $1 from the items I just mentioned for the quarter, including lower earnings contribution from TUI Cruises. Turning to our balance sheet. We ended the quarter with $6.9 billion in liquidity and leverage below 3x consisted with our goal of solid investment-grade metrics. During the quarter, we accessed the capital markets through a $2.5 billion investment grade bond offering. The transaction was well received and was significantly oversubscribed, reflecting continued strong institutional demand and confidence in our credit. Net proceeds were used to refinance existing indebtedness, including near-term maturities. Also during the quarter, we repurchased 2.9 million shares for a total of $836 million. This reflects our strong financial position and commitment to capital allocation priorities will be continue to invest in growth while also returning capital to shareholders. We have $1 billion remaining under our current program authorization. In closing, we remain committed and focused on our mission to deliver the best vacation experiences responsibly as we work to deliver another year of strong results. With that, I will ask our operator to open the call for a question-and-answer session. Operator: [Operator Instructions] Your first question comes from Steve Wieczynski with Stifel. Steven Wieczynski: So Jason, as we think about the rest of the year, we obviously have your second quarter yield guidance, and I have to assume based on Naf's comments that your third quarter yields are going to look somewhat similar to your second quarter given the exposure you have to Europe. So then if that's true, that would imply your fourth quarter yields are going to be growing, let's call it, somewhere in that mid-single-digit range to kind of get you into that 2% midpoint. So wondering what gives you the confidence the fourth quarter could grow that much. And I guess then that actually to me would imply that without the European headwinds you guys encountered -- you guys would have actually been able to raise your full year yield guidance. Am I kind of thinking about that all the right way? Jason Liberty: Yes, Steve. Well, first, thanks for the question and hello to everybody. But I think that's exactly the way to think about it. So the year is a little bit of a smiley face in terms of yield, and that's really impacted, as we said, by our commentary on the Mediterranean, and to a lesser extent, the deployment to the West Coast of Mexico. If you kind of like just kind of zoom out in the beginning of the year, demand from North Americans to go to Europe was really kind of off the charts, which is very much taken into our guidance. And so when the activities started to occur in the Middle East, you saw some level of moderation in demand for the Mediterranean. And when you think about it through the course of the year, we're obviously more pronounced with those itineraries in Q2 and Q3 and very little in Q4. And so as it points to all of our products are doing very well. By the way, Europe is doing well. It's just that it's less than what we had anticipated, while the other ones are doing well. And so when you look at what our book position in Q4, which, of course, has less on the Med product, but is in a very strong book position at very strong rates. You look at the comps with Legend and we have an easier comp in Q4. That's why we feel very good about the fourth quarter of this year. By the way, we feel good about Q2 and Q3. It's just that we did see that moderation, and we have -- and fortunately, that has now turned the corner over the past several weeks, but we have just less inventory to sell to be able to take that price. Operator: Your next question comes from Matthew Boss with JPMorgan. Matthew Boss: So Jason, maybe if we take a step back, so despite geopolitical developments and the elevated industry capacity in the Caribbean, your yield guide at the high end this year stands at 2.5% constant currency. So maybe could you speak to the drivers of durable growth multiyear, which seem intact here regardless of the macro and just how you see the company set up today relative to pre-pandemic? Jason Liberty: Sure. Well, first, I just want to just touch on the capacity in the Caribbean. That has been, I think, much more of an outside looking in observation or concern than it actually has been for our company. The reality of it is we own the Caribbean, especially the Royal brand owns the Caribbean. We have the best assets in the world in the Caribbean. And of course, we have a Perfect Day, and now we have the Royal Beach Club. And all those islands also attract an elevated amount of demand and people's willingness to pay more to have those elevated experiences. And so I think when we look at our business, our brands are positioned in, we think, the perfect segments for them. They are the leaders in those segments. They're supported by these great ships, and they are supported by these destinations which we continue to add on to. So I think we're positioned very well, and I think that our expectation is we'll continue to generate high-quality demand. And one of those points on high-quality demand, which I commented in my script, is we're getting more and more repeat customers inside of our ecosystem. So at this point, about 40% of our customers are coming from our current customer base. And historically, that was 1/3, 1/3, 1/3. And so I think that's a reflection of all the things that we're doing around loyalty, all the investments we've made on AI and other technology that helps curate and engage with our guests are highly effective. And of course, the tools that we have around pricing, et cetera, allows us to kind of meet our guests where they're looking to go and also what they're willing to pay. And that is creating more and more reps and more and more high-quality demand for us. And I think we say this all the time, the leisure marketplace is $2.1 trillion, $2.2 trillion. This industry is a very small [ sliver ], but this industry today as a core vacation experience. It's core to people's vacation considerations. It's no longer kind of a -- well then we consider cruise, cruise is very mainstream. And I think that's why you're seeing a lot of durability in demand for cruise. And you couple that with the reality that we still trade at about a 15% plus discount to land-based vacation also kind of helps inflate us around some of this noise. Operator: Your next question comes from Brandt Montour with Barclays. Brandt Montour: Great. I just wanted to circle back on the third quarter and the Med. And just maybe if you could put a little bit of a finer point on it. How much do you have left to book at this point in the year, how much damage do you think was done over the last few weeks? What are you sort of baking into your forward guidance in terms of how the conflict plays out and how bookings play out from here? Jason Liberty: Yes. Well, Brandt, what I would first start off is, I don't think I would describe we had a record wave period. So I wouldn't describe it as damage. I would probably describe it as the booking trends that we saw for the Mediterranean in the early parts of WAVE and when we gave guidance and even to the point where we -- of course, we put all that into the 10-K, all of our knowledge was just at levels that we had not seen before. And it moderated as we got out of the month of February, with the activity happening in the Middle East, driven by really two things. One of it was people's concern about vacation disruption. But more importantly is cost of air went up by almost -- more than 40%. It's now moderated down to like 15%. And so it was getting to a point where cost of a flight was more than the cruise. But that kind of settled out. And of course, we did have to address that demand. But where we sit there today, we're at the end of April. There's very little inventory left to sell for the quarter, and there's still very little inventory to sell for the third quarter. But of course, we are continuing to actively manage this environment. And if we see things continue to accelerate, that could be a positive light for this quarter and Q3. Operator: Your next question comes from James Hardiman with Citi. James Hardiman: So I wanted to sort of zoom in on the idea that we're turning the corner. Obviously, the weeks following the initial geopolitical disruption were probably the worst. But maybe some indication of where we stand today in terms of the booking trajectory versus where we were in February before a lot of this started, I don't know, if we're fully back or we're just heading in that direction. And then as we think about sort of the 2Q and 3Q, we're saying that's most pronounced. I'm just curious if that's because those are what's next or whether consumers are comfortable booking beyond the third quarter and into 2027, assuming that this disruption will go away, or will sort of worry about that when we get to that point in time. Jason Liberty: Yes, sure. So James, just to -- so we're clear on tenses, we are not turning the corner. We have turned the corner. Now I don't know what -- there's always statements that can be made and that can change the hearts and minds of the consumer, but the moderation that we saw has turned. It's just that we have limited inventory that's in place. We do not see this at all showing up next year in people's booking behaviors. And of course, we have guests that are starting to book next year clearly. And we're talking about a specific product. And so our commentary around the Caribbean and other products, you should hear is very good. And you should hear that bookings for Europe are very good. They are just a little bit less than we had anticipated when we started the year based off of a high-quality demand and really strong pricing. Naftali Holtz: And James, just one other thing on -- we used the word moderation because that's what we saw. We didn't see dip and then it's a return. It wasn't a very strong trajectory. And even following that, we saw that there is enough potential to even accelerate. And so there was a moderation at any time where the bookings were still good. Operator: Your next question comes from Lizzie Dove with Goldman Sachs. Elizabeth Dove: I was wondering if you could maybe give us a refresh on Perfect Day Mexico. You mentioned opening late 2027 ramping '28. Could you maybe share some more details on the cadence of that ramp? And then just bigger picture, your latest thinking around the long-term structural yield growth opportunity there in the Western Caribbean market and particularly around the Galveston, Texas penetration opportunity? Michael Bayley: Lizzie, I'll talk a little bit about construction and cadence. Obviously, we are incredibly excited with Perfect Day Mexico. We have a lot of support for the project from the government in Mexico. And the project is proceeding. We obviously have announced, I think we said that we'll be having a soft opening in Q4 '27, as we move into '28, we'll fully opening the whole experience, which is, in many ways, very similar to often how we open up big traction or big events or new ships, for example. So project is generally on track and its impact in terms of the region, particularly out of Galveston and particularly as it relates to the Texas and the regional market is, is we believe, incredibly significant. We literally will have the biggest, best, most attractive destination experience for that whole Gulf region. And if you look at the opportunity that exists in Texas, it's a market which is much larger than Florida and its penetration rate is much lower than Florida. So we're expecting to -- I guess I'm going to use this word. We're expecting to own the Texas market as it relates to cruising into the Caribbean and Perfect Day Mexico, combined with Royal Beach Club and Costa Maya will be the centerpiece of that combined with, of course, our Icon class ships. So the combination of the hardware, the brand and the destination, we believe, is going to be a massive accelerator for overall financial performance for the business. So we're very excited about that. The project is really exciting. I mean I think what we've got planned is epic in its nature. It's really going to be a stunning experience. So we're very much looking forward to bringing that alive over the coming couple of years. We did have some issues. I think it was reported. There were a little blips in the radar as it relates to environmental issues that have now been resolved, and all of that is now behind us. So we're continuing on track. Jason Liberty: Yes. Lizzie, the last point, I just want to add on it because we are super excited about it. But I always think it's an important point to make the pictures and the videos you've seen of it, that is what it's going to look like. So we will very much live up, hopefully, maybe even exceed all the incredible marketing around it. So we're very excited. And as Michael said, it's owning the Texas market. It's also increasing a catchment area for the drivable market, and it's also going to unlock, we think, more potential in the West, you really kind of west of the Mississippi as the cost to get to Houston and so forth is less than other parts of the country. So we're super excited about it. And it's not that far away. Operator: Your next question comes from Robin Farley with UBS. Robin Farley: I had a question on yields, but also just a quick follow-up. Michael's comment may have just answered it, but it sounded like Mexico, there had been a little bit of a pause in construction because of that environmental stuff. So I just want to clarify if Michael's comment means that construction has resumed in Mexico there? Michael Bayley: Yes. Robin Farley: Yes, great. And then the other question was just sort of thinking about next year and if it's the 200 basis points impact in Q2, Q3, it sounds like the entire 100 basis point change is maybe a mid-single-digit sort of shift in where you had expected European yields to come in this year. Is it fair to assume that you would kind of fully expect that to come back in 2027 when we're kind of thinking ahead to the impact this year being kind of not necessarily coming out of next year? Just help us size that. Naftali Holtz: Yes. The comment about the European one is, there are other things that were already known around some of the structural aspects of it, right? So there was just more because of the geopolitical. But the bottom line is that you're right, this is for this year. We don't see those issues for next year. And we see also the bookings, as Jason mentioned, are strong for next year. We don't see the consumers being the impact of that. It's really a near term for right now for Q2 and Q3. Operator: Your next question comes from Xian Siew with BNP Paribas. Xian Siew Hew Sam: You talked about the co-branded credit card and several changes to the loyalty program and also how repeat guests are kind of stepped up. I'm kind of wondering what do you think is kind of the implications of that in terms of how they could impact net yield growth, maybe repeat guests are booking further ahead, maybe they spend more on onboard, kind of any learnings on how higher repeat penetration could be a benefit and where... Jason Liberty: Yes. Sure. Thanks, Xian, for the question. Yes. So first off, I think we should -- when we look at our repeat guests, one, they tend to sell on us more often. That's not a surprise. But they also tend to spend about 25% more than new-to-cruise or first to brand. The new-to-cruise index is a little bit higher when you get because of the short product, and that has introduced very high-yielding new-to-cruise consumers for us. But effectively, what we are trying to do and kind of go to the saying that we've said is to go from a vacation of a lifetime to a lifetime of vacations. And so we're trying. That's the reason why we're getting into River is we effectively want to use this platform of ours that our guests love and our guests trust to keep them inside of our ecosystem. And so when you look at things, whether it's the point's choice or whether it's the ability for our guests to sail on any of our brands and get recognized and get their points associated with that or now having a co-branded card that now covers all 3 of our brands. It's effectively things to continue to incentivize and recognize our guests to stay inside that. And then we look for what are making sure we have the experiences that they're looking for and that we're elevating the experiences and we're bringing new experiences like River online so that they continue to travel with us in that unlocks great lifetime value of the customer. It makes us more efficient because it helps leverage our ultimately our platform. At the same time, we also need to make sure we have the tools so that we're going to market, and we're connecting with them in the way that they want to, and that's why we have significantly evolved our digital capabilities, our guests are able to see where they are in their loyalty journey. Our guests are able to engage with us at any point in their dreaming or their vacation journey. And all these things kind of come together to have this kind of commercial apparatus and ecosystem to ultimately get more and more of our guests wrapping inside of our ecosystem. Naftali Holtz: And maybe just to add one more thing. If you kind of put everything that Jason just said together, it's really for us looking at the customer lifetime value, right? And so in addition for them having more frequency with us, shortened duration between the cruises, higher spend, lower acquisition cost is also another way to do it. And we believe we will also be able to serve them better because we know them better and we make sure that we tailor the vacation they need with all the tools we have. So it's kind of part together of the customer lifetime value. Operator: Your next question comes from Kevin Kopelman with TD Cowen. Kevin Kopelman: Great. I had a question on North American customers and higher airfares. Can you talk at all? Have you seen any consumer behavior change at all kind of reacting to the higher airfares in North America for your North America itineraries? And how do you see consumers' ability to kind of -- as well as those air fare increases as they're getting to ports as the year goes on? Michael Bayley: Kevin, we've seen a slight impact, obviously, because when the airfares go up, it does have an impact. The great thing is, is we've got a phenomenal global infrastructure. So for example, if you look at the European product in itineraries, when airfares goes up or it spikes and as Jason mentioned, it kind of spiked up and then it started to fall back down again. Then what we see is we see an increase in European customers booking, if there's a slight decrease in U.S. North American customers, which is -- which really does moderate itself out as the situation calms down. So I think that the benefit of our infrastructure, our global infrastructure from a sales and marketing perspective and brand presence has been really quite effective and always has been in these times when we see fluctuating air costs. Jason Liberty: And just -- I think, one thing I just want to add is the North American consumer, as we see it and as we commented in our remarks, is very strong. And at least for our customers in terms of where their balance sheets are, where their level of employment is their balance sheets, et cetera, and their propensity to vacation and their propensity to cruise to us, is really, I mean, at the highest levels that we have seen in the past. What can create outside of the comments we made about U.S. consumers, maybe you're getting a little bit concerns seeing about flight cost to Europe, which have now settled down. What was actually probably impacting them more domestically was just friction in the travel experience, right? And so it was the long lines to the airports and so forth. People will go through, well, can I just drive there or maybe wait until this kind of settles down, which can sometimes impact some of the close-in business. Fortunately, as you can see in our first quarter results, while we saw some of that, but we also saw the consumer breakthrough on that, and we saw a little bit more of our drivable markets kind of lift up. Operator: Your next question comes from Andrew Didora with Bank of America. Andrew Didora: Just two quick questions on costs. So I guess for Naftali, I guess, one, how do you think of rolling in new hedges in this high fuel environment? And then second, just on unit costs, you continue to do a really nice job here. I guess my question is at what level of capacity growth would we start to see maybe more inflationary type NCCx fuel growth in, say, I don't know, 2% to 3% range. Just curious of your thoughts on there. Naftali Holtz: Yes. So first on fuel, where, as I mentioned, we did see higher fuel, fuel costs, obviously, not surprising. And the way we manage our hedging program, and we are hedged 60% for the year. We're hedged a little bit less than 50% already add pre-conflict prices for next year and 25% roughly for '28. So we continue to methodically add hedges and make sure that we manage volatility through the course of a longer period of time. So we'll continue to observe. We feel very good with where we are, and we'll continue to absorb that and add where it makes sense. So that's on the fuel side. On the cost side, we subscribe to our formula. So we say our formula is moderate capacity growth, market yield growth, strong cost control. And so we subscribe to that formula, and we want to maintain a spread between our yield growth and our cost growth. And our focus is to make sure the first that we deliver the best vacation experiences. So we are very a nice about making sure that we don't touch the guest experience and actually enhancing that. And with that also comes yield growth, et cetera. So we're doing that. And then at the same time, we always find ways to do things better. And technology today helps us a lot. And so either it could be through supply chain as an example or other areas that we can just achieve more with these tools. And so we're utilizing those tools and that obviously comes to the benefit of the cost. So that's kind of how we manage the business. Jason Liberty: Yes. And Andrew, one other point I just want to make is that, I mean, at least talking for the Royal Caribbean Group, our business is growing in perpetuity. So we're adding 1 ship or 2 every single year for the foreseeable future. And so I think the combination of the technology that Naf talked about which is pervasive and the opportunities are always existing. But it's also just our responsibility to embrace as our business scales. And when we have that capacity growth coming in, there's always going to be a little bit of some headwinds on it when you're introducing new destinations as an example, but because there's no APCDs associated with it. But for the most part, we look at that as -- our group's challenge themselves on how do we scale our groups as capacity grows. Operator: Your next question comes from Sharon Zackfia with William Blair. Sharon Zackfia: I guess I wanted to follow up on costs. Are you making any itinerary changes given higher fuel either currently or looking out to '27, '28? And then obviously, net cruise costs are coming in a bit lower. Is there anything you've pulled back on this year in terms of initiatives or spend that we should think of as deferring to '27? Or is this just harvesting some of those efficiencies that you just referred to? Naftali Holtz: Yes. So let me be very clear. When we talk about guest experience, our itineraries are the key part of it. And so the answer is absolutely not. We have great ship experiences. We have amazing destinations, and we want to maintain that quality of the experience. So the answer is we have not modified anything because of higher fuel costs. We always do, right? I mean this is not new, but we always try to find other ways to investments into energy efficiency, just better utilization of technology of how we use fuel, but that's not impacting the guest experience. And your second question was about [ deferment ] and the answer is no as well. as I said, all the things that we're doing is we're finding better ways in a sustained way because then that's not really improving costs. This is just deferring. So we're finding sustained ways to operate the business more efficiently while again, ensuring that the guest experience remains intact. Operator: Your next question comes from Vince Ciepiel with Cleveland Research. Vince Ciepiel: Just wanted to dig a little bit more into yield outlook for the year. Could you maybe comment on how you think new hardware, and you have Star, Xcel contribution, Paradise Island, RBC Santorini, like a lot of exciting new products out there, how they might be contributing to the yield growth overall versus the like-for-like impact? And then also on a regional basis, I think you had mentioned or used the term that Europe was doing well, I think, was the quote. Is it fair to assume that Europe yields will grow this year? Or kind of what does the guide assume? Jason Liberty: Yes. So I just want to help on the Europe question again. Europe is going to do very well this year. It is just less well than we had anticipated it was going to do a few months ago. And when answering like what's driving yield, the answer is it's all of it. Whether it's like-for-like, whether it's having more of a year of Star, Legend is coming on. It's the ramping up because we're still very much -- we ramp up these destinations very thoughtfully to make sure that the guest experience is at the very highest level. And so the answer is all of it is going well. And there is again, the onetime realities of the med doing a little bit less well than we had anticipated, but still great. There is the realities that the West Coast of Mexico had some hiccups, we generally think that is also a onetime situation, which provides for great tailwinds into 2027.. Operator: That concludes our Q&A session. I will now turn the conference back over to Naftali Holtz, CFO, for closing remarks. Naftali Holtz: We thank you all for your participation and interest in the company. Blake will be available for any follow-ups. We wish you all a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect and have a wonderful rest of your day.
Operator: Good morning, and welcome to the CNH 2026 First Quarter Results Conference Call. [Operator Instructions] I will now hand the call over to Jason Omerza, Vice President of Investor Relations. Please go ahead. Jason Omerza: Thank you, Warren, and good morning, everyone. We would like to welcome you to CNH's first quarter earnings call for the period ending March 31, 2026. This slide webcast is copyrighted by CNH and any recording, transmission or other use of any portion of it without the written consent of CNH is strictly prohibited. Hosting today's call are CNH CEO, Gerrit Marx; and CFO, Jim Nickolas. They will reference the material available for download from our website. Please note that any forward-looking statements that we make during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material. Additional information pertaining to factors that could cause actual results to differ materially is contained in the company's most recent annual report on Form 10-K as well as other periodic reports and filings with the U.S. Securities and Exchange Commission. Our presentation includes certain non-GAAP financial measures. Additional information, including reconciliations to the most directly comparable U.S. GAAP financial measures is included in the presentation material. I will now turn the call over to Gerrit. Gerrit Marx: Thank you, Jason, and welcome to everyone joining the meeting. We are calling from Sioux Falls, South Dakota, where we just hosted our Board meeting. Sioux Falls is one of our CNH tech hubs, which we acquired through Raven. In Sioux Falls, we have about 300 colleagues who jointly with other sites, not only code and validate our on and offboard software, but also design the architecture of the next evolution of our digital machine hardware. I'm very proud of the advancements that we will be launching over the next couple of years. First quarter results were as expected and guided. Given that Q1 seasonally our lowest quarter, we are at historically low industry demand in North America, and farmers in Brazil have ongoing financial challenges. During the quarter, additional complications emerged, including changing tariff rules and an escalated conflict in the Middle East. I'm very proud of the way the CNH team responded to all the challenges we faced, those we knew about going in and those that emerged during the quarter. We are now passing through what we expect to be the lowest period of the current ag industry cycle, supported by some replacement demand. As we have said before, we also expect Q1 2026 to be the lowest quarter of the year, during which we diligently continued the disciplined management of all levers in our control. Despite the challenging quarter, we have many things to proudly share here. We kept production levels low in order to manage and contain channel inventory. Ag dealer inventory levels remained unchanged since the beginning of the year by design. Normally, dealers build inventory in Q1 in preparation for Q2, but the flat levels are in line with our overall plan to have the dealers reduce their inventories by about $500 million this year. We have been quite disciplined to produce and ship only presold orders or fast-moving stock orders. The net of price and product cost was positive in agriculture as we focus on our operational efficiencies and quality improvements. And we do expect that some of price and product cost to be positive in agriculture for the full year as well. We are making solid progress on our efforts to take cost out and improve our overall product quality, countering the negative impact from tariffs and global supply chain disruptions. We also continue with a raving support our dealer and service network optimization with several new consolidations completed and our tech assist tool rolled out at about 70% of our dealer locations. As a reminder, our AI tech assist delivers near instant diagnostic support while our visual parts search enables rapid and accurate parts identification. These capabilities enhance decision quality and deepen the value we deliver to customers and dealers, and there is much more to come, powered by the rapidly evolving power of artificial intelligence from generative to agentic capabilities. We, along with other industry participants have had productive discussions with members of the U.S. administration on how we can support farmers and builders during these times. We are optimistic about how some developments such as the recently announced increase in renewable fuel standards will help farmers through increased crop prices and demand. There's a new equilibrium of supply and demand of agriculture commodities emerging in all major regions, as upcoming elections, trade deals, including and excluding the U.S. and rerouting of food and nonfood supply chains are settled over the next couple of years. So while market conditions are very dynamic, we are focused on solutions today and in the future that support our farmers and builders and that will deliver returns to our shareholders. Turning to the results, which reflect the expected and guided market headwinds and our decision to keep production very low. Consolidated revenues were $3.8 billion, flat year-over-year, including about 4% positive currency impacts. Our Ag segment sales were up 1% with EMEA up 20%. North America down 3%, and South America, down 28%. With farm incomes depressed and macroeconomic uncertainty, we saw continued softness in equipment demand. Industrial adjusted EBIT was a loss of $45 million, driven primarily by tariffs and high SG&A and R&D expenses, only partially offset by positive pricing and cost savings actions. For the quarter, adjusted net income was $21 million, with adjusted EPS at $0.01. Free cash flow from Industrial Activities was a $569 million outflow in line with Q1 2025 and consistent with the working capital seasonality of the first quarter, where we usually build up some company inventory in preparation for Q2 sales. We remain more committed than ever to strengthen the company and prioritizing long-term value creation. Our company strategy is centered around 5 key strategic pillars: expanding product leadership, advancing our iron and tech integration, driving commercial excellence, operational excellence and quality as a mindset. These pillars remain front and center to ensure we stay aligned with our long-term strategic objectives and our team remains focused and united in our shared purpose to serve and advance those who feed and build the world we all live in. From all the great steps forward we took in the last quarter, I would like to focus today on our operational excellence and specifically our manufacturing plant efficiencies. We use a wide range of tools and latest technologies to unlock cost efficiencies at our manufacturing plants. Last year, we conducted about 1,400 projects, which led to $45 million in savings as we reported to you already last quarter. Individually, these projects may seem modest, but the results are profound when we add them all up. In addition, many of the projects include quality improvements to the product shipped out from our factories. An example of one of those projects was a fiber laser installed last year at our Fargo, North Dakota plant where we make our 4-wheel drive tractors. This machine is used to cut sheet steel and replace an old plasma punch machine. The new process is 52% faster than before, while also reducing other consumables such as oil and lubricants, minimizing secondary operations and my favorite, improving quality. More efficient operations paired with better quality are a win for both CNH and our customers. With that, I will now turn the call over to Jim to take us through the details of our financials and guidance. James A. Nickolas: Thank you, Gerrit. Agriculture Q1 net sales were about $2.6 billion up 1% year-over-year, including 4% positive currency translation. Sales volumes were lower in North and South America and favorable pricing came mainly from North America. Sales volumes and pricing were up in EMEA, mostly in Europe for both tractors and combines, fueled by moderately favorable industry demand and some market share gain. Gross margin was 19.1% from 20% a year ago. Agriculture adjusted EBIT margin was 1% from 5.4% in Q1 2025. The positive pricing and the cost saving contribution only partially offset negative original mix and tariff impacts. The higher year-over-year R&D and SG&A expenses were consistent with our indications with both affected by lower variable compensation in 2025 and labor inflation in 2026. Construction net sales in the quarter were lower 3% year-over-year to $574 million, as higher sales in EMEA were more than offset by lower sales in North and South America. We were initially expecting sales to be a bit higher in North America but we held back sales while working out a supplier quality issue to protect the customer. That issue is now resolved and those sales will be made up in Q2. Q1 gross margin was 11.8% from 14.9% a year ago, largely due to tariff impacts. Construction SG&A was unfavorable due to trade show marketing costs, lower variable compensation in 2025 and labor inflation in 2026. Q1 adjusted EBIT margin was negative 4.9%. In Financial Services, segment net income in the quarter was $74 million, down versus 2025, mainly due to higher risk costs in Brazil. Retail originations in the first quarter were $2.2 billion, and the managed portfolio ended the quarter at $28 billion. Sequential delinquency rates increased slightly to 3.5%, primarily driven by persistent economic difficulties in South America. Our capital allocation priorities remain the same, reinvesting in our business while maintaining a healthy balance sheet and then returning cash to shareholders. During the first 3 months of 2026, we repurchased $26 billion worth of CNH stock at average price of about $10.70 per share. Before we dive into our guidance, let's take a look at the expected tariff impact on our margins, as we had a meaningful change recently in the way they will be applied to our products. First, we need to acknowledge that we did enjoy a brief period of release with naive tariffs were replaced by Section 122 tariffs at 10%, that lasted for about 1.5 months. Just something to keep in mind when we eventually think about run rates in 2027. At the beginning of April, there was a change in the way Section 232 tariffs on steel and aluminum are applied. At a very simple level, it means we went from paying 50% on the value of only the metal to now paying anywhere from 0% to 50% on the total value of the component or machine, depending on what it is. For whole machine imports, we are now paying 25% on the total value of the unit, which overall is higher than what we paid before. However, for some component imports, the tariffs can actually be lower. In our Agriculture business, the impact of this change is net neutral for calendar year 2026. So we still forecast the tariff cost impact to be about 210 to 220 basis points of impact on ag margins or no change from our view last quarter. For construction, we're not expecting to get as much of that component benefit as in ag. And so now we expect about a 600 basis point impact on our construction margins compared to our original expectations of roughly 500 points. It's important to note that Section 301 investigations are ongoing for products coming from China, the EU, India and Mexico. We have not included any factors for that in this forecast, but we will provide an update if there are material changes. Let's first look together at our agriculture industry outlook for 2026. We have slightly improved our outlook for small tractors and combines in North America. In EMEA, we have lowered the tractor outlook, but we are more optimistic for combines. And in South America, we have lowered the outlook for combines. Market risk in South America is elevated due to tighter credit and delays in government-backed financing in Brazil. As a result, we are watching the situation there closely. In total, we still see the industry at about 80% of mid-cycle. When we balance all those changes, along with our unchanged assumptions for favorable currency translation of 2% and positive pricing of 1.5% to 2%, we are comfortable reaffirming our net sales guidance of flat, down 5%. As mentioned earlier, our tariff assumptions for agriculture are net unchanged. While we are seeing increased freight and transportation costs, we are optimistic that our ongoing cost reduction programs and updated geographic mix will be able to offset those impacts. As a result, we are reaffirming our EBIT margin guidance of 4.5% to 5.5%. In construction, we have fine-tuned our industry forecasts across the regions based on Q1 trends and market conditions. And overall, we are slightly lower than our previous expectations. However, we still forecast our own net sales to be about flat year-over-year, including about 1% of favorable currency translation and 2% of pricing. EBIT margin is forecasted to be between 1% and 2% as we focus on cost reductions to offset the increased impact of the tariffs discussed earlier. Putting all those elements together, then we reaffirm our forecast for 2026 industrial net sales to be flat to down 4% year-over-year and industrial EBIT margin to be between 2.5% and 3.5%. Industrial free cash flow is still forecasted to be between $150 million and $350 million. Adjusted EPS is reaffirmed at between $0.35 and $0.45, assuming an average share count of about $1.25 billion. To help you with remodeling, I'll provide some additional considerations for our second quarter. Our order books are full for the second quarter, and we're expecting agriculture net sales to be about flat on a year-over-year basis. We're keeping a close eye on conditions in South America as conditions for farmers there remain very difficult. Construction net sales will be higher in the mid-teens, and that includes some of those sales originally expected in Q1. The construction increase is most pronounced in North America. Transportation costs and the tariff payments are another watch point. The team has done a great job working through these rapid changes and will continue to be vigilant. I'll note, too, that grain prices ticked up a little along with oil prices, they remain below what many consider breakeven levels for farmers, which continue to be -- which continue to challenge their economics. Although both agriculture and construction Q2 EBIT margins are forecasted to follow into the full year guidance ranges. Taken together with the lower Q1, this implies that we expect margins in the second half of the year to be sequentially better than the first half, as is typical. Furthermore, we also expect that both the ag and construction margins will be better on a year-over-year basis in the second half of the year. Financial Services net income in Q2 will be lower year-over-year by $20 million to $25 million. With that, I will turn it back to Gerrit. Gerrit Marx: Thank you, Jim. Let me finish up with some thoughts about the rest of the year. Against the backdrop of heightened global uncertainty, we remain focused on our purpose to serve and advance the world's farmers and builders. That means closely monitoring developments while continuing to deliver for our dealers and end customers through disciplined production planning and a clear path to lean channel inventories by year-end. We continue working on our iron and our tech developments and product launches and delivering on our long-term margin improvement efforts. We continue to work with our dealer partners on finding the right network configuration in each of the markets that we serve. In another step to support our dealers and farmers, we have recently entered into a strategic relationship with [ Abilene ] Machine through a minority equity stake. The relationship will allow CNH to offer our dealer network a comprehensive aftermarket parts portfolio with upcoming access to the Abilene Machine portfolio of all makes parts. This further enables our aim to provide our dealers and customers good, better and the best options to service their equipment fleets regardless of age or brand affinity. In North America and Europe, the average age of ag equipment in the field has been trending older. This should build up a modest demand for new machines in the coming quarters. Significant equipment demand increases usually only happen when there is a good increase in commodity prices that support farm incomes. As Jim mentioned, farmers in South America are a little more cautious and will probably continue to be so at least through the end of the year, and so we will be as well. Selling a machine is one thing, collecting its monthly installments is another, and we have been thoughtfully managing that jointly with our network partners during this difficult period. As we expect to evolve from the industry trough, we look forward to capitalizing on all the improvements that we have made during -- serving and advancing those who feed and build the world, always breaking new ground. This concludes our prepared remarks, and we can now start the Q&A session. Operator: [Operator Instructions] We will take our first question from the line of Tim Thein with Raymond James. Timothy Thein: I just had -- my question on ag. The -- as we look at the production slots for the coming quarters, can you maybe give some context there in terms of, a, I'm curious if you've seen -- has there been any significant changes in terms of the actual build rates implied within -- maybe by region or if there's been any changes there? And then just any comments in terms of kind of regional order commentary. I mean you stressed the softness and the concern around South America. Maybe a little bit more context of what you're seeing within that order board maybe in your largest region in North America? Gerrit Marx: Thank you, Tim. So as Jim alluded to, we are fully booked in Q2, and we have a pretty healthy coverage already for Q3, while being very disciplined in actually loading orders to production because, as I said, we focus on real dealer, let's say, customer orders and orders from dealers referring to machines that have a very high probability to liquidate in due course as we continue to manage our general inventory. Usually, when we see the market picking up again, which we do not yet see at this point. We would obviously load production more with what we call company orders, where we hold inventory on our side to quickly react to a changing market environment. So when we talk about already a Q2 fully booked into Q3 in a good shape, this happens on the basis of a very disciplined order loading to the factories. As per the regional differences, we're pretty happy with the way how things go in Europe. The team makes great progress in building the foundation for gaining share as we do. And we are accelerating our dealer multi-brand consolidation across the region. And you will hear us talk about that almost, I think, probably every quarter from now on. But definitely, for the full year 2026, and obviously, this dealer network consolidation is going to drive as well order momentum in the region as we not only break new ground, but they actually gain ground. Similarly, for the United States, where the market is going backwards as we projected and guided to, we see on the low levels, very good momentum with our dealers when it comes to interacting with our customers. So that is also in a good place. And the region where we have extra efforts and extra attention is, as you also picked up is Latin America, particularly Brazil, although Argentina is not that different in its current dynamics where the farmers are still in a wait-and-see situation in light of upcoming elections in Brazil. And still, the consequences of trade deals still need to show in actual trades of commodities and pricing of those commodities. So I think in Latin America, we apply extra discipline to the taking of orders, making sure that we preserve margins despite a significant price pressure in the market given that all the industry participants had expected a better evolution of market demand, which isn't the case. And so extra discipline is required for LatAm in the order take and that is also seen in our Q3 order take. But overall, we are in a good shape going through Q2 as we look at Q3. James A. Nickolas: If I could add to that, in the Latin America, Brazil, in particular, given the tight conditions, we, along others have tightened underwriting standards, and I think that's also acting industry demand. So it's not a CNH concern. It's an industry-wide country-wide concern. Gerrit Marx: Yes. And maybe last commentary on Asia Pacific, although small, but growing quite a bit. Our teams in India have hit new record highs in terms of production market share, and we really, really built momentum there with our newly launched compact factor lineup, and the to be launched, new utility-light small tractor lineup, not only for India, but for the export, which will mean a step change in small and compact machines that we will ship around the world from India, while we see stable and good progress in China and a rather flattish development in Australia and New Zealand, where the market is basically running on replacement demand only at this point in time. Operator: Our next question comes from the line of Angel Castillo with Morgan Stanley. Unknown Analyst: This is Esther on for Angel Castillo. Just on tariffs and the broader trade backdrop, can you just give us a little bit more color on how you're sizing the impact you're seeing today versus the original tariff impact guide? And how much of that do you think is being offset by pricing versus operational actions? So just like more color on like kind of how you see that dynamic through the year? James A. Nickolas: Sure. Yes. Esther. It's Jim. The -- as we indicated, the ag business, really no net change versus prior guidance. So you think about full year 210 to 220 basis points of a drag versus if there weren't tariffs. So call it, full year cost of $120 million on the ag business. Now that's -- and that's in line with where we were last quarter. There were some puts and takes. [indiscernible] lower gave us some relief, offset by higher impact, higher cost from Section 232 changes. And so that's really a broad for the ag business. On the construction business, it's a bit of a headwind moving from 500 basis points of a headwind to 600 basis points of headwind, again, as opposed to no tariffs. So that's really where it ends up. So we took our lumps, I would say, when they were first launched at Liberation Day. And then since then, the changes thus far have been relatively minor for us overall. The one area that we haven't quantified and are waiting to see where it lands are the Section 301 tariffs, which are sort of related to investigations. The U.S. government is conducting with various counterparties in the trade, EU, India, Brazil, et cetera. So that one is unknown at this point, but I think that covers the landscape of tariffs. Operator: Our next question comes from the line of Kristen Owen with Oppenheimer & Co. Kristen Owen: I wanted to talk through how you're thinking about back half scenarios, just given the consents of now we're looking at higher fertilizer prices, higher transportation cost, some of these acute challenges that you've called out in Brazil versus maybe a little bit stronger forward commodity curve, how that's influencing the range of scenarios that we could see in the back half of the year? James A. Nickolas: Yes. Kristen, the -- again, the range of probable outcomes is pretty wide still in keeping with the last year or so of macroeconomic uncertainty. The fertilizer impact higher cost. So that's less of a concern for 2026 for most of the world. I mean it's a concern, but it's not -- it shouldn't impact us too much this year, second half aside from Brazil, Brazil is where it's going to have more of an impact given their multiple harvests and planting seasons. So there's a little bit of risk, I think, in Brazil from the higher fertilizer costs on top of the credit conditions we mentioned earlier. Transportation costs are growing in most places. We are viewing this as something we can offset today. It's sort of the higher cost due to the Iran conflict persist throughout the year, which we're not forecasting, but if they were to persist throughout the year, the gross net increase in cost could be up around $70 million, that $70 million is gross. It assumes no countermeasures from us in terms of transportation surcharges or lower discounting, we would take action at some point if this elevated cost environment persists on the revenue side. We don't think that's needed just yet, but we're monitoring it very, very closely. So at the back half, we think we've got things balanced out given our levers. But right now, the unknown is the higher elevated transportation cost, that's the primary factor, logistics from shipping and trucking from the higher diesel and fuel costs. So that's the one we're watching closely. And if it persists for a longer period of time, we'll need to make some counter measures to happen on the revenue side. Operator: Our next question comes from the line of Jamie Cook with Truist Securities. Jamie Cook: I guess just 2 questions. I guess, encouraging to see we kept guidance the same and everything seems on track. Obviously, lots of positives and negatives out there. But Gerrit, if you could just comment on, one, understanding it's early on about how you're thinking about the setup for 2027, I guess, for ag in particular, where you would be most constructive or more worried, I guess, Brazil would probably be that area. And then from just a company-specific perspective, with a lot of the company-specific initiatives, streamlining of cost structure, supply chain, all those quality, all those things assuming a flat market in 2027, how do we think about earnings for CNH or potential positives that CNH could realize even in a flat market? Gerrit Marx: Jamie, well, look, we're getting ready for whatever comes our way in 2027. We do see -- as I mentioned, momentum in Europe. We expect the U.S., the North American market to see the trough this year. And in South America, despite the very low levels where we are traveling and we are still probably in Brazil itself looking for the grounding in this trough. We will enter 2027 with a far greater level of certainty around certain factors. Elections in Brazil and South America will be behind us. We'll have the midterms behind us. We will have clarity around all the tariff items that Jim mentioned, most notably the 301. We will see how the administration positions themselves in various different trade deals around the world. And we will see, and that is what I understood from my interactions in Washington is we will see a greater level of detail in the particular bilateral trade deals that are still ongoing and with a particular focus on commodity trade and commodity flows out from the U.S. This will give us a good footing there. I mean in the end, the aging machine park, every acre around the world has been planted and harvested this year, and the same is going to happen next year. And this puts the hours on all machines and everybody's machines that it takes in order to do the job. So despite markets going slow, the machines are aging at fairly the same pace. And as we enter into 2027 and looking at the average age of the machine parts, we do expect some support from replacement demand across the world, obviously, and then also with a greater level of certainty around those bilateral trade deals and maybe with some support of commodity price momentum for 2027. However, we do not back a market bounce in our own actions. What we do is we remain very disciplined on cost. We are making good progress, great progress actually in taking cost out of our supply chain and procurement area. We have even slightly overdelivered our own internal expectations as it came to quality costs last year, and we will continue to do so over the course of this year. We are looking at structural costs. We do have identified pockets of AI deployment, which in first and foremost, will help us to drive productivity in our own operations, such as software coding. I mean we are here in Sioux Falls, and this is one of the sites where we do code our software. And I've seen great examples now of actually a pretty impressive acceleration from the AI advancements over the last 6 months, what can be done in this area. And all of these elements will help us to go faster with tech while reducing our cost base in relative terms and against the backdrop of global and heightened global certainty with those points that are causing right now the uncertainty among our farmers, particularly. So this is something that we stay focused on. And I feel pretty good about the progress we are making against all the commitments we put out there. And then we'll see when the market comes back. This is overall still see and wait where we don't wait, actually, we act. So it's a see and act phase for us, improving things. And 2027 will be probably a better year than 2026. James A. Nickolas: If I could just add one, we're also underproducing versus retail in 2026. So assuming we -- by about 4%. So assuming we produce at retail levels next year, that should be a natural tailwind revenues or profits. Operator: Our next question comes from the line of Kyle Menges with Citigroup. Kyle Menges: I was hoping if you could talk about just any changes you're seeing in industry competition, specifically pricing across any of the major regions as well as just how you think your inventory position is versus the industry? And then just a quick tariff question. You mentioned could be a 0% to 50% tariff would just be helpful to hear examples of cases where it would be 0 versus 50% now? Gerrit Marx: Thanks, Kyle. I will defer the tariff point to Jim. We do see a continued positive price cost development for us, which I don't know what the others are doing, but we do see that building on top of advancing technologies and product launches as well that we have throughout 2026 and the beginning of 2027. We have launched our new short rebase or standard rebased tractor in Europe, also on top of the range, long wheelbase tractor hitting first time ever segment CNH has never played in, which is a sector of 350 to 450 horsepower in the European style designed tractor that is sold around the world. And with these launches, and actually, we are sold out on those with the production slot we have allocated. We also sold out on our next-gen combines this year. We see great momentum in our product, great demand. And with that demand and obviously, further launches of our also offboard systems, connecting the onboard. We have a good base to advance our farmers and with that also have a good net price realization over the next couple of quarters as we also go into 2027. So for the full year, we expect a positive price cost here. On the inventory side, I alluded to a $500 million further reduction of our global channel inventory. This is -- dealer inventory. This is something we will very closely monitor because if there are swings in markets that we see coming maybe more positive on the other way, more negative developments, we will adjust those in inventory targets and destocking activities accordingly. For now, we feel pretty good where we are. We get very good feedback from our dealers. We have cleared aged inventories. We have cleared stock that was hard to sell. And now we are approaching the levels that we want to see with our dealers also to lighten up the financial burden on floor planning, and their overall exposure to that. So that is on a good track. We delivered what we said we will. And I'm quite curious to see what happens in the next quarters, carefully reading commodity prices, carefully reading the demand in every region of the world. And I think, overall, in a good shape on our track in 2026, which is the trough year most notably, probably in like 20 or 30 years of ag. We have never been that low in terms of unit sales in our industry and we are holding up not only, but we are actually building further strength as we go into the future years. So that feels overall quite good. Jim, on tariffs. James A. Nickolas: Yes. Kyle, it kind of depends on the HTS codes, the harmonized tariff schedules. There's a bunch of those. And I don't have the details to discuss this in particular, but we can take that probably offline at some point. . Operator: Our next question comes from the line of David Raso with Evercore ISI. David Raso: Two questions. One, can you give us an update on where you stand strategically with the construction business? And second, the production below retail of 4%. Can you give us a little color, be it geographic or large versus small tractors, combines just that combination that gets you to the down -- or sorry, below 4% retail globally? Gerrit Marx: David, I'll take the first, and Jim takes the second question. As I mentioned during the last quarterly earnings call and the full year 2025 financials, we have restarted our discussions with several partners for our construction business. These discussions advance a pace. We don't rush anything. There are very good conversations that we have that will build a stronger CE lineup for the construction business, and that will also further enhance the construction machines that we expect to get shipped under the New Holland construction brand back to our ag dealers. So progress is made as we speak. We don't rush things. We take the time it takes, and we will update you when we have made a conclusion not saying when that will be the case. But in -- I think over the course of the remainder of 2026 or first half of 2027, we should be clear on the path forward for our construction business, which is a very, very relevant piece as a product for our dealers, but not necessarily has to be in our ownership in order to deliver product and service to those through build and farm the world. So that is what I can tell you. So time wise, we are pretty much a pace of what we said last time over the course of '26 and '27, we'll come back with the progress on that one. But I'm pretty confident that we are moving towards a solution here. James A. Nickolas: Yes. And [indiscernible] question, the underproduction is a rough, but more underproduction happening in combines, less underproduction in tractors, although both are underproduced in 2026. And by geography, I would say balanced, but probably a little bit more under production occurring in Brazil this year for the -- there we talked earlier about the challenges there. Operator: Our next question comes from the line of Joel Jackson with BMO Capital Markets. Unknown Analyst: It's Evan on for Joel Jackson. I just wanted to circle back on the credit dynamic. You pointed out for Q2, Q3 considerations of higher risk reserves, just wonder to see if you can give any extra color on that. Is that all Brazil? Are you seeing delinquencies currently higher bad debt? James A. Nickolas: Yes. It's slightly up in more mature markets, but nothing notable. The real increases are Brazil, primarily and secondarily, Argentina, but to a lesser degree. And in Brazil, May is a big payment month. And so every year in May, we see an uptick in delinquencies, that's typical seasonality. I would expect to see it again this year. And it remains elevated. It's something that bears watching. We're actively managing it. It is not getting worse, but it's not getting better at the same time, so it bears customer-by-customer discussions trying to make sure that they stay current. So I would expect an uptick in delinquencies in Q2 of this year, like we always see. And I'd say, again, it's mostly focused in Latin America is the issue. Operator: Our next question comes from the line of Tami Zakaria with JPMorgan. Tami Zakaria: Question regarding South America, I see you tweaked lower your expectation for combines. But stepping back, should we view this year's decline in South America more like a temporary blip that reverses next year? Or are you seeing indications that this could be a weak market for a couple of more years before demand starts moving up again? Gerrit Marx: Look Tami, the -- I mean Brazil, if you look back the last 40 years, Brazil, had always a very quick ramp to a peak year, and then it dropped quite sharply and it stayed there for a few years and then before it came back. I think the overall cycle dynamics in Brazil are very familiar to us. And the shape of the curve is this year no different than any other cycle before. What is a little different this time is that a few things come together, and like tariffs and the global trade and the new position of China when it comes to purchase global commodities and North and South American frictions. And I think that causes a little deeper and a little longer trough in this cycle than in prior cycles. And I think that is what we experienced right now in '26, which could drag into '27 as well. However, looking at the acreage in South America and knowing that we have 2.5 harvests in South America on many acres down there given the climate conditions that points at our machines aging 2.5x faster when it comes to ours on the machine than in other geographies that have only 1 harvest more or less 2.5x the ours. They planned and they plan differently. So maybe it's rather 2x the aging speed. But that will point at a replacement plan across large ag equipment that becomes quite relevant as we enter into '27 and '28. So I think replacement will provide a floor. And while we go a little deep now and a little longer and in prior troughs, we would expect now that 2027 gives us some footing and with the new elected President in Brazil, whoever that will be certainty will in any case, add to more confidence when it comes to farming and purchase of machines. What that means the numbers we will need to see. But I think the floor will be reached over the course of this year as per our expectations. Operator: Our next question comes from the line of Daniela Costa with Goldman Sachs. Daniela Costa: I just wanted to follow up on Construction Equipment. You talked about the net pricing expectations for ag. And if you could elaborate sort of similar comments for construction equipment, do you think that can turn net positive at some point in the year? And then also on Construction Equipment, 2Q, given the volumes you guide for mid-teens, should we expected already to start breaking even in 2Q? . James A. Nickolas: Daniela, it's Jim. So for the full year, we are not forecasting positive net pricing on the construction business because of the tariffs. Price loss balance to be net negative. Positive pricing, but then the product costs because of tariffs will grow at a higher rate. So net the product price and product cost net negative for the year. There'll be positive EBIT for the year, for the full year is still profitable, but the price cost is a negative equation for us this year. As it relates to Q2, construction business, yes, we do believe it will be above breakeven in Q2. Again, they're going to -- they were penalized from the quality hole, the quality stock at the Wichita plant in Q1, and then that will be made up those sales will be realized in Q2. So a bit of a negative in Q1, bit of a positive in Q2, full year but of a wash. Operator: Our next question comes from the line of Ted Jackson with Northland. Edward Jackson: My question would be just kind of on sort of U.S. legislation and regulation. And I was just curious if you could give some kind of update and thoughts that you all have with regards to the farm bill, which is locked up inside of Congress and then also the efforts to push to EPA -- by the EPA to push for ethanol E15 full year. I mean if the farm bill gets locked up and those come out and we go through another year with it being funded down the road, does that change anything for you? And on the EPA side, on the EBIT team side, maybe just kind of some thoughts in terms of what you think it is in terms of the likelihood of that. Gerrit Marx: Ted, look, the farm bill is -- has been long awaited and is still locked up and it is going to be helpful regardless. It is not going to suddenly boost in itself, it is not going to boost major equipment demands because our farmers, they need to see an operating profit on their bottom line, excluding subsidies and other money that is handed to them. Only if it's structurally positive, which is driven by commodity prices and input costs, only if that turns positive for them, this is the key enabler for equipment purchases because that means that the business is returning back to a healthy and sustainable operation allowing them to upgrade their fleets and advance new tech. So farm bill is very, very helpful, and it's very needed. It is not going to be that one thing that is driving equipment demand from 1 day to another. When it comes to the regulation and legislations, I mean making E15 fuel, I mean, today, it was a temporary E10 -- and then -- sorry, temporary E15 now making it permanent. That has quite some positive impact on corn. I mean, we did some math here back of the envelope. And if everybody, which is not possible. But if everybody was shifting towards a consumption in the United States from E10 to E15, that amount of corn needed to produce that fuel. If I just focus on corn, there are obviously other ways to produce that ethanol content. But that amount of corn is more or less equivalent probably to about the same acreage that is planted today with soybeans, earmarked for China. So I mean, there is a kind of a wash, however, not to be neglected that the marginality of soybeans for farmer is a significant higher than the marginality of corn. So while E15 will drive for corn, and we will see also other sources benefiting from that, and it will help stock levels to deplete a bit. It is overall a less profitable commodity than soybeans. So I think there is is good momentum. It's helpful. It adds. It is not a big ticket item that will turn things around, but it helps to build confidence. When it comes to EPA and emission standards, I mean, staying very, very focused on sustainability and low emissions, which we have already across the board with our machines. I think what EPA is targeting at is make it simpler and make it less disruptive if things happen in the field or reality strikes that suddenly, I don't know, you're running out of the additives and then the engine DD rates. So these things shouldn't happen, so it makes things simpler for our farmers in the field. I think that is also very beneficial the operation makes it simpler. It does not take significant cost out of the machines though. If you imagine you were to roll back an emission standard for the United States, where we are running on, let's say, Tier 5, if you were to skip that or roll back. I mean the rest of the world will still move into higher level emission standards. And if I think if -- in North America, let's say, United States, if the emission standard would start to deviate from the rest of the world, I think that creates more complexity for us because we then need to build machines for a market with a specific, let's say, less sophisticated emission standard. And while the rest of the world is still on a higher level emission standard that might mean we can maybe reduce a few components from the machine because it's a less refined emission standard, but it does not lower the overall cost for us in producing because the rest of the world will not follow. So I think EPA's advancements are helpful to simplify and to make farmers life more focused on what they actually should do rather than be worried about their engines to be rail -- derate. But I think overall, as a cost reduction action, this has limitations when it comes to the machines themselves. Overall, all of it is helpful what it will take, needless to say and you all know that is better commodity prices and managed input costs so that a healthy operating margin emerges with the farmers, and they see the profitability or the overall farm health, which is not only the soil health, but also the economic health of the farm being sustainably advanced in the future, and it's very much driven by a few factors that are not yet clear, i.e., global trade commodity prices, and we'll see how the harvest will go this year. Operator: Our final question comes from the line of Judah Arnovitz with UBS. Unknown Analyst: Actually, 2 quick questions on price cost. In Ag, do you expect positive price cost each quarter for the rest of the year? And then just on the transportation costs, you mentioned if the conflict persists, what's your confidence in your ability to pass these costs on to customers in both ag and construction and then relative to the $70 million growth impact that you mentioned. What is that number year-to-date? James A. Nickolas: Yes. Okay. So price cost for ag per quarter, yes, that just remained positive. So it's good news. On the construction side, we talked about that's not going to happen for the year given the tariff burden. And then I think your second question was the ability to pass on higher costs, logistics, et cetera. I think there will be a bit of a lag effect. And -- but you think that's certainly the ag business certainly has shown its ability to get pricing over time. I think that will continue. So I'd say, a high degree of confidence getting that pricing back. It may not be in the same quarter. Again, there may be a bit of a lag, but a high degree of confidence in getting that back. On the construction business, less confident. It's a much more competitive fragmented market and not all players are impacted equally with these costs. So that's called medium level of confidence on the construction side. Year-to-date, I would say relatively small impact from elevated costs from the Iran conflict, et cetera, relatively small up till now. That's more in the windshield, not the review mirror. Again, we don't think it will be -- it will come to that. That number I gave you $70 million is only if it persists sort of through the end of the year, and we don't think this is going to last at the end of the year. Operator: That concludes today's conference call. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the National Fuel Gas Company Second Quarter Fiscal 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Natalie Fischer, Director of Investor Relations. Please go ahead. Natalie Fischer: Thank you, Karina, and good morning. We appreciate you joining us on today's conference call for a discussion of last evening's earnings release. With us on the call from National Fuel Gas Company are Dave Bauer, President and Chief Executive Officer; Tim Silverstein, Treasurer and Chief Financial Officer; and Justin Loweth, President of Seneca Resources and National Fuel Midstream. At the end of today's prepared remarks, we will open the discussion to questions. The second quarter fiscal 2026 earnings release and April investor presentation have been posted on our Investor Relations website. We may refer to these materials during today's call. We'd like to remind you that today's teleconference will contain forward-looking statements. While National Fuel's expectations, beliefs and projections are made in good faith and are believed to have a reasonable basis, actual results may differ materially. These statements speak only as of the date on which they are made, and you may refer to last evening's earnings release for a listing of certain specific risk factors. With that, I'll turn it over to Dave Bauer. David Bauer: Thank you, Natalie, and good morning, everyone. National Fuel had a solid second quarter with adjusted earnings per share of $2.71, an increase of 13% from last year. This continues our streak of double-digit EPS growth and keeps us on track to achieve our multiyear 10% plus average annual growth target. I'm also happy to report that during the quarter, we achieved additional milestones across the system that further bolster our long-term earnings outlook. Our second quarter was a prime example of the strong operational resiliency of our natural gas assets, particularly during severe weather events. In January and February, we experienced an extended cold snap across our operating footprint, where daily low temperatures in some of our regions were below freezing for 19 straight days. A big thank you to our dedicated workforce and contractors who worked through the elements to ensure that the gas continued to flow during this critical time. Overall, our systems held up extremely well with no notable issues at our Utility and Pipeline and Storage businesses. On the nonregulated side, our production and gathering facilities performed very well with limited freeze-offs. This allowed us to take advantage of some of the strong prices we saw on the coldest days. We did, however, experience some regional road closures over multiple days due to heavy snowfall. During this stretch of weather, we slowed the pace of completions and delayed the flowback of a new pad, which had a modest impact on our production for the quarter and will similarly impact full year production. On the drilling and completion side, we continue to focus on the optimization of our integrated development program. We've made substantial progress on the testing of both our Gen 4 well designs and our Upper Utica locations and are seeing continued success, which further enhances our long-term outlook. With decades of core inventory locations, a growing marketing portfolio and ongoing improvements in capital efficiency, our Integrated Upstream & Gathering business is positioned to deliver meaningful production and free cash flow growth for years to come. Justin will provide additional details later in the call. Our outlook for the regulated businesses is also strong. Starting with the Pipeline and Storage segment, we continue to develop new expansion opportunities on our Line N system, which is well positioned to support both behind-the-meter generation that's co-located with data centers and the broader need for electric generation within PJM. Last week, we executed a precedent agreement on a new expansion opportunity that we're calling the Line N system upgrade project. And this project has a dual benefit for us. First, it adds 94,000 dekatherms a day of incremental transportation capacity, all of which was subscribed under a long-term contract with an investment-grade counterparty. And second, the project allows us to modernize a key 6-mile portion of pipe, ensuring the continued reliability and integrity of that part of our system. The project has an estimated capital cost of $93 million, approximately 70% of which relates to the modernization component of the project, and it's expected to go in service in late calendar 2028. Also this quarter, construction commenced on our Shippingport Lateral and Tioga Pathway expansion projects, both of which are on track to meet their November 2026 target in-service dates. Lastly, today, Supply Corporation is filing a new rate case with FERC that seeks an approximately $95 million increase to our cost of service. In addition, our filing proposes a modernization tracker to support the ongoing investment in the safety and reliability of the system. We expect this proceeding to play out along the typical time line and hope to reach a settlement sometime this fall with new rates going into effect late in the calendar year. Collectively, between the rate case and two expansion projects, fiscal 2027 should be a period of significant growth in our Pipeline and Storage business. Moving to the Utility. Customer affordability remains top of mind, and we continue to work closely with our regulators to ensure we can continue to invest in the modernization of our system while keeping rates reasonable. Our delivery rates are the lowest in both states, and we're doing our best to keep it that way. In New York, we're in year 2 of our 3-year rate plan, which runs through the end of fiscal 2027. As we look beyond 2027, we have over a decade of remaining modernization investments at our current replacement pace. Over the coming months, we'll be proactively working on a solution to recover these important future investments. In Pennsylvania, our rate case is progressing as expected. Testimony from staff and other intervening parties was filed a few weeks ago. We'll file rebuttal testimony in May and then expect to commence settlement discussions over the summer. Given our modest rate increase request, we're optimistic we'll reach a settlement by the fall. I expect discussions will be constructive. As I said, our rates are the lowest in the state and would continue to be the lowest even if we receive the full $20 million increase we've requested. Turning to Ohio. The CenterPoint acquisition is on track for a calendar fourth quarter closing. In January, we made our HSR filing and the required waiting period has since passed, completing that regulatory process. In addition, we've given notice of the acquisition to the Public Utilities Commission of Ohio and expect an order from the commission in late spring or early summer. Tim will have more on the acquisition later in the call. Before closing, a quick word on energy policy in New York State, where we continue to see a growing recognition of the practical role natural gas must play in the state's energy future. While New York remains committed to its long-term climate objectives, recent proposals from Governor Hochul and the adoption of the state energy plan reflect a more balanced common sense approach. Policymakers are increasingly focused on maintaining reliability, protecting affordability for customers and ensuring the system can perform during peak demand periods, particularly during winter weather events. Those discussions underscore what we've long believed. The existing natural gas system remains essential to serving homes and businesses and supporting electric grid reliability and will continue to be a critical part of New York's energy mix for decades. In closing, National Fuel is well positioned to deliver steady growth in earnings and cash flow in the years ahead. We have a great set of Integrated Upstream and Gathering assets with multiple decades of high-quality development inventory. Our midstream infrastructure is strategically located to provide key support to the significant growth in natural gas-fired electric generation expected in the region. And we have a growing base of utility earnings that will be further enhanced with the completion of our pending Ohio LDC acquisition. Taken together, the National value proposition is as strong as it's ever been. With that, I'll turn the call over to Tim. Timothy Silverstein: Thanks, Dave, and good morning, everyone. National Fuel had record earnings per share in the second quarter, driven in large part by the strength of our natural gas marketing and hedging portfolio. We've intentionally positioned this portfolio to capture meaningful upside from higher winter prices, and we saw that come to fruition in late January and February. Combining this with the steady growth of our regulated businesses, National Fuel's adjusted earnings per share increased 13% for the quarter. We also generated approximately $160 million in free cash flow. This unique combination of EPS growth and significant free cash flow generation differentiates National Fuel from many of our peers. Diving a bit deeper into the results for the quarter. First, in the Integrated Upstream and Gathering segment, price realizations were up more than $0.50 per Mcf or nearly 20%. While we convert a lot of our marketing portfolio to NYMEX-linked prices, we maintain a bit more exposure in the winter months to markets that have the potential for premium prices as demand spikes. That exposure provided a great tailwind during the quarter. Pairing that with the skew towards collars in the winter months, we were able to capture a nice benefit during the extended cold snap. On the production side, results came in slightly below expectations. As Dave mentioned, the system held up well during the challenging weather. However, road closures impacted our operations, which reduced production for the quarter. Overall, this had a 5 Bcf impact in the quarter. Lastly, our per unit gathering O&M came in slightly above expectations. This was a result of a new preventative maintenance strategy we deployed on several compressors. In the normal course, we take compressors out of service to perform maintenance. However, in certain instances, it is more beneficial to swap in a new engine to minimize downtime and upgrade the technology. There is minimal cost to doing this, but the accounting rules require us to write down the remaining net book value of the unit being replaced. As a result, we recorded a larger-than-normal expense during the quarter. We now expect gathering O&M to be $0.01 higher at $0.12 per Mcf for the full year. But going the other direction, upstream LOE is expected to be $0.01 lower. On a combined basis, we don't see any impact on our cost structure. On the regulated side of the business, results were ahead of expectations as we continue to see strong execution across the board. Turning to guidance. The biggest change for the remainder of the year relates to our NYMEX price assumption, which we are now projecting to be $3 per MMBtu, down from $3.75. With the lower pricing, we are also seeing modestly tighter basis differentials over that same period, which we now project to be $0.80 below NYMEX. We are approximately 75% hedged for the rest of the year, with the bulk of that in the form of swaps and fixed price sales. This provides price certainty, which lessens the impact of the lower expected pricing on our earnings guidance, which we now project to be in the range of $7.45 to $7.75 per share. At the midpoint, this represents a 10% increase over last year. Embedded in our assumptions are a few other changes, including production guidance, which we now expect to be 425 to 440 Bcfe for the full year. This is down 3% from our prior guidance range, but at the midpoint is still expected to be up relative to last year. Longer term, our outlook for production growth remains intact. As a reminder, our guidance does not assume any price-related curtailments. Thus far since winter, we haven't curtailed any volumes. But to the extent we see material in-basin pricing declines, we may decide to do so. At the midpoint of guidance, our spot exposure is limited to approximately 30 Bcf, which minimizes the potential impact on earnings and cash flows for the year. Lastly, on our fiscal 2026 outlook, we've increased our guidance for Pipeline and Storage segment revenues. During the quarter, as colder weather settled in, we were able to take advantage of the increased demand. We also saw higher revenues tied to a tracker on electric costs, but those are fully offset in O&M. There were a couple of additional tweaks to a few guidance assumptions, all of which are highlighted in our earnings release and IR presentation. Switching to capital. Our guidance remains the same. However, we are trending towards the higher end of those ranges. In the regulated subsidiaries, we have had great success with our modernization programs and are ahead of schedule on our plans for the year. With our pending rate proceedings, we expect to obtain timely recovery for this spending. Our two pipeline expansion projects are on track as well, both from a timing and budget perspective. The bulk of construction season is still ahead of us, so things may move around a bit as we work through the rest of the fiscal year. Justin will have more on nonregulated spending in a minute. Overall, our balance sheet is in great shape. We still anticipate generating a significant amount of free cash flow, more than enough to cover our growing dividend and reduce absolute leverage before closing our Ohio LDC acquisition. We expect to end the year below 2x debt-to-EBITDA and approach 50% FFO to debt. This leaves us in a comfortable position to achieve our target of mid-2x debt-to-EBITDA after the first full year post closing. Sticking with the acquisition, things are moving along well. With the HSR process behind us, our focus is on the notice filing in Ohio. We've had several discussions with commission staff over the past few months, and we expect to complete this process well in advance of closing. Our teams are also working diligently to prepare for an efficient transition of the business, and we are confident that it will be a smooth process for customers. We are also taking the necessary steps to position ourselves to complete the remaining permanent financing prior to closing. We are working to finalize the necessary pro forma financial statements, which we anticipate wrapping up shortly. Once those are ready, we will start to evaluate the market to find the right window to raise the remaining $1 billion we need at closing. We also plan to refinance our $300 million October maturity and term out a portion of the term loan that we temporarily repaid with the proceeds from our equity issuance completed last December. All told, we expect to raise up to $1.5 billion across multiple tranches. We also recently upsized our committed credit facility, which now provides $1.3 billion of borrowing capacity to support our growing operations. This was well supported by our bank group and provides us with additional financial flexibility in the future. In conclusion, we expect 2026 to be a key inflection point for National Fuel. We are leveraging our interstate pipeline assets and commercial relationships to significantly expand the FERC-regulated businesses. We have two critical expansion projects under construction and another expansion announced yesterday. Our Ohio LDC acquisition will provide a further avenue for stable, regulated growth. Lastly, our strong balance sheet and significant free cash flow generated by our nonregulated businesses provides the foundation upon which we can deliver further growth. Combining this with our commitment to consistently return an increasing amount of cash to shareholders, National Fuel is positioned to create value for years to come. With that, I'll turn the call over to Justin. Justin Loweth: Thanks, Tim, and good morning, everyone. Our Integrated Upstream and Gathering segment had a solid second quarter, delivering record EBITDA of more than $300 million, driven by net production of 102 Bcf and higher natural gas prices during Winter Storm Fern. Through the severe weather conditions, our team and Integrated Upstream and Gathering facilities performed exceptionally well with minimal downtime due to freeze-offs. That said, the heavy snowfall and extreme cold in January and February closed roads, which slowed completions and delayed flowback on a new pad. These weather-driven factors modestly impacted production during the quarter and are expected to have a similar effect on fiscal year production as volumes shift into future periods. In addition, last fall, we turned in line a 6-well pad in Northwest Tioga and a separate fault block, which included an Upper Utica well and a Lower Utica Gen 4 test, along with 4 older design wells. The 4 wells with older style designs are underperforming our projections. This pad was strategically drilled about 18 months ago in part to hold an almost 20,000-acre parcel of land, but prior to our 3D seismic shoot and incorporation of that data into our broader subsurface model. Today, we have the benefit of an integrated subsurface model and significant other attributes across the vast majority of our core development area, which we expect will lead to superior outcomes going forward. Going the other way, the Gen 4 and Upper Utica wells on the pad are demonstrating strong productivity in line with our expectations. While the older design wells will modestly impact our production estimate for the balance of fiscal '26, the Gen 4 and Upper Utica results, along with our deep understanding of the subsurface, reinforce our confidence in this area and optimal future well design. Overall, we are reducing fiscal '26 production guidance by 3% at the midpoint to a range of 425 to 440 Bcf to account for the expected impact of these items. Despite this modest adjustment, we remain confident in durable mid-single-digit production growth over the next several years. Across our operations, we remain focused on continuous improvement and are advancing our testing program to further optimize well design and understand productivity drivers across our core area. During the quarter, our two best-performing Tioga Utica pads to date, Bauer and Taft, reached cumulative production of 130 Bcf. The 12 wells across these pads, 10 of which incorporated Gen 3 and Gen 4 designs and two of which are Upper Utica wells were turned in line in late 2024 and produced at rate-constrained levels of 25 million to 30 million per day for an extended period. We estimate they will deliver about 900 million per 1,000 foot in 18 months, among the best results in the basin. Turning to development activity during Q2. We turned in line our first Tioga co-development pad with 3 Upper and 3 Lower Utica wells, and we have another pad planned to come online toward the end of the fiscal year. On this pad, we also utilized production facilities that allowed us to flow a single Tioga Utica well rate constrained at 40 million per day, well above the 25 million to 30 million per day we held on Bauer and Taft. It's early, but this is an encouraging data point. And the team is doing a great job expanding what we believe is possible on well deliverability. Finally, at the very end of the quarter, we began flowing back our first fully bounded Lower Utica Gen 4 pad with a total of 5 wells. Expanding the capacity of our surface equipment, understanding co-development influences and building confidence in optimal well design are key components of our continuous improvement focus. Pulling it all together, these data points inform our long-term development planning, and we'll remain deliberate in testing variables and applying what we learned to further optimize the program over time. Turning to capital. We're maintaining our prior guidance of $560 million to $610 million. Our drilling team is driving efficiencies that may result in more wells being drilled this year. While this is very positive and reduces our cost per foot, it has the potential to bring forward capital. On the land side, we've been extremely active, making a number of strategic moves to further bolster our acreage position given our confidence in the Utica resource. We are also seeing emerging cost headwinds tied to the conflict in Iran, particularly higher oil and diesel prices flowing through drilling, completions and logistics, especially long-haul intensive activities. Altogether, these items have us trending towards the high end of the range. In our gathering operations, construction activities are well underway with seasonal pipeline and infrastructure construction expected to continue into the summer months. Near-term activity continues to support Seneca's production growth while advancing opportunities for incremental third-party volumes in Tioga County. We have multiple projects underway to expand pipeline and compression capacity in our core area. And throughput continues to track Seneca's production closely with third-party volumes steady and in line with our full year projections. Turning to the broader natural gas outlook. We are bullish on the long-term setup and see fundamentals supportive of higher prices over time. LNG exports are near record levels of around 20 Bcf per day with additional capacity coming online. And recent global events continue to highlight the value of reliable, low-cost U.S. natural gas. Domestically, demand is building in the Northeast and the Mid-Atlantic regions, driven by gas-fired power generation, data centers and AI-related load growth. At the same time, producer discipline is keeping supply growth in check, particularly in Appalachia, where pure curtailments are effectively limiting near-term volumes in excess of demand. Overall, we expect a more balanced market and improving long-term price realizations for high-quality Appalachian supply, especially for operators with strong market access and flexibility like Seneca. Against this backdrop, we're executing our multiyear marketing strategy to reach premium markets and added flexibility, both in-basin and out of basin. Over the next few years, we expect total firm transport capacity to grow approximately 50% to more than 1.5 Bcf per day. Just this month, we gained access to our new 50 million per day of firm transportation that reaches the Gulf Coast. During the second quarter, we added another 50 million per day of long-term firm capacity along the same route that will go in service over the next few years, doubling our Gulf Coast exposure over time on similarly attractive terms. Our inventory depth in Northeast Pennsylvania, which is arguably deeper than any peer in the region, positions us well to be a disciplined acquirer of transportation capacity as it becomes available. With increasing access to the Gulf, the soon-to-go in service Tioga Pathway project and the EGT Project Stratum, which reaches premium markets in Western Pennsylvania and Leidy Hub, we're taking strategic steps to support long-term growth through valuable pipeline capacity contracts. We see additional opportunities ahead and remain confident in our ability to deliver growth at premium price realizations over time. In closing, the underlying strength of our asset base is clear. Our testing program continues to validate acreage depth and quality and will help optimize development for years to come. We've remained disciplined on capital despite emerging headwinds and our recent marketing and midstream investments support future growth and greater access to premium markets. Overall, we remain well positioned to deliver durable production growth, increasing free cash flow and long-term value for our stakeholders. With that, I'll turn it back to the operator to open the line for questions. Natalie Fischer: We now turn the line open for questions. Operator: [Operator Instructions] Your first question comes from the line of Zach Parham with JPMorgan. Zachary Parham: First wanted to ask on curtailments. Tim, I think you mentioned in your prepared remarks that NFG didn't have any curtailments in the current guide. Another Appalachian producer talked about some curtailments in 2Q. I know you've got the large majority of your volume hedged, but can you talk about how you're thinking about curtailments? Is there a price level in the in-basin where you think about shutting in some volumes and maybe what -- where about is that price level? Timothy Silverstein: Zach. Like I said, we have approximately about 30 Bcf exposed into the spot market. And as we've said in years past, especially when we've seen lower prices, we don't specifically talk about the price level at which we curtail. I think what we've said historically is that prices north of $2, we're still flowing gas. Prices well below $1, we're definitely curtailing somewhere in there is where we typically make the decision. So we don't give that specific price. But again, we're very limited exposure and each day that passes, we're continuing to flow gas right now. Zachary Parham: Then my follow-up is maybe for Justin. You talked about flowing one of the new wells at 40 million a day versus the 25 million to 30 million that I think you flowed in some of the older wells. Can you talk about, one, your expectations on how long these wells can hold that plateau period at the higher rate? And two, how having the equipment in place to flow at a higher rate impacts both cost and potential returns from pulling forward some volumes? Justin Loweth: Yes. Sure, Zach. So a couple of things. I mean, one, in terms of the ultimate sustained period, we're going to have to do more work and look at it, but it should be relatively linear with wells that we produce at 30 million. We would expect to get some sort of cume in total drawdown over a period of time. Of course, if you're flowing at 40 million versus 25 million or 30 million, that period of time will be a little bit shorter. But it also brings forward value. And so one of the things we're really looking for and trying to optimize on, and I think this goes back to your cost question, is that we believe that we're close on a design where we'll be able to flow at those higher rates and do it at the exact same production facility cost that we have today, potentially even less as we continue to optimize and improve those designs. And what we're really balancing is that particularly if we have a pad with less overall wells, let's say, it's 4 or 5 wells on that pad, and they're very long laterals, which we've been moving towards recently, we're actually -- recently here just finished casing some wells that will be approaching 20,000-foot TLL. With wells like that, the opportunity to flow at a higher rate restricted rate, even if it's for ultimately a little shorter period can pull a lot of value forward. And so we're trying to understand kind of what that relative balance is and what the overall deliverability makes sense. But look, we're encouraged by it. We know from the wells we've drilled that there's plenty of pressure and plenty of opportunity to do more. It's just going to be this balancing act. And the other thing that we, of course, factor into all of this is our gathering infrastructure and what makes the most sense from an integrated investment and capital allocation decision. So those are the kind of guiding principles that we're looking at in it. But this was a great opportunity to just have a well where we could pretty easily and inexpensively really validate this test for ourselves, and it was successful. Operator: Your next question comes from the line of Tim Rezvan with KeyBanc Capital Markets. Timothy Rezvan: I wanted to follow up on upstream. The release highlighted the 6-well pad and in comments, it sounds like 4 wells underperformed expectations with an older completion design. I was curious if you could provide more insight on what happened. Was it simply under stimulation? Was there a downhole issue? And kind of where I'm going with this is, when do you think the team might be comfortable just using the Gen 4 design as your standard recipe going forward? Justin Loweth: Tim, thanks for your question. These wells, you said it right, it was a 6-well pad. It's kind of on the western side of our core development area. Several factors here that play into it. The first one is we have a lot of 3D seismic coverage across our acreage. This area, though, was one we had acquired in 2023, and we're in the process of capturing that 3D seismic and then ultimately processing that and integrate it into our broader subsurface model. So at the time when we were drilling these wells, we didn't have the benefit of that knowledge. Today, we have all of that, and we have tremendous understanding and visibility into this area. And so when they were drilled, which was also tied to holding a very important lease that captured about 20,000 acres of land, when they were drilled, we had a -- we were earlier in our days. We were still drilling both well design in terms of interwell spacing as well as proppant loading. We were still testing and doing our Gen 2 designs and then working towards our Gen 3 and Gen 4 designs. If I could go back in time, these would all be Gen 3, Gen 4 because the Upper Utica well in the pad and the Gen 4 design in the pad are very strong performers, right in line with our expectations. These 4 wells, though, that were older Gen 2 designs, just have underperformed. And so we've got a lot better understanding in this area. Like I said, I mean, we've got now -- we've got a lot of wells across our broader portfolio, a lot more information, a lot better understanding, and that's informing the decisions we're making today. So as part of that, the idea of going all the way to a Gen 4 design we're trending in that direction. But what I'll tell you is we are going to continue to challenge ourselves between Gen 4 and Gen 3 or any other future generation design to really optimize for the best overall return between our upstream and gathering business. And a Gen 4 design is a little bit more expensive than a Gen 3 design, and we want to see additional results from these Gen 4s that we're drilling, including I mentioned at the very end of this Q2, we brought online our first 5-well fully bounded Gen 4 design pad. We want that kind of data to really help inform us on if we're moving all the way towards the Gen 4 design or something in between that could be even better. But ultimately, we're going to be led by the economics between our Integrated Upstream and Gathering, getting the most gas for the least amount of overall capital. Timothy Rezvan: That's a great detailed answer. And as my follow-up, I was curious to learn kind of if you all could give more color on the long-term expansion opportunities for Supply Corp. You highlighted a third project with the Line N upgrade. How many projects are out there? And how do you decide which to pursue? And then on top of that, you mentioned in the slide deck, there's potentially more to do with Line N's potential incremental expansions. And can you talk more about the likelihood that you think you can capture that? David Bauer: Sure. Yes, we've had a great run of doing expansions on Line N over the years. And given its location, I think that we're going to have lots more opportunities in the future. Our current focus right now, if you will, in the Line N area is on power gen, both with behind-the-meter type projects like with our Shippingport project as well as other, call it, just power gen that would go into PJM. And there's a lot of opportunities there. The dialogues that we've had with developers has been productive. As you may know, the Shippingport project, which is initially starting at 200 million a day, could grow to as much as 800 million a day if the project developer was successful in fully building it out. So that certainly would be a big opportunity. And then other opportunities along the line are sizable as well, right? Our plants use a lot of gas. And Line N isn't the only spot that we're looking at. Our Empire line that goes from Tioga County north into New York and then ultimately connecting to Canada is another area that we could expand. I think the region is just generally short electric generation. Certainly, in PJM, we see the results of their auctions. But in New York, where there's been such underinvestment in energy infrastructure, at some point, I really believe that we're going to need more generation within the state. And as much as policymakers would like that to be wind and solar, those just don't work for baseload power. And I think we're looking at needing more baseload power and natural gas is the logical choice for that. And our pipelines, particularly the Empire is really well suited for serving that new generation. Operator: Your next question comes from the line of John Freeman with Raymond James. John Freeman: First question, Justin, you touched on some of the maybe headwinds that you're seeing on the CapEx side on the diesel prices and things like that. Could you give just any more kind of color just on a leading-edge basis outside of like diesel prices, if you're seeing anything that's either supply chain type factors as a result of what's going on and then just any potential pressure on the service cost side? Justin Loweth: Yes. Sure, John. Thanks for the question. The short answer is you're hitting at kind of the main element, which is more diesel, which obviously haul-intensive activities are going to be impacted by that and various surcharges that are baked into a lot of contracts that us as well as many other operators across the country have with their various vendors. In terms of real supply chain issues, we've actually been talking to all of our counterparties, digging into this, trying to ensure that there's no war-impacted challenges. At this point, we don't believe there are. One, we've looked kind of potentially across like, for example, charges to the extent you have more explosives that potentially could get hung up and tied into Defense Production Act or otherwise needs. And we're just not seeing it. So we think we're pretty well insulated from, I'll call it, the same shocks that a lot of people went through back coming out of COVID, where you had an inability of the supply chain to deliver what you need. It's much more about some pricing headwinds. And the reality is we don't -- it's so early in this conflict and don't have a lot of visibility when it's going to end and how that works. So we're evaluating it and working on it. And we're not seeing anything specific as it relates to drilling or completions. I would just note that those generally are longer-term contracts for us. We have a long-term frac provider. And similarly, we generally contract our rigs for 12 to 18 months at a time when we're bringing them in. John Freeman: And then, Dave, I wanted to follow up on some comments you made previously. It seems like over the last couple of quarters, increasingly, we're hearing more and more of a focus on kind of the behind-the-meter kind of projects like what you have done with Shippingport. And I'm just curious, when you look out like at the opportunity set over the next several years and we sort of think about the opportunities behind the meter versus kind of the traditional grid-based solutions, kind of how you see that mix playing out? David Bauer: I think the focus is switching more towards broader generation within PJM. I mean there still certainly is interest in behind-the-meter generation. I think that tends to go over better with the policymakers. But from a practical standpoint, having -- like I said just a minute ago, having more generation just generally in the region is going to require the build-out of new gas-fired generation, and we're going to be there to support it. Operator: [Operator Instructions] Your next question comes from the line of Neil Mehta with Goldman Sachs. Neil Mehta: Can you hear me okay? David Bauer: Yes. Neil Mehta: Sorry about that. So just your perspective on the gas macro would be terrific. I mean we've obviously seen a softening relative to where we were when we connected a couple of months ago and part of that could be the shoulder. Part of it seems like it's just production beats. I mean just your perspective on -- as you think about the balance of this year, we set up for exits in October. How do you think about the setup here? And how is that shaping the way you're approaching activity and hedging? Justin Loweth: Thanks, Neil. I mean, just big picture, nothing has really changed fundamentally about our views. Tim spoke to some of this in his remarks. We've really built the portfolio to go through periods of both high and low prices. And as you're alluding to, that's exactly what we've seen. To go from a February settle of almost 750 and then the settle we just saw here from May of 256 is pretty tremendous volatility. We hedge. We've always hedged. We're methodical about that and thoughtful about it. We use collars to capture the upside. And then we have a marketing portfolio that's designed to capture premium markets at the end, but also minimize in-basin exposure. And so Look, I think across the country, we're going to have more gas coming out of the Permian, particularly as these new pipeline projects go in service. Haynesville, a bit of a wildcard, exactly how that moves and exits through the year. But coming back closer to home for us and what really matters are the flows coming out of Appalachia and the relative demand. And I think our view is that, generally speaking, there's just a lot more discipline these days than there has been if you go back several years ago. And by discipline, what I'm referring to is just producers in Appalachia understanding that we have a specific amount of storage. We have a specific amount of demand that will fluctuate based upon winter and summer temperatures, of course. But generally, the market stays more balanced and maintains, I'll call it, reasonable differentials to NYMEX Henry Hub. And then look, longer term, Henry Hub, I'll just hit at that briefly. We're still very much in the camp that we're -- we've entered a market where, generally speaking, we're going to see Henry Hub prices between $3 and $5. And we would expect that there will be short periods of time that could be above or below that level. And that's really our fundamental view. What's great is that with those kind of prices, with the longer-term $3 to $5, we do fantastic. We generate a lot of free cash flow, a lot of earnings. And as we continue to make forward progress on our capital efficiency trends, that's just going to translate to more and more cash flow. So yes, I mean, very constructive with air pockets along the way, both highs and lows along the way. Neil Mehta: Yes, certainly volatile. I appreciate that. And then just your thoughts around maximizing Gulf Coast exposure and any firm takeaway opportunities down to premium end markets would be good. I mean we saw that you layered in a little bit more here. But how big could that opportunity set be for you guys as you look out over the next couple of years? Justin Loweth: So I mean, we've been at it now for a few years, really trying to further bolster our takeaway capacity in the form of new firm transportation. When we saw the depth and quality of this Utica resource that we have, it was clear to us we needed to protect the pathway to grow and do that through finding our way into premium markets. I spoke about some of those today. We've got the Tioga Pathway service -- coming in service later this year. We've got the EGT Project Stratum coming in, in a few years. And then what we've been able to selectively grab are these Gulf Coast new capacity contracts that you're alluding to. Getting that first 50 million, getting that first olive out of the jar took a long time. We've been working on that for 18 months. And then we were successful here this last quarter at executing a contract to pick up another 50 million. And so over time, we'll have about 100 million going there. And then a lot of our overall FT portfolio, when you think about the $1.5 billion, it gets pretty balanced. We've got a nice chunk that's going to Gulf Coast or to, I'll call it, the Mid-Atlantic markets down as far as Z4, which would be in Alabama, but also Z5 South. We've got some great capacity that gets us into kind of the New York, non-New York markets. And then we've got some access to some premium PA markets where we see continued, in particular, power gen. There's going to be a lot -- there are a lot of plants under development right now and PJM is short power, and we strongly believe that where we're moving this gas is going to be moving right to it. And then through the northern markets, whether that's Canada or Northern New York. So we really like the portfolio setup. We're going to keep chipping away. I'm confident we'll find more ways to continue to expand it. If that's Gulf Coast, awesome. If it's something else, that's great, too. And we're -- but I'm confident we'll keep chipping away. But we've made huge strides. I mean, growing our portfolio by 50% over the last few years in terms of how much capacity we'll have as we get out to 2029. Operator: There are no further questions at this time. I will now turn the call back to Natalie for closing remarks. Natalie Fischer: Thank you, Karina. We'd like to thank everyone for taking the time to be with us today. A replay of the call will be available on the website later today. Please feel free to reach out if you have any follow-up questions. Otherwise, we look forward to speaking with you again next quarter. Thank you, and have a nice day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome to the First Quarter 2026 Caterpillar Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alex Kapper. Thank you. Please go ahead. Alex Kapper: Thank you, Adria. Good morning, everyone, and welcome to Caterpillar's First Quarter of 2026 Earnings Call. I'm Alex Kapper, Vice President of Investor Relations. Joining me today are Joe Creed, Chairman and CEO; Andrew Bonfield, Chief Financial Officer; Kyle Epley, Senior Vice President of the Global Finance Services Division and incoming CFO; and Rob Rengel, Senior Director of IR. In our call, we'll be discussing the first quarter earnings release we issued earlier today. You can find our slides, the news release and the webcast recap at investors.caterpillar.com/eventsandpresentation. The content of this call is protected by U.S. and international copyright law. Any rebroadcast, retransmission, reproduction or distribution of all or part of this content without Caterpillar's prior written permission is prohibited. Moving to Slide 2. During our call today, we'll make forward-looking statements, which are subject to risks and uncertainties. We also make certain statements that could cause our actual results to be different than the information we're sharing with you on this call. Please refer to our recent SEC filings and the forward-looking statements reminder in the news release for details on factors that individually or in aggregate could cause our actual results to vary materially from our forecast. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. On today's call, we also refer to non-GAAP numbers. For a reconciliation of any non-GAAP numbers to the appropriate U.S. GAAP numbers, please see the appendix of the earnings call slides. For today's agenda, Joe will begin by sharing perspectives about our results and sliding initiatives across our segments. Then he'll discuss our full year outlook and insights about our end markets followed by a stat update. Andrew will provide a detailed overview of results and Kyle will share key assumptions looking forward. We'll conclude by taking your questions. Now let's advance to Slide 3 and turn the call over to Joe. Joseph Creed: All right. Well, thanks, Alex, and good morning, everybody. Thanks for joining us. Our team delivered a strong start to the year driven by resilient end markets and disciplined execution in operating environment. Sales and revenues were $17.4 billion, up 22%, and we delivered adjusted profit share of $5.54, an increase of 30% versus last year. Backlog grew to a record level of $63 billion, an increase of $28 billion or 79% compared to the first quarter last year. All 3 primary segments contributed to both the year-over-year and sequential backlog growth. Also, total first quarter orders, an all-time record, providing a solid foundation positive momentum. Our strong balance sheet and MP&E free cash flow allowed us to deploy $5.7 billion to shareholders through share repurchases and dividends in the quarter. Solid sales and revenues growth combined with robust order activity demonstrate the strength of our business and our focus on solving our customers' toughest challenges. Now I'll discuss first quarter results in more detail. Sales and revenues were $17.4 billion, an increase of 22% versus the previous year and in line with our expectations. Adjusted operating profit margin was 18%. First quarter adjusted operating profit margin and adjusted profit per share of $5.54 were better than we anticipated, mainly due to favorable manufacturing costs, including lower-than-anticipated tariff costs. Costs related to tariffs introduced since the beginning of 2025 were approximately $600 million in the quarter. This was favorable to the estimate we provided in January, primarily due to an adjustment to the computation of those in 2025. Andrew will provide a little more detail in a moment. Now I'll review first quarter retail statistics. Sales to users grew in all 3 of our primary segments. In Power and Energy, sales to users grew a robust 32% with growth across all applications. Power generation grew 48%, driven by strong demand for large gensets and turbines used in data center applications with an increasing mix towards prime power. Sales to users in oil and gas increased 16% and were driven by reciprocating engines, turbines and turbine-related services sold in the gas compression applications. Industrial growth was driven by engines sold into multiple applications. Construction Industries total sales to users grew for the fifth consecutive quarter, up 7%, increases in North America were slightly better than we anticipated, mostly due to nonresidential construction. Rental fleet loading increased and our dealers' rental revenue continued to grow in the quarter. Sales users declined slightly in EAME and were below our expectations due to timing in key projects. Middle East was slightly lower, but was partially offset by a better-than-expected activity in Africa. Asia/Pacific was about flat and below our expectations due to timing of customer deliveries, while growth in Latin America was slightly better than anticipated. For Resource Industries, first quarter sales to users increased 6%, which is below our expectations, primarily due to timing of customer deliveries. Mining sales to users were higher year-over-year with growth across most product lines. Heavy construction and quarry and aggregates were about flat. Rail remained at relatively low levels. Turning to Slide 4. I'll cover a few highlights since our last earnings call from each of the segments, starting with Power and Energy. Yesterday, we announced another exciting opportunity to provide Pro Power up to 2.1 gigawatts of large gas generator sets for prime power generation in support of data center, oil and gas and industrial applications. The orders will enter the backlog on a rolling basis. We expect to deliver generator sets over the next 5 years and anticipate long-term services growth opportunities in the future. This represents the sixth agreement with at least 1 gigawatt of Caterpillar equipment for prime power applications. Moving on to Construction Industries. Last month at CONEXPO, we launched CAT compact, a streamlined customer experience designed for small contractors and growing businesses that value simplicity and speed. It brings everything together in one destination, enabling customers to buy, rent and service compact equipment with ease. We believe this will expand our relevance in the compact equipment industry and make it easier for our customers to do business with us and our dealers fitting to our 2030 target for CI of 1.25x sales to users growth. And finally, Resource Industries completed the acquisition of RPMGlobal in February, bringing a leader in mining software technology into our portfolio. As we highlighted at our Investor Day, RPMGlobal's capabilities complement our existing technology, strengthening our ability to deliver integrated solutions that help customers improve safety and productivity across their operations. We see this as a long-term investment in technology-enabled growth that will help solve our mining customers' toughest challenges. Now on Slide 5, I'll provide an update on our outlook. While there is increased uncertainty due to geopolitical events and elevated energy prices, our end markets have been resilient. We are closely monitoring the environment, and we are not forecasting material impact to our 2026 outlook at this time. We now anticipate low double-digit growth for full year 2026 sales and revenues. The increased outlook is driven by resilient end markets and solid execution by our team. Notably, we're tracking ahead of our lending capacity expansion plans for the year. Order rates are very strong across a wide range of products, driving backlog growth in all 3 primary segments. We also expect growth in services revenues for the full year. As a result, we anticipate stronger growth across all 3 primary segments compared to the outlook we gave during our last earnings call. With the improved sales and revenues outlook, full year adjusted operating profit margin will be higher than we expected in January. As a reminder, our operating profit margin target range is progressive with sales and revenues. Adjusted operating profit margin is estimated to remain near the bottom of the target range corresponding to the now higher top line expectations. Our full year margin expectation reflects the strategic investments we're making to execute our growth strategy as well as the ongoing impact of tariffs. The situation around tariffs remain fluid, while we continue to execute our mitigation plans. Kyle will discuss our revised estimate for tariffs in more detail. I remain confident that we'll manage the impact of tariffs over time as we aim to operate around the midpoint of our adjusted operating profit margin target range. We're also increasing our MP&E free cash flow expectations to be higher than 2025, reflecting our improved outlook and strong top line growth. To further support our outlook, I'll discuss our key end markets starting in Energy. The 2026 outlook remains positive. Robust backlog was driven by continued momentum in both power generation and oil and gas. We anticipate growth in power generation for both reciprocating engines and turbines, driven by increasing energy demand to support data center build-out related to cloud computing and generative AI. We continue to see demand for prime power trend higher as data center customers look for alternative power solutions to keep pace with their growth. Oil and gas expect moderate growth for the year. Reciprocating engine sales are expected to increase, driven by strong demand in gas compression applications. Solar turbines oil and gas backlog remains healthy with continued solid order and inquiry activity. As a result, we anticipate another year of strong turbine sales. Services revenues in oil and gas are also expected to increase in the year. Demand for products in industrial applications is projected to grow modestly in 2026. For Construction Industries, we continue to expect full year sales to users growth, supported by strong order rates. Overall, the outlook for North America remains positive as sales to users are anticipated to grow versus last year. Construction spending remains at healthy levels supported by the IIJA with the remaining funds to be spent over the next few years. Also, investment in critical infrastructure programs and data centers is contributing to overall construction spending levels. Dealer rental fleet loading and rental revenue are both projected to increase compared to 2025. In EAME, Europe is expected to remain stable, supported by nonresidential construction and construction activity in Africa is projected to remain strong. While softening in the Middle East is anticipated, as of now, we expect the impact on EAME sales to users to be limited. In Asia/Pacific, outside of China, softer conditions are expected. In China, we anticipate moderate conditions with full year growth in the above 10 ton excavator industry off of low levels of activity. Growth in Latin America is expected to continue. We're seeing continued positive momentum in Resource Industries with strong backlog growth. Robust order rates across most products drove the highest quarter for order intake since 2012. For 2026, sales to users are expected to increase, primarily driven by rising demand for copper and gold and positive dynamics in heavy construction and quarry and aggregates. Most key commodities remain of investment threshold. Customer product utilization is high and the age of the fleet remains elevated. While some commodity prices have increased recently, customers remain focused on the long term. We continue to expect rebuild activity to increase slightly compared to last year. Rail services and locomotive deliveries are both anticipated to grow for the year. Now let's turn to Slide 6 for an update on our strategy. Over the past year and even since our Investor Day last November, our largest customers in the broader data center industry have significantly increased their expectations for capital spending. That has translated to accelerated order rates for us. In fact, since we first announced our initial capacity expansion plans in January of 2024, our large reciprocating engine backlog has grown by more than 3.5x. Customers are committing to longer-term orders with some orders well into 2028. In addition to order growth for backup power, we're also seeing higher demand for prime power applications, which will lead to long-term service opportunities and higher demand for aftermarket components. As we've discussed, our large reciprocating engine capacity also serves a wide range of applications in addition to power generation, including oil and gas and mining, which are all expected to benefit from long-term secular growth trends. As a result of these trends, I'm excited to announce that we are increasing our large reciprocating engine capacity from 2x 2024 levels to nearly 3x 2024 levels. Over the last 2 years, we've maintained a disciplined strategy of scaling capacity in direct alignment with our growing backlog and long-term order visibility. By working closely with our customers to forecast their future requests, we ensure that our capacity expansions are additive to our OPACC growth. Today's announcement reflects the continuation of this disciplined and measured approach. The additional investment will begin as soon as possible but primarily occur from 2027 through 2029. As a result, MP&E capital expenditures are expected to average between 4% and 5% MP&E sales through 2030. Based on our record backlog and customer forecast, we estimate a positive cash payback on the entire reciprocating engine investment, including what was previously announced by the end of this decade. As a result of the additional capacity, we're increasing our 2030 growth targets. We now expect the compound annual growth rate for total enterprise sales and revenues to be between 6% and 9% between within '24 to 2030. The target for power generation sales has increased to more than 3x sales by 2030 from a 2024 baseline. We continue to see attractive growth opportunities across all our segments due to our role in providing the invisible layer of the tech stack, the critical minerals, the reliable power and physical infrastructure that the modern world depends on. We believe we are well positioned to deliver long-term profitable growth. And finally, earlier this month, we announced that Kyle Epley will succeed Andrew Bonfield as CFO effective tomorrow. It's been a very privilege to work with Andrew. His leadership has been instrumental to Caterpillar's success, and he's brought exceptional financial expertise and relentless focus on disciplined decision making and a deep commitment to our customers and shareholders. He's made our global finance organization a strategic advantage and has impacted long after his retirement. I've worked closely with Kyle for over 20 years and have great confidence in his ability to build on Andrew's legacy. He's an outstanding leader with deep institutional knowledge and a proven track record of partnering with the business to deliver results. Kyle is also deeply involved in developing our refreshed strategy and will help drive achievement of our 2030 growth ambitions. With that, I'll turn it over to Andrew and Kyle. Andrew R. Bonfield: Thank you, Joe, and good morning, everyone. I'll begin with a... Operator: Pardon the interruption. We have lost audio to our speakers. Please stand by. [Technical Difficulty] Andrew R. Bonfield: Sorry, I'll start again. Thank you, Joe, and good morning, everyone. I'll be doing the summary of the first quarter and then provide more detailed comments, including performance of the segments. I'll then discuss the balance sheet and free cash flow. Kyle will conclude with remarks on our expectations for the second quarter and our current full year assumptions. Beginning on Slide 7. Sales and revenues was $17.4 billion, up 22% to prior year, which was in line with our expectations. Adjusted operating profit was $3.1 billion, and our adjusted operating profit margin was 18.0%, both were stronger than we had anticipated. Moving to Slide 8. The 22% increase in sales and revenues compared to the first quarter of 2025 was primarily driven by strong growth in sales volume and favorable price realization. The stronger volume was mainly driven by the impact from changes in dealer inventories and higher sales of equipment to end users. As we expected, dealers recorded a seasonable inventory build in Construction Industries compared to the slight decrease in the first quarter of 2025. The bill was slightly higher than we originally anticipated, supported by the expectation of stronger sales to users for the rest of the year. Sales were in line with our expectations with favorability in Power and Energy and Construction Industries, offset by lower-than-anticipated sales in Resource Industries. One note before I move forward. We will now report changes in dealer inventories in total and for construction industries needs, removing the total machines analysis. Remember that typically over 70% of dealer inventory in Power and Energy and Resource Industries is backed by firm customer orders. So dealer inventory changes in these segments are mainly a function of timing within the commissioning pipeline and less indicative of changes in demand or demand planning. Construction Industries products are generally more reflective of dealer inventory available on the lot. And this level of transparency along with sales to use should help you more accurately model this segment. Moving to operating profit on Slide 9. Both operating profit and a adjusted operating profit in the first quarter of 2026 increased by 20% to $3.1 billion mainly due to the profit impact of higher sales volume and a favorable price realization, partially offset by unfavorable manufacturing costs and higher SG&A and R&D expenses. The adjusted operating profit margin was 18.0%, which was only a 30 basis point increase compared to the prior year despite higher tariff costs. Margin was stronger than we had expected. This was mainly due to favorable manufacturing costs, including lower tariff costs and beneficial cost absorption and lower freight. Excluding the impact from tariffs, our first quarter margin was significantly higher than the prior year reflecting the higher sales volume and favorable price. For the tariffs introduced since the beginning of 2025, the first quarter costs were approximately $600 million. This was favorable compared to the $800 million estimate provided in January, primarily due to an adjustment related to the computation of tariffs incurred in 2025. This adjustment is reflected in operating profit within corporate items and only impacts the first quarter. Segment margins are not impacted. Moving to Slide 10. Profit per share was $5.47 in the quarter. Adjusted profit per share was higher than we had anticipated at $5.54, excluding restructuring costs of $0.07 versus $0.05 last year. Data center profit per share included a discrete tax benefit of $0.15 in the quarter. The favorable adjustment to our tariff costs benefited the quarter by about $0.31. Excluding discrete items, the provision for income taxes in the first quarter of 2026 reflected a global estimated annual effective tax rate of 23.0%. Finally, the year-over-year impact from the reduction in the average number of shares outstanding, primarily due to share repurchases resulted in a favorable impact on adjusted profit per share of approximately $0.13 compared to the first quarter of 2025. On Slide 11, I'll review the performance of the segment, starting with Power and Energy. Keep in mind that our comments now reflect the realignment of the rail division moving from power and energy to resource industries. For Power and Energy, sales of $7.0 billion increased by 22% versus the prior year. Sales exceeded our expectations driven by strength in power generation. The sales increase versus the prior year was mainly due to higher sales volume. First quarter profit for Power and Energy increased by 13% versus the prior year to $1.5 billion. The segment profit -- 20.6% was a decrease of 170 basis points versus the prior year. mainly driven by tariffs, which had about a 270 basis point impact on the segment's margin. As we expected, higher manufacturing costs were also impacted by spend relating to our capacity expansion including depreciation. Favorable volume and price were partially offset to the manufacturing cost increase. The margin was stronger than we had anticipated primarily due to the benefits of some litigation efforts to reduce tariff costs. Sales volume also supported the stronger-than-expected margin. Now moving to Slide 12. Construction Industries sales increased by 30% in the first quarter to $7.2 billion. This was higher than we expected mainly due to stronger-than-anticipated volume from higher dealer inventory build supported by continued momentum in our end markets. The 38% sales increase was primarily due to the very strong sales volume growth and favorable price realization, which included the benefit from geographic mix. Higher sales volume was mainly driven by changes in dealer inventories with a more typical $1.5 billion increase in the first quarter as compared to a slight decrease in the prior year. As Joe noted, sales to users growth was healthy with a 7% this quarter. First quarter profit for the construction industry was $1.5 billion, a 50% increase versus the prior year. The segment's margin of 21.4% was an increase of 160 basis points versus the prior year, mainly driven by the favorable price realization and the profit impact of higher sales volume. This was partially offset by tariff costs, which had an impact of about 550 basis points on the segment's margin. Margin was stronger than we had expected, mainly due to the lower-than-anticipated manufacturing costs, including cost absorption and the impact of stronger sales volumes. Turning to Slide 13. Resource Industries sales increased by 4% in the first quarter to $3.8 billion, driven by higher sales volume and favorable currency impact. The year began a bit slower than we had anticipated, primarily due to timing as volume was affected by some short-term production delays. First quarter profit for Resource Industries decreased by 39% versus the prior year to $378 million. The segment's margin of 10.0% was a decrease of 700 basis points versus the prior year driven mainly by tariff costs and an impact of about 500 basis points on the segment's margin. The margin was lower than we had anticipated, primarily due to the lower-than-expected sales volume and the timing of discounts, which impacted price realization within the segment on a short-term basis. Moving to Slide 14. Financial Products revenues increased by 9% versus the prior year to $1.1 billion, mainly due to higher average earning assets across OEMs. Segment profit increased by 14% to $245 million. The increase was primarily due to higher average earning assets and margins at Insurance Services, partially offset by higher SG&A expenses. Our customers' financial health remains strong. Past dues were 1.39% in the quarter, down 19 basis points versus the prior year. The allowance rate was 0.86%, matching the fourth quarter of 2025 for our lowest ever level reported in any quarter. Business activity at Cat Financial remains healthy. Retail credit applications were roughly flat, while retail new business volume grew by 8% versus the prior year, our highest first quarter in over 15 years. In addition, used equipment inventory levels continue to remain low and conversion rates remain above historical averages as customers choose to buy equipment at the end of their lease term. Moving to Slide 15, MP&E free cash flow was nearly $600 million in the first quarter, which was higher than we had expected and about a $350 million increase versus the prior year, impacted by stronger profit. The course included our annual payment of 2025 short-term incentive compensation, CapEx spend was about $700 million. Moving to capital deployment. We deployed $5.7 billion to shareholders in the first quarter. After the dividend payment to $5 billion was for share repurchases, which has included a $4.5 billion accelerated share repurchase, or ASR, that may last for up to 9 months. Our balance sheet remains strong. We have ample liquidity with an enterprise cash balance of $4.1 billion in addition to $1.3 billion in slightly longer-dated liquid marketable securities to employ our cash. So after more than 90 quarterly or biannual calls, it is finally time for me to retire. I could not have scripted a better set of results to be my final call. It has been an honor and privilege to serve alongside the CAT team and to work with Joe and Jim, the Board, our executive officer and our employees and dealers around the world as we've delivered on our strategy through a wide range of environments. I'm extremely proud of what this team has accomplished, and I am confident that the foundation we built together and the growth opportunities ahead. I also want to thank the investment community for the thoughtful engagement here at Caterpillar. Finally, Kyle has worked closely with me since our beginning Caterpillar, and I have watched his development as a key member of Caterpillar's leadership team. His knowledge of the business and involvement in the development of the strategy was an invaluable help to me as CFO, and I could not have been more pleased that the Board elected him as my successor. As I step away, I am confident that Caterpillar is well positioned for the future and that the finance organization is in very capable hands with Kyle Epley as CFO. With that, thank you again. Kyle Epley: Thank you, Andrew. And I'm honored to be the next CFO of Caterpillar, and Andrew, I am very grateful for you and all the guidance you provide to me over your years at Caterpillar. So now let's go through our outlook assumptions. Turning to Slide 16. I will start with the second quarter. We maintain a watchful eye on the environment as the geopolitical landscape remains complex. Our assumptions are based on what we see today and what we believe is most likely. Keep in mind that our assumptions reflect the realignment of the rail division and Resource Industries, we filed an 8-K in late March to recast historical periods and establish in a baseline for you to evaluate segment-level performance and expectations. Based on what we see today, for the second quarter, we anticipate another quarter of strong sales growth versus the prior year. We expect volume increases and favorable price realization in each of our 3 primary segments. We anticipate volume will be driven by a higher growth rate in sales to users compared to the first quarter, with a minimal change in Construction Industries during dealer inventory. If we look at the second quarter by segment, we anticipate strong sales growth in Power and Energy in the second quarter versus the prior year, driven by continued strength in power generation, and in oil and gas and favorable price realization. We expect strong sales growth in Construction Industries in the second quarter versus the prior year, mainly due to strong sales to users supported by the backlog and favorable price realization. We anticipate a more typical sequential sales increase in the second quarter as compared to the first. In contrast to the sizable sales increase we saw a year ago, following a lighter first quarter, which was impacted by the lack of dealer inventory build. In Resource Industries, we also expect strong sales growth versus the prior year primarily due to higher sales of users. We also anticipate favorable price realization with the primary driver being geographic mix. Now I'll provide some color on our second quarter margin expectations versus the prior year. Excluding tariff costs, we expect higher margins at the enterprise level, primarily due to price realization and higher volumes. But partially offset by higher manufacturing costs and SG&A and R&D expenses. The higher manufacturing costs assume unfavorable cost absorption and investments to support higher volume and capacity investments, including depreciation. SG&A and R&D expenses will reflect investments and higher compensation expense. Despite the ongoing impact of tariffs, we also expect higher margins in the second quarter versus the prior year. We anticipate tariff costs of around $700 million. This remains a headwind compared to the impact last year, which was around $400 million. We expect about 50% of the tariff cost to be incurred in Construction Industries and 25% in both Power and Energy and Resource Industries. Now on to the second quarter margins by segment. In Power and Energy, including tariffs, we anticipate a slightly higher margin percentage compared to the prior year on stronger volume and favorable price realization. This is partially offset by higher manufacturing costs including tariff costs and expenses related to our capacity expansion projects. In Construction Industries, including tariffs, we anticipate a higher margin percentage compared to the prior year as stronger volume and price particularly offset by higher manufacturing costs, primarily driven by tariffs and SG&A and R&D expense. In Resource Industries, including and excluding tariff costs, they had a lower margin percentage compared to the prior year due to higher manufacturing costs and SG&A and R&D expenses. Higher compensation expense and strategic investments related to technology, including autonomy, are driving the higher SG&A and R&D expenses. Favorable price realization and higher volume are expected to be partially offset. Note that for Resource Industries, we anticipate the benefit from price realization to improve as we move through the year. Now on Slide 17, let me provide a few comments on the full year. As Joe mentioned, we now anticipate sales and revenues growth in the low double digits for the full year of 2026. This is versus our expectations from last quarter. The increase in our full year sales and revenue expectation is supported by solid sales to users growth amid resilient end markets, the fact that Power and Energy is tracking ahead of our 2026 capacity growth plan and continued robust fundamentals and industry growth in North America. We've had strong sales growth across each of our primary segments, driven mainly by volume and price. Now on to margins for the full year. Excluding tariff costs, we expect to be in the top half of the adjusted operating profit margin target range. Compared to the prior year, favorable price realization and volume are partially offset by higher manufacturing costs related to capacity and higher SG&A and R&D related to increased incentive compensation and strategic investment spend. Including tariffs, we continue to anticipate that the adjusted operating profit margin will be near the bottom of the target range. However, with the improved sales and revenues outlook, full year adjusted operating profit margin will be higher than we expected in January. As I mentioned, the situation flex, but we now anticipate full year 2026 tariff costs in the range of $2.2 billion to $2.4 billion based on our current volume assumptions. This figure reflects adjusted 2026 full year impact of tariffs implemented since the beginning of 2025 and in place over the course of this year. This compares to the $2.6 billion estimate we provided last quarter. Let me provide some additional context on our tariff assumptions. The bottom line is our expectation for tariff cost in the second through fourth quarters has not changed significantly since January. Based on the recent ruling on IEEPA tariffs by the U.S. Supreme Court, we removed these tariffs from our estimate and added Section 122 tariffs. We expect to ramp up our actions to mitigate our tariff costs in the back half of the year. The recent updates to Section 232 guidance have a roughly neutral effect, and we are not currently in any IEEPA-related refunds as a result of the Supreme Court's decision. Moving on. We continue to expect restructuring costs of approximately $300 million to $350 million in 2026. And our anticipated global estimated annual effective tax rate remains approximately 23% for '26, excluding discrete items. We now anticipate MP&E free cash flow will be higher than the $9.5 billion last year, an improvement versus our expectations last quarter, reflecting our improved outlook. While our CapEx forecast for 2026 remains approximately $3.5 billion. As Joe discussed, we are increasing our large reciprocating engine capacity from 2x to nearly 3x 2024 levels with additional CapEx spend occurring primarily from 2027 to 2029. We now anticipate MP&E CapEx spend to average approximately 4% to 5% of MP&E sales through 2030. Capital spend for our large engine capacity expansion is supported by strong demand signals and confidence in a positive cash payback by the end of the day. We believe these investments will support future absolute OPACC dollar growth. which is our definition of winning. So now turning to Slide 18. Let me summarize. We delivered a strong start to the year with better than expected earnings. In this dynamic operating environment, we now anticipate higher sales and revenues growth in '26 compared to a quarter ago. We will remain disciplined and measured in our strategic investments while maintaining our strong balance sheet and we will continue to return substantially all of our MP&E free cash flow to our shareholders through dividends and share repurchases. Finally, we will continue to execute our strategy for profitable growth. With that, we will take your questions. Operator: [Operator Instructions] Please note, we are only allowing 1 question per analyst. And your first question comes from the line of Rob Wertheimer from Melius. Robert Wertheimer: Congratulations to Andrew and Kyle. It's been a pleasure getting to know you both. My question is on large engine capacity expansion. It sounds like most end markets for big engines are pretty good. But is there any one that kind of predominated in the additional capacity expansion decision whether prime or Bower, oil and gas, whatever. Do we think about the timing as being kind of linear or lump sum at the end of the expansion period in 2029? . Joseph Creed: It's Joe. It's -- definitely you think of the size of those industries right now and where the growth is really happening. We are seeing -- one of the things I'm really happy about is it's not just power and energy, we've had really good oil and gas quarters as well over the past few quarters from an order standpoint and health of the business. But just the pure size of it is really driven by power generation and that's where we're putting the capacity. And even over the last 6 months, the last 2 quarters, we've seen the orders go up pretty consistently. And if you go back to the industry with data centers and just the amount of CapEx announced in that industry since a year ago is quite significant. So that's the main driver of why we feel comfortable putting this capacity in place, we have the benefit that it does over multiple industries, and we do think -- I do think we're going to move a lot of natural gas, and I'm excited about the oil and gas business and what its outlook is over the next few years. It's still a lot of prime power. So we still see a lot of cloud. It's not just AI. When we move into use of AI, we're going to use a lot more data. So the backup power opportunity provides a good base for us. But it is fungible capacity. We're seeing a lot more mix towards prime. And then also that drives when it's gas compression or prime power drives a lot of aftermarket, which this capacity will also allow us to serve that aftermarket opportunity, which I think gives us great services growth opportunity beyond 2030. From a timing standpoint, with the second part of your question, we're going to try to put this capacity in as soon as we can. The data centers are trying to move quickly. We've been talking to customers. So we're going to start right away. I think you should see heavy investment in '27, but we'll be investing still in '28 and '29. We also hopefully, our expectation is to get incremental units out of this latest capacity announcement as early as 2027. So it will happen fast. Operator: We'll move next to Jerry Revich at Wells Fargo. Jerry Revich: Congratulations, Andrew and Kyle. Joe, I'm wondering if we could just go back to your prepared remarks, you mentioned you booked Prime Power large recips for now 6 data center projects, considering just the full scope of products that you have for us behind the meter offering. Can you just talk about what you're seeing in the architecture plans. We're hearing about increasing use of recips plus turbines in series of projects going forward. And if that happens, you folks would be in a pretty good position. So I'm wondering if you just outlined, is that what you're seeing, what kind of developments are you seeing in architecture and if you're willing to give us the number of gigawatts booked for recip buying power, that would be helpful. Joseph Creed: Yes. I think I don't know that we -- I even have on the top of my head the number of gigawatts on prime power, but from a trend perspective, I think when you step back, what you're saying is exactly what we're seeing from our customers, each side is a little bit different. So I think all that depends on the site, the size of the facility, their access to gas, the footprint and power demand. So our teams are in early with customers. And you're right, I think we do have an advantage of having -- when you're going to string together a number of products behind the meter and you need multiple products, us having turbines and recips is an advantage for us, we can configure it one way or the other or a mix and a lot of it's driven by timing to and how fast we can get on product. . So each one is a little bit different, but it does present an opportunity for us. And I think we're seeing as a trend more and more data center sites asking for behind-the-meter power. And so that's translated into, as I said in prepared remarks, I think 6 announcements over 1 gigawatt, but also multiple projects as well that are less than 1 gigawatt where we're supporting customers with prime power. Operator: We'll go next to David Raso at Evercore ISI. David Raso: I just want to thank Andrew, obviously, one of the best CFO runs I've seen in my career. So congrats, enjoy your retirement. And obviously, congratulations, Kyle. I want to talk long-term targets. The change from a 6% CAGR to now a 7.5%, you can account for that almost, really almost more than the change just from the increase in your target today for power gen sales going from double to triple over that same time frame. . And just given the ecosystem around power when it's that strong, be it oil and gas, construction, mining, I'm just curious why you left every other part of the business with the same view. I would just think there'd be some ecosystem benefit if you're raising your power gen thoughts that dramatically. Joseph Creed: Thanks, David. So when you think about it, you're right, when you do the math, it comes out to the increased power gen, but that's really what's different, right, today from where we were at our Investor Day. As I mentioned, you look at the amount of CapEx spent in -- by the data center industry, particularly as it relates to power, we need to add capacity to do that. So that's incremental opportunity for us. Keep in mind, we have healthy growth ambitions, and we projected those out when we had our Investor Day. So it wasn't like the other 2 segments didn't have growth. We have growth across all 3 parts of our business. So we're pretty comfortable with the new 6% to 9% raise, and we're happy to be able to raise it, particularly so soon after really putting those targets out just in November. Operator: We'll take our next question from Tami Zakaria at JPMorgan. Tami Zakaria: So with an improved top line outlook for the long term that you just updated this morning. Wondering what keeps your view on the margin opportunity unchanged versus the Analyst Day. Wouldn't you expect better fixed cost absorption? Maybe D&A steps up, but I would expect pricing could also be better given surging demand. So trying to understand what underpins this sort of high 20% incremental margin versus historically you have seen higher. Andrew R. Bonfield: Yes, Tami, it's Andrew. Just if you remember when we actually set the targets, the average progressive, remember, they're progressive margin targets. At the moment, they go out to $100 billion. Obviously, at some point in time, that may be updated as we get closer. But remember that we had progressive targets of around 31%, which is the same average that we had than the previous margin targets which we think is fair and reasonable. Obviously, the aim always is to do better, and that's always one of the things we'll continue to focus. But today, we have headwinds, for example, caused by tariffs. So our target is really to get back to the middle of the range over a period of time and to mitigate the impact of tariffs as we speak. But that's really the driver. I think obviously, we're also in a situation when we add capacity because we do accelerate the depreciation. Just to remind you, that does have a drag on margins as well, particularly in Power and Energy over the next few years as they bring that on. So it's not all incremental margins based on the old capacity rate. So you don't get quite the same amount of leverage as you would have done previously. Joseph Creed: Yes, I think that's an important point that Andrew made, right? The progressive targets as we're adding sales, it's a 31%. That's just to stay at the same point in the range that we are. We're at the bottom. And as we've said many times, our goal is to work our way back up towards the middle of the range. So to do that, we're going to have to have better pull-throughs in that 31% as we work our way out. So that's primarily the reason. And we are spending, right, and we're adding the capital to do this. If you look at where we've been in the past, the last 7 or 8 years, we've not needed the capital to increase our sales because it's come back within the footprint that we have before. Now we're moving to higher sales levels than we've ever had in the company. So we're going to have to spend a little money to get there. . Operator: We'll take our next question from Angel Castillo at Morgan Stanley. Angel Castillo Malpica: I just want to echo everyone's congratulations to Andrew, I wish you all the best, and Kyle, looking forward to working with you. I wanted to spend a little bit of time on the capacity addition. I guess, can you talk about just the decision to add more capacity in the large engines as opposed to perhaps increasing investments on the gas turbine side. I guess I'm trying to understand if at all, this is any kind of read-through on how you view the demand of either product? And then I know you said essentially the capacity here is fungible between prime and backup. But curious if you could just talk a little bit about more specifically the backup supply/demand backdrop. I think we've been seeing some rising concerns that as we kind of move to an 800 BDC or behind the meter that you could potentially more and more of that being kind of displaced or designed out? And again, you have the benefit of having that fungibility, but just curious if you could talk about that supply/demand and what you're hearing from your customers on that backup opportunity. Joseph Creed: Yes. I think part of the explanation there is a large part of the base increase in the capacity is backup power, right, which is what we've done to back up data centers, and we've been leading that for a long time, and we continue to grow. That will be driven by continued more data on the cloud. So more tokens are being used, more data is going to be needed. We look at our own internal -- look at what we're trying to do internally with automating our factories and automation, what we're doing in the office, what we're doing with autonomy and our machines, right? We're going to use a lot more data and we just look at the growth and the use that we're going to have, and we're not the only company out there doing that. So I think useful need to go up. All these projects for right now that we're seeing for prime power, we're not seeing customers not have backup power or making sure that they have the ability to run with backup plans. They're not just going with one option. So we haven't seen that trend continue. So I think the backup power is going to continue to be there. Not every data center is going to go behind the meter either and those are going to drive a lot of backup demand. So as we look at it, we feel pretty confident in this investment in raising in capacity. Look, I've been around a long time. I know there are no such thing as sure things. But when you think about all the capacity investments we've made in my career, this is a better line of sight to getting the return than anyone we've ever made. And we don't need to be at all this capacity to be OPACC positive and grow OPACC. So that gives us confidence to make this investment at this point in time. Operator: We'll move next to Michael Feniger at Bank of America. Michael Feniger: Andrew, congratulations. Just when we think of 2030, that 50 gigawatt number you guys laid out at the Investor Day, is there any way we can get an update on that given the announcement today? And Joe, just when we look at the pricing in Power and Energy, it's still around this 2% number. I realize there's going to be some new products and maybe there's not a lot of like-for-like, but just generally speaking, should we be expecting that number to gradually rise through this year and into '27 as we see some of this backlog get delivered? Just directionally, how should we kind of think about that figure going forward? . Joseph Creed: I'll take the second one first. From a pricing standpoint, I think 2 things I would say, we're taking orders well out in the future. Those have -- we take orders that are multiple years out, they have price escalators in there typically that are agreed with frame agreements. So we plan to see -- it won't be today's pricing, it will be whatever the appropriate pricing at the time is. When it comes to the capacity increase -- well, the other thing on pricing, keep in mind, power and energy is a big segment. So that 2% is over the entire segment. So obviously, where we're capacity constrained, we're able to do a little bit more, a large part of that business is industrial and smaller power generation, marine, there are other parts of the business for the smaller product, where we aren't constrained. It's a competitive environment. So that number you're seeing is weighted across the entire segment. When it comes to capacity, so the 3x and the way we've said 2x capacity now going to 3x, that's sort of factory output in the way we look at it in units. From a gigawatt standpoint, we gave the 50 gigawatts. The mix is a little bit different in this. So you can't really equate this increasing gigawatts to what's in the 50 base, but we estimate this will give us another 15 gigawatts capacity annually when we're done with this installation. Operator: Our next question comes from Jamie Cook, Truist Securities. Jamie Cook: Congrats on another great quarter, and thank you, Andrew, for all your help throughout the year. Congrats on a fantastic career and look forward to working with you, Kyle. Congrats as well. I guess my question, just to generate back on Power and Energy again. I guess Tami asked the question on why margins shouldn't be going up which you answered. I guess my other question with regards to margins. Should we assume the variability of margins narrowed relative to, I think, the 400 bps pegged on each revenue cycle or throughout the cycle just to power your visibility and service aftermarket becomes a larger percentage of the business you're thinking the volume margin should narrow. And then just the follow-up, just again, you're announcing capacity increases, a top line increase relative to just where we were in December. Is there anything going on structurally from a market share opportunity for Caterpillar that perhaps we're underappreciating. Joseph Creed: Yes. So thanks, Jamie, we probably addressed that margin question, right? We're really happy with Power and Energy operating margins. When you think about one of the reasons we sort of reorganize ourselves, there's a lot of synergies that we get with the rail group being with the mining group, but it also gives you a good view of our Power and Energy business. And I think if you compare where we're at from an operating margin standpoint to the industry, we are leading in that space, and we have a really, really healthy business and it's continuing to grow, and it's an area we continue to invest. I don't know that as that business grows, I think that we have any intention right now on narrowing that operating margin range. There are a lot of things that can go in to make that happen. Just look at our backlog growth, in this quarter, one of the things that I'm excited about, we added another almost $1 billion sequentially. We did almost saying from the third quarter to the fourth quarter last year, and we saw the percent of backlog delivered in the next 12 months come down quite a bit because it was heavily Power and Energy was a big part of that. We're pretty similar this time, which shows that all 3 of the businesses are taking healthy orders right now. So our intent is to grow all 3 of our segments. And so we don't have any intention of narrowing the bandwidth on the margin targets. Andrew R. Bonfield: And just to remind you, Jamie, remember, our definition of winning is absolute OpEx growth in not necessarily margins. So the margins will always be there to give flexibility to enable us to invest. I mean one of the great things we're doing is we are putting central investment of dollars behind to get to those growth targets, which I think is really a positive even in an environment where we are seeing higher costs as a result of tariffs. Operator: We'll take our next question from Chad Dillard at Bernstein. Charles Albert Dillard: So how is CAT helping the Tier 1 and Tier 2 suppliers ramp power gen capacity along with CAT. Curious to get your perspective on where you see the biggest bottle next arm. And then also by 2030, what share of, I guess, now 65 gigawatts of large engine production will be prime vs back up? Joseph Creed: Yes. I don't know in 2030, I'm not sure we'll -- we can tell you exactly the mix between prime and backup. What we're seeing right now is a trend much more towards prime, but backup is growing quite significantly at the same time, as we said, I don't know that you'll see a mix change. I think both of them are going to change. By then, the more prime we sell, the more gas compression we sell, the more oil and gas, we'll also see a heavy shift towards the aftermarket as well for 2030 and beyond for services growth opportunities. We -- as far as working with the supply base, that is a big part of the investment is not only within our 4 walls, but it's also working with the supply base to make sure that they can ramp and we have a big team that's working nonstop with them to make sure a lot of it's forecast visibility. So the more visibility we can give them to the forecast, the better they can react. And that's one of the reasons, frankly, why we've been able to be running a little bit ahead of schedule on the capacity we're installing right now is we've had great performance out of the supply base. So right now, we don't see any major issues. And that's the first quarter and being ahead is allowing us to have more confidence, which is why we gave a little bit better outlook for this year as we think we can maintain that as we go throughout the rest of this year. Operator: We'll move next to Kyle Menges at Citigroup. Kyle Menges: Congrats to Andrew and Kyle. I wanted to follow up on some of the RI commentary. It sounds like in Resource Industries backlog is growing nicely at a pretty significant quarter of order intake. I'd just love to hear kind of what's driving that. How much of it is perhaps new mines versus existing mines coming back and replacing fleet? And yes, I just would love to hear more of what's driving the strength in the RI backlog. Joseph Creed: Yes. I think you could -- I mean, when it comes to new versus existing, there aren't a tremendous amount of new mines that are going in, you kind of see where they're at. We continue to work with customers. The age of the fleet is pretty old. So we'll see customers continue to update their fleets. And as we look forward as well, the technology that we can bring in on new equipment, we think will help drive some of that fleet turnover as well. But it's really driven right now by strong mining, particularly copper and gold that's driving the backlog growth. The other thing in RI to keep in mind, the North America construction industry has been very resilient when you think about what's driving it, and that has a carryon effect into heavy construction. So that's also in the RI backlog and contributing to the strength that we've seen in the orders there. Alex Kapper: Adria, we have time for one more question. Operator: Today's final question comes from the line of Mig Dobre from Baird. Mircea Dobre: Andrew, thank you, and all that in retirement. Maybe we can continue the conversation on mining here. Your comments on orders being the strongest since 2012 really kind of stood up. I mean it's a little bit at odd with negative pricing still with margins you're seeing impacted by tariffs near term. But I guess my question is, as you see this demand cycle manifest itself, how do you think about the segment operationally? Whether we're talking about the manufacturing footprint, whether we're talking about pricing, can we actually see mining get back to the kind of margins that you've experienced back at the prior feedback in 2012? . Joseph Creed: Yes. I mean I think we had slightly negative pricing in the first quarter, and that's a little bit due to timing. And keep in mind, the mining delivery cycle is much longer. So as we take orders, delivery, what we're delivering now the orders from quite a while ago, when you look at the RI segment now, it has the rail group in it. So I think you just make -- going back to 2012 is not going to be apples-to-apples when we look at it. But we're going to continue to invest in the business. The strong orders are a great sign of what we think is to come. It's a competitive industry as well. So we want to make sure we're being competitive as we go into each tender. The other thing I would keep in mind when it comes to margins, particularly right now, our eyes relative size to the other segments, a little bit smaller on the top line. So we're going to make the investments that we think we need to be competitive in autonomy and other things. So if you have an autonomy investment, in RI and you have an autonomy investment in CI, it's going to have an outsized impact on the operating margin percent in RI for now. But as we continue to build that segment and we get operating leverage back, we would definitely expect the operating margins to get better. We think they'll get better even this year from what you saw in the first quarter. But as we continue to grow the segment, our goal would be to get those operating margins up as we move forward. So thank you for all the questions and your engagement today. One, I just want to say, congratulations to Kyle, I look forward to working closely with him executing our strategy. And Andrew, again, thank you for everything that you've done. You've been an amazing CFO. And if you look at the track record of the company during your tender is probably like no other CFO we've ever had. So you will be missed, and we appreciate everything you've done, but you're leaving us in a great place and in great hands. And thank you all for joining us. We truly appreciate your questions. I'm very proud of the Caterpillar team's strong performance in the first quarter. Our first quarter results demonstrate the resilience of our end markets and our disciplined execution. With a record backlog and a focus on delivering for our customers, we're well positioned to continue creating long-term value for our shareholders. With that, I'll turn it back over to Alex. Alex Kapper: Thank you, Joe, Andrew, Kyle, and everyone who joined us today. A replay of our call will be available online later this morning, we'll also post a transcript on our Investor Relations website as soon as it's available. You'll also find a first quarter results video with our CFO in an SEC filing with our sales to users dated. Click on investors.caterpillar.com and then click on Financials to view those materials. If you have any questions, please reach out to me or Rob. The Investor Relations general phone number is (309) 675-4549. Now let's turn it back to Adria to conclude our call. Operator: Thank you. That concludes our call. Thank you for joining. You may all disconnect.
Operator: Ladies and gentlemen, welcome to Martin Marietta's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded and will be available for replay on the company's website. I will now turn the call over to your host, Ms. Jacklyn Rooker, Martin Marietta's Vice President of Investor Relations. Jacklyn, you may begin. Jacklyn Rooker: Good morning, and thank you for joining Martin Marietta's First Quarter 2026 Earnings Call. With me today are Ward Nye, Chair, President and Chief Executive Officer; and Michael Petro, Senior Vice President and Chief Financial Officer. As a reminder, today's discussion may include forward-looking statements as defined by United States securities laws. These statements relate to future events, operating results or financial performance and are subject to risks and uncertainties that could cause actual results to differ materially. Martin Marietta undertakes no obligation to publicly update or revise any forward-looking statements, except as legally required, whether due to new information, future developments or otherwise. For additional details, please refer to the legal disclaimers contained in today's earnings release and other public filings, which are available on both our own and the Securities and Exchange Commission's website. Supplemental information summarizing our financial results and trends is available during this webcast and in the Investors section of our website. As a reminder, our full year 2026 guidance summary on Slide 5 reflects continuing operations only. Definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measure are provided in the appendix to the supplemental information in our SEC filings and on our website. Today's earnings call will begin with Ward Nye, who will discuss our first quarter operating performance, 2026 outlook and supporting market trends. Michael Petro will then review our financial results and capital allocation details, after which Ward will provide closing remarks. Please note that all comparisons are to the prior year's corresponding period. A question-and-answer session will follow. Please limit your Q&A participation to 1 question. I will now turn the call over to Ward. C. Nye: Thank you, Jacklyn. Good morning, and thank you for joining today's teleconference. Before reviewing our first quarter results, I'll take a moment to discuss the leadership appointment we announced earlier this week. As you may have seen, Chris Samborski was appointed Martin Marietta's Chief Operating Officer, effective May 1. Chris is a highly respected and proven leader who most recently served as President of our West and Specialties division. Under his leadership, both businesses delivered meaningful growth and strong operational execution. Since joining Martin Marietta in 2018, Chris has consistently made a significant and positive impact in every role he's held. His deep operational experience, disciplined leadership style and strong commitment to our culture make him exceptionally well suited for this role. With Chris serving as COO, Kirk Light will assume leadership of our West and Specialties divisions while continuing in his role as President of our South West division. In addition, our East Division President, Oliver Brookes; Central Division President, Bill Padraic; Vice President of Operational Excellence, Ronnie Walker; and Vice President of Safety and Health, Jessica Cosan, will report directly to Chris. This appointment and enhanced leadership structure reflects a deep bench of talent across our divisions, districts and functions, all focused on consistent execution, continuous improvement and a shared commitment to our one culture. I'm pleased to welcome Chris to his new position, and I'm confident that as COO, he will continue to play a critical role in helping guide Martin Marietta to even greater success. With that, I'll now turn to the quarter. 2026 is off to a strong start with revenues increasing an impressive 17% to $1.4 billion, a new first quarter record. Organic aggregate shipments growth of 7.2% meaningfully exceeded our guidance, benefiting from an early start to the construction season in the Midwest and Colorado as well as continued strength in infrastructure and heavy nonresidential demand across our geographic footprint. As we look ahead, underlying fundamentals across the business remain favorable. Notably, the quarter's results reflect a 14% improvement in both adjusted EBITDA from continuing operations as well as adjusted earnings per diluted share from continuing operations. I'm especially pleased to report that our teams delivered the strongest first quarter safety performance in the company's history as measured by both total and lost time incident rates. This achievement reflects the strength of our culture, unwavering commitment to world-class safety and the operational discipline embedded throughout the organization. The quarter was also highlighted by the February 23 closing of the Quikrete Asset Exchange, our largest aggregates acquisition to date. Importantly, this transaction accelerated our aggregate sludge strategy by shifting the portfolio away from more cyclical cement and concrete assets, enhancing the quality and durability of our earnings profile, while providing $450 million of cash to redeploy into aggregate acquisitions accordingly. And consistent with the company's SOAR 2030 strategic plan, on April 19, we entered into a definitive agreement to acquire New Frontier materials, a complementary bolt-on to our central division that produces over 8 million tons of aggregates annually. This transaction is expected to close in the second half of the year subject to regulatory approvals and other customary closing conditions. Looking ahead, our M&A pipeline remains active and is primarily focused on pure-play aggregates opportunities across attractive SOAR aligned geographies. As highlighted in this morning's release, our core aggregates product line delivered record first quarter shipments of 43.9 million tons, a 12% increase and record revenues of $1.1 billion, representing a 14% increase. Our Specialties business also achieved new all-time quarterly records with revenues of $143 million, up 63% year-over-year and gross profit of $45 million, an increase of 17%. Despite ongoing macroeconomic uncertainty and volatility, we continue to benefit from a business intentionally built for durability and resilience, enabling us to remain focused on what we can control regardless of underlying economic trends. With April's continued strong product demand, the impact of April 1 price increases and ongoing optimization efforts, we're reaffirming our full year 2026 adjusted EBITDA from continuing operations guidance of $2.43 billion at the midpoint. Turning to wind market trends. We continue to see a constructive backdrop for U.S. infrastructure, our most aggregates-intensive and countercyclical end market. Sustained federal and state investment continues to provide meaningful multiyear funding visibility as we look ahead to the next surface transportation reauthorization. Notably, a significant portion of authorized funding under the Infrastructure Investment and Jobs Act or IIJA, has yet to be deployed with nearly half of highway and bridge funding remaining undistributed as of late February. Policymakers are negotiating a 5-year successor surface transportation bill with committees targeting reauthorization by October 1, following the current IIJA's expiration on September 30. While the timing remains subject to the legislative process and could include an interim continuing resolution, industry commentary from the American Road and Transportation Builders of America, or ARPA, indicates that state departments of transportation retain multiyear visibility into their project pipelines and continue to plan under assumptions of stable federal funding. As a result, we do not expect a short-term continuing resolution to disrupt construction activity in 2026 and for the near future. Beyond infrastructure, heavy nonresidential construction demand continues to be driven by robust data center and power generation activity. Aggregates-intensive LNG work along the Gulf Coast is also gaining momentum, including projects such as the one at Port Arthur LNG, which Martin Marietta is actively supplying. Warehouse and distribution construction trends continue to recover as shipments inflected positively in the third quarter of 2025 and have continued to trend favorably. By contrast, affordability pressures tied to higher interest rates continue to influence the pace of light nonresidential and residential construction activity. Taken together, all these trends underscore the durability of long-term construction demand across our footprint and bode well for our company and shareholders. I will now turn the call over to Michael to discuss our first quarter financial results. Michael, over to you. Michael Petro: Thank you, Ward, and good morning, everyone. As Ward noted, our core aggregates business delivered record first quarter revenues of $1.1 billion, up 14% year-over-year, driven by organic shipment growth of more than 7% and approximately one month of acquisition contributions. Daily shipments have continued to trend above expectations in April, led by infrastructure and nonresidential strength in our East Division. Organic pricing in the first quarter was negatively impacted by geographic mix driven primarily by robust organic shipment growth of more than 20% in our Central and West divisions, which carry lower average selling prices and gross margins than our East and Southwest divisions. Reported aggregates gross profit declined 3% to $288 million as stronger volumes and underlying organic pricing improvements were more than offset by geographic mix and purchase accounting impacts. Including a noncash $22 million charge associated with the fair market value step-up of Quikrete inventory as well as higher depreciation, depletion and amortization expense which is now disclosed within our product line reporting. Importantly, underlying organic cost of goods sold per ton, excluding pass-through freight cost and timing-related items is tracking below our implied 3% guidance as cost optimization efforts continue. Other Building Materials revenues declined 5% to $116 million and consistent with typical first quarter seasonality, posted a $16 million gross loss driven by customary asphalt plant winter shutdowns in both Colorado and Minnesota. Our Specialties business delivered revenues of $143 million and gross profit increased 17% to $45 million, both all-time quarterly records, reflecting contributions from the July 2025 Premier Magnesia acquisition and organic pricing gains, which were partially offset by lower organic shipments and higher energy costs. Turning to capital allocation. Completion of the Quikrete asset exchange on February 23 marked a significant milestone, concluding our SOAR 2025 divestiture program, providing $450 million in cash and simultaneously representing the largest aggregates acquisition in our history. With this transaction complete, we've now launched SOAR 2030 supported by a strong balance sheet and a focus on aggregates-led acquisitive growth. The Quikrete integration is progressing ahead of plan with results since closing, exceeding both our EBITDA and margin expectations. Further, we expect to realize synergies of approximately $50 million over the coming years as we normalize unit profitability. Importantly, the $450 million of cash proceeds, combined with the company's significant free cash flow generation, provides ample capacity to advance our very active M&A pipeline and opportunistically repurchase shares during times of market volatility. Consistent with this capital deployment framework, we repurchased $200 million of shares in the first quarter and announced the acquisition of New Frontier Materials, which complements our differentiated position along the I-70 corridor from Kansas City to St. Louis. Please note that our reaffirmed 2026 guidance does not include contributions from New Frontier as the transaction has not yet closed. Consistent with historical practice, we will revisit guidance at midyear. With that, I will now turn the call back over to Ward. C. Nye: Thank you, Michael. The first quarter of 2026 marked the launch of SOAR 2030 and an important milestone in the continued evolution of our company's portfolio. Our increasingly aggregate led foundation was strengthened by the closing of the Quikrete Asset Exchange and further reinforced by additional bolt-on aggregates acquisition activity already announced this year. Combined with our high-performing differentiated Specialties business, these actions have created a resilient and durable enterprise. This streamlined and focused portfolio supported by attractive long-term demand drivers, advantaged market positions and culture deeply rooted in safety, commercial and operational excellence reinforces our confidence in SOAR 2030 and our ability to deliver sustainable growth and enduring value creation for our shareholders. If the operator now provides the required instructions, we'll turn our attention to addressing your questions. Operator: [Operator Instructions] And our first question comes from the line of Trey Grooms with Stephens. Trey Grooms: So given the more challenging near-term cost environment, particularly around diesel and potentially softer residential demand backdrop. Ward, could you walk us through some of the key assumptions that are supporting your decision to reiterate the full year EBITDA guidance, specifically, maybe how you're thinking about the cadence of pricing through the year, including any catch up to the higher diesel costs and what level maybe of incremental or midyear increases is embedded in that outlook? C. Nye: Trey, thanks for the question. Good to hear your voice. So several things. One, as you noted, we are reaffirming our guidance for the year relative to EBITDA. We feel very confident in that. As you know, this actually excludes anything from New Frontier because that hasn't closed yet. Secondly, we tend to come back at midyear and reassess our guidance. I'll tell you right now, I'm feeling pretty optimistic about what that reassessment is going to look like. So I'm looking forward to that in midyear. I would say several things. One, if we just think about some of the reasons why, if we're looking at our shipment trends. As you may recall, when we announced our guide in February for the year, we said if there was any place that we thought we were being a little bit probably conservative on. It may be on the shipment outlook. You can see how that came through in Q1. You can also tell from the prepared remarks today and the headlines to the release that April has come out of the box very attractively as well. So my guess is we're going to see shipments probably trending to the higher end of the guide. Relative to pricing, I'm not looking at pricing and having any concern about how I think that's going to roll out for the year. We did call out in the prepared remarks, I know Michael said that what we saw in the Central and West groups, in particular, was volumes of 21%. I mean that's a big number. And keep in mind pricing there is notably lower. And by that, I mean dollars per ton lower than it is in the East and the Southwest. And so what we've seen so far in April is we're seeing that mix flow back to the type of cadence that we would ordinarily expect. So we're seeing the East really catch up nicely with that. Keep in mind, too, I anticipate we're going to see a greater realization of midyear price increases this year than we saw last year. Clearly, the diesel impact and others will be a driver on that, that is not taken into account in our guide. So again, it's something that gives me a lot of confidence in what we're doing. I know part of your question very specifically with diesel and how we see that. So if you think about the fact that we're going to consume, let's call it, 55-ish million gallons of diesel fuel this year, that's assuming the diesel prices peak probably in Q2 and then return not to lower levels, but probably somewhat more moderated levels in Q3 and Q4. We feel like the overall impact from diesel headwinds, and that's including other items impacted by it -- will be about $36 million in the aggregates business, probably [ $50 ] million for the entire company. So it's not going to be anything that's material. The other thing that I would remind you is if we go back in time and remember what diesel pricing looks like, back when Ukraine and Russia first started their conflict. Diesel spiked and then we saw that headwind for a while. And then we actually saw a nice margin expansion actually later that year. This is not as pronounced as that was at the time. So I feel like it's very manageable. And again, to your point, with what's going on in infrastructure and what's going on with heavy nonresidential activity, I think the volume backdrop will continue to be very attractive. But Trey, I hope that helps. Trey Grooms: That did. That was super helpful, Ward. And specifically on that $36 million you're talking about for 2Q, I'm guessing it'd be more weighted there. Any color just for our modeling? C. Nye: It is weighted more then. I'll give -- I'll turn it over to Michael to talk to you a little bit more about any modeling questions you may have. Michael Petro: Yes, Trey, you're absolutely right. So we're thinking about $20 million to $25 million of it coming through in Q2 given where spot rates are. But just in terms of the organic cost cadence as compared to last year. Remember, in Q1 of last year, we had sub-2.5% COGS per ton growth. And then we had 6-ish percent in Q2 and Q3 and 4 in Q4. So we've now passed the tough cost comp growth. And so we feel very good about the implied cost per ton through the balance of the year, assuming we do get a little bit of diesel headwind embedded in there as well. Operator: And our next question comes from the line of Kathryn Thompson with Thompson Research Group. Kathryn Thompson: And appreciated your color and prepared commentary on the reauthorization of IIJA. So we've been speaking to a wide variety of contacts all this still reauthorization. And the general theme is no bill is going backwards on funding. The house is -- what we're hearing is $550 billion, sounds like it fits pretty close to what you're also saying, but I think the important thing, too, just to clarify is how much of this is going to be true surface transportation versus the $350 billion from the prior bill that was for surface? And if you could further suss out how much of that is of surface is true highways and bridges versus other things that could potentially fall into that category? C. Nye: Welcome. Thank you for the question. So I would say several things. We're totally aligned with what you're hearing, and that is nothing in this is going backward. I think it's really important to note that as we're looking at what's likely to come out of the house and the Senate. Neither committees of jurisdiction are planning to include broader infrastructure components like energy, broadband programs or others that made up more than half of the 2021 infrastructure law. So I think to your point, this is going to be a highway bridge Rodsand Street's core infrastructure bill, and we don't see anything that's changing that overall notion. As we're looking at it right now, from my understanding of the House is targeting May to mark up the legislative text, so we'll certainly know more than, but I think the numbers that you've indicated are certainly what I've heard from Chairman Graves and others who are on that committee. I also think we're likely to see numbers notably ahead of that coming out of the Senate. So as this goes to a conference, I think we're going to see a nice solid, robust core surface transportation bill that's going to come out. I think they're still aiming to have this done in time so they don't have to have CR. I do think if they have to have a CR, it's likely going to be one. I think it's likely to be relatively short. And of course, Kathryn, as you know, if they do end up with a CR, what that means is the federal highway funds will continue to flow to the states in an uninterrupted fashion and will remain at the current levels that are actually very high and attractive. The other thing that I think goes on here, but I think it's important to remember, is if we look at Martin Marietta state DOT budgets, those budgets, not in every instance, but in the vast majority of instances, are up year-over-year, which tells us that they're anticipating not seeing any interruptions from the federal side as well. So I've tried to address does timing look like. I've tried to address what it's looked like coming out of the house because I think that's going to lead. I try to address what we see coming out of the Senate. And I've tried to address a CR that if we have one, frankly, we're not the least bit concerned about. So Kathryn, again, I hope that helps. Operator: And our next question comes from the line of Adam Thalhimer with Thompson Davis. Adam Thalhimer: Three-part question on M&A. Can you give us any early thoughts? I know it's only been a couple of months on Quikrete. On New Frontier, are there any kind of unique synergy opportunities there? And then lastly, on the M&A pipeline and outlook for deals from here? C. Nye: Now, you're hitting us with a hat-trick coming out of the box -- so I'd say several things. Quikrete has frankly exceeded expectations. And the integration has gone really well. The business is performing better than we expected. I mean we saw $17 million of EBITDA, which on an annualized basis is going to be well ahead of anything that we saw. The fact is we worked through and are continuing to work through very sensibly the markup in the inventory. I mean that's the purchase price accounting that we always have to manage. . When we came out with that transaction, as you recall, we said we thought we'd have around $50 million of synergies. I don't think we see anything in that number that causes us any degree of heartache whatsoever. And hopefully, we can see more on that. Relative to New Frontier, we're really excited about that transaction. So if you think about what that's doing, again, the purchase of Quikrete, we bought very attractive assets in Virginia, attractive assets in Missouri and Kansas and attractive assets in British Columbia. And what New Frontier is doing is it's adding more assets in what for us is a very attractive market position in Missouri right now. And we're excited about the transaction, not just because of where it is. the really high-quality team that's coming with that as well. So we're excited to welcome them to Martin Marietta, hopefully sooner rather than later. It's an interesting transaction because as we noted in the prepared remarks, this is about 8.5 million tons annualized of aggregates and about 1.5 million tons annualized of asphalt. But keep in mind, this business is a lot like the tiller business that we bought years ago, meaning. It's an FOB asphalt business. So we're not involved in lay down there. It's truly a materials business. And again, we think this is going to be nicely accretive to what we're doing in the middle part of the country. But as Michael called out in his commentary is really a differentiator for us. Relative to the pipeline, it's looking pretty attractive. Look, as we discussed at last year's Capital Markets Day, we've identified at least 300 million tons a year businesses that are in store-related markets that we think are compelling to us. As I indicated in my commentary as well, we continue to be focused largely on pure aggregate transactions. And I think New Frontier is a great example of that. I mean, 8.5 million tons is not a trifling acquisition. And we continue to see that opportunity for more, and we look forward to doing that very successfully this year and into next year and beyond. So Adam, I hope that hit the 3 parts. Operator: And our next question comes from the line of Anthony Pettinari with Citi. Anthony Pettinari: I look at the contract awards data that we can see, you've seen very strong contract awards growth in your states really for a number of years. And I think the last 12-month number looks good. But I think for some of the states, maybe we've seen a deceleration in some softer awards just looking at the last 3 to 6 months, if I look at the ARPT data. And understanding these awards are like very, very chunky, especially in the beginning of the year, and you've got a big lag between awards and revenue recognition. I'm just wondering if there's any states where you've been surprised on the contract awards data either positively or negatively? Or just kind of like how we should think about that flowing through as the year progresses? C. Nye: Anthony, thanks for the question. I would say several things. One, if we look at the ARPA data, there's nothing that's been in that that's been surprising to me. I think the other thing that's worth noting is ARPA will typically say that value of contract awards can be particularly volatile in the first quarter. And that's really as state and local governments typically simply bid less work in the early parts of the year. I think importantly, and I'm trying to give you a guide on how to think about it going forward, as your question indicated, I look at the spending authority. And I think that's really important to look at relative to our leading state. So if I'm looking at Texas, which matters disproportionately to us, that's up almost 15%. If I'm looking at Colorado, which is one of our leading states in the west, something nearly 7%. If I'm looking at Georgia, which is a critically important state to us. We're the largest aggregates producer in Georgia, that's up almost 7.5%. And then in California, it's been interesting to watch that. They're up almost 6.5%. So again, as we're looking at what's coming out of the federal government as we're thinking about timing and choppiness that's not unusual, particularly in Q1. And as we're looking at that level of spending authority, in our top DOT states on the public side, it actually gives me a great deal of confidence. The other thing that helps in that respect is simply looking at what's happened so far this year. Now keep in mind, if we're looking at Q1, about 18% of our volume for the full year is going to go in Q1. So I mean, it's not necessarily a driver of anything that's going to happen for the rest of the year. which is why we never, for example, update our guidance at the end of Q1. You have a much better feel for it when you get to half year. But I do think this is notable. If I'm looking at tonnage that went to highways and streets in Q1 versus the prior year quarter, they're up 23%. So I mean I think that gives us a good sense of where it's heading right now and takes me back to some of the commentary that I gave early on if we're being conservative anywhere, it's probably on the volume outlook. And I think as we look at the volume outlook, we're very bullish on the way public is going to pull through. So Anthony, again, I hope that helps you as well. Anthony Pettinari: No, that's extremely helpful. I'll turn it over. Operator: And our next question comes from Tyler Brown with Raymond James. Patrick Brown: Hey, first off, congratulations to everybody on their new roles. It sounds like some movement there, so that's great. But hey, big picture, there are a lot of moving pieces in the numbers this morning. I think pricing was maybe flat on a reported basis. Gross profit per ton was down. You had Quikrete, geo mix, purchase accounting, I mean, all of that's having a big impact. So Michael, is there just any way that we could cut through the clutter, just get some color kind of how ASP and gross profit are looking like on more of a like-to-like basis? Is that mid-single-digit pricing, high single-digit unit profitability algorithm still very much intact. I've just been getting some questions this morning. Just some color there would be helpful. Michael Petro: Yes. No, sure, Tyler. What I would say is, on an organic basis, our guide for the full year would still remain firmly intact, which would see a gross profit up, call it, double digits for the year. Now how that plays out through the balance of the year, as Ward mentioned, there's probably going to be more volume. So volume trending to the high end. In fact, I mean, as we sit here closing April, we're at the high end of a full year guide with how much volume we've already banked. And with the pricing, it's just difficult to make up in a calendar year the pricing that we saw in Q1 given the geo mix over the balance of the next 3 quarters. So what we said is, look, we're seeing that broaden out with the East division, higher ASP leading the way in April. So we're starting to see that geo mix shift on ASP, which also flows through to the margin because it's not only higher ASP, it's lower cost to produce in the East as well. So we're going to see that come through here in Q2 and into the balance of the year. But making that up might be difficult. So we're saying, "Hey, look, organic pricing might be towards the 4% absent any mid-years, but we're going to be out, and in fact, we're already out with midyears pretty much across the entire country, where we expect to see a lot of that is also in the East and where we completed acquisitions this year. So there's nothing in the organic guide that gives us any pause. In fact, we feel pretty confident in that. And then getting to the full year EBITDA guide, as Ward mentioned, Quikrete has actually come out of the gate much better than expected in just one month with $17 million of EBITDA, 42% EBITDA margin, so nicely accretive and their volume is actually exceeding expectations, but at a little bit lower reported ASP. But remember, we always said it was ASP dilutive but margin accretive. So what do we mean by that, is a relatively low cost of production operations. So we're going to start to see that flow through. Once we eat through the inventory markup, which, as Ward mentioned, there's about $44 million of that left to chew through in Q2. But of course, that's an add back to EBITDA, but it's going to be a hit to add gross profit in Q2 just for modeling purposes. But does that answer your question, Tyler? Or any more color you need? Patrick Brown: Yes. Just -- no, just that the algorithm that you guys laid out at Capital Markets Day is firmly intact. That's kind of the takeaway. Michael Petro: Yes. On a price cost spread basis, absolutely. Yes. And think about that really over a 5-year period, not in a quarter or a year. So what we said is there's a long history in this industry -- Martin Marietta specifically of delivering 200 basis points of spread over a 5-year interval. And what we're saying is this year, given -- or this 5-year period, we expect to expand that by about 50 basis points. So look at that over a 5-year period and not in any particular quarter. C. Nye: And Tyler, let me add one more thing to because I think this is more -- because you nailed it in that there are a lot of moving parts right now. So cutting through and trying to get to really clear numbers is important. And the cost performance is something that I want to make sure you have a clear look at too, because I'm looking at that through 2 different lenses. Number one, what does it look like organically? Number two, what does it look like on a consolidated basis? And here's what I would tell you. If we're looking at organic ags cost of goods, I would say several things. One, take out the external freight because that's simply a pass-through. We had some odd one-offs on rail maintenance and track repair expenses. If we're really looking at it same on same, COGS per ton went up about 2.7% organically. If we're looking at it on a consolidated basis and again, taking out the fair market inventory markup, the external freight and just the acquired DD&A. COGS were up around 1.7%. So I think to mid point, that cost price spread that we anticipate seeing is fully intact. And part of what I'm taken by, as you may recall, we actually took our CapEx guide down very purposely coming into the year. because we felt like we had invested in the business really responsibly the last several years, and that really came through in what we're seeing in lower repairs and supply expenses as well. I wanted to come back and give you even more color relative to, okay, these are the things that we talked about at Capital Markets Day. These are the things that you built into a model over time and are they firmly intact. I don't think there's any question as we drilled in and look at these that they are. Michael Feniger: Yes. No, very, very helpful and very much appreciate D&A disclosure. Operator: And our next question comes from the line of Phil Ng with Jefferies. Jesse Barone: It's Jesse on for Phil. Just on Quikrete, was there any disruption in them announcing pricing to start the year just with the pending transaction? And I know it kind of closed a little bit later than maybe you expected. Are you still able to announce kind of mid-years in some of those territories that you just acquired? C. Nye: Thank you for the question. And the short answer is, we are expecting mid-years in those markets. We have already put our correspondence to our customers indicating as much. And obviously, we -- as we've indicated for the ASPs overall that Quikrete had in their business were not at the same level that Martin Marietta typically is. So our aim is to try to get that closer to something that looks normal across our enterprise. So yes, that is very specifically -- one of the areas in which we anticipate midyear price increases. Jesse Barone: Okay. Great. And then just one quick follow-up. You've had specialties in the Premier business for a couple of quarters now. Anything that's kind of sticking out to you, either incremental opportunities or anything that you're kind of more convicted in having owned it for a couple of quarters? C. Nye: What I would say that our conviction remains the same. It was a very attractive business. Now we have the synthetic and natural magnesia. It's a business that continues to have earned the right to grow. -- executing against their plan very, very well. It's not necessarily a seasonal business. So again, I think that's important to have within a seasonal business because it gives you such good stability all the way through portions of the year. So everything we look at in that we like, their safety culture is becoming more aligned with ours. Their margins still have room for improvement, and the core business is running very well. So nothing there to be concerned about from my perspective. Operator: And our next question comes from the line of Angel Castillo with Morgan Stanley. Angel Castillo Malpica: I just wanted to go back to the midyears. Just wanted to go back to the midyears conversation. I was hoping you could talk a little bit about what you're seeing perhaps in the asphalt markets versus ready mix. I think ready mix has seen some push out to April. I guess are you able to try to get mid-years in the ready-mix side as well? Or are those -- how do you kind of address the energy or inflation that you're seeing across those markets? C. Nye: So I would say several things. As we think about hot mix for itself, several things that are worth noting. Number one, we can actually store a lot of liquid. So if we're looking at our fiscal position today, particularly in Minnesota because part of what we bought when we bought Tiller, a very significant tank farm. We use winter fill to go through that. I think from an energy perspective and otherwise, we're going to be in a very good position in our asphalt business. Equally, if we think about the asphalt business, it's not a huge portion of it that's in California, but California also has indexing that's basically there. So as it flows through, we're going to be in fine shape on that. And again, to keep in mind from an EBITDA or other perspective, these downstream businesses are not going to add huge amounts of EBITDA to it. It's really, in some respects, more to take the stone and push it through those markets. So I think we're going to be in a perfectly good spot there. I think relative to concrete, again, if you're looking at where we have concrete now, it's really a pretty concise marketplace. It's really in Arizona. We're talking about a concrete business now that on an annualized basis is going to have, let's call it, about 1.2 million cubic yards. So if you go back several years, and remember, look, this used to be about a 10 million cubic yard business and now it's down to about 1.2 million cubic yards. Arizona is an attractive ready-mix market for us. We are seeing some price increases there. So we would anticipate that business performing very much in line with the way that we indicated. And again, given what we can do on asphalt and liquid storage, we don't feel like the energy component is going to be a threat to that business on the hot mix side either. Angel Castillo Malpica: Very helpful. And then what I wanted to follow up on your comments that April is off to a very good start and pushing your shipment volumes perhaps to the higher end. I guess can you talk a little bit more, particularly on the -- I guess, on the private side, I think you've given a lot on the public side, that's really helpful. But just as it pertains to what you're seeing here in April and what you saw in sounds like weather a lot a little bit maybe of activity to start earlier on, but are you seeing projects that maybe weren't in the backlog move forward faster, just greater confidence? Or how do we kind of reconcile the strength in some of that volume what you might be seeing on the private side, just with some of the rising costs, rising interest rates and other factors that we're hearing? C. Nye: Sure. I'll pivot nice the private side and say several things. One, if we're looking in the quarter on what we saw relative to warehousing. And warehousing was up 57%. If we're looking at what we saw relative to data centers. Data centers were up 62%. If we're looking at what we're seeing in degrees of different forms of energy, for example, LNG for us during the quarter was up 20%. If we go and take a look at what's going on in shale. I mean, shale was up on a percentage basis a ridiculous percentage amount simply because it's coming from such a low base. But part of what I think is important to remind people probably back in 2010 or '11, we were sending about 7.5 million tons of stone per annum to the different shale plays across the United States. So think about what that means. That's about 1 million tons less than the New Frontier business that we just bought. So again, as I'm looking at what's happening with warehousing. And so I look at what's happening with data centers. As I look at what's going on relative to energy. Those are the types of things that, as we look you said, at the private side that gives us that degree of confidence. But what I'm taking on the warehousing in particular, this isn't just an Amazon show anymore. It's much broader than that. We're seeing it with Walmart. We're seeing loss distribution centers. Dell Hays is building a nice distribution center in North Carolina right now. But -- to be even more specific, if we go through and look at the LNG project pipeline today, on projects that are currently supplied by Martin Marietta, they're going to consume about 10.6 million tons. So if we look at projects we believe are potentially coming our way relative to LNG and otherwise. I mean, that's another 33 million tons. And I'm sorry, I that first number I gave you on projects was in fact, LNG, and that was on projects at 10.6 million. Data centers are right at 3.27 million tons that are estimated and well over 2 million just for this year. So again, if we're looking at the heavy side of non-res, there's nothing there that doesn't look pretty attractive to us. Now to your point, on residential and like non-res you get the same story that we do and that is those are highly interest rate affected areas. They are not booming in any respect right now. So what I'm really taken by is we're putting up double-digit volume growth, and we've got those interest rate sensitive portions of our business that are, frankly, not doing anything right now. But here's what we know. If we're looking at the overall housing market in the United States generally in Martin Marietta states specifically, everything that I've seen indicates that it's going to require about 4 million additional homes simply to restore a balance. So as I'm looking at these areas that are more interest rate sensitive, to me, it's not a matter of whether they return, they're going to return. It's a matter of when they return. And then if we come back to this notion, do I think infrastructure is in a place that it's going to be steady for a while. And by that, I don't mean quarters and months, but years. I think it is. If we look at the rate of growth in energy data centers, warehousing, et cetera, that, too, to me, looks like it's probably a multiyear run. And I think somewhere in there, you're going to see private decide they're -- they're going to stop being spectators and get in the game. So Angela, I hope that gives you some specifics around the areas of what you asked. Operator: And our next question comes from the line of Steven Fisher with UBS. Steven Fisher: Just wanted to follow up again on the midyear price increases. It sounds like you're pretty confident in them. Can you just remind us how much of that is sort of an automatic I think you mentioned California has indexing. So how much of that from a process perspective just flows through versus negotiated? And have you gotten any preliminary feedback from customers on this, are people just sort of resolved that this is going to happen because of all the inflationary pressures on fuel and everything. So that's one question. And then just a clarification on what you assume for the residential markets for your residential business in the second half of the year? . C. Nye: So Steven, I would thank you for the question. I would say several things, Steven. One, let's make sure we're keeping buckets really clear. So when we're talking about the indexing of thing, that's really more relative to liquid and what's going on in asphalt and places like California. So really put that in the same bucket that I do midyear pricing in stone. So what I would say is this, we saw midyear pricing last year in aggregates. We saw it principally in areas where we had done new acquisitions. I think we will certainly see that again. But I think it's going to be more broad-based than that because of the inflationary trends that you've highlighted. So if you want to say, look, we're not going to about 1,000 on it. But if you say we've added 300 last year that would have put you in the hall of fame. Look, we're going to not be at 300 and we're not going to be at 1,000, but we'll be somewhere between those two. And I think it's going to be a really attractive percentage for all the reasons that you said. I think customers are seeing inflation in what they're trying to manage from their cost perspective. We are as well. And this is just something that if we're going to be responsible stewards of our business, we need to do this. So I wanted to break out and differentiate what you spoke specifically in California with really what we're talking about on midyear and give you a sense of what realization I think we're likely to see in that respect. Steve, I assume -- I hope that helped. Steven Fisher: Yes. That was very helpful. And if you had a comment on the resi business expectation for the second half, that would be great as well. C. Nye: Yes. We came into the year with very low expectations of resi, and I don't think it's going to disappoint us. I think it's going to continue to -- there's just not going to be anything that's going to be, at least in my view, a real pop on that. And that's exactly why we came into the year with it case the way that we did. So resi is moving exactly as we thought it would. And that's why I'm taking with the rest of it. You're seeing a nice volume pop with resi not yet at the party. At the same time, we go back to that notion that I shared before. Martin Marietta has built its business very purposefully in states that have significant population inflows coming in. And the housing markets in most of our MSAs is pretty tight. So I think it's a matter of time, but it's not going to be this year. Operator: And our next question comes from the line of Rohit Seth with B. Riley Securities. Rohit Seth: You started talking about the network optimization a couple of quarters ago. I want to get an update on how things are trending in the first quarter. C. Nye: Thanks for the question. It continues to go quite well. And as you recall, we said at the time, we would probably come back at half year and give you a good sense of how that's working. But again, if we go back to the notion and the numbers that I went through a little while ago, really looking at organic costs up 2.7%. Looking at consolidated costs, the way that we look at them, up 1.7%, really looking at repairs, supplies. I mean if anything, frankly, those are, frankly, in the green for the quarter. So we continue to feel like the program itself is working. It still has some maturity to go through, and we look forward to having a more robust conversation with you about that at half year. Rohit Seth: All right. And just to clarify on the guidance, in terms of the upside leverage that you guys have, it's the mid-year pricing that's not in the guidance, the network optimization that you're going to address at midyear is also not in the guidance and then the NFM acquisition as well, correct? C. Nye: That's exactly right. So those are all -- I'm going to say, more than potential upsides to the guy. Those will all be, I think, meaningful upside to the guide. Operator: And our next question comes from the line of Garik Shmois with Loop Capital Markets. Zack Pacheco: This is actually Zack Pacheco on for Garik today. Just a quick one on the bidding environment. Just curious, given oil inflation pressure, are you seeing any rebidding right now? Or is that not really something popping out? C. Nye: Yes, it's a good question. And the short answer is no. We really haven't seen that. It's been pretty steady, pretty consistent. No real surprises there. If we see anything that's different in that, we'll obviously talk about it at half year. But as we're sitting here toward the end of April, it has largely been a nonevent, but it's a good question. Operator: And our next question comes from the line of Mike Dudas with Vertical Research. Michael Dudas: Maybe one from -- Michael, looking at the balance sheet and before you ended the quarter and on a pro forma basis, given the acquisition and any working capital or cash flow changes, will net levels of that be fairly similar? How should we think about that when we see the close of the transaction? On the acquisition and the capacity you have for further acquisitions, Ward, is the pipeline weighted and your thoughts weighted towards adding to some of your existing levels or maybe some of the levels that you just recently purchased -- or companies in look the last couple of years? Or is Martin Marietta really to step out in some other areas to put store into place outside of its current regions? C. Nye: But let me take part two of that, and Michael will come back and take part one of that. So here's part of the glorious position that we find ourselves in today. With the coast-to-coast business now that we have, particularly after the transaction with Heidelberg that put us in California and Arizona, that's put us number one, coast-to-coast, number two, with a footprint now in every mega region. And now with things like the transaction that we did with Quikrete, for example, an even more significant footprint in the Northwestern United States as well. So I think what's going to happen is a practical matter, is transactions that we would do will all tend to have something of a bolt-on feel to it relative to the concept of how close is it to an overall Martin Marietta business. And I like that because the most dangerous transactions you do is when you go into a brand-new area of the country. You don't have a team there, you don't have a history there and you're having to go in and kind of reinvent yourself. I don't think we're in positions that we need to do that anymore. Now does that mean the transactions financially on occasion won't look like a platform transaction? No, it doesn't mean that at all. So what I'm taken by and I continue to be taken by is the size and the scope of some of the potential transactions that we're looking at or that we may be looking at. So we may come to you at some point this year, next year or others, with transactions financially that you would say that looks and feels like a platform transaction. But when you look at it geographically, you're going to say, but it's going to act like a bolt-on transaction. I think that might be the best of both worlds. Now with that as an aim, Michael can come back and talk to you about where we sit financially. Michael Petro: Yes. From a balance sheet standpoint, these transactions, New Frontier pro forma specifically to your question, would not really move the needle on our leverage ratio because remember, we had the cash proceeds coming in from the Quikrete transaction, number one. And number two, we just sit here at the end of sort 2025, generating over $1 billion of free cash flow after dividends that we've said we'd back to work, primarily in aggregate led M&A. And so we -- the pipeline that we're talking about here, we think that fits right within that free cash flow generation redeployment. Operator: And our next question comes from the line of David MacGregor with Longbow Research. David S. MacGregor: Ward, you were asked earlier about bidding. I guess I wanted to come back to that kind of bigger topic just -- and get your sense of how you're seeing state DOTs responding to project cost inflation. Are you seeing them skew the resources to larger or smaller projects? Maybe how much push forward to '27 are you seeing any cancellations as they focus limited resources on their top priority projects? And maybe how quickly they're revising engineers' estimates? C. Nye: So great questions all there. No, we're not seeing anything pushed out, David, number one. Number two, we continue to see them trend toward larger as opposed to smaller projects, which I think underscores the view that I think going back to the IIJA conversation that we had, I don't think states tend to see any break in the funding and the way that they're going about this because I think they feel like is going to get done timely, if it doesn't be 1 CR, then we're into a new cycle. When I went through those numbers that I gave you before, just simply talking about what it looked like in Q1 when we said streets and highways were up 23%. If we think about the fact that we're sitting here today and still half of that money is still yet to be deployed. I think state DOTs want to get that in play and they want to get in place sooner rather than later. I think equally, when we come back and look at our state DOTs more specifically and think about what's Texas thinking? What's North Carolina thinking? What's Georgia thinking? What's Florida thinking? These are states that need to add capacity. And I think they're very focused on capacity, which again takes us to what I think will continue to be an increasingly aggregates intensive type of work. that are not seeing the same degree of population inflows that we're seeing tend to default to more maintenance and repair. And that's simply not as aggregates intensive as either building new roads or building new lanes. And I continue to think that's where our DOTs are largely to be focused right now. David, did I answer all your questions? Or is there another component I did not answer? David S. MacGregor: No, that was pretty good, Ward. Maybe just -- I wanted to get your temperature on midyear pricing as well and any features of how you're pursuing the increases this year that could make it more impactful to second half realizations than they would normally be -- post just the compounding benefit into the new year? C. Nye: Well, I think we'll clearly see the compounding benefit into the new year. I mean that's always there. I think the question that you're asking is a good one to that is how much of it are you going to realize during the course of the year? History tells us, typically, we'd realize about 25% of it during the course of the year in which it was put in, then you'd have the compounding benefit going into the next year. If we continue to see this rate and pace of work on non-res and res, I think you could see a higher realization than that historic 25%. I'm not willing to get in over my skis on that at this point. So I would ask you not to model that in, but at least that's what it looks like historically. But again, if you go back to those numbers that we're seeing on the up, on infra, the up on warehouse, the up on data, the up on energy, I don't see that abating here over the next few months. So David, that's what makes me at least think there's a likelihood that you might see greater realization. Operator: And then our final question comes from the line of Ivan Yi with Wolfe Research. Ivan Yi: Last week, CSX on the earnings call highlighted a large expansion of a Martin aggregates loading facility in Florida. Can you just comment this on this a little more, how much are volumes increasing through this facility? And is this supporting data center growth in particular? And lastly, what are the cost advantages you're experiencing from shipping more rail versus truck? C. Nye: Ivan, I'll take the front end that, Michael will take some of that as well. So we'll split this up a little bit. So if you go back and think about it, Ivan, we send more stone by rail than any other stone produced in the country. So we're going to ship about 30 million tons per annum by rail. Obviously, we'd like to do more of that because you have to have two things to make that work, a rail producing quarry in a rail yard in a market that needs the product. What we're primarily doing in Florida is, historically, it's been by rail, an infrastructure play for us. Because what we're doing is we're the largest importer of Granite into that marketplace. So we're coming in by granite by rail, which means we're coming in by CSX. So you mentioned we're coming in by Norfolk Southern. And we're also coming in by Panamax vessels out of Nova Scotia. So those are our vehicles literally to bring Granite into a granite starved state. So again, if we look at Florida DOT and the way it's going to continue to grow, asphalt producers in that state will prefer a granite product because it's not as absorptive of liquid asphalt. If we go back to the notion that liquid has moved pretty considerably in price, you're over $500 a tonne, usually on average if you can put an asphalt mix down and back off on the liquid, that's actually very helpful. The other thing is Granite tends not to polish the same way that Limestone does. So if you're looking at a top coat on asphalt, it's better. Now relative to other data center and related activity in Florida, number one, we have grown our overall presence in that market with what you've seen with Bluewater and what you're seeing with Younis Brothers as well. So we have the ability to hit more of that market by truck than we ever have before. We're ramping up our ability to continue to hit that market by rail. Michael, anything you want to add? Michael Petro: Yes, I would just say, given our rail network, not specifically in Florida, but more so in Texas and East Texas, in particular, one thing that we started seeing in Q1, and Ward mentioned it is the Haynesville shale coming back online. So that's the direct pipeline down to the LNG export facilities. So we have rail terminals in East Texas and West Louisiana that we can reach that others simply can't. So we saw an acceleration there. And then we also have now West Texas terminals where we can get down to Abilene and around Stargate, and we can get out to Amarillo, Texas all the way from Mill Creek, Oklahoma to serve a large data center project there. So what you'll start seeing is those projects start to come online over the balance of the year. You will actually see that ASP mix headwind that we had in Q1 start reversing into a tailwind as we sell those products, FOB, the terminal typically pretty attractive ASPs because you have the embedded rail freight in those. So I hope that answers your question there. Operator: And that concludes our question-and-answer session. I will now turn the conference back over to Mr. Ward Nye for closing remarks. C. Nye: Happy. Thank you, and thank you, all, for joining today's earnings conference call. We're very pleased with the company's strong start to 2026 marked by outstanding safety results, solid operational execution and resilient financial performance. The results reflect the strength of our strategy, the quality of our portfolio, and most importantly, the dedication of our employees across the organization. Heading into the year's busier construction months, Martin Marietta enters the remainder of 2026 in a position of strength. Our aggregates led portfolio concentrated in the nation's most attractive markets, supported by a differentiated Specialties business and a strong balance sheet provides us with the resilience and flexibility to perform consistently across cycles and continue compounding long-term value for our shareholders. We look forward to sharing our second quarter 2026 results in the summer. As always, we're available for any follow-up questions. Thank you again for your time and your continued support of Martin Marietta. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
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.