加载中...
共找到 17,821 条相关资讯
== — Facebook: https://www.facebook.com/yahoofinance — X/Twitter: https://x.com/YahooFinance — Instagram: https://www.instagram.com/yahoofinance/ — TikTok: https://www.tiktok.com/@yahoofinance — LinkedIn: https://www.linkedin.com/company/yahoo-finance https://finance.yahoo.com/
Fed Chair Powell said he is staying on the Fed because of the legal actions taken against him and will leave when he thinks “it's appropriate to do so.”
The Mag 7 put in a triple top this past fall and early this year before the more prolonged selloff from late January through late last month. GOOGL has been in a tighter range over the past few days without the same clear breakout as AMZN saw.
Fed Chair Powell said he would continue acting as a Fed governor after his chairmanship concludes. "The things that have happened in, really in the last three months have, I think, left me no choice," he said.
Operator: Thank you for standing by, and welcome to Waste Management, Inc.'s First Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Edward A. Egl, Vice President, Investor Relations. Please go ahead, sir. Edward A. Egl: Thank you, Jonathan. Good morning, everyone, and thank you for joining us for our first quarter 2026 earnings conference call. With me this morning are James C. Fish, Chief Executive Officer; John J. Morris, President and Chief Operating Officer; and David Reed, Executive Vice President and Chief Financial Officer. You will hear prepared comments from each of them today. I will cover high-level financials and provide a strategic update. John will cover an operating overview, and David will cover the details of the financials. Before we get started, please note that we have filed a Form 8-K that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release, and the schedules for the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections, or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K and Form 10-Qs. James and John will discuss our results in the areas of yield and volume, which, unless stated otherwise, more specifically reference internal revenue growth, or IRG, from yield or volume. During the call, James, John, and David will discuss operating EBITDA, which is income from operations before depreciation, depletion, amortization, and accretion. Beginning this year, landfill accretion expense was moved from operating expense to depreciation, depletion, amortization, and accretion to enhance comparability and better reflect operating performance. For comparability purposes, 2025 actuals have been updated to reflect the change. Any comparisons, unless otherwise stated, will be with the prior-year period. Net income, EPS, income from operations and margin, operating EBITDA and margin, operating expense and margin, and SG&A expense and margin have been adjusted to enhance comparability by excluding certain items management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to our earnings press release and tables, which can be found at the company's website at www.wm.com, for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1 p.m. Eastern time today. To hear a replay of the call, access the Waste Management, Inc. website at investors.wm.com. Time-sensitive information provided during today's call, which is occurring on 04/29/2026, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of Waste Management, Inc. is prohibited. I will now turn the call over to Waste Management, Inc. CEO, James C. Fish. James C. Fish: Thanks, Ed, and thank you all for joining us. The Waste Management, Inc. team again delivered strong quarterly results with earnings and cash flow results that achieved our expectations. What continues to set us apart is our ability to consistently achieve strong performance regardless of external factors. Q1 operating EBITDA grew by nearly 6% compared to 2025, driven by solid performance in our collection and disposal business, and further supported by growth in our sustainability businesses and ongoing optimization of health care solutions. This momentum to start the year, combined with our proven operational execution and resilient business model, reinforces our confidence in achieving our full-year financial guidance. In the first quarter, our results clearly advanced each of our four strategic priorities for 2026. First, we grew our collection and disposal business, achieving 6.4% operating EBITDA growth supported by our focus on customer lifetime value, operational excellence, and network advantages. Our strategically positioned post-collection network is driving profitable MSW volume growth while our technology leadership leads to differentiated services and lower costs. Our people-first culture and disciplined approach to retention are driving meaningful improvements in safety, service reliability, and operational efficiency. As we look ahead, we continue to see opportunities for tuck-in acquisitions that complement our existing portfolio that we expect to close in 2026. Second, our sustainability investments continue to generate meaningful returns, underscoring the value of the capital we have deployed over time. In renewable energy, operating EBITDA more than doubled in the quarter, driven by the completion of seven new renewable natural gas facilities since 2025. In the recycling segment, even though pricing for single-stream commodities declined 27%, operating EBITDA grew by 18% as we realized automation benefits that lower labor costs and deliver higher-quality material, and processed 9% more volume. In 2026, we are on track to substantially complete the sustainability capital expenditure program we laid out in 2023. Third, in health care solutions, we continue to advance the business towards scalable, accretive growth. While revenue was impacted by volume losses from last year, effective cost management and synergy capture drove operating EBITDA growth of nearly 12% in the quarter. Importantly, we expect an inflection in revenue growth in 2026 as the ERP is stabilized and the benefits of our integrated offering become more evident. And finally, turning to capital allocation. Our strong operating performance translated into significant free cash flow generation with Q1 free cash flow of $920 million, nearly doubling from the prior year. This enabled us to return about $730 million to shareholders through dividends and share repurchases. As we close out the first quarter, our performance reinforces both the strength of our strategy and its alignment with the long-term trends shaping our business: delivering consistent results in our core operations, realizing returns from years of disciplined investment in sustainability, advancing health care solutions towards scalable growth, and pairing that execution with a thoughtful, shareholder-focused approach to capital allocation. As we progress through 2026, we are well-positioned to continue to produce strong results and harvest the benefits of our investments. I want to thank our employees for their continued dedication and hard work. I will turn the call over to John to discuss our operational results. John J. Morris: Thanks, James, and good morning. The first quarter once again demonstrated the strength and resilience of our operating model and the progress we continue to make in optimizing our business. Despite a softer volume environment, driven largely by winter weather impacts and the absence of last year's wildfire-related volumes, we delivered strong financial performance by remaining focused on disciplined price execution, technology-enabled efficiency, and cost control. This is clearly visible in our collection and disposal business where we delivered operating EBITDA growth of more than 6% year-over-year with margin expanding approximately 110 basis points. From a cost perspective, our focus on operational excellence continues to drive meaningful results. Operating expenses as a percentage of revenue improved 70 basis points and came in below 60% for the fifth consecutive quarter, underscoring the durability of the structural changes we are making across the business. Automation and technology continue to help us flex costs as volumes fluctuate. As an example, whole dollars repair and maintenance costs were actually lower year-over-year and improved by approximately 30 basis points as a percentage of revenue. This improvement reflects innovative solutions and disciplined fleet actions, including the use of augmented reality tools to improve technician efficiency, and continued benefits from rightsizing the fleet. Together, these initiatives are improving asset utilization and delivering sustainable cost savings. Equally important, our people-first approach continues to show up in our results. Total driver and technician turnover, both voluntary and involuntary, remained low at 17.2%, improving 130 basis points year-over-year. The strong retention supports safer operations, higher service reliability, and greater efficiency across the business. Notably, our first quarter safety performance was our best-ever Q1 performance for safety-related incidents, which is particularly impressive given the challenging winter weather conditions. Together, these results reflect the engagement, consistency, and dedication our teams bring to executing our strategy every day. Turning to the top line. Pricing execution remains strong. Each of collection and disposal's core price of 6.3% and yield of 3.9% exceeded our expectations, with pricing dollars up year-over-year. Core price growth in our commercial and landfill lines of business each exceeded 7.5%, reflecting the value of our service offerings, consistent execution in the field, and focus on price-to-cost spread. Shifting to volumes, we began the year softer than expected, with about half of the shortfall in collection and disposal volumes driven by severe winter weather. We did see several areas of underlying strength and stability. MSW volumes were up 2.7%, and special waste volumes were up 6.7% when excluding wildfire volumes from the prior year. Industrial collection volumes returned to modest growth in the quarter, supported by continued internalization of solid waste from health care solutions customers. While volumes were a headwind early in the year, we expect improvement from seasonality as well as the lapping of a couple of larger, low-margin contract losses in the balance of the year. In Q1, our energy surcharge program recovered the increase in both direct and indirect fuel costs we saw in the first quarter. Higher revenue from fuel recovery created a 20 basis point drag on operating EBITDA margin. Putting together these pieces on pricing, volume, and energy surcharges, we expect to achieve our full-year revenue guidance in 2026. Turning to health care solutions. We continue to see the benefits of integration into our core operating structure. Operating EBITDA margin improved by 200 basis points in the quarter, while SG&A costs decreased roughly 20% year-over-year, reflecting discipline, operational alignment, and the benefits of Waste Management, Inc.'s integrated business model. We remain on track to achieve a run rate of $300 million of total synergies by 2027 with results reflected across all of our business segments. In closing, I want to thank our teams for their continued focus, discipline, and commitment to serving our customers. The strong start to the year reinforces our confidence in our strategy, operating model, and ability to perform consistently in a dynamic operating environment. With that, I will turn the call over to David to walk through our financial results in more detail. David Reed: Thanks, John, and good morning. We are pleased with our strong start to 2026, particularly when looking at the drivers of our first quarter operating EBITDA margin expansion, which reflects solid contributions from across the business. The collection and disposal business expanded margin by 110 basis points driven by strong pricing and our success using technology and automation to reduce costs. This growth includes the 20 basis point headwind John mentioned from the impact of higher fuel prices. Our recycling and renewable energy businesses together contributed approximately 50 basis points of margin expansion, reflecting accretive growth from investments in renewable natural gas facilities and recycling automation and new market projects. Health care solutions contributed another 20 basis points of margin expansion due to effective cost management and synergy capture. These contributions were partially offset by 40 basis points of increased spending on technology initiatives and 70 basis points related to higher cost and timing-related impacts from incentive compensation and employee benefit costs. The strong execution translated into robust cash generation. Operating cash flow was $1.5 billion in the quarter, an increase of nearly $300 million compared to 2025. The increase was driven by working capital improvements and our strong earnings growth. Capital expenditures totaled $650 million in the quarter, including $61 million directed to sustainability growth investments. Capital spending was approximately 22% lower year-over-year, as expected, reflecting normalized spend on collection vehicles and lower sustainability capital as several projects reached completion during 2025. Combining all of this, first quarter free cash flow nearly doubled to $920 million, putting us on track to achieve our full-year guidance. As James mentioned, we allocated the majority of our free cash flow to shareholder returns in the first quarter. We returned $385 million to shareholders in dividends, and we resumed share buybacks, repurchasing $344 million of our shares. Our leverage ratio at the end of the quarter was 2.94 times, returning to within our target range of between 2.5 and 3 times. Our effective tax rate was approximately 18% in the first quarter, lower than planned, driven largely by the benefit of production tax credits related to our renewable natural gas business. During the quarter, the IRS clarified the qualification for these credits. We now expect to realize benefits during the next several years, another value add from our strategic decision to grow our renewable natural gas portfolio. That benefit is approximately $27 million for the 2025 tax year and $30 million to $35 million annually from this year through 2029. As a result of receiving 2025 and 2026 production tax credits, we now expect a full-year effective tax rate of approximately 23% in 2026. In closing, I want to thank the entire Waste Management, Inc. team for their continued focus and execution. Their dedication has driven a strong start to the year and positions us well to deliver on our full-year financial guidance. Through our disciplined approach to operations, capital allocation, and investment, we remain confident in our ability to create long-term value for shareholders. With that, Jonathan, let us open the line for questions. Operator: Certainly. Our first question comes from the line of Jerry Revich from Wells Fargo. Your question, please. Jerry Revich: Thanks. I just want to unpack the really strong margin performance despite the lower volumes. In the quarter, really nice price-cost. As we think about the volume cadence over the balance of the year, can we double click on what gives you confidence that volume trends will be better in the back half of the year? Can you quantify the weather impact? If you want to talk about it month by month or just give us more visibility on that point, that would be helpful. David Reed: Just in terms of the margin trajectory for the back half of the year, you should note that Q2 will be a tough comp for us with the wildfire volumes, but we do expect EBITDA margin to lift nicely from there in the second half and follow a pattern similar to what we saw in 2025. We had a strong start to our pricing plan for the year, and that also gives us confidence with the margin trajectory. James C. Fish: And then, Jerry, as far as volume goes for the remainder of the year, first quarter was impacted by weather. We do not normally talk about weather because it happens every year, but this year in particular along the East Coast, three feet of snow in Boston—I do not think they have had that in 15 years. It did impact us. We had a number of facilities that were shut down. Some of our facilities were shut down for as many as 10 days, including our Stericycle facilities. So it did have a significant impact on volume. As we look at volume going forward, there are a couple of things that give us reason to be optimistic. Specifically, special waste, which we knew was going to be a difficult comp because of Southern California fire volume last year. Including the fire volume, it was down about 1.5%. But excluding it, as John mentioned, it was up 6.7%. The reason that is meaningful is because it gives us an indication of what special waste will look like when we anniversary this fire volume, which is for the most part at the end of Q2. We did get some fire volume in Q3 in the month of July, and then it almost all went away after July. So we will get to a clean year-over-year for special waste by August, and this gives us an indication that special waste volume should be strong for us—6.7% is a pretty decent number. John also mentioned MSW volume. Looking at the numbers for last week, MSW volume was over 4% positive for us, which is a positive. And industrial volumes have finally shown a reversal of a six- or seven-quarter trend. We had been negative on roll-off volumes for at least a year and a half, and we finally got to a point where we are slightly positive—about 0.2% positive versus last year's approximately 1.5% negative. We are fairly encouraged with volume numbers. Will we hit our guidance for the year? We will reassess at the end of Q2, but we are encouraged with what we are seeing on the volume side. Jerry Revich: Okay. I appreciate the color. And just to unpack the comments about the tough margin comp in 2Q, I think normally you are up somewhere around 150 to 200 basis points margins in 2Q versus 1Q. Given the weather that we just stepped through, it does look like you should be in a position for good year-over-year margin expansion in 2Q even with the tough comps from the wildfire standpoint, given the run rate in 1Q. I just want to make sure we are on the same page and not miss any moving pieces in the 1Q results as we think about the normal seasonality for 2Q. John J. Morris: Jerry, I would say the outsized impact of the wildfires in Q2 is really worth noting again. I think the revenue number was about $85 million and probably strong flow-through on that EBITDA. If you take that out, what I would point you to is, if you look back in the tables, you can see whether it is collection, disposal, recycling, renewable energy, or health care, you can see the margin improvement in Q1. Net of the fire headwinds, we are going to see good margin from Q1 to Q2, but it will be somewhat muted by that volume not repeating in the landfill line of business. Analyst: Thank you. James C. Fish: Sure. Analyst: Good morning. Can you hear me? David Reed: Yes. Good morning. Thanks for taking the question. Analyst: Overall, really strong margin expansion in the quarter. The only item that jumped out in a negative way was the magnitude of the increase in corporate expense. You had been flagging that would be up because of some technology-related investments. Is the level of increase in 1Q appropriate for 2Q, or should we think about that moderating throughout the year? David Reed: Thanks for the question. We did expect Q1 to be a tougher comp in this segment. I will break it down into two pieces. There was a health and welfare cost aspect to an unusually favorable Q1 last year—it had some one-time benefits—so that made the year-over-year comp a bit difficult. We also had higher annual incentive compensation and annual wage increases, along with the increased technology costs that you mentioned. Those costs support strategic initiatives that benefit other segments, and if you look at the overall performance of those other segments, I think you are seeing some of the returns on those investments. In terms of cadence for the rest of the year, Q1 is indicative—it is a normalized rate for the remainder of the year. It is pretty flat throughout the rest of the year at the Q1 level. Analyst: Understood. Thank you. And then, John, you mentioned surcharges for rising fuel costs. Do you anticipate any drag on EBITDA in 2Q given potential timing differences between rising costs and surcharge implementation, or is this happening in real time? John J. Morris: It is almost real time. There is a little bit of drag—we said 20 basis points on the margin side. Based on the way our billing cycles work, there is about a month lag, but from an EBITDA standpoint it is not going to be anything material. Operator: Thank you. Our next question comes from the line of James Joseph Schumm from TD Cowen. Your question, please. James Joseph Schumm: Hey, good morning. Looking at the solid waste volumes up quite a bit and transfer station volumes down, what is driving that? Does that have something to do with Waste Management, Inc. Health Care? James C. Fish: No, James. The transfer volume is probably as much about the Northeast and the weather. In the New York metro area, there was significant impact due to the weather. That is really what is driving the transfer volume, not the health care business. James Joseph Schumm: Okay, I see. On the health care business, can you give us a sense of customer credits? You said they peaked in Q4. What did that look like in Q1 and what does it look like in Q2? How is that trending? David Reed: Customer credits peaked in Q4, as we said, and then fell off a little bit in Q1 and Q2, and then they will really reverse when we get to Q3 and Q4. So the year-over-year comp becomes quite a bit easier in Q3 and Q4. James C. Fish: Overall, as I look at the health care business, it is really turning out to be exactly what we hoped it would be. EBITDA improved by almost 12%. We are better than our own business plan by about 3%. Pricing is right on track with where we thought it would be. We said last quarter that the year on the top line was largely going to be about price, not volume. Volume would be negative, mostly a function of losing a couple of hospitals. We projected to lose three hospitals; we actually only ended up losing one. That was a positive. I think the reason we only lost one is because our customers are now getting a very payable invoice. All the work that continues to happen—we are still working on ERP—is behind the scenes, so it is invisible to the customers, and that is a real positive. The ERP is progressing, but we wanted to make sure it was not visible to the customer. We will continue to do the technology work, the systems work, and the process work, which is ongoing. A lot of that will be done by the end of the year; some will carry over into next year. My biggest concern was the customer, and now the customer is getting a good bill. That is why we only ended up losing one of the three hospitals. As I think about cross-selling or synergies, cross-selling has been a positive. We had two big cross-selling closes for the quarter that benefited both health care solutions and solid waste. Pricing is on track and continues to improve as we get into the rest of the year. Synergies are at or even potentially ahead of plan. We are moving fleet maintenance in-house; that should be a positive on the cost line. Overall, we are very pleased. The credit memos in large part in Q4 were really cleaning up the mess from prior periods. We will always have credit memos, including in our solid waste business, but if you look at things like DSO—down 14 days—that is a major change. Past-due receivables are down by two-thirds over less than a year. All of those are positive signs, and we think that the health care solutions business is shaping up to be exactly what we hoped when we bought it. James Joseph Schumm: Since you brought it up, on the synergies on the path to $300 million, roughly where are you now? David Reed: The total number we said would be $300 million; I think $50 million of that was cross-selling benefits. We are on track for that number, and you could argue we may be ahead of that a little bit. We are targeting $300 million still, but it could end up ahead of that and maybe as high as $325 million. Operator: Our next question comes from the line of Faiza Alwy from Deutsche Bank. Your question, please. Faiza Alwy: Hi, thank you so much. What are you seeing from a recycling commodity pricing perspective? Given higher oil prices, are you expecting an improvement in those prices, and can you help frame that in terms of upside? I know you are typically hedged, so potential upside to revenue and EBITDA? Tara J. Hemmer: We were pleased with where we exited the quarter. March was at about $69 a ton, and as you recall, we guided to $70 a ton, so we feel positive about where that is heading. Two points: about 80% of our commodities stay domestic between the U.S. and Canada. We do have some exposure to what is happening globally, which really is about freight disruptions given what is going on in the Middle East. We have no qualms about demand for our products; it is really about us tracking what those freight costs might look like, and that will be a function of how long this goes on in the Middle East. That being said, we feel really positive about the $70 per ton that we guided to. We will give more of an update in Q2 on where we think it could head up or down. Faiza Alwy: Thank you. And on the health care cross-selling opportunities, could you frame how much of the improvement you are seeing on the industrial volume side is related to cross-selling benefits, and how much better are you doing relative to the underlying market? James C. Fish: That is a good question. We will have to get back to you on how much of that cross-selling actually impacts the industrial line of business. I can tell you the annualized EBITDA benefit was about $27 million from cross-selling, but I do not know offhand how much of it was in the industrial line of business. Operator: Thank you. Our next question comes from the line of Trevor Romeo from William Blair. Your question, please. Trevor Romeo: Good morning, and thank you. On collection and disposal pricing, I think you said both core price and yield were coming in a little ahead of what you had expected. Where are you seeing pricing stick a little better than you thought, and what are the drivers? And then if CPI starts to trend higher, and given some contracts take time to reset, how does that impact your ability to price in a higher inflationary environment? Could we see those pricing and spread metrics move up into 2027? James C. Fish: I will take the second part first on CPI. We tend to say there is about a one- to two-quarter lag on the adjustments for CPI. About 40% to 45% of our total revenue is based on an index. Those indexes tend to reset on a quarterly basis, and it often takes two quarters for that reset to take place. Any movement in CPI we would have seen in Q1 probably will not have much of an impact until the back half of the year. On price overall, two lines of business were ahead of expectations—residential (Resi) and MSW. Resi yield was up 110 basis points versus 2025, and yield was 6.3%. That is really strong for residential. We have been talking about residential for quite a while as we have pared down some unprofitable business, and that is part of that exercise. MSW might have been the single most impressive performer for the entire quarter, both on volume and price. MSW yield was 6.9%. What you are seeing with MSW yield—and this takes place slowly over years—we talked about it at last June’s Investor Day—as landfill capacity slowly comes offline for the industry or moves to more center-U.S. locations away from big cities, we end up in a better position because our lives—our landfill lives—are longer than the rest of the industry. It gives us the ability to raise price to preserve airspace, and that is what you are seeing with MSW yield up 6.9%. It is a bit of cost recovery, but also airspace preservation. Those were both upside surprises. The rest were pretty much on track. Trevor Romeo: Thanks. I would also love your perspective on AI and new technologies. Waste Management, Inc. has been leaning into automation for a long time, but in terms of AI, are there new tools you are looking at that could accelerate your efficiency going forward? John J. Morris: Good question. We have embedded technology into the business across recycling, routing, and logistics with the roughly 19 thousand trucks we have on the street, and in the health care business. A lot of the technology benefits we see in our traditional collection and disposal business have yet to show up in the health care business, so we see upside there. We still feel like we are in the early innings in terms of embedding technology to drive efficiency and improve the roles, making them less labor dependent. Our turnover at 17-plus percent is the lowest it has ever been; part of that is we are changing the scope of roles. On safety, our best Q1 safety numbers ever are helped by using AI for coaching with our 20 thousand-plus drivers. As much benefit as we have seen show up in OpEx and margins, we still see a lot of runway to continue to accelerate those investments. Operator: Thank you. Our next question comes from the line of Noah Duke Kaye from Oppenheimer. Your question, please. Noah Duke Kaye: Following on the safety discussion, risk management is at about 1.5% of sales, which is very good. That is a lagging indicator of safety performance. How sustainable are these gains on safety? Could we get further benefit, and how should we think about that translating to risk management going forward? John J. Morris: This is not something that happens over a quarter or two. We have had slow and steady improvement in our safety results, and you are starting to see it show up in the risk numbers over time. Our recordable injury rate for the quarter was about 2.7, under 3, which is a big milestone. We still see plenty of opportunity, and it will translate positively to risk going forward. Noah Duke Kaye: Thanks. Question on renewable energy segment contributions—how did the mix of lower RIN and higher energy commodities impact results in the quarter? Tara J. Hemmer: We almost doubled our renewable energy production from our renewable natural gas plants, which was excellent and what we anticipated coming out of 2025 with plants that came online that year. We did not have any new plants come online in Q1. We expect three more to come online in Q2 and the rest in the back half of the year. That is up from 60% when we announced guidance in January. We are pleased with our performance, how we are tracking, and we are seeing the benefit of some higher commodity prices too. Noah Duke Kaye: Thanks. One quick one for David. On the weather headwinds in the quarter, you said those were about half of the delta on volumes. Was that half of the 1.5% volume decline? David Reed: It is half of the 1.5%. Operator: Thank you. Our next question comes from the line of Analyst from Bernstein. Your question, please. Analyst: Thanks. On AI investment, others in the industry have talked about benefits from a pricing standpoint—commentary that they expect a 100 basis point improvement in margins over the next few years. Have you seen similar benefits mainly on pricing, and do you have a sense of what that number could be, or is it still too early to tell? James C. Fish: As it relates to AI and pricing, we have been using AI-enabled cameras on trucks to help with quality of material. As a can is dumped into a recycling truck, the AI-enabled cameras identify nonrecyclable materials accurately, and we can contact the customer to clean up their recycle stream. If they choose not to, we will bill them for it. It has been a positive on the price line and on the quality of material coming into the recycling plants. Operator: Thank you. Our next question comes from the line of Robert Wertheimer from Melius Research. Your question, please. Robert Wertheimer: Thanks. You mentioned 2H revenue growth as ERP stabilizes in health care. Is that mostly the absence of customer credit, or are you seeing more price and volume opportunity come through as you improve service quality? When do those factors start to make a bigger difference? James C. Fish: It is all of the above. Credits will improve as past due receivables are cleaned up; they have dropped by two-thirds in a short period of time, and we will continue to see positive year-over-year change, particularly in the back half. Pricing—last year we were getting our sea legs a bit. This year, we are in a good spot. We understand the customer better, our customer service stats are as good as, if not better than, some of our solid waste stats, and that gives us the ability to put through price increases. It is hard to put a price increase through if your customer service has been poor, and we have turned that corner. We also see volume contribution from cross-selling opportunities starting to manifest. The losses that presented a roughly $40 million headwind coming into 2026 were mostly a front-half issue. We are very optimistic because the front half versus back half story is starting to show up for us. Operator: Thank you. Our next question comes from the line of Sabahat Khan from RBC Capital Markets. Your question, please. Sabahat Khan: Thanks. Following up on health care, I think you are talking roughly flattish volumes this year with most of the gain coming from pricing. Longer-term number is about 3% to 5% top-line growth. Based on what you have learned about the business and the customer mix, how are you thinking about price versus volume opportunity going forward? Does this align more with solid waste where growth remains primarily pricing-driven? James C. Fish: I think what we are seeing with price—particularly as we think about Q2, Q3, Q4—looks like what we would expect for the long term. Volume was where we had the most ability to improve, and that is why we are encouraged about the front half/back half. The front half was soft from a volume standpoint due to customer losses; we are encouraged those losses are lower than we thought. As we get into next year where we do not have this front half/back half dynamic, we expect a nice level of volume growth so the top line is not solely reliant on price. Price is quite good, and volume is coming. Sabahat Khan: And on the back half of the guidance and the outlook, with RINs and commodities maybe in a better position than a few months ago, are you assuming volume inline with initial expectations with potential upside from RINs and commodities, or do you see those as offsetting? Tara J. Hemmer: On sustainability-related businesses, we are still expecting to come in at that $240 million to $250 million benefit to EBITDA from the sustainability businesses. While we expect, at least on the renewable energy side, pricing to come in a bit better, one of the things that we are tracking is interconnect delays with utilities that might have been unexpected. All of that said, we are in a great spot to achieve our goals for 2026 and positioned nicely for 2027 when all the plants are online and our ability to meet or exceed the $26 per MMBtu number. David can speak to how that stacks with the rest of the business. David Reed: It is still in line with what we guided to last quarter. It is a little more weighted in the second half in terms of EBITDA contribution. The margin trajectory for the remainder of the year looks similar to 2025 in terms of the slope—you do see sequential and year-over-year improvements in the back half on margin as well. Operator: Thank you. Our next question comes from the line of Konark Gupta from Scotia Capital. Your question, please. Konark Gupta: Thanks. First question on volume. Residential volumes have been soft. Where do you see that softening slowing down substantially? Is it still more a second half story or more of 2027 now? And the initial rebound in industrial volumes was small but positive in Q1. Would that, along with special waste strength, indicate the macro turning more positive? John J. Morris: On special waste, as Jim mentioned and I noted in my prepared remarks, we saw strength net of the wildfire benefit last year. In our quarterly business reviews last week, there was optimism around the special waste pipeline. We feel good about that for the balance of the year. On residential, we posted about a 5% negative volume for the quarter—it does fluctuate. Looking back to 2023, with about a 3.5% volume decrease each quarter since then, we have seen revenue and EBITDA improvement. From 2023 to 2026, residential EBITDA was up 211%. While we traded off some volume, we have seen financial benefit. We have automated the majority of that fleet, seen improved safety and efficiency, and focused on quality of revenue and contract terms. We said at the end of the year that we see some moderation coming in the second half—not to positive, but we will see positive movement through Q2 and Q3 in terms of slowing volume degradation. To date, every quarter for the last three years, we have shown substantial positive EBITDA dollar and margin improvement. We feel good about where we are, and we see residential becoming more of a tailwind over the next handful of quarters. Konark Gupta: As a follow-up on margin, fuel is a headwind of about 20 basis points for now. For the full year, the EBITDA dollars are not impacted much given fuel revenue and fuel costs offset. Is the top end of the guidance range for margin, 31% for the full year, still obtainable in the current fuel environment, or might that be impacted just given the mathematical influence? David Reed: Based on where we are now, we are very comfortable with the whole margin range we gave. For context on surcharge revenue, about a $1 increase in the price of diesel equates to about $200 million of annualized surcharge revenue. If you assume a one-to-one trade-off with fuel cost and surcharge revenue, that is about a 20 to 25 basis point headwind. We have that factored into our forecast and still feel comfortable with our guidance range. Operator: Thank you. Our next question comes from the line of Adam Bubes from Goldman Sachs. Your question, please. Adam Bubes: Good morning. On corporate expense, how should we think about what normalized corporate expense as a percent of sales looks like beyond 2026 and your ability to achieve leverage on that line item beyond 2026? David Reed: The cost shows up in that segment, but the benefits are showing up elsewhere. For the remainder of this year, corporate and other is relatively stable at the Q1 level. You have to look at the whole picture in terms of returns, particularly on technology investments. That may mean SG&A as a percentage of revenue is more in the 10% range long term versus south of that, but you should also see improvement to OpEx so overall margin improvement as a result of those investments. James C. Fish: Part of that 10% is having the Stericycle business onboard. Prior to Stericycle, the number was approaching 9%. Stericycle's SG&A was as high as, I think, 25%. We have reduced that to the high teens. It is still not down where the business was prior to the acquisition, so David's number of 10% is a reasonable, quite good number considering the high-teens business in Waste Management, Inc. Health Care Solutions. As we continue to get synergies—and a lot come out of SG&A—I think it is possible to get the business down into the low teens and maybe below that. There is a long-term pathway to getting total SG&A back in the low 9s, but for now we are focused on sub-10% because of the Stericycle business. Adam Bubes: Got it. And on free cash flow conversion trajectory from here—excluding growth investments as a percent of EBITDA, you would be at high 40s this year. Where can that trend beyond 2026? You will have landfill gas, which is high free cash flow conversion, ramping, and continued focus on working capital improvements. You also talked about incremental production tax credits. David Reed: Given the quarter with $920 million of free cash flow, it is actually close to 50% for the quarter. For the year, it is around 46% including all investments. We see a path to continuously improve that, and I think 50% is a good number to aspire to. We are charging forward with plans and investments that should enable us to do that. Operator: Thank you. Our next question comes from the line of Toni Michele Kaplan from Morgan Stanley. Your question, please. Toni Michele Kaplan: Thanks so much. It looks like you restarted your buyback program with over $340 million of buybacks. Can you refresh us on capital deployment strategy going forward and how you are thinking about M&A and the pipeline for deals? How will you balance M&A versus buybacks? David Reed: We commenced our share repurchase program right after our earnings call last quarter, and we are on track for $2 billion for the year. It is going to be a little more end-weighted—call it 55% to 60% in the second half. Our capital allocation strategy for this year is balanced. It is a year of harvest, and we are focused on returning cash to shareholders—over 90% of our free cash flow will be deployed in the form of dividends and share repurchases this year. We do have a decent tuck-in pipeline. We previously said $100 million to $200 million; it is likely we will be at the high end of that, if not above, but we will give more guidance next quarter. Our leverage target is back within our long-term range, which gives us capacity and flexibility for acquisitions longer term. But this year, we are primarily focused on harvesting. James C. Fish: One thing I would add—there were a few acquisitions we expected to close in Q4 or Q1 that have not closed yet, but we expect in the next days or weeks one of those will close. That was a little bit of a revenue headwind in Q1—just under $20 million. We expect to have it as part of our run rate going forward sometime in Q2. Toni Michele Kaplan: Helpful. As a follow-up on technology and automation, which initiatives are you seeing the most benefit from right now, and which will continue to benefit you going forward? John J. Morris: In recycling, despite low commodity prices, we are making more money with better margins because we have structurally lowered the operating cost model—automation and AI in plants. On trucks, all of our commercial and residential fleet is outfitted with technology that captures over 300 million images a year. We process about 95% of those images without human touch, providing data for safety, contamination, pricing opportunities, and right-sizing service. That technology has been around for close to a decade. From a safety perspective, AI helps us capture data on how folks are operating inside the cab, enabling coaching and contributing to historically low turnover and strong retention. Going forward, we see tremendous opportunity in routing and logistics. We are piloting remote heavy equipment in a number of spots, a potential pathway to forms of autonomy at some landfills. Those are examples in place now and drivers of future benefits. Operator: Thank you. Our next question comes from the line of Tami Zakaria from JPMorgan. Your question, please. Tami Zakaria: Good morning. Probably a question for Tara. Your sustainability EBITDA dollars were robust, but margin sequentially ticked down to, I think, 45% from 50% in April. Is that due to seasonality? What margin are you expecting in 2Q and for the rest of the year for sustainability? Tara J. Hemmer: We saw strong margin improvement year-over-year in both renewable energy and recycling, and we were pleased with where we came in. We previously said on recycling we would anticipate roughly 300 basis points of margin expansion this year, and we are still on track for that. In renewable energy, we anticipated 200 basis points of margin expansion related to growth investments, which might be offset slightly related to our third-party fuels program. Given that pricing is a bit higher in renewable energy than we anticipated, we would expect margins to tick up a bit based on what we guided to. All in all, we are in a really good spot, performing as anticipated, and feel positive about where we are headed this year. Tami Zakaria: Understood. And on the health care business, could you quantify the price versus volume you saw this quarter? James C. Fish: We can follow up offline with that breakdown. Operator: Thank you. Our next question comes from the line of Seth Weber from BMO. Your question, please. Seth Weber: Good morning, and thanks for extending the call. Quick one on special waste strength. In your experience, is that typically a good leading indicator of the broader macro, and do you think about special waste as an indicator of the business? James C. Fish: Yes. Special waste is one of the best forward-looking metrics we have. Customers have flexibility in timing on special waste projects. When we see that pipeline materialize in volume growth, it tells us our customer base is relatively optimistic. Operator: Thank you. Our next question comes from the line of Shlomo Rosenbaum from Stifel. Your question, please. Shlomo Rosenbaum: Thank you. Can you talk about the current price-cost spread within collection and disposal versus your outlook, and how we should think about that spread as we go through the year? John J. Morris: You can see collection and disposal margins—EBITDA margins up 110 basis points, overcoming a 20 basis point fuel headwind. Operating expenses again below 60% in Q1. We are showing good spread between price and cost. We have talked about 150 to 200 basis points; it is probably a little more than 200 basis points now. That has translated to the 70 basis point EBITDA margin expansion across the business and 110 basis points in collection and disposal. On inflation, we are seeing around 3% to 3.5%, with a little more pressure on labor, probably closer to 4%. Our core price performance quarter in and quarter out, the yield conversion, and margin translation give us confidence to continue driving margin expansion as we go forward. Shlomo Rosenbaum: And on churn rate in the quarter versus last quarter and year-over-year, and the role of technology and AI in improvements in customer and price stickiness? John J. Morris: We were still positive on service increases in the quarter. Churn was around 10%—it varies quarter to quarter; national account business can affect it. We have not seen wide swings. Encouragingly, we are driving strong core price and yield conversion without driving defection. On technology, it is broader than AI—we use predictive analytical capability our customer teams have built, using a lot of data filtered through technology tools to give a better predictive position on when and where pricing is warranted and how it will be received and accepted. You are seeing the results in our financial performance. Operator: Thank you. Our next question comes from the line of Analyst from Barclays. Your question, please. Analyst: Good morning. Coming back to the renewable energy business, the EPA recently finalized the RVO for 2026 and 2027. How has that impacted your discussions with customers in terms of forward selling of RNG, and pricing expectations on voluntary offtake? Tara J. Hemmer: We were pleased the EPA slightly raised the renewable volume obligation. Prices have held steady at about $2.40 per RIN, which is good for us and well above what we anticipated for our long-term investment thesis at $2. We have been able to forward sell RINs, and we have 80% of our volume locked up for 2026—some in the RIN market. We are tracking the voluntary market more broadly. Roughly half of our long-term offtake will be transportation, and half in the voluntary market. We have seen strong voluntary markets outside the U.S. (Canada, the U.K., Europe, Asia). We are continuing to look at what public utilities might do in the U.S. as they pass along options to ratepayers. We feel confident we can sell all of our volume in the voluntary market at or above our $26 per MMBtu investment thesis. Analyst: Appreciate the color. Thanks very much. Operator: Thank you. Our final question for today comes from the line of Kevin Chiang from CIBC. Your question, please. Kevin Chiang: Thanks. Maybe for you, Tara. What are you seeing in the recycled plastics market? Virgin plastics have gone up significantly since the onset of the conflict in the Middle East. You did shutter a Natura plastic film processing facility. Do the economics of that facility change given the broader plastics market? Tara J. Hemmer: Clearly, what is happening in the Middle East and with virgin pricing could impact recycled commodities, potentially positively. We are tracking that closely, and it is starting to creep back up, but the key word is creep. We are not anticipating any significant benefit from plastics pricing right now, nor would it change our view on the facilities we have shuttered at this point. Operator: Thank you. This concludes the question-and-answer session of today's program. I would like to hand the program back to James C. Fish for any further remarks. James C. Fish: Thank you. One last comment: we did not talk much about the geopolitical environment, but even with the uncertainty and the weather we discussed, we are most proud that our 60 thousand folks have produced good results and we are on track to hit our guidance for the year. We are very proud of that. Thank you all for joining us, and we look forward to talking to you next quarter. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the program. You may now disconnect. Edward A. Egl: Good day.
Operator: Greetings. Welcome to TPG RE Finance Trust First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Dan Kasell. Thank you. You may begin. Daniel Kasell: Good morning, and welcome to TPG RE Finance Trust Earnings Call for the first quarter of 2026. Today's speakers are Doug Bouquard, Chief Executive Officer; Brandon Fox, Interim Chief Financial Officer; and Ryan Roberto, Head of Portfolio Management and Capital Markets. Doug, Brandon and Ryan will provide commentary regarding the company, its performance and the general economy, and we'll answer questions from call participants. Yesterday afternoon, we filed our Form 10-Q, issued a press release and shared an earnings supplemental, all of which are available on the company's website in the Investor Relations section. This morning's call and webcast is being recorded. Information regarding the replay of this call is available in our earnings release and on the TRTX website. Recordings are the property of TRTX and any unauthorized broadcast or reproduction in any form is strictly prohibited. This morning's call will include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially. For a comprehensive discussion of risks that could affect results, please see the Risk Factors section of the company's latest Form 10-K. The company does not undertake any duty to update our forward-looking statements or projections unless required by law. We will refer during today's call to certain non-GAAP financial measures, which are reconciled to GAAP amounts in our earnings release and our earnings supplemental, both of which are available in the Investor Relations section of our website. Now I'll turn the call over to Doug. Doug Bouquard: Good morning, and thank you for joining the call. The broader economic backdrop during the first quarter of the year continued to provide an encouraging environment for investment activity within the real estate sector. While concern over private credit and broader geopolitical tensions have permeated the market, real estate credit has been relatively stable. As we survey market opportunities, we are closely monitoring capital flows in both real estate and credit, which will allow us to identify real-time trends that will drive the investment landscape. These insights are further augmented by the depth and breadth of TPG's global alternative investment platform. While real estate values have reset and our lending pipeline is robust, the recent steepening of the yield curve has put modest pressure on new acquisition activity. That being said, many of the key themes we've previously described continue to remain in place, including heavy refinance volume driven by broken capital structures and reset values, which have been further exacerbated by sustained elevated interest rates and supported by a consistent supply of back leverage for bank balance sheets. Building on the momentum of 2025, a year where TRTX closed $1.9 billion of new investments and achieved 25% year-over-year growth in earning assets. We are pleased to report a strong start to 2026. For the first quarter, our performance reflects our disciplined approach to risk management as we maintain stable risk ratings and 100% performing loan portfolio at quarter end. We saw no negative credit migration in the quarter with risk ratings unchanged at 3.0 and CECL reserves essentially flat quarter-over-quarter. In April, TRTX received the full payment of 575 Fifth Avenue, which was our largest office exposure and the material partial repayment on another office loan. And as a result, our office exposure is now less than 5% of our current balance sheet. As a natural consequence, the vintage of our balance sheet continues to compare favorably to our competitive set with 67% of our balance sheet comprised of 2023 and new loan originations. This is a direct result of the proactive risk management we've been consistent with over the past few years, combined with our strategic and measured approach to making new investments. As I look at our origination and repayment pace for this year, I expect we will finish 2026 with a substantial majority of the balance sheet comprised of 2023 and newer loan origination dates, which will provide shareholders with a new vintage portfolio and attractive credit profile. Of note, we've been able to achieve this balance sheet transformation while generating steady earnings and remaining underlevered relative to our peers. From an investment perspective, thus far this year, we've closed $324 million of loans and have another $535 million of executed term sheets, the majority of which are multifamily and industrial collateral, sectors we continue to target given their strong downside protection and solid long-term fundamentals. Since the start of Q4 2025, we originated 12 loans with total commitments of $1.25 billion, with more than 90% of these from repeat borrowers, underscoring the deep relationships we've cultivated within the real estate ecosystem, further amplified by the breadth of TPG's integrated real estate debt and equity investment platform. Furthermore, within the $535 million of executed term sheets that we have this quarter, the majority of those new investments are collateralized by multifamily and industrial exposure and are sponsored by high-quality borrowers across the U.S. From a liability perspective, we continue to expand our lender relationships and optimize the durability of our capital structure. Building on the 2 Series CLOs issued in 2025, which provide ample reinvestment capacity at an attractive cost of funds, we ended Q1 2026 with $173 million of liquidity, 78% non-mark-to-market financing and a debt-to-equity ratio of 3.1x. This positioning affords TRTX flexibility to pursue accretive investment opportunities while maintaining balance sheet discipline. Our company is in an advantageous position from a capital allocation standpoint. Given our strong liquidity position, we are able to both increase net earning assets while also repurchasing shares that we believe are undervalued. Since the year began through April 27, we repurchased over 1 million shares of common stock for a total consideration of $8.7 million at an average price of $8.07 per share. While we are proud of the foundation laid in 2025 and the strong start in Q1 2026, we remain focused on building on the success throughout the year. Our objective remains to continue to grow net assets and the earnings power of our company. With the insights and reach of TPG's real estate investment platform, a stable balance sheet and an attractive opportunity set, we are confident in our ability to deliver continued strong performance. Despite the strength of our balance sheet and our growing earnings power, our stock trades at a valuation that we believe significantly undervalues our position relative to competitors and offers compelling value on an outright basis as well. Simply put, our balance sheet looks remarkably different from our peers with a newer vintage loan portfolio that provides steady earnings and credit stability. Relative to our peers, we continue to distinguish ourselves, particularly when you look at a number of important metrics, including loan vintage as a percentage of the portfolio, multifamily and industrial exposure, office exposure, unfunded loan commitments, REO as a percentage of assets and total debt-to-equity ratio. The offensive posture we've embraced rooted in the strategic approach we laid out years ago positions us well to sustain our momentum. Our performance in 2025 set a high bar, and we entered the remainder of 2026 with the capital, the team and the drive to continue creating value for our shareholders. With that, I will turn the call over to Brandon to discuss our financial results in more detail. Brandon Fox: Thank you, Doug, and good morning. For the first quarter of 2026, TRTX reported GAAP net income of $15.2 million. Distributable earnings for the quarter was $19.5 million or $0.25 per common share, a 1.04x coverage ratio of our first quarter common stock dividend of $0.24 per share. During the quarter, we repurchased 557,000 shares (sic) [ 556,592 ] of common stock at a weighted average price of $8.06 per share for a total consideration of $4.5 million, which increased book value by $0.02 per share. As of March 31, book value per share was $11.06. During the first quarter, we originated 2 loans with total commitments of $148.4 million at a weighted average credit spread of 2.73% and received loan repayments of $123.6 million, including 2 full loan repayments of $92.7 million where the underlying collateral was 40% multifamily, 35% hotel and 25% industrial. Subsequent to quarter end, we originated a hotel loan with a total loan commitment and unpaid principal balance of $175.4 million at a weighted average credit spread of 3.0% and received 2 office loan repayments totaling $262.3 million, reducing our office loan exposure on a pro forma basis to less than 5%. Quarter-over-quarter, net assets remained flat at $4.1 billion. Year-over-year, our net assets have grown 26% or $868.0 million. At quarter end, our loan portfolio was 100% performing. During the quarter, we did not have any credit migration in our loan portfolio. Our weighted average risk rating for the loan portfolio is unchanged at 3.0. Our CECL reserve decreased slightly quarter-over-quarter to 179 basis points compared to 180 basis points at December 31, 2025. We ended the quarter with near-term liquidity of $172.8 million, consisting of $77 million of cash on hand available for investment, net of $15 million held to satisfy liquidity covenants, undrawn capacity under secured financing arrangements of $39.7 million and CRE CLO reinvestment proceeds of $41.2 million. Additionally, we held unencumbered loan investments with unpaid principal balance of $106.8 million that are eligible to be pledged under our existing financing arrangements. The company's liability structure is 78% non-mark-to-market across 10 financing sources and carries a weighted average cost of funds of 1.80%. Total leverage increased slightly quarter-over-quarter to 3.1x from 3.02x. At quarter end, we had $1.5 billion of financing capacity available to support loan investment activity, and we're in compliance with all of our financial covenants. With that, we welcome your questions. Operator? Operator: [Operator Instructions] Our first question is from John Nickodemus with BTIG. John Nickodemus: Doug and Brandon, you both provided some great color about sort of what you're seeing for originations looking ahead. Doug, I know you mentioned the $535 million of executed term sheets. With the portfolio kind of flat quarter-over-quarter, but obviously up year-over-year. I'd love to hear just some more thoughts on how we could see portfolio growth trending throughout 2026, particularly with those term sheets in mind, but also the large repayment that's already come in, in the second quarter. Doug Bouquard: Yes, sure. So look, I think that from a quarter-to-quarter perspective, obviously, we had a pretty substantial Q4 and then Q1, I think probably a touch of seasonality mix in there, resulted in perhaps a lighter number relative to Q4. But I really think the sort of big story is the trend, right? I mean the trend is growth the trend remains that we have -- even having $535 million of term sheets executed at this point, that also doesn't reflect the pipeline that we have beyond that. So when we think about earnings growth and our ability to really grow the company, our -- the stability of our balance sheet, the durability of our liability structure puts us in a great place. And when you combine that with the sourcing and resources of TPG's broader platform, we feel really excited about our ability to kind of continue on our path. John Nickodemus: Great. Really appreciate that, Doug. And then just one more for me. I believe on the last call, you mentioned that we should see some further progress on the REO portfolio this year. There's nothing huge, 5 assets, but I was just curious if there are any assets like 1 or 2 in particular of those 5 that we could expect to see come off sooner rather than later in 2026. Ryan Roberto: This is Ryan. I'll take that one. Thanks for the question. As we demonstrated last year, we sold 2 office assets. And I think our plan this year kind of remains the same as Doug iterated last quarter, which is our plan is to sell some assets this year as well. The majority of our REO is focused on multifamily, which there is some seasonality to leasing and some other things that we're kind of nearing the corner on. So we'll look to kind of update everyone with some progress there. But again, it remains the plan to sell some REO this year. Operator: [Operator Instructions] Our next question comes from Chris Muller with Citizens Capital Markets. Christopher Muller: Congrats on a really solid quarter here. So looking at the subsequent origination at $175 million, that's, I guess, above what your portfolio average is at about $80 million, but you guys do have other loans in that size range. So I guess the question is, are you guys starting to push into that larger loan space? Or is this more of a one-off deal? Doug Bouquard: Yes. So look, I think from a loan size perspective, we've kind of generally averaged somewhere in the sort of $85 million to $90 million range historically. So I think that really -- when I think about going forward, it will just be a mix. We're still looking at loans that are $30 million, $40 million, $50 million, $60 million. But if we see a really compelling high-quality asset or portfolio that is between $100 million and $200 million, we're also happy to pursue that. So I'd say in short, it basically has been a mix in the past and will continue to, frankly, remain a mix of, again, that sort of $30 million to $60 million range combined with some that again, just sort of warrant larger exposure based on borrower quality, asset quality and sort of how it fits into our portfolio. Christopher Muller: Got it. And it looks like multifamily and industrial have been the bulk of the recent activity, I guess, aside from that 2Q origination. How is competition for these assets these days? And are there other asset types that you guys find attractive right now? Doug Bouquard: Sure. Yes. So I think first on the competitive front, I think multifamily and industrial does have some competition. But that being said, I think we have a pretty tremendous sourcing edge at TPG. And also I think where we've probably been able to find some incremental value recently has been in the industrial space. I think that is a marginally less trafficked part of the market that I think people have a little bit less understanding of. We benefit from a fully integrated debt and equity platform that's both an owner of industrial and also a lender on industrial. So we feel like we have a particular edge there. So I would say that multifamily, I'd say it's sort of been pretty steady in terms of the competitive dynamic there. I think industrial is a little bit spottier, and that's where we found probably on the margin a little bit more value. Outside of multifamily and industrial, I think a lot of what we've done in the past, we will continue to do so, which is right now with the funding of this recent hotel well, that gets our pro forma hotel exposure to about 9%. We've generally kind of tended to keep that sort of below 10% to 15% as a target. So we will look at other sectors. We're very selective. But I think at the core of where we're focusing our energy is finding assets that have substantial downside protection in particularly 2 asset classes that we do feel like have strong long-term fundamentals. Christopher Muller: Got it. And if I could just squeeze a quick housekeeping one in probably for Brandon. Do you have the earnings contribution from the REO assets, handy? Brandon Fox: Thanks, Chris, for the question. We do have the incremental distributable earnings contribution for the REO assets. On a quarterly basis, it is positive. I would say that you can probably expect, depending on seasonality to Ryan's point, between, call it, $0.02 and $0.03 per quarter as a good run rate. Operator: [Operator Instructions] Doug Bouquard: I just want to thank everyone for joining the call this morning, and we look forward to updating you on our further progress. Thank you very much. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Good afternoon. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA Corporation March Quarter 2026 Earnings Conference Call. I will now turn the call over to Kevin Kessel, Vice President of Investor Relations and Market Analytics. Please go ahead. Kevin Kessel: Welcome to the March 2026 quarterly earnings call for KLA. I'm joined by our CEO, Rick Wallace; and CFO, Brent Higgins. We will discuss today's results as well as our outlook, which we released after the market closed and is available on our website along with supplemental materials. We are presenting today's discussion and metrics on a non-GAAP financial basis unless otherwise specified. We will not reference fiscal years in our discussion, all full year references we may refer to calendar years. The earnings material contain a detailed reconciliation of GAAP to non-GAAP results. KLA's IR website also contains future events presentations, corporate governance information and links to our SEC filings. Our comments today are subject to risks and uncertainties reflected in the disclosure of risk factors in our SEC filings. Any forward-looking statements, including those we make on the call today, are also subject to those risks, and KLA cannot guarantee those forward-looking statements will come true. Our actual results may differ significantly from those projected in our forward-looking statements. We will begin the call with Rick providing commentary on the business environment in our quarter, followed by Brent with financial highlights on our outlook. Now over to Rick. Richard Wallace: Thanks, Kevin. KLA delivered strong results across the board for the March quarter with revenue of $3.415 billion, up 4% sequentially and 11% year-over-year driven by increased investment in leading-edge foundry logic and high bandwidth memory. Non-GAAP diluted EPS was $9.40 and GAAP diluted EPS was $9.12. We continue to see AI as a core driver of KLA's performance and an enabler for our growing momentum. Highlights in the quarter include KLA achieving the #1 position in process control for advanced wafer level packaging for 2025 due to continued customer adoption KLA's packaging portfolio. We continue to see improving momentum and advanced packaging revenue growth and market share, and we now expect semiconductor process control product portfolio revenue for advanced packaging will grow from approximately $635 million in 2025 to approximately $1 billion in 2026, well above our prior estimates. CLA service business was $775 million in the March quarter, up 16% year-over-year but down 1% sequentially due to the timing of revenue recognition. Consistent long-term growth in service is a key aspect of KLA's business model and delivers predictable cash flow to anchor our capital return strategy. Quarterly free cash flow was $622 million, over the past 12 months, free cash flow was $4 million, producing a free cash flow margin of 31%. Total capital returned in the March quarter was $875 million comprised of $626 million in share repurchases and $249 million in dividends. Total capital return over the past 12 months was $3.2 billion. Additionally, recently published industry research shows KLA increased its global share of both the overall wafer equipment and the process control market in 2025. This growing market leadership was highlighted by significant gains in advanced wafer-level packaging, where KLA increased its market share by 14 percentage points and achieved approximately 70% year-over-year revenue growth. KLA's market share also improved across basket inspection, optical pattern wafer inspection and electron beam inspection. Since 2021, KLA shared process control has grown by 360 basis points and is approximately 7x greater than the nearest competitor. Looking ahead to 2026 and 2027, our expectations for growth in the wafer equipment industry are accelerating. KLA's relevance has increased across all vectors of semiconductor manufacturing as process control enables a growing volume of design starts at the leading edge and supports the needs for increased performance and reliability in the production of high-bandwidth memory. It's important to distinguish that design activity and rising memory complexity are not the only catalyst driving benefits for KLA and process control, faster product cycles, higher-value wafers and mask, rising design complexity and variability and the growing demand and complexity of advanced packaging all require significantly more process control solutions. These solutions shorten time to results by addressing process integration challenges in R&D and early fab ramp phases, while continuing to manage yield with strong design mix and high-volume manufacturing. Turning to services. As KLA systems become more technologically advanced and have longer service lifetimes in fabs, our service business continues to gain strategic importance, driven by rising customer expectations for tool performance and availability across all customer segments, creating a strong, predictable long-term tailwind for overall KLA revenue growth. KLA also recently held an Investor Day in March, detailing our position in the semi-sector market and our unique portfolio approach to solving customer process challenges and enhancing yield learning cycles within process control. We introduced new long-term revenue growth targets along with a 2030 financial model and increased our capital allocation to target over 90% of free cash flow. We also announced the 17th consecutive increase in our quarterly dividend level and an incremental $7 billion share repurchase authorization. KLA revised up 13% to 17% revenue CAGR objective through 2030 reflects strong growth across our key business segments and includes an increased long-term services revenue CAGR growth model of approximately 13% to 15%. Our long-term model assumes a baseline semiconductor industry growth CAGR of 11% from 2025 to 2030 and wafer equipment market growing 1% faster than the semiconductor industry to $215 billion, plus or minus $20 billion by 2030. Given the growing relevance of process control across all customer segments, we expect KLA to continue to outperform the wafer equipment market on the top line, driving operating leverage and continuing to deliver our best-in-class financial model. I'll close my remarks by saying that KLA's sustainable outperformance reinforces the strength of our leadership and process control. It also underscores the critical role KLA's suite of products and services play and enabling AI field growth in the semiconductor industry. Our consistent execution reflects the resilience of the KLA operating model, the talent of our global team and our disciplined approach to capital allocation focused on long-term investment and maximizing total shareholder value. With that, I'll turn the call over to Bren to discuss the quarter's financial highlights. Bren Higgins: Thanks, Rick. KLA's March quarter results reflect strong year-over-year growth with an industry-leading margin profile, highlighting our market leadership, consistent execution and the dedication of our global teams and meeting customer commitments. Revenue was $3.415 billion, above the guidance midpoint of $3.35 billion. Non-GAAP diluted EPS was $9.40 and GAAP diluted EPS was $9.12 each above the midpoint of the respective guidance ranges. Gross margin was 62.2%, 45 basis points above the midpoint of guidance, driven by better-than-modeled service business mix and manufacturing scale due to higher business volume. Operating expenses were $670 million and included $389 million in R&D and $281 million in SG&A. Operating expenses were higher than expected, principally due to [indiscernible] materials timing and other reserve adjustments. Operating margin was 42.6%. Other income expense net was $9 million in income. The variance relative to guidance was due to a significant mark-to-market gain of a strategic supply investment. The quarterly effective tax rate was 15.4% at the guided tax rate of 14.5% and non-GAAP earnings per share would have been $0.10 higher or $9.50. Breakdown of revenue by reportable segments and end markets, major products and regions can be found within the shareholder letter and slides. Moving to the balance sheet. KLA ended the quarter with $5 billion in total cash, cash equivalents and marketable securities and debt of $5.95 billion. The company has a flexible and attractive bond maturity profile supported by investment-grade ratings from all 3 major rating agencies. KLA generates consistent strong free cash flow, driven by our high-performing operating model. Over the past 5 calendar years, Free cash flow has grown at approximately 20% CAGR, above the revenue CAGR of 16% over the same period. This growth, coupled with resilience across business cycles, enables a comprehensive capital return strategy, featuring double-digit dividend growth and share repurchases to support long-term shareholder value creation. This strategy prioritizes predictable, assertive capital deployment and remains an important differentiator of the KLA investment thesis. Now turning to the industry outlook for 2026, which continues to strengthen across all segments. We expect the wafer equipment market which includes advanced packaging to exceed $140 billion in 2026. The strength of demand and customer engagement and ensuring KLA has the capacity to support numerous new fab projects currently under construction, has led to unprecedented demand visibility from our customers. While normally, we would not comment on 2027 growth rates at April of 2026. This demand environment gives us confidence in 2027 visibility for the wafer equipment market. Today, we expect the 2027 year-over-year growth rate to be higher than our growth rate expectations for 2026. KLA has strong business momentum, expanding market share and higher process control intensity at the leading edge across all segments. Given all this, we are well positioned to continue to increase our share of the overall market in 2026 and 2027. The strong customer momentum that we are experiencing is reflected in our growing systems backlog and sales funnel. We continue to expect quarter-to-quarter revenue growth throughout 2026 and strong business momentum leading into 2027. For 2026, we expect sequential revenue growth for the company to accelerate, leading to high teen revenue growth year-over-year in the semiconductor process control systems business to grow over 20%. KLA's June quarter guidance is for revenue of $3.575 billion, plus or minus $200 million. Foundry logic revenue from semiconductor customers is forecasted to increase to approximately 82% and and memory is expected to be approximately 18% of semi process control systems revenue to semiconductor customers. In memory, DRAM is expected to account for roughly 84% with NAND accounting for the remaining 16%. As always, these business mix approximations pertains solely to our semiconductor customers and do not fully reflect our total semiconductor process control systems revenue. Gross margin for the quarter is forecasted to be 61.75% plus or minus 1 percentage point. Although volume levels are up quarter-to-quarter, product mix is modestly weaker than in the March quarter. As discussed last quarter, the guidance also includes the persistent impact of elevated DRAM ship costs for the company's image processing computers that ship with our systems, creating a headwind to the company's gross margins. While the memory pricing environment remains challenging in the near term, we have secured the required supply to meet our build plan requirements. Our view of elevated memory pricing persisting through at least calendar 2026 is unchanged. And we continue to see a roughly 100 basis point negative impact on our gross margin over the next several quarters. Considering this impact, the tariff environment, along with product mix and volume expectations, our view of gross margins remains unchanged at approximately 62%, plus or minus 50 basis points in calendar '26. Operating expenses are forecasted to be approximately $665 million in the June quarter. For 2026, we will continue to prioritize next-generation product development and company infrastructure investments to support expected revenue growth over the next several years, and we anticipate these expenses to grow by roughly $15 million sequentially throughout the calendar year. Our business model is designed to deliver 40% to 50% incremental operating margin leverage on revenue growth over the long run. Other model assumptions include other income and expense net of an approximately $25 million expense for the June quarter, and we expect it to remain at approximately this quarterly level for the calendar year. The planning tax rate is 14.5%. As always, we expect some quarter-to-quarter tax rate variance due to discrete items as we move throughout the year. In the June quarter, non-GAAP diluted EPS is expected to be $9.87, plus or minus $1, and GAAP diluted EPS is expected to be $9.66, plus or minus $1. EPS guidance is based on a fully diluted share count of approximately 131.4 million shares. In conclusion, our near-term revenue guidance reflects consistent growth and strong profitability. We expect our semiconductor process control systems business to outperform the wafer equipment market in 2026 driven by rising process control intensity and growth in advanced packaging. KLA continues to focus on delivering a differentiated product portfolio that supports customer technology road maps and production efficiency, driving our long-term relevance and growth expectations. Daily operating model drives our best-in-class execution. Our focus on customer success, innovative solutions and operational excellence enables industry-leading financial performance and consistent predictable capital returns. As we detailed at our March Investor Day, KLA's business is uniquely positioned to capitalize on today's technology inflection points and growth drivers. We are encouraged by strengthening customer confidence and engagement, which informs our business forecast. The long-term secular trends driving semiconductor industry demand and investments in wafer equipment are compelling and represent a relative performance opportunity for KLA over the next several years. KLA's business has gone from being primarily indexed to leading edge R&D investment and fab capacity ramps to now addressing all row phases in wafer equipment enabling leading-edge process development, time to results in fab capacity ramps and optimizing yield in a high-volume manufacturing environment. In addition, the growing investment in custom silicon particularly among hyperscalers developing their own custom chips has led to a proliferation of new higher-value design starts and increased demand on our customers to deliver performance, volume and time to market. Design mix and complexity grows, so does the need for process control. As a result, KLA has seen consistent growth in process control intensity as each new chip design requires rigorous inspection metrology and yield optimization solutions. KLA is uniquely positioned to benefit from these trends as we expand our market leadership and deliver differentiated value to our customers. That concludes our prepared remarks. Kevin, please begin the Q&A. Kevin Kessel: Thank you, Bren. Operator, can you please provide instructions and then begin the Q&A session. Operator: [Operator Instructions] We'll now take our first question from C.J. Muse with Cantor Fitzgerald. Christopher Muse: I guess first question I would love to dig a little bit deeper in terms of your extended lead times and visibility into '27. Can you kind of speak to we're in the portfolio, kind of what in the end markets and how you kind of see that progressing into perhaps soon having visibility into 2028. Bren Higgins: Yes, CJ, thanks for the question. It's really broad-based. Certainly, we're seeing backlogs build. And so order flow is very high. customer engagement as we talk about slot planning into next year is also very strong. So I think when you take that, couple it with now we're working really hard here to make sure that we can enable the capacity to meet our customer time lines. But most of our focus and discussion is on how do we address the opportunities in '27, lots of new greenfield opportunities. So I think customers want to make sure that they're in the queue is to align with their construction schedules. And I think it's pretty broad-based across our product portfolio. Certainly, most of it is more leading edge centric. So it's the most advanced products in the product families. Kevin Kessel: Yes. Just to build on that, CJ, the conversations I've had with customers in the last few months, there's there's a higher level of urgency around securing capacity for our customers that I remember seeing. And I think it's indicative and speaks to the demand that they're feeling from their customers. And so there's a huge amount of interest and push to make sure that they can get slots assigned. And I think the other realization they all have is that they're not alone in doing this. So the whole industry is trying to support that growth as we go forward. So there's no question '27 is going to be a massive buildup. Christopher Muse: Perfect. And maybe as a quick follow-up. I guess as you think about the sequential going to the high teens in the second half, should we be thinking about kind of $49 billion, $15 billion as the right framework for calendar 2016 revenues? . Bren Higgins: Yes, I think so. If you just take the commentary, getting the high teens, it gets you into the 15-ish range -- and I think when you look at the second half and we'll call it 15% to 20% type second half sequential growth or growth over the first half. It puts you up into that ballpark. I think you're thinking about it the right way. Operator: We'll move on now to Stacy Rasgon with Bernstein Research. . Stacy Rasgon: At the Analyst Day, you talked about a 2030 model, which had a $250 million WC and like $1.4 billion in semis and I mean it's looking increasingly likely that we might get to those kinds of levels like this year or next year. I guess maybe you could talk a little bit more about the underlying assumptions for that long-term model? And maybe it's a little craft asset, like why isn't it higher, given where we're sitting right now and what you guys are seeing? . Bren Higgins: Say, great question. I think a couple of things are driving the increased revenue. And I think the number you're referring to that might be closer to what we talked about for 2030 is the semi revenue number, not the equipment number. And the reason the semi revenue is going higher, faster is pricing. And so there's been more elasticity, especially around memory and that pricing that's driven that number up. So when we talk about 2030, we talk about a normalized level of capital intensity associated with the revenue that we said would be in the range of $1.3 billion to $1.5 billion. If we had to redo that today, there are a lot of reasons why you'd push that up from that -- as you know, that was 6 weeks ago. So things have changed. But I think the numbers around equipment haven't moved nearly as fast as the numbers around semi revenue associated with pricing. Does that help? Stacy Rasgon: Yes, that actually does help. And I guess just for a quick follow-up. There's been some news flow apologize if you maybe mentioned this on the call or not, but there's a new law about bands for a Huahong. And I guess, is there any implication of that on you? And just, I guess, how are you thinking overall about the kind of trajectory as you go forward from yours, has your thinking there changed at all? Bren Higgins: So we got the letter. I'm not going to say too much about it other than we're still looking at it. The impact on the company in terms of our Q2 guidance and the commentary around 26%, I would say, is fairly immaterial. It's focused on not all affiliated fabs. So the impact, I would say, is fairly immaterial and contemplated in the guidance we provided. Stacy Rasgon: Broader thoughts on China? Richard Wallace: Broader thoughts broader thoughts. I think when you look at China overall, it's playing out more or less consistent with the way we've talked about it. I think if you look at overall spending in China, it's more or less flat, maybe a little bit up has been fairly flat in terms of spending levels over the last few years. And so what's driving our business is what's happening at the leading edge. I would expect that the China growth rate is probably lower than where the overall WFE growth rate is projected to be here moving forward. Operator: We'll move next to Harlan Sur with JPMorgan. Harlan Sur: On your 2026 WSE better outlook now $140 billion plus of kind of high-teens percentage type of growth outlook. On the incremental upside this year, is it being driven by new brick-and-mortar sort of greenfield programs being pulled forward or are customers just accelerating technology migrations on existing capacity or maybe focusing on improving yields on existing capacity? Any color there? And then for on the '27, now you are saying WLC will go faster than '26 versus your prior view of in line or better. Looking at your order book, is that a continuation of the broad-based spending growth across segments, foundry, logic, memory advanced packaging? Or is there a particular segment that is driving the strong growth? Any color there would be helpful as well. . Richard Wallace: Yes. So I think around the [indiscernible] view, just the urgency from customers to take slots or take deliveries. As we have moved here into better visibility into the second half, we're seeing nothing more than just general urgency across different segments with our customer base. And that caused us to increment the views of industry growth upwards. If you look at 2027, obviously, you've got a lot of new fab projects out of greenfield activity, both on the logic side and memory. I think you'll also see some greenfield activity in flash. So -- and packaging of role also. So I think it's really pretty broad-based across the -- all our different customer segments. Harlan Sur: I appreciate that. And then your serves business grew 15% last year with an exit run rate of about 18%. That strong growth carried into the March quarter with 16% year-over-year growth. you guys just outlined the 4 CAGR Analyst Day of 13% to 15% growth rate. In the current environment, just given the very high customer utilization for advanced services offerings obviously, lots of focus on driving as much output and yield per fab as possible. How should we think about the services growth profile this year? . Richard Wallace: I think the service will be in the range as we move across this year. Obviously, a lot of the shipments that we're shipping this year will start to flow into service as you move into next year and beyond. So I think that's an accelerant to we'll call higher end of the range growth opportunities as we move over the next couple of years. But more or less, we're trending in service in line with the target range. We would expect to to be within it. Operator: We'll move on to Krish Sanker with TD Cowen. Sreekrishnan Sankarnarayanan: The first one, I think, Rick or Bren, I think the visibility angle was pretty interesting. How much of that is really driven by true demand? Like the customers doing [indiscernible] maybe in '28 versus trying to ensure that you have enough capacity or even personnel who needs to be trained and service the tools. So how much do you think -- how much of that do you think is actually true demand versus setting you up for what could be potential demand? Then I have a follow-up. . Richard Wallace: I'm sorry, it's a little hard to hear. So the question is -- is the demand real? Is that the question? Or do we think we're getting orders in anticipation of shortages? Is that your question? Sreekrishnan Sankarnarayanan: No, no, I was just wondering how much of it is actually true demand versus customers making sure that there's enough capacity and service personnel, et cetera, people looking like [indiscernible], et cetera. Richard Wallace: Well look, I think our customers, given they're going to -- these are significant investments they're going to open these fabs. I mean part of the discussions are not only around tools and tool delivery timing, but also in our support resources, our installation resources, applications, which are people that are out there working with our customers to drive value out of the tools, that the service teams are there to support. So it's really across the company that we're in position to support what they expect to be a pretty significant ramp in terms of business activities as those fabs come up to higher levels of productivity. Sreekrishnan Sankarnarayanan: Got it. And then a quick follow-up. It seems like some of the incremental WFE demand this year is coming from the CPU titles. But like inter last week spoke about incremental CP capacity coming from Intel 3 and Intel 7, which are prior nodes where I believe the initiatives are already being solved. So will the incremental CPU demand actually benefit KLA or not as much. Richard Wallace: Certainly, it's something we've talked about over the last year is that we're encouraged by is the broadening of investment at the leading edge in our lease edge. And so that has been, I think, good for KLA. Our collaboration levels are very high with our customers. And so if you look at what we're -- the easiest way to drive efficiency out of the existing installed bases to drive yield. And so that plays to KLA ability to help drive learning cycles and drive yield in a high-volume manufacturing environment. So I think we're well positioned. We're encouraged by the engagement levels really across the installed base and the broader participation I think lends itself to a pretty robust leading-edge environment as we go forward. Operator: We'll move on now to Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Yes. Maybe just a follow up on that. I guess, like when we think about your customers trying to obviously drive higher yield to drive higher output, is that a bigger driver for potential incremental like process control system sales for you? Or is it largely flowing through the service line? Richard Wallace: Well, it absolutely drives process control sales. It drives both, but the process control, especially if they're dealing with fabs that are already up, but don't have a particularly high yield and if they've changed die size. So that's the challenge, I think, that they're dealing with when they're trying to put out more capability to support AI. And I think that's a different fact that's driving a lot of the activity around process control. And you even heard -- I mean, Intel was public about increasing their metrology usage as you heard on their call. So we're definitely seeing, in general, because there's a shortage in the industry, the easiest lever anyone can use is to get more yield out of the existing capacity that they have. even the leaders have gone back to prior nodes and added process control because they recognize that's a faster way to get more that's far less true in historical cycles when they're meeting demand. So once you see utilizations go way up on leading edge, the only lever you have left, you can build new fabs. But the thing you can do before that is try to squeeze out more yield. I think one of the other benefits we see is just the product types change that our customers are shipping serving different parts of the market that the need for different capability arises -- it might be different than how they originally set up the fab to run a different type of parts or different mix of parts. So that tends to create opportunities for us because new and different capabilities required to support different like higher performance compute markets, for example. Joseph Quatrochi: That's very helpful. Maybe as a follow-up, I was wondering if you could maybe talk about your own lead times and just kind of thinking about your own supply chain and kind of I think last quarter, you talked about maybe things being tight from a component standpoint in the first half of this year. I mean the really opening up in the second half. And obviously, you've increased your WSE guidance now a couple of times. Just how do we think about KLA's capacity to support this ramp as we continue to increase into 2027? Richard Wallace: Yes. So thanks, Joe. So look, I think the thing that surprised us was the slope and duration of how quickly the business started to ramp into the first half. And so that did put some constraints on our ability to to scale from an overall supply chain capacity point of view in the first half of 2016. As we move into '27 and some of the context we provided and some of my comments earlier around growth rate in the second half. I think we're much better positioned to support this ramp and support customer requirements. And as we look at '27, as I said earlier, our focus has been really to ensure that we we have the capacity to support the different forecasts that are out there. So we feel pretty comfortable about the guidance we gave today and our ability to support that and then some. We always try to to think about all the conceivable opportunities as we plan along our supply chain. And so there's a tremendous amount of focus across the company to ensure that we have that capacity to support what looks to be a very strong environment next year. And then as we said earlier, we've got to do -- we're hiring a lot too. We need to make sure we've got our installed resources or service resources to be able to support the tools after we ship them. Bren Higgins: Yes. Joe, and the folks in our operations service know that we're matching the urgency in providing capability to our customers that our customers are sharing with us. So this is a time, like I said, I've not seen this before, but there's such broad demand, such capacity at [indiscernible] speed. So we're working very hard to support that. And historically, we've always done it, but it's going to take a lot of work. Operator: We'll move on now to Timothy Arcuri with UBS. Timothy Arcuri: Bren, I just wanted to come back to this idea that you're outgrowing WFE this year. You're guiding up sort of high teens. I think the general consensus among all the other companies is that WFE is growing like mid-20s. So is it that you just think that, that WFE growth is too high, maybe your baseline for WFE last year is more like 120 or something. So actually, you don't think there'll be even high teens. Is that -- is that how you get to the concept that you're going to outgrow this year? . Bren Higgins: Well, yes, I think you're right. I think the baseline is about 120, and that aligns with where the various third parties. And if you do kind of a consensus view of all the different forecasts that are out there, you end up somewhere more or less in that ballpark in terms of where 2025 growth rates were. And if you look at the different relative performance of the different players, it does imply that that '25 was a pretty good year, greater than 10% growth. So from a baseline point of view, we see it at about 120, growing to about 140 plus, as we said, which translates into this call it, mid- to high-teen growth rate. If you look at the semi PC business, as I said in the prepared remarks, we expected it to grow our systems business to grow in excess of 20%. So that's aligns with our view of growth. As we talked about at Investor Day, we spent a lot of time trying to explain how we're defining the. Everybody, of course, defines it in different ways. But we believe that the approach that we've taken, as I said, it lines up with third parties. I think there's a lot of opportunity out there that starts to span not just traditional WFE, but also in the advanced packaging parts of the market. And as we've seen our revenue inflect in that part of the market, we think it's appropriate if you're going to measure yourself on share of market that you got the numerator, but you also get the denominator, right? So that's how we see it, and that's that kind of informs the forecast that we have here. Timothy Arcuri: Okay. Got it. And then I guess just, Rick, I wanted to ask you about the pushout of High-NA. And just like what the puts and takes are for you? I mean, I can see on one hand, you've got like 25%, 30% direct attached to litho. So maybe that's a bad thing that is pushing up. But on the other hand, there's going to be some other process things that get more complex and things like that, which obviously would actually help you. So how do you weigh those puts and takes. Richard Wallace: Yes. Thanks, Jim. There's no change in the high NA forecast from everything that we've modeled. It's exactly what we've modeled and started talking about a couple of years ago. So in that sense, this is what we're talking about when we put out the 2030 plan. However, INA has puts and takes, as you say. So ultimately, it's going to be better if people are printing smaller geometries and the defectivity challenges are going to be greater. But it's also the case that, that's not going to happen until the economics support it. So I'd say for us, it's a push. It's going to happen, it's going to extend the time line for which people could keep getting benefit out of process. That's good for the industry. But it is in our -- what's happening is in our model. So that there was no change from our expectations. Bren Higgins: Yes, Tim, and I think this attach rate to litho historically when scaling was driving the innovation in the process road map, that was more true than it is today. Today, you have architecture changes, you have the nature of a high mix design environment. We talked a lot about larger die and what that means in terms of defect density the value of that die and how that translates to how much you're willing to invest to ensure that those die are good and are performing at spec process and performance requirements are much more significant. So there's a lot of drivers there for process control that's beyond just traditional lympho scaling. If you look -- we need a lot to scaling road map, as Rick said, it's important. It's good for the industry, but it's not the only factor that drives process control intensity. The 2-nanometer node has higher intensity than 3-nanometer node and the amount of EUV layers hasn't changed all that much from node to node. So I think that gives you an indication that that it's not the only factor that influences how customers invest in our products. Operator: We'll move on now to Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could maybe address your expectation for the advanced packaging market and your revenue growth there in calendar '26. And maybe just kind of talk about how that's likely to kind of filter as we go throughout the year. Richard Wallace: Yes. And so it's a pretty exciting part of our story. Of course, we spent a lot of time talking about how it's how that market has moved to the need for more front-end like requirements and how well the KLA portfolio is positioned here. We talked about exceeding being somewhere in the range of $1 billion in business and advanced packaging for our process control business this year, growing from about $635 million in 2025. One of the great things that we're starting to see also is as the packaging market has evolved and more nanometer level inspection is required, but the need for more precision and more capability from the tool set. So as we look at 2026, we're actually seeing meaningful revenue increases across some of our more advanced systems as we talked about that, that was going to come, and we're starting to see that both in terms of of [indiscernible] packaging, but also emerging SOIC packaging as dista is happening, driving hybrid volume requirements and so on. So we're pretty excited about the growth in that part of the market for us. It's likely one of the top growing markets certainly in overall packaging, and we expect it to continue to grow into next year. James Schneider: And I was wondering if you could maybe provide a little bit of color kind of given your extended sort of order book and higher visibility, can you see your way clear to a point in time in the future where you would expect the process control intensity to really step up and start to really materially outgrow the overall WFE envelope you're forecasting? Richard Wallace: Well, the last 5 years, we gained 160-ish basis points of share, and that translated into about a 6.5% growth rate for KLA above the market baseline. If you go back to what we talked about at Investor Day, we thought that we could gain another 150 basis points plus share of the overall wafer equipment market, and that translates into a 4.5% growth for the company over the market baseline of WFE growth of 12%. So it's -- these are small increases, but on a pretty big base, and it translates into meaningful CAGR upside relative to the overall market. And that's our plan that then feeds into our $26 billion target for 2030. Operator: We'll move on next to Charles Shi with Needham. Unknown Analyst: I have a question around some technology in metrology. There is a lot of discussion around x-ray versus optical for CD measurement in the front end, let's say, in [indiscernible] detection, those kind of other stuff in hybrid bonding type of advanced packaging. And Rick, I'm sure you're familiar with all of this discussion around the debate around optical versus e-beam DUV versus actinic. I think you've said that when you can use optical, customers will stay with the optical, but -- is this new debate around metrology, x-ray versus optical, you would have the same view, maybe optical eventually win or you have some other starts? I understand you do have XTD tool, but I want to get your thoughts. Richard Wallace: Yes. I think that the history of inspection and measurement and really the industry is you move to the highest capability tool that can do the job additionally to debug it and then you go to the cost of ownership play. So whatever can do the job and most efficient. And we talked about the roll off, for example, in our wafer inspection portfolio where you might under process at a very high level of, say, e-beam during characterization along with high and optical. But then if you can possibly go to higher throughput, lower cost, you do. The case of X-ray is interesting because in some ways, when we introduced Axion a few years ago, that was a product that was really solving a problem that could only be solved in failure analysis. And the challenge with that was getting the tech to work, getting adoption and getting proof of concept with enough players that they would make the change. And we've done that, but it took quite a while because the industry it's remarkably aggressive in new technology development, but slow in making changes in manufacturing except for when it has to. So I think the question is, is there a capability that you can use and you can drive more with x-ray and can you do it? And the answer is you might be able to do it, but the question is, is it something you can do in production? You can do it to debug the process. But if even in e-beam, what we're seeing now with our portfolio is we might use our eBay system, coupled with our inspection system to tune that inspection system, but offload as much as we can to higher throughput. So I think there's a scenario in which you see that that's what happens with X-ray as well. You want to have the capability, but the problem is always eventually is the cost. And if it's something that is so out of control that the only way you can do it is with massive amounts of very inspection metrology and it's very expensive, you are not going to do it, and you're going to figure out another process. So I think the answer is yes, there's a lot of work going on, and there's people that are really focused on getting something to work, but that's different than what they'll use in volume production. As a company, we've always focused on the difference between the characterization, development phase and what you can pan out. So when we laid out our 2030 plan, we obviously work very closely with our customers on their packaging road maps and what we anticipated was having capability across our portfolio to solve all the tool, the needs they have, including in their development phase. So I don't think you're going to see a quick adoption of X-ray anytime soon. And those of us who have been around a while, there was an x-ray lithography company 30 years ago. So it's not like it's a new idea to leverage x-rays, just the cost and throughput is really challenging. I hope that helps. Bren Higgins: And just to build on that, the market size, most of the adoption has been in memory. And so the market size has been roughly, I'll call it, today, it's about $75 million to $100 million. And I'd say we have probably about, call it, 60-ish percent share of the overall market. I think as adoption starts to increase as maybe more production opportunities become available, you could see that moving up into the $150 million range over the next few years. But the challenges of the productivity of the tool and how that then translates into volume production as Rick said, has been the biggest challenge, and I think has affected how the pace of adoption for that technology. Unknown Analyst: Maybe a quicker one as a second question. You gave that advanced packaging revenue outlook from $635 million to $1 billion. But if I recall correctly, one quarter ago, you were basically calling advanced packaging. I mean, probably gets like a much lower growth -- it feels like that was a Abrevision to advanced packaging revenue outlook. So may I ask what was the big upward revision about? I mean, it happened like a just over 60, 90 days? And what's changed? -- from maybe a quarter ago. Richard Wallace: Yes. So we thought in a quarter ago, we thought that the overall growth rate in Process Control Advanced packaging was somewhere in excess of 30%. Obviously, if you do the math on the numbers we've talked about, we're now in the upper 50% range in terms of growth. There's clearly been -- and one thing about packaging is it's shorter lead time business generally. And there's clearly been momentum from a number of customers for additional capacity this year. We didn't have the visibility to it going into this calendar year. And we see it growing more, and it's I think it's going to be a little bit more of a second half dynamic in terms of of half to half of that growth. But it has absolutely picked up over the last 90 days or so. And I think the competitive positioning, the need for more capability, as I talked about earlier, are big drivers in it. So semiconductor process control, growing in the range of $1 billion, up from about $635 million, which translates, as I said, into the high 50% range. Operator: We'll move on now to Srini Pajjuri with RBC Capital Markets. Srinivas Pajjuri: I have a clarification -- sorry, I've been jumping between calls here. It looks like you're raising the WFE number to about 140 versus 135 to 140 at the Analyst Day. But at the same time, your annual guidance, revenue guidance is still for high teens. I understand high teens can mean a lot of things. Just trying to see if I'm reading that correctly, if you can kind of give me some additional color on that number. Richard Wallace: Yes. I think that we're talking about a pretty small adjustment from where we were about 6 weeks ago, but we think it's 140 plus and I think that, as I said, I'm pretty comfortable with the guidance that we provided, I would say, it probably translates into consistent with the stronger view of the industry that translates into probably a little bit stronger view of of 2026 for KLA than we thought 6 weeks ago. But look, we've got 9 months to go here, and we have a number of opportunities to provide an update to that forecast. So we're pretty excited, and we'll see how the second half plays out in terms of opportunities to to reduce the risk and increase the -- our views of performance here for the year. But I think that's as good as we can do for now. Srinivas Pajjuri: Yes, that's fair enough. And then on the 2027, just a few clarifications, Bren. So you're obviously guiding for high teens or better. It seems like I'm assuming WFE is at least growing in one or maybe you continue to outperform WFE as you've been doing over the past few years. Just trying to understand the moving pieces there. I know you said it's fairly broad-based, but can you maybe parse it out by end market, memory versus logic, what you're seeing it also. What's your base case assumption for China WFE from next year? Bren Higgins: Yes. So I think that if you look at the greenfield opportunities, which I think is for DRAM but also in the flash market is that memory is probably a few percent higher than this year. So this year, memory is about, we'll call it, 60 -- logic [indiscernible] about 62% of the overall spend. I think it's probably closer to 60% more memory focused versus logic into next year. I don't think it's hard to say about China, we're a little ways away, but at least in terms of how we're modeling it, our general view on China is that it grows at a slower rate than overall WFE. And we haven't seen it change much at least in terms of KLA's business levels over the last couple of years. So I would say that you'll see us more along those lines. Now it's more greenfield, less around technology upgrades. And so that drives a different dynamic. And with the rising process control intensity that we're seeing in memory, we feel very good about how well we're positioned for that activity into next year. Logic foundry continues to be very broad-based. And legacy is pretty weak this year. So I would think that legacy probably has some upside into next year. I don't want to quantify it yet though. Operator: We'll move next to Shane Brett with Morgan Stanley. Shane Brett: My first question is on margin. I want to assume that your customers are likely fighting for KLA shipment slots at the moment. Just how should we think about your ability to take advantage of this demand via margin I'm especially curious in the context of your memory customers, given you have seen a gross margin headwind due to higher DRAM pricing, but shouldn't we be able to pass this cost on earlier than the historical 1-year pricing pass-through cycle? . Richard Wallace: Yes, Shane, we don't price based on scarcity at KLA, our pricing is based on cost of ownership improvements from one generation to the next. We're pretty disciplined about about that, and that translates into terms of meeting our customers' view of incremental performance and incremental cost of ownership improvement. If you start to price based on different price changes and components, I would expect that your customers would want symmetry with that. And so that's not how we think about it. At KLA, it's much more about the value that we offer, the value-based pricing and how we're able from product type to product type to deliver new capability at better cost of ownership to our customers. So I think we do a pretty good job around that at KLA. And this is a headwind around memory that we think ultimately will normalize out in the future. I don't think it's going to I think it's going to be with us for a little while, but we feel pretty good about the supply that we have to be able to support the growth outlook we've talked about. And as I talked about at Investor Day, I think it's highlights why our new product introduction cadence is so important for KLA because it allows us to introduce new products, rethink how we're pricing that incremental value, how do we share it with customers as we move forward. So I think we feel pretty good about how we're positioned. And the last thing you're going to do is go to a customer in the middle of a transaction or middle of a buy and change pricing. So that just -- it doesn't work that way. So I think we're pretty good and feel pretty good about what we do. Shane Brett: Got it. That's very clear. And for my follow-up, this is more of a clarification on advanced packaging. So I understand you see your business growing 30% in packaging. But your process peers are now also talking about 50% plus growth. Correct me if I'm wrong, but does that mean that relative to your initial packaging guide of approximately $12 billion that you disclosed in late January, we should be looking at closer to $13 billion or $14 billion for this year. . Bren Higgins: Yes, Shane, so we're growing greater than in the high 50%, as we said in the prepared remarks, the shareholder letter and the question I answered earlier. The overall market is somewhere growing up in the range of about $13 billion, we think. And so that's approximately 30% growth in the overall market from 2025. Operator: We'll move on now to Edward Yang with Oppenheimer. Unknown Analyst: Just following up on DRAM and the gross margin headwind. You mentioned having procured enough hits now. Is that through calendar year '26 or possibly longer? Richard Wallace: Longer. I feel very good about our supply situation going into to support our bill plans through next year. Unknown Analyst: Great. And second question is on AI CapEx assumptions. A couple of hyperscalers reported tonight as well, not a couple of few, a couple have appeared to have come in a little light on CapEx tonight. Microsoft and Google for the quarter, Meta and Amazon were a bit higher. But we all appreciate those numbers can be lumpy quarter-to-quarter. But given sporadic market concerns around data center CapEx durability, can you bridge your updated '26 WFE view of greater than $140 billion and your expectation of growth in 2027 to the underlying AI infrastructure assumptions. Put differently, what level of hyperscaler end customer AI CapEx due to WFE forecast effectively require? Richard Wallace: Yes. So when we talk -- and like I said, we've had all these conversations with customers recently about what is their expected demand and what kind of capacity are they bringing online recently, within the last 2 weeks, I've had those conversations, both on the foundry live side and on the memory side, there's still -- with all these very aggressive plans through '26 and '27 they're not going to close the gap. And in some cases, the gap is even expanded from where it was a few months ago because of the demand. So this equilibrium between what the CapEx hyperscaler you guys say and the notion that you can draw a straight line to WFE, you can't because they're -- we're way under serving those demands. So our contention has been for quite a while that there's not enough silicon to be able to support the plans that people have. And so the WFE is literally just as fast as we can go as an industry. That's kind of what we're seeing when we talk to our customers and we talk to their plans for build-out in '27. And the reason '26 isn't bigger is because they can't build enough fast enough. And take the extreme of this because he said it on his call, if you say what Elon Musk was saying about SpaceX and the demand and why he talked about building Parapat because it was going to be a massive shortage of semiconductor capacity through 2030. So nothing about the short term, and I think that's -- that confuses a lot of people. What is talked about short term in terms of the hyperscaler CapEx and the buffer between that and what's happening in terms of the ability of the industry to bring on all that capacity. So I understand people are trying to correlate it, but there's a massive assumption in there that this thing is even close to filling that capacity and it's not. Operator: We'll take our last question from Chris Caso with Wolfe Search. Christopher Caso: Just as a follow-on to the prior question. And it does certainly sound like demand is well ahead of the industry's ability of supply. Does that cap the amount that [indiscernible] ship to customers and that the customers have clean room space to be able to put tools right now. I mean you talked about perhaps the opportunity to increase the view as the year goes on, but are we sort of towards the upper limits of what can be supplied in '26 and we're just going to have to supply it in '27, '28? . Richard Wallace: Well, yes, I think so. And the way to think about this, and I think this is we are an ecosystem. So it kind of takes all the parts of the ecosystem to make it happen. And so when you look at what are the constraints or one of the limits, I know when we talk in the AI world about power constraints or other constraints. But in the semiconductor industry, the first constraint is how many fabs do you have? Like how many shelves can you fill? And then you got to have enough equipment from all the different suppliers to be able to make functioning line. So in many ways, this is why we talk about the overall investment in the industry, you kind of have to think about it in aggregate because let's say, we could infinitely ship. -- there'd be nowhere to send it because you'd be sending it in a fab that haven't been built yet. So that's why we look very closely at what the overall industry is doing, what our customers are doing. And that's why when we say you can get a marginal increase in 2026 to the numbers we're talking about, you can't go from 140 to 200 in 2026. And there's only so much you can add in 2027 and those fabs have to be built now. So when our customers say, it's just not easy, it's because it takes a long time to get through even in places where they build fabs very quickly takes a long time to build them and then to get the equipment and the fastest in the world, places to build fabs have big plans for expansion next year, and they're still going to be short by the end of next year. And so that's how the whole system is working. So when we give our guidance for the year, it's -- yes, it's what we can do, but it's also collectively what we as an industry can do. Does that make sense? Christopher Caso: Yes, it does. That's clear. So the last question, I have something more mundane on gross margins for the year. And I think you indicated you're kind of sticking with a view of 62% for the year. Can you talk about the pluses and minus on that? I know you had some mix headwinds earlier, and there's some cost increases. So what should we be watching for on the gross margins this year? Richard Wallace: Pretty consistent guidance with what we had last quarter, I would say the memory pricing environment is on the margin worse. I thought that the headwind was 75 to 100 basis points. I think it's 100 basis points now. And part of that has been the relative pricing on DDR4 versus DDR5, where they're generally, and it depends on what type of memory level. But but more or less the same prices. You still have tariff dynamics. I would expect as we move through the year, the tariff headwind that we have at KLA will become less, but it's still meaningful, I'll call it. I talked about 50 to 100 basis points of overall impact. I said we're operating at the middle of the higher end of that range today, but would expect that to come down to the lower end of the range as we go through the year with some of the things we're doing here operationally. Overall mix generally is pretty consistent with how we thought about it. So like anything else, there's always puts and takes. But in general, we said 62%, plus or minus 50 basis points, and we still feel that that's an appropriate way to think about the company at the revenue guidance that we provided for the year. Unknown Executive: Thank you, Chris, and thank you, everybody, for tuning in. We appreciate your support. Apologies for those that weren't able to get a question on this call. We will catch up [indiscernible]. And with that, I'll turn the call back to the operator to provide any closing remarks. Operator: Thank you. This concludes the KLA Corporation March Quarter 2026 Earnings Call and Webcast. Please disconnect your line at this time, and have a wonderful day.
Operator: Thank you for standing by, and welcome to MediaAlpha, Inc. First Quarter 2026 Earnings Call. I'd like to remind everyone that this call is being recorded. [Operator Instructions] I would now like to turn the call over to Investor Relations. You may begin. Alex Liloia: Thanks, Angela. Good afternoon, and thank you for joining us. With me are Co-Founder and CEO, Steve Yi; and CFO, Pat Thompson. On today's call, we'll make forward-looking statements relating to our business and outlook for future financial results, including our financial guidance for the second quarter of 2026. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q for a fuller explanation of those risks and uncertainties. All the forward-looking statements we make on this call reflect our assumptions and beliefs as of today, and we disclaim any obligation to update such statements, except as required by law. Today's discussion will include non-GAAP financial measures, which are not a substitute for GAAP results. Reconciliations of these non-GAAP financial measures to the corresponding GAAP measures can be found in our press release and shareholder letter issued today, which are available on the Investor Relations section of our website. I'll now turn the call over to Steve. Steven Yi: Thanks, Alex. Hi, everyone. Thank you for joining us. We're off to a strong start in 2026, delivering record results across all of our key financial metrics. First quarter transaction value came in above the midpoint of our guidance range, reflecting continued strength in auto insurance carrier spend and further broadening of carrier participation on our platform. These dynamics drove a favorable mix shift to our open marketplace, pushing both revenue and adjusted EBITDA above the high end of our guidance. Within P&C, we've seen a number of carriers that were previously punching under the weight in our marketplace take meaningful steps over the last several quarters to increase their spend. As anticipated, this is resulting in a mix shift towards our higher-margin open marketplace, where our estimated 3x scale advantage and unmatched proprietary data fuel highly differentiated predictive AI optimizations that drive better outcomes for our partners. Moving forward, I'm encouraged by the productive conversations we're having with a growing number of leading carriers about further leveraging our trusted infrastructure and AI targeting capabilities to maximize the return on ad spend and gain market share. The underlying auto insurance industry remains healthy. Carriers are strongly profitable and are competing more aggressively by lowering their rates and increasing their advertising spend as they prioritize policy growth. While underwriting margins have begun to decline from record levels, they remain robust by historical standards. We believe these conditions support further growth in our P&C vertical, which continues to benefit from the secular shift in carrier distribution spend from agent commissions and off-line advertising to a direct-to-consumer model supported by online performance marketing. While not yet material to our results, our strong first quarter P&C traffic growth suggests that consumers who are starting their insurance shopping experience on LLMs are driving incremental referrals to our marketplace. During the quarter, we were pleased to see a significant strategic shift by a leading LLM to place greater emphasis on advertising monetization to support the consumer product. We view this as a favorable development that could meaningfully accelerate LLM referral traffic and revenue growth for us and our partners. We remain confident that carriers will stay central to the quoting and binding experience regardless of how the consumer shopping experience evolves, reinforcing our highly defensible position as the core infrastructure layer connecting carriers with insurance shoppers. As a trusted partner to carriers and a leader in AI-powered insurance distribution, we recently launched autoinsurance.net, a ChatGPT-powered shopping experience that simplifies the consumer journey while keeping carriers in full control of their brand, compliance standards and quoting processes. This is an early proof-of-concept product, and we're excited about what comes next as we continue to build out this capability to better support our partners. On the health insurance side, our under 65 business continues to represent a diminishing portion of our overall mix, which is in alignment with our plans. We continue to believe that Medicare Advantage is the long-term growth opportunity for this vertical. Importantly, we remain focused on utilizing our significant free cash flow to maximize shareholder value. We are executing aggressively on our outstanding share repurchase authorization and have returned over $25 million of capital to shareholders already this year. As we look ahead, we're energized by the opportunities in front of us. Carrier and agent participation in our marketplace continues to expand and the innovations we're bringing to market are opening new doors for consumers to discover and connect with both carriers and agents. Overall, we believe we're well positioned to deliver both sustained profitable growth and long-term shareholder value. Before turning the call over to Pat, I'm proud to share that MediaAlpha has earned a Great Place to Work certification for the 10th consecutive year with 95% of our team members affirming that our company is indeed a great place to work. This recognition reflects the strength of our culture and our exceptional team, which underpins everything that we do. Patrick Thompson: Great. Thank you, Steve. I'll start by walking through the key drivers of our Q1 results and then cover our Q2 outlook. As Steve mentioned, transaction value came in above the midpoint of our guidance range. Revenue was $310 million, above the high end of our guidance range, reflecting a favorable open marketplace mix shift driven by broader carrier participation in our marketplace. Adjusted EBITDA for the quarter was $31.4 million, up 7% year-over-year. Our efficient operating model and disciplined expense management allowed us to convert 64% of contribution to adjusted EBITDA. Excluding under 65 Health, our core business performance was very strong with year-over-year revenue and adjusted EBITDA each growing 28%. Turning to the balance sheet. We completed the refinancing of our credit facilities during the quarter. As detailed in the Form 8-K we filed with the SEC, we put in place a new $150 million senior secured term loan and a $60 million revolving credit facility, both maturing in March of 2031. The refinancing replaces our prior arrangements, extends our debt maturity profile meaningfully and provides enhanced financial flexibility. We drew modestly on the revolver in connection with closing, and we ended the quarter with $26.1 million in cash and $45 million undrawn on the revolver. On capital allocation, since the beginning of the year, we have repurchased approximately 2.6 million shares for $25 million, representing approximately 4% of the company. We remain committed and on track to complete the vast majority of the remaining $60 million of our $100 million authorization in 2026. Turning to Q2. We will be changing how we present guidance. We will be guiding to contribution and we will no longer report transaction values as we think contribution is a more relevant metric for investors evaluating the company's performance relative to our publicly traded peers. For Q2, we expect revenue of $290 million to $310 million, up approximately 19% year-over-year at the midpoint. Contribution of $45.5 million to $48.5 million, up approximately 18% year-over-year at the midpoint. Adjusted EBITDA of $28 million to $30.5 million, up approximately 19% year-over-year at the midpoint, including an approximately $2 million year-over-year decline in contribution from under 65 Health. Excluding under 65 Health, we expect contribution to increase by 25% and adjusted EBITDA to increase by 31% year-over-year. For Q2, we expect the health vertical to be approximately 1% of total revenue, as we made a strategic decision to limit under 65 Health open marketplace participation to carriers only, simplifying our operations. Looking at the remainder of 2026, we are entering a more normalized growth environment in P&C. Accordingly, we expect growth rates to moderate in the back half of 2026 as we lap increasingly strong prior year comparisons. For the year, we expect to generate $90 million to $100 million in free cash flow. Overall, we remain confident in the strength of our position and the long-term opportunity ahead. With that, operator, we are ready to take the first question. Operator: [Operator Instructions] And your first question comes from the line of Tommy McJoynt with KBW. Thomas Mcjoynt-Griffith: Steve, could you go into a bit more detail and specifics about the LLM comments that you made? You seem to suggest a strategy shift in LLM that's monetizing advertising leads. Could you add some more details and specifics around that? Steven Yi: Yes. So what I was referring to was OpenAI's announcement that ChatGPT was going to increase, I guess, reliance on advertising monetization. And I think the number that they threw out was that by 2030, they wanted to generate about $100 billion in ad revenue by then, which is about 4x the previous forecast for ad revenue that they had released, I think, earlier this year. And so, for us, that was a really clear sign that OpenAI and ChatGPT, at least with the consumer-facing product, we're going to monetize primarily using an advertising model. I mean, certainly, I think with Gemini being owned by Google, you can expect Gemini to do something similar. And so, what we really was saying was that with the adoption of this advertising model as opposed to a closed commerce model as some people had expected, I think that means a good thing for our overall industry because what I have full confidence in is our supply partners to be able to adapt to this new upstream traffic acquisition source and really be able to tap into the incremental demand and shopping behavior that the LLMs are going to generate. And we think ultimately, over the next 2 to 3 years, this is going to be a significant tailwind to our business, both on the publisher side and for us as a whole. Thomas Mcjoynt-Griffith: And then switching gears, we often talk about the carriers being stratified into those leading players that were first to reengage in advertising spend and then more carriers catching up. Have you seen any of the leading carriers start to pull back on advertising spend as they seem to maybe notice that the underwriting cycle is nearing its peak? Steven Yi: No. No, we haven't. I think what we're seeing is really accelerating growth from the non-leading carriers more than any pullback from the leading carriers. I think they were obviously the first ones to come back and really lean into growth mode by acquiring customers. And really the spending came back very quickly within our marketplace from a couple of the leading carriers. I think they're maintaining the levels of spend, we continue to see growth there. But really, what you're seeing, and you're seeing that coming out in our numbers with the higher growth rate that we're seeing from our open marketplace is really just the growth that we're seeing from a lot of the other top 15, top 20 carriers as they continue to -- or they increasingly start to lean into growth marketing. And so, we're obviously very encouraged by that. It's really the broadening of the demand that we have been expecting for the last couple of years. It represents both, I think, really the strong cyclical tailwinds that you're seeing, as carriers start to lower rates and really pour money into advertising to grow their policy counts. And then in addition to that, really the cyclical tailwind really fueling the secular shift that we're starting to see again from an increasing number of carriers as they pivot from being primarily reliant on agent-based distribution to really building a strong direct-to-consumer channel as well, which effectively means that a lot of the distribution costs that a lot of these agent-based carriers were incurring really is starting to shift from agent commissions into advertising dollars, which is a net positive for our industry and clearly a net positive for us. Operator: Your next question comes from the line of Cory Carpenter with JPMorgan. Cory Carpenter: I just wanted to ask, last quarter, you talked about an expectation for carriers to enter the year kind of with a more prudent start and then kind of save some, if you will, for later in the year should the opportunity present itself. Maybe could you just give an update on kind of that? And has any of the macro uncertainty that we've seen unfold over the last couple of months changed kind of your expectations for how you expect spend to trend through the year? Steven Yi: Yes, sure. I think that what I said in the last comment, I think, really holds for this one, which is that they may have started the year a little bit conservatively. Certainly, the big ones have continued to grow organically, but it's really the body of the demand for carriers who are, again, top 15, top 20 carriers, but weren't big spenders in the past within our marketplace. And we've been really pleasantly surprised to see the level of growth that we're seeing from them. Now the -- I'll say a couple of things there, right, which is, we still think that, that broadening of demand has a ways to go because all of those outside of the top carriers that you're referring to are still only allocating, let's say, 2% to 3% of their overall advertising budget to our marketplace. If you look at benchmarks and really where we expect them to be, it's really somewhere between 10% to 20%. So they have somewhere between 5 to 10x to go in terms of the level of spend that they could support with us, right, once they eventually get to a point where the industry leaders are. And so, even though we're seeing really strong demand, robust growth in our open marketplace by the broadening of demand, we think that there's still a ways to go there. To answer the last part of your question, are we seeing any slowdown with some of the macro effects? I'm guessing that you're referring to the war and rising gas prices and then fears of increasing inflation. I mean, certainly, those things could have an impact on loss ratios. We're not seeing the carriers really taking any action right now based on any fears of inflation. I think it's going to cut both ways because gas prices going up means that people are going to drive less, that's going to reduce frequency. But certainly, higher gas prices or higher oil prices is likely to result in inflation of car prices, which could have a negative effect on severity. Operator: Your next question comes from the line of Mike Zaremski with BMO Capital. Michael Zaremski: Just a couple of numbers questions. On the -- I heard loud and clear about reiterating the free cash flow. Did you mention why the cash flow didn't come through this quarter? And then just another numbers question. Did you specify the new terms on the debt so we can calculate the potential savings? Patrick Thompson: Sorry, on mute. Mike, on the cash flow side, the -- a couple of things happened in Q1. So first off, we had an $11.5 million payment to the FTC. That was our second and final payment to the FTC. So that was obviously a use of cash. And Q1 is a quarter where we have a couple of kind of annual payments that go out the door. So we've got annual bonuses to employees, which is kind of -- it's a mid-, high single-digit million number, and we've got annual payments that go out the door on our tax receivable agreement. And I would say that Q1 had those kind of 3 one-timers or once annual items. The rest of the year should not have those. And so, the adjusted EBITDA to free cash flow conversion should be very strong for the balance of the year. And moving to the debt side of the house. The refinance had essentially very minimal changes to the overall interest profile of the debt. Probably the most meaningful change to cash flow is that the amortization is going to be slightly lower. We have $7.5 million annually of amortization, kind of paid 1/4 of that every quarter. So there's a little bit less paydown that occurs naturally on the debt. But I would say otherwise, the economics of the debt are largely unchanged from the prior agreement to this one. Michael Zaremski: Got it. And probably for Steve, on the removing transaction value, I'd say investors did find that helpful. Are you saying you feel like it's proprietary and some of your competitors don't disclose it, so you'd rather not disclose it? Patrick Thompson: Yes. And Mike, this is Pat. I'll take that one. I would say that for us, transaction value was something we originally disclosed at the time of the IPO to show our scale, and it's something we've shown since to show our scale. And as Steve said in his scripted remarks, we estimate from a transaction value standpoint, we're close to 3x the size of our nearest competitor. And so, we think we've kind of probably pretty clearly proven that point and investors understand it. And as we think about the most important metrics for understanding the business, those really are revenue contribution and adjusted EBITDA. And those are the exact metrics that all of our public peers show. And so, we're just in a spot where we thought from a simplicity standpoint and a conformity standpoint that it made sense to focus on the same things that everybody else does. Operator: That concludes our question-and-answer session and as well as today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, and welcome to the Moelis & Company First Quarter 2026 Earnings Conference Call. To begin, I'll turn the call over to Mr. Matt Tsukroff. Matthew Tsukroff: Good afternoon, and thank you for joining us for Moelis & Company's First Quarter 2026 Financial Results Conference Call. On the phone today are Navid Mahmoodzadegan, CEO and Co-Founder; and Chris Callesano, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements that are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company's filings with the SEC. Actual results could differ materially from those currently anticipated. Firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods to better understand our operating results. The reconciliation of these adjusted financial measures with developing GAAP financial information and other information required by Reg G is provided in the firm's earnings release, which can be found on our Investor Relations website at investors.moelis.com. I will now turn the call over to Navid. Navid Mahmoodzadegan: Thank you, Matt. It's great to be with you all this afternoon. We have had an active start to the year with record first quarter revenues of $320 million, record first quarter levels of announced transaction activity, strong momentum in senior hiring and continued execution of our strategic growth priorities. Since our last earnings call, we advised that a number of notable M&A transactions, including Clear Channel Outdoors $6.2 billion sale to Mubadala Capital and TWG Global, Tri Pointe Homes $4.5 billion sale to Sumitomo Forestry and Kennedy Wilson's $9.5 billion take private. Beyond M&A, we advised TowerBrook on its $1.2 billion continuation vehicle for EisnerAmper, and most recently, we acted as an active book runner on X-energy's $1.2 billion IPO. We entered 2026 with high levels of new business origination and a constructive outlook. While the war in the Middle East, disruptions in private credit and the impact of AI on certain sectors, have created some near-term headwinds in parts of the transactional environment, the same forces create new opportunities for our firm. We remain confident about the trajectory of our business, supported by our pipeline near all-time highs and the fundamental drivers of transaction activity firmly in place. Let me briefly take you through an overview of what we're seeing in each of our major product areas. In M&A, corporates continue to seek scale to strengthen their strategic positioning especially amid rapid technological disruption. This dynamic is most pronounced in large-cap transactions, which continue to drive M&A volumes and is further supported by a more accommodative U.S. regulatory backdrop. Dislocation in various parts of the public equity markets is also driving take-private transactions, an area where our Board and special committee advisory practice is strong. In addition, our business continues to benefit from financial sponsors need to monetize an extensive backlog of investments. While the market is not yet seeing a broad-based increase in sponsor exit activity, our M&A revenues from sponsors grew double digits during the quarter. In private capital advisory, the market for GP-led secondaries continues to hit record levels, driven by sustained demand for liquidity solutions, increased adoption of continuation vehicles and a growing base of institutional investors seeking exposure to seasoned assets with more predictable return profiles. Our thesis for PCA is playing out as expected with the team executing a number of live mandates and rapidly building a significant pipeline. With the recent addition of a Managing Director focused on private credit secondaries and another joining later this year, we will have 7 senior bankers dedicated to GP-led secondaries further strengthening our position in this important market for our sponsor clients. Turning to capital markets. Demand for growth capital from high-quality issuers is driving activity in our business, particularly in late-stage growth and pre-IPO issuance for AI, digital infrastructure and aerospace and defense oriented business models, just to name a few. IPO issuance is also strong with our team involved in a number of transactions coming to market in the near-term. In addition, technology disruption is creating a more dynamic financing environment and accelerating opportunities for hybrid and structured solutions. We are further investing to meet the opportunities we see in capital markets. We've recently hired 2 managing directors in the space, including a Managing Director focused on securitization will help develop this important growth opportunity for the firm. And a Managing Director that complements our already strong private credit and debt capital markets capabilities. In capital structure advisory, liability management continues to be the most active segment of the market. increased lender selectivity is widening the gap between companies that can readily refinance and those requiring more complex solutions, which we expect will lead to more traditional restructurings over time. Our CSA pipeline is meaningfully above last year's levels and ongoing technological disruption and volatility in commodity prices are creating new opportunities. Additionally, our growing creditor coverage is diversifying our CSA business, contributing to a larger share of revenue and positioning us well with the creditor community. Turning to talent. We have hired 8 MDs year-to-date, 2 who have already joined and 6 who will join us over the course of the year. In addition, the PCA and Capital Markets hires previously mentioned, we've also invested across industries where we see attractive long-term opportunities. This includes recent Managing Director hires in key sectors, including energy and health care IT. In Europe, we've hired 2 managing directors to enhance our expertise in chemicals and deepen our sponsor coverage capabilities. We recently relocated to a new and expanded office in London to support our talent, our clients and our continued growth in the region. In general, we remain intensely focused on attracting the best and brightest talent and are excited about our high level of engagement and dialogue with world-class candidates. With respect to capital return during the quarter, we repurchased 1.9 million shares including 895,000 shares in the open market while preserving the strength of our balance sheet with substantial cash and no debt. Finally, we are actively testing and deploying AI tools across our business with broad adoption from our teams. We see AI as a clear productivity lever supporting our bankers and providing the best possible advice to clients and driving greater efficiencies throughout our organization. With a strong pipeline, including high levels of announced transaction activity and the most comprehensive capabilities at any point in our history, we are well positioned to support our clients and deliver long-term value for our shareholders. With that, I'll pass the call to Chris to review our financial results in more detail. Christopher Callesano: Thanks, Navid. Good afternoon, everyone. As Navid mentioned, we reported record first quarter revenues of $320 million, an increase of 4% versus the prior year period. Our revenue growth was driven by year-over-year increases in M&A and private capital advisory, partially offset by decline in capital structure advisory capital markets. Our business mix for the first quarter was approximately 2/3 M&A and 1/3 non-M&A. Turning to expenses. Our first quarter adjusted compensation expense ratio was 65.8%, down from 69% in the first quarter of 2025 and in line with our full year 2025 adjusted compensation ratio. As the year progresses, our compensation ratio will depend on the trajectory of revenues and the pace and magnitude of hiring throughout the year. Adjusted noncompensation expenses were $67 million for the first quarter, resulting in a 21% noncompensation expense ratio. Main drivers of the expense growth were higher deal-related costs and increased communication and technology expenses. As previously communicated, we currently anticipate our full year 2026 noncompensation expenses grow at a similar rate to 2025 due to our ongoing investments in technology, including AI, increased deal-related travel expenses and growth in headcount. Our adjusted pretax margin was 15% for the first quarter of 2026 as compared to 14% in the prior year period. Regarding taxes, our underlying corporate tax rate was 29.3% for the quarter before the discrete tax benefit related to the vesting of equity. Turning to capital allocation. We continue to maintain a strong balance sheet ending the quarter with $354 million of cash and no debt, allowing us to continue investing in the business while also returning meaningful capital to shareholders. Board declared a regular quarterly dividend of $0.65 per share and as Navid said, we repurchased 1.9 million shares during the quarter at an average price of $61.40 per share, including 1 million shares to settle employee tax obligations and 895,000 shares repurchased in the open market. Through the combination of net settlement and open market repurchases, we have offset more than half of our annual equity incentive compensation issuance. Including the dividend declared today, we have returned approximately $171 million of capital to shareholders with respect to the first quarter. With that, we are happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Devin Ryan with Citizens Bank. Devin Ryan: I want to start with a question, kind of big picture just on the software sector. Obviously, you guys have made some investments there and have scaled nicely. Clearly, kind of one area that's getting caught up in some of this AI dislocation. But curious kind of what you're seeing kind of play out there relative to maybe what people were expecting heading into the year? And I know it's not just one category. There's a lot of kind of subsectors to it. But kind of where do you see activity there evolving do we see forced consolidation later this year? Are there take private to public companies? Maybe that's a catalyst. Just would love to get some sense of how you see this mapping out and then how important that is for kind of the broader M&A recovery, just given that it is a kind of important subsector? Navid Mahmoodzadegan: Sure. Thanks for the question, Devin. So you're right, we have a great, great team in technology at the firm and within our technology group, software is a really important set of subsectors within that group. So the events of this quarter, essentially what you've seen is a repricing of software stocks in the public markets due to fears over what AI is going to do to a lot of these historically very sticky business models. That's caused a revaluation in the public markets, that clearly leads over into the private markets, both in terms of the private M&A market and lenders' desire to finance these types of companies. And so it's definitely harder in the near-term to navigate traditional software M&A at the same rate as you've seen over the last few years. I think if you take a step back, I think we're likely to see because right now, the market is putting sort of a broad brush on all of these SaaS business models. And I think what's likely to happen, if you sort of simplistically put all of these companies into 3 buckets, I think, in 1 bucket and time will tell. This will play out over a period of time. There will be companies that -- where the AI threat is misperceived these companies will adapt and use AI to their advantage and prosper and grow through some of this disruption. And I think those companies, you'll see active again in the M&A marketplace either as consolidators or as candidates for sale to other strategic or private equity firms. On the other end, I do think there's a category of company that the business models are going to be significantly disrupted. And if those companies carry a lot of leverage, either because they're subject of a historical LBO, we're owned by a sponsor, et cetera. I do think you're going to likely see liability management and other actions to deal with those capital structures, which are not sustainable going forward given the disruption from AI. And I think there's a category in the middle of companies where it's just going to take some time to figure out what AI means for those businesses and those companies will need time and the owners of those companies will need time to adapt to kind of the changing landscape. And I think for those companies, things like bespoke capital hybrid solutions, things that delever the capital structures and give the owners of those businesses more time or continuation vehicles. You'll notice that in each of these different buckets, we have great product expertise to service those companies to leverage the deep relationships our technology team has with companies and with sponsors and with their deep expertise and knowledge in these spaces. And so I think we're really well positioned as the market evolves and makes sense of AI disruption to these different categories of software companies I think we're really well positioned to be able to provide great service to our clients to help them navigate that. Devin Ryan: That's terrific color. And then just as my follow-up, I heard the comments on sponsor engagement in the prepared remarks, but just curious kind of what you think bring sponsors back. I mean, this is supposed to be the year of the mid-market sponsor exit first few months, obviously, not very conducive. But do you still see that as likely if kind of the macro conditions settle down? Or what do you think needs to change to just unlock that reacceleration in sponsor activity? Navid Mahmoodzadegan: Look, I can tell you, Devin, there is significant desire and need for these sponsors to transact with these portfolio companies. So the demand is there. It's really a question of lining up that demand with market conditions that enable these transactions to happen. So geopolitical uncertainty, a widening out of spreads in certain sectors because some of the dynamics that are playing out in private credit. Those things in the near-term aren't conducive to a full-scale reopening of the full breadth of the middle market M&A business, which is where a lot of the sponsor activity is. I think it's coming. I think as we kind of hopefully get through the geopolitical uncertainty as some of the headlines around private credit subside. I do think sponsors are going to take advantage of the need to transact with these portfolio companies. So you're right, it hasn't happened quite yet. And our sponsor business is growing through that, so I'm really proud of that. But I do think it's going to take a little bit more time to see that full breadth of the market that we all anticipate will appear at some point, hopefully soon. Operator: Your next question comes from the line of Alex Bond with KBW. Alexander Bond: I want to start on the restructuring side. You noted in the release that the revenues declined there year-over-year in the quarter. A, can you just help us think about the magnitude of the decline there in the quarter? And then also if you could help put some context around the results here. The commentary from some of your peers has continued to be relatively upbeat and you noted the pipeline here is up meaningfully year-over-year. So maybe if you could just speak to the drivers behind the year-over-year decline and maybe it's just timing. But any other color there would be helpful. And then additionally, any color around the pipeline would also be helpful. Navid Mahmoodzadegan: Yes. Look, we're not going to get into specific details of the quarter. But look, it's really just timing. The transactions -- the revenues in the quarter are a function of which transactions closed in the quarter. And so there's always going to be a little bit of variability depending upon the quarter and the business segment. But as I said, we -- our team is doing a great job. They're working on a number of really important and significant mandates, got a lot of momentum. Their pipelines are up in a really positive way. And I do think some of the same volatility that we've been talking about in terms of raw material prices, input prices given the geopolitical uncertainty, tech disruption, AI disruption, some of those same themes that are potentially causing some near-term headwinds on the M&A side are creating opportunities for liability management and other things that our CSA teams get involved with. So I feel really good about the trajectory of that business and feel really great about our team. Alexander Bond: Okay. Great. And then maybe just on the PCA side, you noted the stronger year-over-year revenues there, which makes sense given the build-out of the platform. But maybe if you could just help us think about the contribution here in the quarter, maybe how that progressed sequentially. And then also, any updated thoughts around where you sit in the competitive landscape and progress in terms of market share gains to date, that would be helpful as well. Navid Mahmoodzadegan: Yes. Look, we're building that team aggressively, as I mentioned. We'll have here soon 7 managing director -- senior folks managing directors, building that business for us. We love the team. They're doing a great job getting great reviews from clients who they're going to see, and they're getting hired on and building up their pipeline pretty significantly. So it's still early days. We're starting to see kind of the fruits of that early start-up phase in that business. But I think I said in the prepared remarks, our thesis is spot on. The client -- the sponsor clients that we have these deep relationships with want us to be in that business. They want to support us and hire us. They want us to be involved with their portfolio companies. And now that we've been able to put in place a world-class team in a really important product, both on the traditional GP-led secondary side and with private credit secondaries, both of those are growth areas and I suspect there'll be growth areas for a while, and we've got a great team there that's out there winning mandates and executing mandates. So I feel really good about that. Operator: Your next question comes from Ryan Kenny with Morgan Stanley. Ryan Kenny: So just to follow up on that last question on private capital advisory. So it sounds like it's starting to contribute to revenues, which is great to hear. Is it accretive yet to pretax income, so revenues less expenses? And is that something that can happen this year? Navid Mahmoodzadegan: I don't know. Chris, do you want to take that, Chris? I don't know. Christopher Callesano: Yes. I mean it's hard to tell during the quarter, right? But I would say this year, I think there's sure it could be accretive. Like Navid said, it's certainly growing. It's part of our non-M&A, right? You mentioned that 2/3 of our business is M&A, 1/3 is non-M&A. That's split between capital market, CSA and now with PCA, that's a growing component of it. Ryan Kenny: And then as a follow-up on private credit. So it came up a couple of times as one of the near-term headwinds. I'm wondering, are you seeing anything under the hood there? Or is this just headline specific with perceived risk impacting activity? Christopher Callesano: Yes. I don't think there's systemic risk in the private credit market and a lot of the headlines you're seeing around direct lending. Direct lending is a small part of the overall private credit complex. And most of the issues right now are around direct lending into software and concentration around some of those portfolios. I do think when things like the sort of revaluation of software companies happens, lenders, direct lenders, folks in the private credit industry tend to get a little more selective and tend to ask themselves the question of, right, what's next? Are the risks that I haven't seen in other parts of the marketplace. Now put that aside, there's all sorts of other parts of the marketplace, many, many sectors that are really insulated from some of this technology disruption and/or our beneficiaries of the technology disruption. And so the direct lenders are actively lending -- continue to actively lend into all of those different bases and sectors at a very rapid pace. But I do think it does cause folks to say, are there other spaces where I didn't see risk that -- and we're at mispriced risk essentially. And so -- and causes them to be a little bit more cautious lending in some of those areas. And so those are -- that's a flavor for some of the headwinds that I was talking. Operator: Your next question comes from the line of Ken Worthington with JPMorgan Chase. Kenneth Worthington: As we think about the business environment for M&A and the puts and takes that you highlighted at the beginning of the call, how does the U.S. compare with Europe and with Asia as we think about the outlook for M&A activity for the next few quarters? Navid Mahmoodzadegan: So I think the U.S. is still ahead of Europe. If you look at the announcements this quarter in Europe, there's a little bit of a pop I think that's really due to a few larger cap transactions, but the volumes just aren't there in Europe yet. So Europe is still behind the U.S. in terms of momentum in the M&A market. I think that will change over time. And certainly, we're super committed to our build in Europe. It's a critically important part of the world. If you're going to have a world-class investment bank on a global basis, you have to be strong in Europe, and we're committed to that region. But the pace of the M&A market, the dynamism of the M&A market is still not what we're seeing in the United States. Asia, there is pockets of activity in Asia, a little less on the cross-border side that we're seeing, but there's still activity there, and we have a presence there, and that's obviously critically important as well. Kenneth Worthington: Okay. And maybe just following up on Europe. Why is Europe maybe not coming together like we're seeing in the U.S. M&A market? Is it a financing issue? Is it a sentiment issue? Is it just like a sector mix issue? What would you sort of put your finger on as to why we're not seeing the same level of engagement? Navid Mahmoodzadegan: I think that's a longer philosophical question that you one could take a lot of time answering, but let me give you my views. I think, look, part of it is I think a different relationship between government and enterprise in some of those markets. I think there's a different and more difficult regulatory environment in some of those markets. I think there's a different approach to entrepreneurialism in Europe in some of those markets that you see in the United States. And I think there is a different pace to capital formation in parts of Europe, and you see in the United States. So I think you could talk about it for a long time, but I think some of the pillars of why you see a healthy growing dynamic M&A markets in the United States. Europe is just a little bit behind the United States in some of those areas. Operator: Your next question comes from the line of James Yaro with Goldman Sachs. James Yaro: I just want to touch a little bit more on the restructuring backdrop in 2026. Could you just comment a little bit on your view as to whether that could improve to a lesser or greater extent as a result of issues within private credit. And maybe if that's true, then the cadence over which that could occur? And then just maybe if you could also comment on the mix of M&A versus non-M&A revenue? Navid Mahmoodzadegan: Yes. On that last point, Chris. Christopher Callesano: Yes. I mean the mix was 2/3 M&A, 1/3 non-M&A, split between CSA and capital markets. Generally, we don't give a breakdown, but I would say they're in the same ZIP code depending on the quarter. And then again, now we have PCA in that area, and that's growing nicely. Navid Mahmoodzadegan: Look, on the outlook for restructuring generally. But there's still significant maturity walls as you kind of look out to the '28 to '29 to '30 timeframe. I think something like $2 trillion of maturities that are set to hit the leverage loan in the high-yield market during those time periods. So those maturity walls have to be dealt with -- some of that are prior maturity walls got kicked out to '28, '29 and '30 and some of those companies may or may not be able to continue to refinance and down the road I do think some of the tech disruption and the AI disruption we talked about, some of the factors that come out of some of the geopolitical events in terms of raw material prices and fuel prices that are impacting some sectors. All of those things create stress with companies that have levered balance sheets. And all of those are areas that were structuring teams are actively involved in conversations with clients. So I do think we're in for continued liability management opportunities. And we think over time, liability management will turn into more traditional restructuring as well. Default rates are still sort of low, but we do think there's plenty of activity for a number of years on the restructuring side. James Yaro: Okay. That's super helpful. I just wanted to touch again on the private equity backdrop. You made the comment that sponsor M&A is growing double digits. I assume that's a year-on-year comment, but correct me if I'm wrong. And then I just wanted to touch on what's driving your business to outperform the broader market on the sponsor side. Is it that you're taking market share? Or are there specific types of sponsors that are particularly strong that you're seeing, whether it's in terms of geography, the size of deals that they're transacting in or something else? Navid Mahmoodzadegan: Yes. That -- just to clarify, that is a year-over-year growth number. And look, just like if we don't do well in 1 space in a quarter, I don't want -- you shouldn't make too big a deal but I don't want to make too big of a deal that the other way when we do well in the space relative to the market either. So look, I think, generally, sponsors has always been very much part of the DNA and fabric of our firm. We cover corporates actively. We cover sponsors actively. We have dedicated sponsor coverage teams. And really, even before sponsors were in vogue, we were doing that from the early days of the firm. So I think we are -- our teams do a great job and are very focused on covering those entities like we cover corporates. We think that's a very symbiotic thing to do to understand all the players in a particular ecosystem or the corporate and sponsor and so I think really, it's just -- we do a good job of covering them, and it's really an important thing we focus on. So again, I don't want to overstate the market. The market is still not fully open in terms of -- again, back to the demand the desire for activity. The level of actual activity is not meeting the demand yet. And I think once that happens, we're going to be particularly well positioned to reap the benefit of it. Operator: Your next question comes from the line of Brennan Hawken with BMO Capital. Brennan Hawken: Excellent. So Navid, you spoke to expanding relationships in the creditor community in the capital structure advisory in the restructuring business which I thought was kind of interesting. Could you drill down on that a little bit, like which parts of the credit community have you been focused on? Is that shift or expansion in relationships sort of centered around an opportunity set that you believe is likely to become more robust. And I don't think you touched on this before when you were talking about the fact that 1Q started off a little slower, but you had recently taken up your outlook for the year. Do you still expect that business to be flat to up here as we progress through '26? Navid Mahmoodzadegan: Sure. Thanks for the question. So yes, look, we -- a couple of years ago, we hired a couple of senior professionals to really focus in on the creditor side of the business. Really, over the last number of years, the creditor side of the business has really evolved. I think post financial crisis and then for a number of years thereafter, a lot of the action in the creditor community really revolved around hedge funds and I think over time, that's really shifted more to CLOs. And in order to make sure that we had best-in-class coverage of CLOs and the other constituents in the credit marketplace. We had to be more intentional about covering those players actively and really making decisions as we were going after corporate opportunities in the restructuring world, making a decision are really going to focus on a company side situation or we're going to focus on a creditor-side situation because a healthy balance, I think, between those 2 businesses is important to have the biggest TSA business you can have. And I think having a group of people who are really intentional about building relationships to make sure we were well positioned, especially, I think this is really, again, part of the secret sauce of how we go to market. Our CSA business, like all of our sectors, all of our product businesses are deeply collaborative with our sector teams. And so especially where we had a good relationship with the company, knowledge in a sector to make sure we were lining up with the right creditors, if we were chasing a creditor assignment and being really intentional about that, it's been really, really important and it's opened up a lot of opportunities for us. So that's -- that's what I was referring to in the comments. And I think the investment in that side of the business being more intentional there has really paid off. Brennan Hawken: And no change to the outlook, right, just to confirm? Navid Mahmoodzadegan: Yes, I think I mentioned in the prepared remarks that our pipelines are up meaningfully and we'll see how the year plays out, but we do expect growth in our CSA business. Brennan Hawken: Great. Great. The next 1 is a little more ticky-tacky. So probably more for Chris accounting-oriented. Comp expense of $210 million. How close is that to a floor for you guys on comp. And if that layer above the floor is a little thinner than normal, is that a statement of optimism around the ability to accrue against more robust revenues as the year progresses? Christopher Callesano: I mean I'd say a couple of things. Our Q1 comp ratio is down, right, over 300 basis points from this time last year. Q1 had equity comp in there and it's higher, right, due to the acceleration of retirement eligible equity awards. So I think you're aware of that. However, those awards are fully considered in our 65.8% full year estimated comp accrual. So I think right now, we're just -- we are projecting that 65.8% for our best estimate for the year. And as always, we plan to evaluate and adjust the comp as the year to develops, considering revenues, investment in the business and the competitive landscape. Operator: Your next question comes from the line of Brendan O'Brien with Wolfe Research. Brendan O'Brien: I guess to start. Just from what we can see in the public data, it seems like you have been having a lot more success with strategic clients in terms of share than what you have historically. I just want to get a sense as to whether this is a concerted effort on your part to focus more of your efforts on strategic clients, just given some of the softer activity among sponsors and whether you view this as being more sustainable share gains that you could hold on to as sponsor activity begins to recover? Navid Mahmoodzadegan: Yes. Thanks for that observation and for the question. I agree with you. I think our platform and our bankers and the quality of the hiring we've been doing laterally. I think all of that has contributed to a more active transactional activity around strategics to go and pair with our always historical strength with sponsors. And so that's very intentional. And I do think from my perspective, our best sector bankers know a lot of companies and transact with a lot of companies. They also understand sponsor space. They also understand our product capabilities and work collaboratively with our product folks and those are the kinds of people we're hiring. Those are the kinds of people we're developing through our internal development pipeline. And I think really what you're seeing is, yes, intentionality to make sure we're covering corporates the right way. And to think big in terms of larger opportunities, we definitely have a concerted effort at the firm to make sure we're thinking about the largest transactions and are pursuing the largest opportunities but it's also, I think, a testament to our hiring and our talent development and the maturation of our plan. Brendan O'Brien: That's helpful color. And then -- for my follow-up, I just wanted to touch or drill down a bit more on the comp ratio. I understand there's a lot of uncertainty on the back half of the year at this point, but just struggling to reconcile the record 1Q pipeline commentary and just the overall optimism on activity trends across the business with the flat comp accruals. So I guess it would just be helpful to understand -- and for the remainder of the year in the 1Q accrual and how we could think about comp leverage if activity continues on this positive trend? Navid Mahmoodzadegan: So I think on the last call, as we were looking into 2026, even though we had made, I think, meaningful progress over the last couple of years to bring our comp ratio down. I think I was pretty clear that we don't intend to be finished there. And our goal is to continue to work the comp ratio down as the investments that we've made over the last number of years in our people started to show up in terms of increased revenue as the market improved and as our business continues to grow, that's still exactly the plan. And I'm hopeful and optimistic that we'll see that as we roll through the next few quarters and have a great year this year. The first quarter was up. It wasn't up a lot. You can see what percentage it was up. And I do think as we roll forward in fact, if we see the kind of growth numbers that I hope we see and I anticipate we'll see, we will revisit comp ratio in subsequent quarters. Christopher Callesano: Yes, I agree. I think it's just a little too early. Just like last year, we started out at 69% and as the year progressed and saw our revenues come in and our investments, we were able to lower it over 300 basis points. So we're hopeful -- I'm not sure that it would be the same pace as we did last year, but we're still hopeful to make increases in improvement on our comp ratio this year. Operator: Your next question comes from the line of Mike Brown with UBS. Michael Brown: I wanted to ask you about the pipeline here. So your pipeline that I guess, all-time highs. Public backlog does seem to support a good second quarter here, but it does seem like there's a lot of market uncertainty could certainly elongate some of the deal closings for the industry, maybe impact the pace of new deals. So as you think about the next quarter or 2, can you just maybe give us a view on how you think those could shape up relative to the prior year? Any color there would just be helpful just given kind of a lot of the pockets of softness in the market currently? Navid Mahmoodzadegan: Sure. Look, we feel really good about the overall level of our pipeline, as we mentioned in the prepared remarks, and we have a I think the highest at this point in a year, the first quarter in terms of our announced pipeline deals that have been announced that are waiting to close. So I think those are both really good data points as we kind of think about the rest of the year. But you're correct that at the end of the day, we have to transact against that pipeline. Our teams are working extremely hard to service clients and give great advice and try to get transactions done, but some of that is out of our control. And as I pointed to in the remarks as well, some of the factors in the marketplace coming out of the geopolitical environment, AI disruption, do create some near-term headwinds that we're working through, but they also create some opportunities in other parts of our business. So a long way of saying we'll see how the year plays out, but we're optimistic the business is in a really good spot. And our teams are working exceptionally hard to make this a growth year. Michael Brown: Okay. Great. And I wanted to ask maybe another question on the comp ratio come at it maybe a little bit of a different way. And again, with the theme of kind of wide range of outcomes here. So if we have a better environment here and continues to accelerate and you see revenue growth pick up from here. What would kind of be the level that could actually push that comp ratio down 100 basis points from that 65.8% level? And then conversely, if revs were to be more flattish for the year, could you hold the comp ratio flat to last year? Just trying to think through as you're investing and then maybe the push and pull on some of your fixed comp costs. Christopher Callesano: Yes. I don't think we're going to get into any sort of algorithm or percentages. I would say, yes, if the environment improves and we ultimately have revenues of what we would expect. We will have an improvement in comp ratio. I'm not going to give you the percentage because, again, we don't know what kind of investments we're making -- we're making all sorts of estimates based on revenues, investments and the competitive landscape at the end of the year. And yes, I think -- sorry, what was your second part of the question? Michael Brown: Just how to think about the comp ratio of revenue was to be more flattish year-over-year? Christopher Callesano: Yes. I mean, right now, we're not expecting that. But sure, if it was flat versus last year, we had an increase in heads, there's a possibility that you would have to adjust that. We don't expect that at this time. Operator: Your next question comes from the line of Nathan Stein with Deutsche Bank. Nathan Stein: I wanted to follow up on Devin's question earlier in the call. So you said in your prepared remarks, large strategic transactions have been driving M&A volumes. That's consistent with what we've seen in the data and also the trend last year. I was hoping you could talk about what's going to get that core middle market strategic deals to really pick up speed here? Navid Mahmoodzadegan: Look, I think -- look, some stability. Look, as I mentioned earlier, I do think if you're a sponsor and you own a company, you waited to monetize it because you're holding out for a price. If -- and you see war break out in the Middle East and that reduces the likelihood after waiting this long to monetize that asset that you're going to actually hit the mark, you're waiting for a little bit, right? If you see credit spreads gap out a little bit because there's disruption in the private credit industry, you're waiting a little bit to see that play out. High-quality assets have been trading. There is activity in the marketplace, but there's also a bunch of -- a whole suite of companies portfolio sitting inside private equity firms people have been waiting to do something, and they have a price in mind of what they want for the asset. And they're waiting for the optimal moment to go ahead and monetize that asset if they haven't done a CV or if they haven't done a refinancing or something like that. And I think it just takes some time. But these assets do have to move. There's no doubt in my mind that these assets have to move, and they will come to market. And it will just take time for that middle market to open up, but it's coming. Operator: Your next question comes from the line of Daniel Cocchiara with Bank of America. Daniel Cocchiara: Sticking with comp and just hiring, I was wondering if you could talk to us about the competitive dynamics you're seeing on this front and whether or not you're seeing any added pressure maybe from like the bulge brackets and their ability to retain talent. Navid Mahmoodzadegan: Sure. It's -- look, it's competitive. There's no doubt hiring great people, what I call difference makers, it's super competitive. It's rare that you're talking to somebody who is great in a space where they're not talking to another firm as well. So we have to compete against bulge bracket firms. We have to compete against other independent firms, and we have to compete against people doing other things and staying at the firms they're at. So look, what we're looking for, again, are people who want to be part of a collaborative environment will fit in great and be accretive to our culture. and who are difference makers. And finding and cultivating those relationships takes time. And it's definitely hand-to-hand combat to get those people here on terms that make sense for us and for them. But again, hired 8 people this quarter. We're excited about all those hires. It's my #1 focus as CEO of the company is not just to make sure our bankers that are here continue to think Moelis & Company is the best place to work with the best culture, but also to recruit other super talented people from all over the world to join us. And we're -- I think we do a great job. Our teams do a great job of identifying those people. And as a senior management team, we spend a lot of time developing those relationships and trying to get those people to yes. Operator: Your next question comes from the line of Devin Ryan with Citizens Bank. Devin Ryan: Just had a quick follow-up on non-compensation expense. Obviously, you heard the guidance and pretty consistent with what you guys had said previously. It was a little bit higher than we had modeled. I think we were a little bit low and kind of building through the year. And I think the guidance implies kind of more of a steadier pace. But in the other expense line, obviously, that jumped up pretty meaningfully. I know there could be some kind of lumpy deal costs and things like that. So I'm just curious what drove that kind of step up and how much of that is kind of core versus like transitory or just one-off items? Christopher Callesano: Yes. I mean -- so I would say that other expenses, this line includes costs that don't warrant their own separate category. So there are things like client conferences are in there, certain deal-related capital markets underwriting expenses, but we have other things like insurance, education, business taxes and just a number of other items. The individual -- like you pointed out, individual non-comp line items fluctuate quarter-to-quarter. But in aggregate, they generally balance each other out. And we still anticipate full year non-comp expenses to grow at a similar rate to 2025. Operator: I'll now turn the call back over to Navid Mahmoodzadegan for closing remarks. Navid Mahmoodzadegan: Thank you all for joining today. Really appreciate it, and we look forward to speaking to you all soon. Thanks so much. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Greetings, and welcome to the Euronet Worldwide First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce your host, Ms. Stephanie Taylor, Head of Investor Relations for Euronet Worldwide. Thank you, Ms. Taylor, you may begin. Stephanie Taylor: Thank you. Good morning, and welcome to Euronet's First Quarter 2026 Earnings Conference Call. On the call, we have Mike Brown, our Chairman and CEO; and Rick Weller, our CFO. Before we begin, I need to call your attention to the forward-looking statements disclaimer on the second slide of the PowerPoint presentation we will be making today. Statements made on this call that concern Euronet or its management's intentions, expectations or predictions of future performance are forward-looking statements. Euronet's actual results may vary materially from those anticipated in these forward-looking statements as a result of a number of factors that are listed on the second slide of our presentation. In addition, the PowerPoint presentation includes a reconciliation of the non-GAAP financial measures we'll be using during the call to their most comparable GAAP measures. Now I'll turn the call over to our Chairman and CEO, Mike Brown. Michael Brown: Thank you, Stephanie. Good morning, and thank you, everyone, for joining. I'll begin my comments on Slide #4. The first quarter here in 2026 represented a solid start to the year as we navigated what continues to be a fluid operating environment. Importantly, we continue to make meaningful progress on our growth initiatives that we believe will position Euronet as a long-term winner in the payments and cross-border space. We are pleased by the broad-based strength across our business, which drove 19% growth in adjusted EPS alongside accelerating momentum in several of our key digital efforts. Highlights include 35% growth in Ria Digital transactions and a 42% growth in new digital customers, the addition of approximately 2,300 new merchants in our Merchant Acquiring business, Dandelion delivering its strongest quarter to date and 3 EFT payment infrastructure deals signed and continued the expansion of our CoreCard client base. During the quarter, we continued to face headwinds from immigration policy and ongoing economic pressures and the conflict in the Middle East introduced additional volatility across parts of our business. These impacts were most pronounced within the Money Transfer segment. We believe the softness associated with these factors is transitory, and we remain focused on what we can control, continuing to operate the business efficiently, executing our long-term growth initiatives across all 3 segments and maintaining financial discipline. We remain confident with our full year outlook, supported by our strong balance sheet and our historically disciplined balanced approach to capital allocation. We believe that we are well positioned to execute against our strategic priorities and deliver adjusted EPS growth in the 10% to 15% range for the full year. Next slide, please, Slide #5. During the first quarter, the EFT team continued to expand our banking and payments infrastructure business with a particular focus on growing the REN platform, our ATM-as-a-Service offering and our merchant acquiring network. As a reminder, these are key offerings within EFT that we believe will play a significant role in accelerating growth at Euronet for years to come. Starting in Europe, in Austria, we implemented an ATM-as-a-Service banking infrastructure agreement with bank99. Under this long-term agreement, Euronet will provide full outsourcing services for bank99's ATM fleet across the country, reinforcing our role as a long-term infrastructure partner to leading banks. In Poland, we signed an agreement with UniCredit Bank to deploy cash recyclers across its branch network. This deployment also allows UniCredit's customers to access Euronet's market-leading depository network. In Latin America, the REN team signed its first banking infrastructure agreement in the region with Banco Itau in Paraguay. This agreement enables the bank to take full ownership and management of its ATM network, allowing it to exit the country's centralized ATM monopoly and then transition to a modern independent processing model with direct scheme connectivity. I want to highlight the strategic importance of these banking infrastructure agreements. Across several European markets and even at an EU level, regulators are developing standards and in some cases, formal regulation that require banks to maintain ATM networks to ensure customer access to cash. By leveraging Euronet's REN technology and scale, banks can meet these requirements while delivering a better customer service at a significantly lower cost. For Euronet, these agreements generate long-term recurring revenue and deepen our position as a critical infrastructure provider. In addition to these core platform wins, we continue to expand our product footprint with existing relationships. In Ecuador, we extended our partnership with Banco Guayaquil through a 3D Secure agreement. This is notable for 2 reasons. First, it demonstrates our ability to cross-sell incremental REN products to existing clients; and second, it represents the first deployment of this product in Latin America, highlighting the cross-geography synergies resulting from our 2024 Infinium acquisition in Malaysia. We also saw continued momentum in merchant acquiring, adding approximately 2,300 new merchants to our existing portfolio. During the quarter, we further strengthened our position in Spain through the announced acquisition of PaynoPain. This transaction enhances our ability to offer digital merchants a comprehensive and flexible suite of omnichannel payment solutions tailored to a wide range of customer needs and industries. Overall, I am pleased with the EFT Group's solid start to the year. Their continued focus on expanding banking and payments infrastructure continues to provide long-term recurring revenue while also providing state-of-the-art technology for banks, merchants and fintechs, around the world. With that, let's turn to Slide #6, and we'll discuss epay. During the quarter, epay continued to make steady progress expanding its digital content distribution capabilities across both established and developed markets or developing markets. We extended our digital content distribution relationship with Revolut into Brazil and Mexico for a total of 22 countries. Revolut is a banking super app and one of the most successful fintech companies in the world with over 65 million global users. This expansion reflects continued demand from global partners to leverage our distribution infrastructure across global markets. We signed and launched a B2B agreement with Apple for distribution through corporate benefits, a leading European employee benefits and rewards platform, across 6 countries. In Japan, we signed a content distribution agreement with Roblox, adding another global brand to our network. This agreement represents continued progress in expanding epay's presence in key digital entertainment markets. We also advanced our alternative payment initiatives during the quarter. We launched Amazon Paycode in partnership with Italy-based LIS PAY, increasing consumer access to alternative digital payment solutions through additional payment channels. In India, we launched Google Play and Apple Gift Card codes on Zepto, a leading quick commerce platform. This launch expands our distribution of key digital content and supports our strategy of partnering with digital platforms to capture the evolving consumer purchasing trends. Overall, epay continued to execute on its growth strategy during the quarter with incremental expansion across geographies, partners and product offerings. We expect this trajectory to continue as we seek to leverage existing infrastructure into high-growth adjacencies, which we will discuss in greater detail at our upcoming Investor Day. The team remains focused on building its global distribution network to support long-term value creation. Now let's go on to Slide 7, and we'll talk about Money Transfer. In the first quarter, we continue to make progress in our Money Transfer segment, but a few external factors masked these positive developments. Pressure on transactions initiated in the U.S. retail business to countries south of the border remained persistent, largely due to the continued effects of U.S. immigration policy, where the industry has continued to experience a 1-2 punch of lost customers from deportation and a virtual freeze in replacement immigration. To a lesser extent, we also saw some impact from the geopolitical developments in the Middle East. While these factors affected our reported results for the quarter, we do not view them as indicative of underlying weakness across our global business or long term in nature. While we faced challenges in the physical retail channel, we received benefits in the digital channel. The U.S. immigration policy, combined with a 1% remittance excise tax and our targeted investments in new customer acquisition, resulted in accelerated digital transaction growth of 35%, new customer growth of 42% and digital revenue growth of 42% year-over-year. The average spend per transaction increased approximately 6% and gross profit per transaction improved year-over-year. Dandelion also posted its best quarter on record. So while external pressures remain, we stayed focused on execution. expanding our digital cross-border payments capabilities, including the launch of real-time payment services in 9 new markets and continuing to scale the Dandelion network. I want to emphasize an important differentiator in our Money Transfer business, the strength and the scale of our global cross-border payments network. Today, that network reaches more than 4 billion bank accounts, 3.7 billion wallet accounts and more than 4 billion debit card accounts as well as over 600 payout cash locations. The unparalleled reach, speed and product differentiation powers Ria, Dandelion and xe with real-time consumer and corporate payments at lower cost than competitor networks. While cash pickup remains a critical service for a large portion of our remittance consumer base, we continue to see Ria, Dandelion and xe customers gravitate towards the convenience of digital payout. Our account deposit transactions grew 12% this quarter and now represent 44% of the money transfers transactions and 58% of the principal transfer. We see account deposits as the solution to driving long-term sustainable growth in cross-border remittances and payments. During the quarter, we remained focused on expanding digital payout capabilities in key corridors. We made a minority investment in the MIO Wallet, a fintech venture, which enables digital cross-border payout capabilities in the Dominican Republic. We also continued to invest in future-ready payment infrastructure. In partnership with Fire Block, we established stablecoin rails during the quarter. The initial deployment enhances our treasury management capabilities. And over time, we expect to expand functionality, including enabling our global assets across all 3 segments to serve as on and off-ramps for stablecoin users. This is important to understand as our ability to operate in a licensed and compliant manner across many countries, particularly in emerging markets, positions us to facilitate stablecoin movement in a way that few fintechs can. Turning to Dandelion. We continue to expand the client portfolio with the launch of 2 new partners. Master Remit, a leading money transfer operator in Australia and New Zealand; and U-Transfer, a South Korean-based fintech specializing in cross-border remittances and foreign exchange. In addition, we signed agreements with 5 new clients, further broadening the platform's reach. These additions underscore both the growing demand for Data Lion's capabilities and its role as an increasingly important driver of long-term growth. Overall, the Money Transfer segment made measurable progress during the quarter with a continued focus on disciplined expansion, digital enablement and investment in scalable payment infrastructure. We remain focused on executing against our long-term strategy. With that, I'll turn it over to Rick to walk you through the financial results in more detail. Rick Weller: Thanks, Mike. Good morning, everyone, and thank you for joining us today. I'll start my remarks on Slide 9. We delivered revenue of $1 billion, operating income of $72 million, adjusted EBITDA of $126 million and adjusted EPS of $1.58. Adjusted earnings per share increased 40% from $1.13 in the prior year. Excluding a onetime tax charge of $0.20 per share in the prior year, adjusted earnings per share increased 19% from $1.33. You can see we are on track to meet the guidance range we shared with you earlier in February. Further, this quarter, we continued our track record of producing strong free cash flows. And because we didn't have any large pending acquisitions or other capital requirements, we repurchased $100 million of our shares. Given the timing of the repurchases, there was only a marginal benefit of about $0.02 per share in the first quarter adjusted EPS. But we know this repurchase will continue to support per share earnings in the future. I'll point out that our operating income of $72 million includes $5 million of additional noncash purchase price amortization reflected in the GAAP purchase accounting for the CoreCard acquisition and an additional $3.5 million for noncash share-based comp. Excluding these 2 noncash items, our operating income would have grown 7%. Slide 10 shows our first quarter year-over-year results on an as-reported basis. Most of the major currencies we operate in strengthened compared to the dollar. To normalize the impact of the currency fluctuations, we have presented our results adjusted for currency on the next slide. I'm on Slide 11 now. The EFT segment delivered strong revenue growth in the first quarter of '26 with constant currency revenues increasing 19%, driven by a combination of double-digit growth in REN and merchant acquiring, certain interchange rate increases and the full quarter inclusion of the CoreCard acquisition completed in the fourth quarter of 2025. Morocco, Egypt and Philippines led the way for the geographical expansion of our ATM footprint, together with deepening our banking outsourcing partnerships. ATM expansion was modest with installed ATMs and active ATMs up 1% after deinstalling approximately 1,400 nonperforming ATMs. In Poland, interchange increased during the first quarter with certain schemes implementing new interchange rates that include both fixed and variable components. These rate increases reflect a similar theme where we have seen rate improvements across Europe. Looking ahead, we expect to continue to see improvements in interchange rates and direct access fees or DAF, as regulatory requirements evolve across Europe, where approximately 15 countries have implemented formal ATM cash access frameworks. These changes are designed to preserve customer access to cash while supporting the long-term sustainability of ATM networks. As additional bank branches decline, independently owned ATM networks are increasingly filling the gap, enabling banks to lower cost while still meeting regulatory requirements for access to cash. As these trends evolve, we expect pricing structures to adjust to support accessible ATM networks. Adjusted EBITDA increased 12%. Operating income remained relatively flat, largely due to the approximately $5 million increase in noncash purchase price amortization related to the CoreCard acquisition. Absent this $5 million increase, operating income for the segment would have grown 21%. These double-digit operating results reflect the earnings leverage of revenue growth while exercising disciplined expense management. Operating margins were consistent year-over-year after adjusting for the inclusion of the $5 million noncash purchase price amortization. In epay, the segment delivered solid results for the first quarter of 2026 with revenue increasing 2% on a constant currency basis. Operating income rose 13% and adjusted EBITDA increased 12% on a constant currency basis. Results benefited from the absence of a $4.5 million onetime operating tax impact in the prior year first quarter. epay revenue and gross profit per transactions were consistent to improving. In the Money Transfer segment, revenue declined 4% on a constant currency basis. Operating income was $38.9 million and adjusted EBITDA $45 million, both down year-over-year. Total transactions decreased 2% to $43.9 million, while digital transactions grew 35%. New digital customers increased 42% and the network locations expanded 4%. The decline in constant currency revenue was primarily driven by immigration-related pressures impacting transfers between the United States and Mexico, the implementation of a 1% remittance excise tax paid on cash transactions in the first quarter and reduced volumes in the Middle East. These headwinds were partially offset by growth in markets outside the U.S., continued strength in consumer-to-consumer digital transactions and the expansion of our Dandelion cross-border payment network. While constant currency revenue per transaction came in a bit, gross profit per transaction improved, driven by a favorable mix toward account-based payouts, improved payout rates and more efficient network routing, highlighting the strength of our cross-border payments network. Operating profit benefited from expanded gross margins, which were reinvested in digital marketing to support long-term growth, resulting in lower operating profit year-over-year. At the consolidated level, despite a more challenging macro environment, we delivered solid earnings growth, supported by strong performance in EFT and continued momentum in our digital channels. While Money Transfer faced near-term pressure, the underlying fundamentals of the businesses remain intact. Turning to the full year guidance. I'd note that as we continue to see the benefits of our key digital growth initiatives, we are seeing a corresponding evolution in our seasonal earnings profile. In prior year, earnings were more heavily weighted toward ATM tourist activity. As we continue to diversify the business and expand our digital products, we expect the second and third quarters to represent a lighter portion of full year earnings than in the past. As Mike mentioned earlier, our current operating momentum and pipeline of growth initiatives give us confidence in our ability to deliver adjusted earnings per share growth of 10% to 15% in 2026. Let's now turn to Slide 12 for a few brief comments on the balance sheet. As you can see, we ended the first quarter with $2.1 billion in unrestricted cash and ATM cash. Total debt was $2.6 billion at the end of the quarter. The increase in cash and debt was due to an increase in cash in ATMs in preparation for our tourist season in Europe as well as cash generated from operations, partially offset by share repurchases and working capital fluctuations. During the first quarter, we repurchased $100 million of our shares. Share repurchases remain a core component of our capital allocation strategy, funded primarily through our strong recurring operating cash flows. We believe share repurchases have been an effective use of capital and underscore our confidence in the long-term value of the business. Over the past 4 years, we have returned, on average, approximately 85% of our annual earnings to shareholders through share repurchases, reflecting a strong return of capital to shareholders. Our broader capital allocation framework continues to prioritize maintaining an investment-grade balance sheet, investing in organic growth, pursuing disciplined and strategic M&A opportunities and returning excess capital to shareholders. With this, I will turn it over to Mike to wrap up the quarter. Michael Brown: Thanks, Rick, and thank you, everybody, again. To close, we are pleased with the solid start to this year. We continue to benefit from product and geographic diversity, which allow us to deliver good results despite a complex and uneven macro environment. Our digital initiatives are clearly delivering results. We're seeing accelerating adoption across the business, driving meaningful mix shift and operating leverage. That progress reinforces our confidence in our strategic direction and the investments that we have made to develop an industry-leading global payments network and expand digital access for our customers and partners. At the same time, our core platforms continue to scale globally. Long-term infrastructure agreements, expanding networks and continued partner wins across the portfolio are strengthening the durability and reach of the business. We also remain disciplined on how we allocate capital. We are balancing organic growth and innovation with selective M&A opportunities while continuing to return capital to shareholders in a way that supports long-term value creation. Our balance sheet and cash generation remains strong, providing us with the flexibility to execute and give us confidence in our full year outlook while continuing to build long-term value for our shareholders. Thank you for your time today, and we look forward to seeing you at our Investor Day on May 20. With that, we will open the floor for questions. Operator, will you please assist? Operator: [Operator Instructions] Our first question comes from the line of Vasu Govil of KBW. Vasundhara Govil: I guess the first one on the strong acceleration in the ESC segment. Just could you maybe help us think through how much was the contribution from CoreCard versus just organic growth in that segment? Michael Brown: Yes. So CoreCard was a little bit squirly this time, Vasu. So we were able to pick up about $30 million in revenue. However, 40% of that $30 million was card stock purchases in anticipation of issuing lots of cards and that 40% was at almost no margin. So -- but it is exciting that they bought so much card stock because they are -- with that contract, they're expecting to launch and issue a lot of cards. Vasundhara Govil: Got it. So like should we be then modeling $30 million less the 40% as we look through the rest of the year in the EFT segment from CoreCard? Michael Brown: Yes. I think that would be -- we'll see what we do, but for sure, you don't want to count that $13 million or whatever it is, the 40% of $30 million, you don't want to count that chicken every single quarter. Vasundhara Govil: Got it. And then just on the Money Transfer segment, I know there are a bunch of different macro headwinds ongoing. But just on the U.S.-Mexico corridor, I wanted to get a sense for whether you've seen the headwinds stabilize there? Or is it still continuing to get worse? And in light of the geopolitical events in the Middle East, just curious what you're seeing in terms of trends in the month of April. That would be super helpful. Michael Brown: Okay. So let me tell you, in the month of April is the first month of the new quarter. I have -- for the last year, the last 3 quarters, the first month has always been pretty good. And then the following months gets crummy. And so I think it would be not in our best interests to expect what April does is going to look -- is going to end up being for the quarter. We'll just say that it's a very choppy environment, a lot of unknowns out there. We continue to do well in comparison to our competitors. Our digital business is growing like crazy. And so we're feeling pretty good about Money Transfer, but the reality is I think anybody who gives you a number for the quarter based upon April is really going out on a limb. Operator: Our next question comes from the line of Rayna Kumar of Oppenheimer. Rayna Kumar: I just want to go back to Money Transfer for a second. I see that you're still growing agent locations. I think it was up 4% in the quarter. Like what are your expectations going forward on increasing physical locations just given the ongoing pressure from U.S. immigration and from the Iran war? Michael Brown: Well, this pressure -- this macro pressure that we see is certainly not in our favor, but it's also not in the favor of our competition. So what we believe is we will continue to add more physical locations because some people just prefer to transact that way, whether they pay with a card or not. And so we will -- we expect a continued growth there. And maybe there will be some opportunities for us to just be aggressive and get these agents quickly because we're doing so well really as a company and the agents and the competitive pressures are not what they used to be. Rayna Kumar: Got it. That's helpful. And then on CoreCard, just like your thoughts on how that pipeline for CoreCard is looking? It sounds like CoreCard had a strong quarter. How should we think about it for the year? Michael Brown: I think I said this on the last call, Rayna, when we bought CoreCard, in our business plan, we really didn't expect to sign a new deal for the first 18 months because that's kind of the closed cycle of signing new deals. We have been absolutely kind of floored and positively surprised with the fact that we're selling new deals as we speak. And we've got a very strong pipeline in process. So we're going to -- by the time we get to that 18 months when I thought we wouldn't close a one, we're going to have a lot of deals under our belt, and that's going to -- and that's the goal. We want to make sure that by the time the Apple business goes away, which we don't -- we're not quite sure when that will happen, but it will be sometime after the end of '27. We want to make sure that we filled that bucket and then some. Rayna Kumar: Got it. If I can just sneak in a modeling question. Just, Rick, how should we think about interest expense for the rest of the year? Rick Weller: Rayna, we've got about $700 million in our Eurobond that matures in May. And we would expect that we'll finance that maturity with something that will be probably a couple of hundred bps more in interest cost. So if you would factor that into it, I think that would be pretty consistent. Operator: Our next question comes from the line of Pete Heckmann of D.A. Davidson. Peter Heckmann: Interesting dynamic playing out, has taken some time. But in terms of countries looking at ATM fee frameworks, I guess, are any of those alone, do you think significant to the near-term outlook of your business, particularly Poland, I think you have a fairly large number of ATMs there? Is the change in interchange rates there enough to really move the needle? Michael Brown: Yes. I mean all these deals, whether it's that or the infrastructure plays are all really good deals. And yes, they all move the needle a little bit. But in total, they continue to move our needle upward. And that's the nice thing with where the world has kind of gone to. Now that we've had this kind of backlash with all the bank branches in Europe being closed, citizens are demanding access to cash. Already 15 countries are mandating cash access with more in the works. One, even Switzerland put it into their constitution. So we know that somebody has to bear that load and us as an independent provider with scale, best scale in Europe puts us in kind of the catbird seat for long-term infrastructure plays in these respective countries. So -- and every one of them is a good deal. So we're -- that's one of the things that really has changed over the last 2 years. We've always done infrastructure deals, but they are accelerating now based upon the legislative and political environments within these countries. Rick Weller: And Pete, I'd just add that all of that just gives us greater confidence in the long-term durability of the business. Peter Heckmann: Okay. That's helpful. And... Michael Brown: Yes, we're just -- in the old days, we were 100% focused on tourist-related revenue for ATMs. That has really changed. Peter Heckmann: Yes, definitely, definitely. Okay. And then I missed it on Bilt. For some reason, I was confusing that was Bilt when you first mentioned it. But with Bilt, is that a U.S. card for... Michael Brown: Yes, it is. It's a very successful U.S. card. It is basically targeted to customers who rent their housing and then they get extra points and rewards and so forth if they use the Bilt credit card to pay their landlords for their rent. It's spelled B-I-L-T, by the way, if you want to look at it. Operator: Our next question comes from the line of Gustavo Gala of MCH. Gustavo Gala: I'm going to keep it to one. It's a little bit long. So with the Investor Day coming around, you guys have consistently delivered double-digit CAGR on revenue, but the multiples continue coming in. What is -- was the Investor Day attendance correct? I think one of the things that has come up is a time to stop trade like it's implying terminal decline. And as part of the Investor Day, is the Board considering any structural actions, anything from a spin-off, strategic review, anything that could help crystallize value? Michael Brown: Well, the -- I mean, the Board will consider anything that kind of pops up. We have to do that. We're a publicly held company. But when you look at our digital initiatives and our growth aspirations for each of those, we're pretty excited about where we're going without that. And our whole industry, as you know, you track a lot of these people, the whole fintech segment is down probably 30%, 35% from a year ago. We kind of fell into that vortex with them. But the nice thing is we -- structurally, we've got a growing, booming business. We've got some challenges with the immigration policy here in the U.S. and money transfer. Otherwise, Money Transfer continues to grow very well. And we've got this network that is without peer and allows us to sell infrastructure deals to lots of people. So I mean, we're not planning on doing anything aggressively with respect to that. When you've got as many growth drivers as we have and accelerators as we have, we'll just keep putting more money on the bottom line, and we will do acquisitions. And if the acquisitions aren't there, we will consider stock buybacks as we have in the past. Operator: Our next question comes from the line of Mike Grondahl of Northland. Mike Grondahl: Two questions. One, could you talk a little bit about the double-digit revenue growth you saw at REN and merchant acquiring? Just kind of what's driving that? And then secondly, have you seen any effect of this $100 oil in your end markets or customer activity? Michael Brown: I'll answer the last one first. Well, the Middle East is not just $100 oil, there's a little volatility going on there right now, and that has affected our Middle East transactions in Money Transfer. With respect to the $100 oil, we haven't seen any direct effect. We do consider the fact that there'll be a derivative, first or second derivative for that is with $100 oil, is that going to push up inflation? Is that going to reduce people's spend, et cetera, just across anybody's business? So that is something that we consider, but we haven't really seen any direct effect of that so far. Now I'm trying to remember what the first question was, yes, double-digit growth in -- in REN. I'll tell you, REN just continues to do well. We're accelerating. We're doing more deals. Remember, when we started REN, it was all in Asia. Now we're signing deals. As you know, we've got one -- we've got Bank of America here in the U.S. We've got several deals in Latin America. REN is one of those things where it is modern technology and the banks don't have modern technology. So what you just need is some reference customers in their geographies. And that's what we're doing, doing more and more deals on account of that. Rick Weller: I think and you add to that, Mike, that over the years, we've been just adding to the product functionality of the REN platform. As you may recall, it essentially started out as a switching product. But even here a couple of years ago, and we made reference earlier in the presentation on the deal with the 3D Secure. We acquired this little piece of business in Malaysia that directly lines up with it. The CoreCard thing directly lines up with it. So as you go into a bank and you talk to them about their payment infrastructure needs, it ranges from switching to credit, to debit, to real-time switching, to security, to payment transactions. This is where we get the leverage across our segments where we're selling to customers that we have in multiple segments. And so it's not unusual that we will have a bank customer that we have in the -- let's say, a REN customer that we also talk to them about a Dandelion product. So I think it's the addition of more and more product into the portfolio, and it's the momentum that takes a while to kind of build the momentum. These are long sales cycles, et cetera. So I think it's the combination of those that come together to really give us that momentum we're seeing. Michael Brown: And I think we've got a couple of things up our sleeve for the Investor Day, too. We're finding that REN typically is used by banks and fintechs. We will talk in the Investor Day how we've leveraged that platform into new verticals that we see a lot of potential growth in. So more news on that to come. Operator: Our next question comes from the line of Josh Levin of Autonomous Research. Unknown Analyst: Two questions from me. First, your competitor, Western Union said the Middle East was actually a source of strength for money transfer, meaning the war spurred some higher transfer activity. It sounds like you had the opposite experience. How might we sort of reconcile those comments? Second question, you launched stablecoin payouts. Can you give us some sense of the specific unit economics for stablecoin transaction compared to a traditional FX-based remittance? Michael Brown: The advantage that stablecoin gives us -- I'll answer the second question first. The advantage that stablecoin has -- gives us at this point in time is basically just treasury float. So we're able to -- what we have -- the way money transfer works, an immigrant comes into either digitally or into one of our physical locations, they give them $300. They've got to send that to their mom in the Philippines. What happens is, we estimate what those numbers are every day. We prefund the Philippines correspondent bank in advance. And then over weekends, it's multiple days of prefunding. So with stablecoin, we can kind of do that ad hoc. So you don't have as much float. You can really do it -- as we get better and better at it, it's going to be kind of instantaneous. And so it just -- it helps us on the float side. Rick Weller: I think when you take a look at what happens really at the consumer level, there's a huge range of what's out there. If you're a very -- doing very large transactions, you can execute those at nearly -- at very, very small rates, very few basis points to do large transactions. You get down to the consumer level and you see numbers that range from 3% to 4% to get on the chain and 3% to 4% to get off the chain. So if it's costing you 6% to 8%, think of this in relationship to the money transfer industry, where you generally see something like sub-3% in terms of total consumer cost to send a transfer. So I think that there's a lot of evolution that is to yet develop out there. But we would see on the low end, the transactions are not being more economical, at least today, what we see out there than what you see in your traditional technology that we move money. Important thing is that we've got the technology ready to go. And as the use cases develop, we've got one of the best networks, if not the best network, as Mike said, to deliver on and off ramps around the world. Michael Brown: And with respect to your first question on the Middle East, you said that our competitor has said that the Middle East has been an opportunity for them. For us, we don't have as big of a Middle Eastern contingent of agents and everything. So it might be kind of country-specific as opposed to more broad-based. Rick Weller: And I think that there might be a couple of aspects of the business in there where they have some increasing volume to a certain country that we don't operate or send to. And there might be some movement in certain agents that they have there that they benefit from. So I think it... Michael Brown: Yes, you might remember, they did quite well a couple -- a year ago or so to Iraq. We don't have Iraq as a payout. And so all that gets kind of mixed in there. Rick Weller: Yes. Hats off to them for doing that. I think that's nice work. But I think it's different underlying business circumstances that we see over there. Operator: Our next question comes from the line of Cris Kennedy, William Blair. Cristopher Kennedy: Mike, you mentioned Dandelion had one of its strongest quarters on record. Can you just provide a little bit more color on those comments? Michael Brown: Okay. So we've got a couple of big customers and then lots of little customers in Dandelion. So we don't really -- we're not talking about its numbers specifically because it would give us a competitive disadvantage as we bring on new customers. But it was great to see good, strong double-digit growth, best quarter ever. Dandelion is one of those things where every quarter it's a bigger quarter than the last one because more and more people are using it more often. So I really can't give you any quantities, but really, as far as our digital endeavors, it's going to be a big one. Rick Weller: And I would just add to that, that continuing on a similar line as REN. I think we begin to see the momentum build. Clearly, we've been focused on the business. It's a long sales cycle, but we're continuing to see that momentum build. As you noticed, we made a mention of a number of other wins that we had in that category. So I think as we continue to see our sales success, we'll continue to see that business do nicely. Michael Brown: And just as an example, our very first big bank customer was HSBC. About every month is a new record for them. It takes a while for these banks to communicate to their customers, the ability to send money cheaper and quicker than they could through the old Swift channels. And so as more people find out about it, more and more people use it. So there's this kind of innate ramp-up. And there's more places as that bank as an example, there are more customers that they haven't even begun to market it to, but they will as their confidence grows, and we just have to work with bank bureaucracy. Cristopher Kennedy: Understood. And then, Rick, you mentioned the three drivers of improving gross margin in the Money Transfer side. Can you just talk about the sustainability of gross margins on that segment? Rick Weller: Yes. I would expect that we continue to see that, Cris. It, I think, speaks to the strength of the network and our volume. So it gives us a good opportunity to negotiate rates with payout agents. It gives -- the bigger our network, the more choices that we have to route a transaction and more customers going to send money to accounts. And remember, this account could be a bank account. It could be a wallet account. So it's account-based and account-based are lower cost payout structures for us. So Cris, I think we'll continue to see the benefit of this really, really impressive network we've built. Michael Brown: Operator, do we have any more questions? If not, we can close -- we have one more, I think. Is that right, operator? Operator: Yes. We have one more question. I'll go ahead and bring them up now. We welcome Darrin Peller with Wolfe Research. Darrin Peller: Can you hear me okay? Michael Brown: Yes, perfectly. Darrin Peller: All right. Just one question is more on the margin structure and the margin expectations on the Money Transfer segment. I know you expected it to be decent. I think you had expected 50 to 70 bps of margin improvement in the year. Just you were working through some of the restructuring that would help that despite some of the headwinds. I saw noticing margins were down year-over-year now. So just what is your conviction on that front first? And then overall, just thinking about that segment, I mean, it seems like this is hopefully in terms of the headwinds may not persist forever. But I'm curious how you think about approaching that segment given the context of the political environment and the migration that could last for a while? Rick Weller: Yes. On the margin, I'd say, Darrin, we would expect to see that to be a little bit more back-end loaded. As we entered the year, a number of those programs are being worked on. In fact, some of the expense it takes to implement some of those things that we did is, again, a little bit more front-loaded. So the benefit will deliver a little more on the back end of the year. And as it relates to -- I guess I'm going to say broadly your question on the industry. Well, when we take a look at Money Transfer and think of it over the years. I mean, I can't remember a time in history that immigration has not been -- has not, not happened. if you add up the population of all the developed countries, you only get to about 20% of global population, which means that 80% of the population continues to live in lesser developed countries. And as with most humans, when they have an opportunity to improve their rotten life, they do that. And when they do that, they're very loyal to their -- they do that for their families, and they send money back home to their families. So I think certainly, we are experiencing the impact of a different political environment. You can take a look over the years on how that kind of attitude has moved positive, negative, positive, it ebbs and flows with politics. We also have an economy that's dependent upon a certain amount of immigrant labor. And so we believe that we will continue to see in the future what you have over the history. And it's a point of time that we get through. I don't think you throw in the towel because of a particular immigration policy this year in the U.S. As we said, we saw the growth in our markets outside of the United States. So we continue to believe it's a great -- it's a big and growing market for sending cross-border money, has great margins to it. So we see long-term potential to it despite the challenges that we have to work through. But we're also glad that we've got a very good durable diversified business, which gives us the ability to weather that. Michael Brown: And you've seen our results over the last year even where we have outgrown our competitors, so we are picking up more market share. So as some of this stuff settles down in the U.S., we're going to be in a better position, plus we continue to grow overseas. Darrin Peller: Okay. That's helpful. Mike, I may have missed this earlier, but just a quick follow-up on the Iran conflict. What were the implications on travel that you're seeing? Or from your perspective, what kind of impact is that having on the EFT segment right now? Michael Brown: So far, we've... Darrin Peller: More traffic. Michael Brown: Yes. So, so far, we haven't seen anything. There are kind of threats that there may be some flights that may be canceled if they're not able to get fuel for the summer, but we don't know for sure. So we'll just have to see what happens. The interesting thing is the one thing that the conflict has done is if you look at Europeans and where they travel, a lot of them liked to go to places like Dubai, to Turkey, et cetera, on their vacations. They're probably not going to do that this year. So a lot of these people are going to stay a little bit closer to home where they can either take a short airplane ride or a train ride to their vacation, and that probably would be a benefit to us. Rick Weller: And I think we've shared with you in the past that 75%, 80% of our cross-border transactions in Europe really come from Europeans going cross-border as opposed to people coming into Europe, so maybe we'll see. But at least what Mike said a little bit ago is something that may be an opportunity for us as opposed to a challenge. Michael Brown: Thank you, Darrin, and thank you, everyone, for joining us today. We'll sign off. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and welcome to the Essex Property Trust First Quarter 2026 Earnings Call. As a reminder, today's conference call is being recorded. Statements made on this conference call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to the company at this time. A number of factors could cause actual results to differ materially from those anticipated. Further information about these risks can be found on the company's filings with SEC. It is now my pleasure to introduce your host, Ms. Angela Kleiman, President and Chief Executive Officer for Essex Property Trust. Thank you. Ms. Kleiman, you may begin. Angela Kleiman: Good morning, and welcome to Essex's first quarter earnings call. Today, I will cover our first quarter performance, discuss regional trends and conclude with an update on the transaction market. Barb Pak will follow with prepared remarks, and Rylan Burns is here for Q&A. Starting with the macro environment. U.S. economic conditions year-to-date have generally unfolded in line with our outlook with national labor trends remaining soft. Additionally, heightened geopolitical tensions and inflationary pressure in recent months have contributed to increased near-term uncertainty. Against this backdrop, we delivered a solid first quarter with core FFO per share exceeding the high end of our guidance range and same property revenues trending ahead of plan. Two key factors contributed to these results. First, we successfully deployed an occupancy-focused strategy to maximize revenues, generating a 20 basis point year-over-year occupancy gain. Second is the strength in Northern California combined with the durability of our supply-constrained West Coast markets. There is a direct correlation between housing supply and the cost of housing for consumers. It is no surprise that markets with some of the highest rental rates are typically markets with significant legislative burden on housing providers, which deters building activities, leading to a chronic housing shortage. Looking forward, permitting activities remain at a historical low in California. And as such, we expect new housing deliveries to remain low at around 0.5% of existing stock for the next several years. On the demand side, we are seeing early indicators of improvement in 3 areas: first, job postings from the top 20 technology companies have remained steady despite the layoff headlines. Second, elevated levels of venture capital investments in the Bay Area are funding a new wave of startup companies. And third, continued office expansion announcements in our markets. In summary, the low level of housing supply throughout our markets provides resilience across a wide range of economic conditions while improving demand indicators position the portfolio for sector-leading long-term rent growth. Moving on to property operating highlights. We achieved same-store blended rent growth of 1.4% for the quarter, which is generally in line with our expectations as we execute an occupancy-focused strategy ahead of the peak leasing season. From a regional perspective, Northern California was our best market, performing ahead of plan for the quarter, with blended rent growth of 3.2% led by San Francisco and San Mateo, followed by Santa Clara County. During the quarter, while occupancy increased by 50 basis points sequentially, we were also able to increase rents, demonstrating the strength of this market. Attractive affordability, favorable demand drivers and limited supply support our expectations for solid growth to continue in this region. As for Seattle, this region performed in line with our expectations for a slow start to the year, with blended rent growth of negative 80 basis points. This was primarily driven by a soft demand environment combined with the absorption of supply delivered last year. Encouragingly, during the quarter, we achieved sequential improvements each month in net effective new lease rent growth and occupancy while reducing concessions. With additional office expansions recently announced in the region, we maintain our conviction with the long-term outlook for this market. On to Southern California, which is closely linked to broader national employment trends. This region also performed on plan with blended rent growth of approximately 1%, led by Orange County and Ventura. In Los Angeles, incremental improvements continues at a modest pace. Heading into peak leasing season, we have shifted our operating strategy to driving rent growth across most markets, and our portfolio is well positioned with April financial occupancy at 96.4% and blended lease rate growth north of 3%. Turning to transaction activities. With minimal forward-looking supply deliveries and favorable fundamentals, interest in multifamily assets on the West Coast remains healthy, especially in the Bay Area, as evidenced by the 50 basis points cap rate compression since 2024. Essex has been the largest investor in this market in the past 2 years as we allocated approximately $1.7 billion of capital ahead of the cap rate compression, generating substantial value for our shareholders. Overall, cap rates across our markets remain consistently in the mid-4% range. However, with our stock trading close to a 6% implied cap rate over the past several months, which is a significant discount to private market valuation, we shifted gears and repurchased approximately $62 million of stock, thereby continuing our strong capital allocation track record of maximizing accretion for our shareholders. With that, I'll turn the call over to Barb. Barb Pak: Thanks, Angela. Today, I will discuss our first quarter results and full year guidance and conclude with comments on the balance sheet. We are pleased to report a solid first quarter with core FFO per share exceeding the midpoint of our guidance range by $0.11. There are 3 key drivers of the outperformance. First, same-property revenues, which grew 2.9% on a year-over-year basis, was 50 basis points ahead of plan and accounted for $0.04 of the beat. Higher occupancy and other income were the key components of better revenue growth during the quarter. Second, same-property operating expense growth was flat on a year-over-year basis, which was lower than expected and accounted for another $0.04. However, this benefit is timing related and expected to reverse in the second half of the year. Third, non-same-property and co-investment NOI make up the remaining $0.03 of outperformance. As for our full year outlook, we are reaffirming our same-property growth and core FFO per share guidance ranges. While we have started off the year in a solid position with revenue growth trending ahead of plan, we'd like to get further visibility into peak leasing season before adjusting our forecast due to the current macro uncertainty. As it relates to the remainder of our FFO forecast, there are 2 key factors that are different from our original guidance. First, we expect to receive approximately $90 million in early structured finance redemption proceeds, which are expected to occur in the second quarter. We are pleased to see this early redemption activity despite it causing a $0.07 headwind to our second half forecast as it demonstrates the continued strength of the West Coast markets. The second factor is share buybacks. We took advantage of the significant discount in our stock price and repurchased approximately $62 million at an average price of $243.76, which equates to an attractive FFO yield of 6.5%. As such, the near-term earnings headwinds from the structured finance redemptions is largely offset by the benefits from the buybacks, and our full year forecast is unchanged at this time. Concluding with the balance sheet. We recently repaid $450 million in unsecured bonds that mature, resulting in limited remaining maturities for the balance of the year. With net debt to EBITDA of 5.5x, over $1 billion in available liquidity and ample sources of available capital, the balance sheet remains in a strong position. I will now turn the call back to the operator for questions. Operator: [Operator Instructions] Our first question is from Nick Yulico with Scotiabank. Nicholas Yulico: In terms of the blended rate growth, I know, Angela, you gave the April stats there. I think you said north of 3%. Can you just remind us how to think about how that's going to trend this year to get to your 2.5% guidance for the year? Angela Kleiman: Nick, thanks for your question. We're on plan as it relates to our guidance. And so if you look at first quarter coming in at 1.4% and April is already north of 3%, it's -- we don't anticipate challenges to hitting that 2.5% for the year. And we -- at this point, we're still anticipating that first half and second half are pretty similar to each other. And so things are on plan. Nicholas Yulico: Okay. Great. And then second question, I guess, Barb, on you talked about the FFO guidance the $90 million. I just want to be clear, the $90 million of additional or early redemptions, is that like a pull forward for redemptions you assumed in the back half of the year? Or is it just an additional level of capital coming back altogether? And how should we think about -- is there any potential for that FFO headwind to get even worse throughout the year if this kind of repeats again? Barb Pak: Nick, that's a good question. So the $90 million is effectively maturities that were set to mature in '27 and '28. And so it's been pulled forward into 2026. And because of that, we don't have any redemptions in '27 and '28 now. So the headwind is effectively behind us at this point. Operator: Our next question is from Jana Galan of Bank of America. Jana Galan: Sorry, just a quick question on the change in methodology for the net effective rate growth. I guess, like, one, what drove the decision to change it? And then two, when comparing with the prior disclosure, it appears like it's higher in 2Q, 3Q and then lower in 4Q and 1Q. Would that be correct? Angela Kleiman: Jana, you are right on point on the cadence when it comes to the lease rates. So effectively, we made this change, and we actually signaled this change last year when we reported or detailed like-for-like lease terms, but we also reported all lease terms because with feedback from investors that it was easier for everyone to look at how we report the same way as our peers. So just really to be in line with our peers. So there's no change to our business and certainly no change to how we approach our business. And as far as the cadence, all leases means there will be a little bit more variability and with the highs in the second and third quarter and lower lows around the first and the fourth quarter. Jana Galan: And I appreciate the color on, kind of, the April operating stats. I'm wondering if you could share where renewals are being sent out for the summer? Angela Kleiman: Yes. Yes. We are actually in a good position. We continue to be with renewals sending out around 5%. And of course, that can get negotiated. But so far, our renewals have been pretty darn sticky, which is a good indication of the fundamentals of our markets. Operator: Our next question is from Eric Wolfe with Citi. Nicholas Joseph: It's Nick Joseph here with Eric. California is off to a strong start, but obviously, there have been some recent layoff announcements from some of the larger tech companies. Are you seeing any changes in that market or all the forward indicators holding strong? Angela Kleiman: Yes, Nick, that's a good question. Job -- the demand side is something we do watch closely and BLS visibility is not as great nowadays. But what we are seeing is the layoff announcements, if you look through to the WARN notices, it shows that the majority of the layoffs are not in our markets. These are -- these layoffs apply to global locations. And a couple of areas that we track that I'm happy to share with you that gives you a better forward-looking indication. One is that when we look at the top 20 tech job openings, they remain steady and it's actually improved a little bit in the past couple of months. But we don't expect that to accelerate. Having said that, things are just fine on the ground. We also look at both new and continued unemployment claims, which remains at a low level. Now this tells us that people that are displaced in our markets, they're able to find another job quickly. But most importantly, is our Northern California performance, which is -- that market has the highest concentration of tech companies, and it's our best-performing region. Operator: Our next question is from Steve Sakwa from Evercore. Steve Sakwa: Maybe just going back to the -- I guess, the repayment. Is there any chance that you could backfill that with, I guess, new investments? I don't know exactly kind of what the market looks like to make some of these new investments and kind of where your head is in terms of making new investments. Rylan Burns: Steve, Rylan here. As we've communicated, we remain actively involved in many conversations related to new investments on the structured finance side. We were not anticipating going into this year that we'd get that $90 million back. But as Barb alluded to, this business has kind of been level set at a lower rate. So we're continuing those conversations. We're tracking a few deals that we think could present really attractive risk-adjusted returns. So we remain committed to the business, and we'll continue to look for opportunities when the opportunities present themselves. Steve Sakwa: Okay. And maybe just going back to the expense. Can you provide just maybe a little bit more color? I mean, I realize it was pretty flat in the first quarter, and it sounds like a lot of that was timing. Can you maybe just provide a little more detail on kind of where the surprises came in the first quarter and what, I guess, is likely to reverse itself in the back half of the year? Barb Pak: Yes, Steve, this is Barb. On the expense side, it really came down to lower controllable expense spend in the first quarter as we delayed several projects from the first quarter into the second and third quarters. And so that's really what drove it. For the full year, our controllable expense spend is expected to be around 2%. So it's still very low in anemic, and we do still think it's going to hit at this point. It was just a delay in our spend. Operator: Our next question is from Brad Heffern with RBC. Brad Heffern: Barb, last quarter, you said that you were assuming no redemption proceeds for a couple of the 2026 maturities. I was wondering if you have any update there or if that's still the case? Barb Pak: Yes. So good memory. That is the case. We did have one of our investments did mature at the end of March, and the sponsor did contribute some additional equity, and we did grant a small extension on that investment. And there is still a lot of moving parts with that investment and not everything is finalized. And while we could have continued to accrue from an FFO perspective and it would have benefited our FFO, given some of the uncertainty related to this investment, we decided not to continue to accrue. There is value there, and there will be upside to our FFO, but it really is depending on the timing of when we can settle a few of these open items. And right now, it looks like it's probably an early '27 event, but more to follow as we go forward. The other large investment that we had stopped accruing on in the fourth quarter, we're in ongoing discussions with the sponsor. That one doesn't mature for a couple more months. So more to follow on that one. No difference in how we budgeted that one as of yet. Brad Heffern: Okay. Got it. And then just a follow-on to the change in the spread methodology. Do you have the number handy for what 1Q would have been under the old methodology just so that we can kind of compare to what we had in our models? Angela Kleiman: Sure. Happy to. Angela here. So on a like-for-like Q1 blended would have been 2%, so a little bit higher than on all lease. And the components are new lease will be negative 1.2% and renewal will be the same, 3.9%. Operator: Our next question is from Jamie Feldman with Wells Fargo. James Feldman: So I appreciate the color on blends in 1Q across the regions and even in April. Can you talk about new versus renewal in April? And then also for 1Q, can you talk about new versus renewal across the regions? Angela Kleiman: Sure, happy to. So in April, I'll start with April, new versus renewal, let's see. New is -- where to go. Hold on, James, I have it somewhere. Here you go. New is about negative 90 basis points and renewal is about 5%. So that takes April to 3.1%. And on a regional basis, Northern California, once again, the shiny star with the blend at north of 5% and followed by Seattle with a blend north of 2% and Southern California around 1.5%. So that gets you to that 3.1%. So it's generally playing out as we had anticipated. And I know I had guided to, for the full year, renewal around 3% to 4% and new around 0% to 1%. And all the markets are pretty much coming in, in line with the exception of Northern California outperforming. James Feldman: Okay. And there's been a lot of kind of political tax headlines across some of the West Coast markets. I mean any thoughts or any feedback from tenants if there's any implications to demand? Or it sounds like you're feeling pretty good about the job market and job postings, but any color or conversations with your peers about how people are thinking about the political environment? Angela Kleiman: Yes, that's a good question, and it's so hard to predict, and it's just too early to know how this will play out. There's the wealth tax that is probably what you're referring to, but at the same time, there's also what we're seeing is a lot of opposition to it, and there's actually a counterbalance measure to advocate responsible expense management rather than imposing more taxes. So I think this will -- we just need a little more time to see how this plays out. But we've not seen any impact to our business, and we've not heard from others about having a direct impact to Essex or multifamily directly. Operator: Our next question is from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Could you guys speak to affordability within Northern California? And just given kind of the optimism that you highlighted around job trends and supply conditions, I guess, what the runway looks like for you to continue to push on blended lease rate growth within that region? Rylan Burns: Austin, this is Rylan here. I mean this has been a key component of our fundamental thesis on Northern California for the past several years. You've seen significant steady increases in household income growth over the past decade continued through COVID. So as it stands today, our current rent-to-median income ratios in Northern California stand at around 21.5% compared to a 20-year average of almost 26% and a historical peak over the past 20 years, closer to 32%. So there is significant rent upside on those metrics alone to get back to a point that's more in balance or closer to those historical peaks. So again, it's not the primary driver, but it is a fundamental thesis that we feel very attractive as it relates to Northern California. Wages continue to increase in these markets. And yes, again, I think the consumer is feeling very healthy in Northern California in particular. Austin Wurschmidt: That's helpful. And then just switching maybe to Southern California. I mean, last quarter, I think you indicated maybe it was L.A. specifically that conditions were stabilizing and maybe we're seeing sort of some early signs of rent growth improving. What's sort of the latest thoughts and outlook for that region as well? Angela Kleiman: Yes, Austin, good question. L.A. is progressing at a glacial pace. It continues to be our most challenging. So for example, if we excluded L.A. portfolio, our April new lease rates actually would be 180 basis points higher. It will flip to 90 basis points positive. Having said that, we didn't anticipate things to move quickly. We expect the progress to be slow and choppy, which has been the case. And so we don't get too caught up by short-term numbers because you'll see puts and takes. For example, if you look at economic occupancy compared sequentially from fourth quarter to first quarter, it's a slight decline. But if you look at blended, it actually went up by 70 basis points. So you're going to see that dynamic to continue to play out. But the net-net is that this market is stable. We are -- we've seen the trough, and there's now -- it's trending better, but just slow. Operator: Our next question is from John Kim with BMO Capital Markets. John Kim: We're halfway or half an hour into this call, and I don't think you've mentioned AI. So I'm wondering if you feel like you're getting a direct benefit or you a direct beneficiary of AI job growth? Or is it more indirect for you or more moderate given most of your assets are in Santa Clara and San Mateo County. I was just wondering if you could just comment on if you're seeing a lot of tenants in your market employed by AI companies. Angela Kleiman: Sure thing, John. I do believe that we are getting a direct benefit from AI, especially as you get closer to San Francisco. But more importantly, what we don't have clarity on is all the start-ups that's happening because of AI, and that is throughout our markets. And if you look at the strength of our market, while downtown is doing strong or doing well, it also is still in recovery because it recovered later than the Peninsula. And so we certainly anticipate that benefit of AI to continue. And more importantly, we are also seeing a lot of these large AI companies expand to the Peninsula as well. So over the long term, I think all of our markets will continue to benefit, particularly in the suburban markets. John Kim: Okay. And then I wanted to ask Jana's question maybe a little bit different way. But looking at your lease growth under the old definition, you had a peak in the second quarter and a deceleration of 70 basis points in the third quarter. Under your new definition, that drop-off is steeper. It's 130 basis points. So do you see that a similar dynamic occurring this year? Or do you think this -- the seasonal trends will be different and that drop-off would be more moderate? Angela Kleiman: Yes, John, that's a good question. Big picture from -- when you look at all lease perspective, it's going to be -- you're going to have more variability. Now I don't know the exact magnitude at this point because we are just starting to enter into our peak leasing season. But it wouldn't surprise me that, that drop becomes more significant because keep in mind, all leases means you're going to have different terms, so it's going to just have a lot more noise in it. Operator: Our next question is from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: So 2 questions. The first is on Seattle. We sort of hear different things like East Side, super strong, Seattle CBD softer. Certainly, on the office side, we hear that and on the apartment side, it sounds like the same, but yet there's a lot of job growth out there, especially on the East Side. So can you just provide a little bit more color on how the market breaks out? Seattle CBD would certainly seem culturally to be a little bit more exciting than maybe sort of the 95 Bellevue. But can you just provide more color of how the residents are looking at the broader market and how you guys are thinking about where you want to either own more assets, divest assets, et cetera? Angela Kleiman: Alex, yes, it's a good question. With Seattle, it's a combination of 2 things. It's demand and supply because Seattle historically generates more supply than California. So it's the impact of those 2 playing out that then drives the rent growth. So East Side has performed better than CBD, although not by a huge margin from what we're seeing. But over the long term, East Side has historically outperformed mostly because it has a strong employer base, but lower supply. And we do expect that to continue. And as far as generally speaking, this is a market that has greater highs and lows because of supply, combination of supply. And so with first quarter, demand was soft, and we anticipated that. So we -- the performance was pretty much in line with our expectation. Alexander Goldfarb: Okay. And then the second question is, and obviously, looking at public information, but Camden has their portfolio out there for sale. You guys obviously look at everything. Are you -- the interest that you hear that they're receiving, is it what you expected? Or are you surprised by maybe the number of people who are coming to look at the portfolio? I'm just trying to get a sense of the appetite for California real estate, Southern Cal real estate, if it's in line from an institutional perspective, if it's more then you're like, wow, there are a lot more people coming or wow, I would have thought more people would have come. Just trying to get a sense for the investment appetite as people look at California versus other parts of the country. Rylan Burns: Alex, Rylan here. As you mentioned, we do look at everything in our markets. We're also subject to nondisclosure agreements. So I can't elaborate on details on any one deal specifically. But what I would say is I feel like there has been a significant uptick in terms of capital interest on the West Coast, partly driven by performance issues you're seeing throughout the rest of the country and the relative strength and the forward-looking fundamentals, particularly as it relates to supply as well as some of the demand drivers that Angela mentioned. So I think there's been an increase in capital interest on assets in the West Coast. You've seen this in terms of the cap rate compression we've seen in Northern California. And as we look at the fundamentals over the next several years, I wouldn't be surprised if that continues. So very healthy demand for assets on the West Coast. Operator: Our next question is from Adam Kramer with Morgan Stanley. Adam Kramer: I just wanted to ask about renewal growth trends. And I recognize sort of the methodological change here that might be sort of impacting this comparison I'm about to make. But I guess just bear with me. So if I look at Q4 2024 versus Q1 2025, it looks like about a 10 basis point decel in renewal growth. If I look at what you guys just reported yesterday, it looks like it was about an 80 basis point decel this year. So just wondering, I guess, number one, if sort of the methodological changes played any impact here on just sort of what's happening with renewal growth, maybe there's sort of an operational or strategic change in terms of how you guys are thinking about renewal growth. I just sort of wanted to focus on that piece here today, just sort of that Q-over-Q decel that you reported last night. Angela Kleiman: Yes. Adam, good question. And as far as our pricing methodology or operating strategy, it hasn't changed. The reporting change to all leases is really a reflection of what -- just to make things easier for comparative purposes for our peers versus our peers. But ultimately, we continue to focus on maximizing revenues, and we don't manage to a specific metric. So what you're seeing on renewal is really an output, not an input. And ultimately, we can manufacture a high lease rate by reducing occupancy, but you wouldn't want to do that. And just back to the basics, we're running a business here, and the goal is to try to maximize revenues. So I wouldn't get too caught up on the renewal rates. At a minimum, I would point you to look at the blends. The blends have improved, continue to improve sequentially. And ultimately, that is what really hits the bottom line, the combination of your blended and your occupancy. Adam Kramer: That's helpful. And then just maybe switching gears to capital allocation. I don't think we've touched on that yet. I recognize there was some buyback activity in the quarter and subsequent to quarter end. I don't think you did much, if any, of buybacks last year, so a little bit of a shift there. Stock has moved a little bit versus sort of the average share price that you bought back at. So just wondering sort of as you sit here today with where the stock is, how do you sort of think about stack ranking capital allocation opportunities? And where does the buyback fit into that? Angela Kleiman: Adam, it's Angela here again. I do want to point to last year, the environment was different in that cap rate compression has not really take hold, and we were very opportunistic in our capital allocation strategy. And by buying assets before cap rate compression, we were actually able to generate a lot of accretion. And also, the pricing level was different back then. I'm very pleased with our finance team executing at that $243 pricing on average, that's a terrific execution. So what you'll see us do is we're going to be thoughtful and opportunistic. And at every point in -- when you look at the investment spectrum, we're going to pick our spots. And so that means that there's not an exact price today because the relative value will change based on what's available to us in the future. Operator: Our next question is from Haendel St. Juste of Mizuho Securities. Haendel St. Juste: I wanted to go back to Seattle. Your tone there seems to be more constructive relative to L.A. where it sounds like things will be more challenged for a bit longer. So is your view on Seattle, I guess, the more constructive, more hopeful view tied to that reduction in supply you're referring to? Perhaps are there other KPIs you're watching more closely? I'm curious what those are and what they're telling you? And when do you think we can expect Seattle to track a bit more closely to San Francisco, which historically has shared a lot of the same demand drivers? Angela Kleiman: Yes. Haendel, yes, I think you picked up on my tone being more constructive on Seattle for a couple of reasons. One, you mentioned on the supply, I think that it certainly has a direct impact. And first quarter, we did expect that legacy absorption for last year is going to have some overhang. And so it's good that we are mostly behind that. But more importantly, as we look at where leases are, while Q1 overall lease rate was negative, the rates actually flipped positive in March and has continued in April. And we know we are aware that because this is our most seasonal market, it could flip quickly. And so the fundamentals are quite sound in this market. And so we do view that it already has started to trend toward what -- at the midpoint of our expectations. Haendel St. Juste: Maybe unfair to ask, but I'll try anyway. Would it be your expectation that Seattle would perform more closely to San Fran next year, narrow the gap? Angela Kleiman: That's a good question. I have a -- I'm not sure on the exact timing. We are seeing office announcements and expansions into Seattle, and you would expect that Seattle does follow the Northern California market. It's hard to predict the actual timing because once they expand, they're going to have to hire, and we don't know how long that's going to take. I will tell you that at this point, just even on the renewal side, Seattle is starting to catch up to the Bay Area market, which is a good sign. So it tells us that it's going to get there. I just don't have enough data to be able to tell you when. Haendel St. Juste: Fair enough. Fair enough. Second question is on concessions. Maybe some color on where they stand today across the portfolio, how that compares to a year ago last quarter, some context. Angela Kleiman: Sure. Happy to. So concessions, this -- it's not a whole lot different. So first quarter concession for the portfolio was about 6 days. And last year, first quarter was about 4 days. So it's not a huge variation. I think the largest area is really L.A. continues to be lumpy. And so L.A. concessions this year is a little bit higher than last year, although that's not anything that we're surprised by. San Diego is a little higher because of supply that I talked about, which you would expect. And then the rest of it generally performing in line. Operator: Our next question is from Julien Blouin with Goldman Sachs. Julien Blouin: And sorry if I missed this. But on the new reporting last year, was April the highest blend month? I'm just trying to get a sense on that north of 3% for April. Would you expect it to be even higher as we move into May and June? Angela Kleiman: Yes. Typically, you would expect blends to continue to improve as we head into our peak leasing season. And so on average, you would say we would anticipate blends to peak, say, around June through July, somewhere in that time period. The question here is really the trajectory of that increase. And I do want to say that while we're performing well here, we are still in a soft demand environment generally across the U.S. and with geopolitical uncertainty. So how much that blend is going to increase will have some of that impact. And one of the reasons why we didn't raise our same-store revenues. We're very comfortable with where we're at. And in fact, our same-store, if it performed consistent with what we had anticipated when we released our guidance, just based on the first quarter results, same-store revenues will be about 15 basis higher. Having said that, when we set our guidance last year in early February, we weren't in a war with a new country. So things are moving around, and there's a lot of noise out there in the broader economy. Operator: Our next question is from Wes Golladay with Baird. Wesley Golladay: Can you comment on what's going on in Alameda? It looks like it's having a little bit of an acceleration. Just curious if this is more of a concession burn off or a pickup in demand. Angela Kleiman: Wes, it's a combination of a couple of things. One is that we do have concession burn off. We had talked about supply abating and starting to benefit this year. So concession in the first quarter of last year was almost 2 weeks, and now it's half a week, which is terrific. And we're seeing both rental rates and financial occupancy improve. We're also seeing that there's, of course, the spillover effect that helps with San Francisco performing well. And so there's some demand driver as well. So both of those components are helping Oakland, which is playing out what we had expected. Wesley Golladay: Okay. And then maybe just one on the financial modeling. Do you have a timing expectation for the preferred investments being redeemed for the second half? Barb Pak: They're expected to be redeemed in the second quarter. I think if you model mid-Q2 redemption, that will get you close on the guidance. Operator: Our next question is from Michael Goldsmith with UBS. Ami Probandt: This is Ami on with Michael. We were just wondering, what are you seeing in terms of residents moving in from outside of your MSAs? Has there been any change in either domestic or international immigration? Barb Pak: Ami, this is Barb. Yes, on the immigration front, what we're seeing is domestic immigration within the Bay Area has continued to improve, and it is above pre-COVID levels. And I think that's a function of the demand for tech jobs and tech workers. In terms of international immigration on the legal side, we haven't seen any material change on H-1B visas or anything like that. We know that the H-1B visas for 2027, they've already hit the cap. And so those will all get filled. So overall, it's been a slight benefit on the immigration side to our markets, specifically in the Bay Area and no material change from what we said in the past. Ami Probandt: Great. And just a follow-up on some of the questions about the structured finance opportunities. How has competition trended for these deals? And for the deals that you guys look at and underwrite, how far off are you from getting these deals and being the selected bidder? Rylan Burns: Ami, a good question. As we've said for the past couple of years, there was a significant amount of capital raised in the past several years to invest in this structure. So there has been more competition. We have seen yields compress. And it's somewhat opaque in terms of like where on specific deals we might miss out. But we're just trying to be diligent and stick to our process. So we still feel it's a relationship business. If you start to see developments pick up, that will create some more opportunities for us. We have a long history in this business. We're viewed as a good partner on the preferred side. So we're going to continue to see opportunities, but we're just trying to stay disciplined as it relates to our underwriting process and not chase the market as some covenants get weaker and/or yields compress. We're going to stay disciplined to our return requirements. Angela Kleiman: Yes, Ami, it's Angela here. Ultimately, there's been a lot of volatility to our earnings because of the preferred book overhang and the size of the preferred book. I, for one -- and poor Barb here has had to deal with the direct impact, and we are quite relieved that this is the last year of that volatility. And so going forward, what we have been is much more selective and in an effort to maintain a size that's going to be accretive to the portfolio and our business but not create so much noise that it becomes a distraction to our business. Operator: Our next question is from John Pawlowski with Green Street. John Pawlowski: On the capital allocation front, assuming your cost of capital stays in a similar ZIP code as it is today, what kind of -- what rough range of disposition volume could we expect this year and then the most likely use of those funds? Rylan Burns: John, Rylan here. As Angela mentioned, our capital allocation strategy doesn't change. We're really trying to maximize FFO and NAV per share accretion and improve the growth profile of the company. We have several assets that are currently on the market. So we will probably do several dispositions this year, and those proceeds will be allocated to whatever is the highest risk-adjusted return at the time of that. So we have the ability, as we talked about the health of the transaction market, which I think you're aware of, we have the ability to ramp that up and down as we see fit. And again, the strategy has not changed, and we'll continue to do as we have for many, many years. John Pawlowski: Okay. But today, given the health of the private market pricing, is it fair to assume that currently the best use of the funds is share repurchases on your guys' math? Angela Kleiman: I don't think so, John. Once again, it depends on what the opportunity is available at the time. And so I would point back to the transactions that we completed, over 60% of it was off market. And so we certainly have an incredible network and extensive relationships and a reputation that gives us an advantage. And the stock price is going to change every day. And so to pinpoint, what we're going to do based on today's stock price is probably not something you want us to do. Rylan Burns: John, I would add on that when I look at our menu of investment opportunities today, we've got several development land sites that we're quite excited about. We think these are going to be very attractive risk-adjusted returns as well as our redevelopment opportunities, particularly ADUs. This is a business that we've been ramping up where we're getting 10% return on cost. The per unit costs are a fraction of in-place value. So those are 2 areas that we're going to continue to invest in because the returns, in many cases, exceed the highest risk-adjusted returns. John Pawlowski: Okay. Last one for me. Barb, can you talk a little bit about the insurance market, the property insurance market? I think you're expecting maybe a 5% decline on your insurance and other expenses this year. Curious if the market is healing faster and more dramatically than you thought or if that's still a fair bogey. Barb Pak: Yes, John, we actually went to the insurance market and did our renewal for property in December. And so we did see a healthy reduction in our property insurance. And so I do think that market has held up from what we're hearing even today. I know we're, I think, 4 months past or 5 months past the renewal. It sounds like on the commercial side, that is the case. I think if you're talking residential, it's a much more challenging market, but we have seen the reinsurers come back in and the insurance premiums have come down from where they were over the last couple of years. Operator: Our next question is from Omotayo Okusanya of Deutsche Bank. Our next question is from Alex Kim from Zelman & Associates. Alex Kim: I wanted to circle back quickly to Los Angeles and the extent to which the eviction processing time line impacts the pace of improvement. Have those eviction processing time lines improved at all in the first quarter? And when do you anticipate that the supply reduction in 2026 shows up in meaningful pricing power improvement? Angela Kleiman: Yes, that's a great question on L.A. So delinquency processing or the court processing time has improved over time. It's -- as far as just from fourth quarter to first quarter, it's pretty sticky. It's around 4 months, but this is a huge improvement from -- it wasn't too long ago when it was 6 months and thereafter. And -- so what we would want to see is for that to improve, say, closer to 3 months, that's closer to our long-term average. And that will definitely help on the delinquency front. As far as pricing power is concerned, we would want that economic occupancy to be at about 95% or better. We are very close right now. We were above 94% in the fourth quarter, and we're still above 94% in the first quarter, although it's a little bit lower than the fourth quarter. But pricing power is -- will be available to us once we hit 95%, and we're feeling good that we're close to it. Alex Kim: Got it. So just taking a bit longer than occupancy returns. That's all for me. Angela Kleiman: Yes, it's taken longer. But then again, we didn't expect this to happen quickly. We had thought it was going to take multiple years. Operator: Our last question is from Rich Anderson with Cantor Fitzgerald. Richard Anderson: Angela, when I was -- I was just reading the transcript from last quarter and you were talking about Los Angeles and you described it as just so close to the magic 95% economic occupancy where things perhaps get a little bit better for you. I know you described SoCal in general is in line, perhaps L.A. in line with your expectations, but deep in your heart, were you expecting more this quarter from L.A. that you didn't get? I'm just curious, and I have a follow-up to that. Angela Kleiman: Rich, always happy to hold out for you. Deep in my heart, I always hope for better numbers. And I think anybody who works with me knows that we push pretty darn harder. Having said that, the expectations are such. And sometimes things do better. Northern California expected -- exceed expectations and sometimes they meet expectations. And with L.A., I think we have always said that it was going to take a little bit longer and occupancy, once again, it's so close. But even though we didn't see significant occupancy improvement from quarter-to-quarter, which we didn't expect, 70 basis points improvement in blends, that's not bad. I'll take it. Richard Anderson: Okay. And then on the Camden process, I don't think you're a buyer, but is there anything about it that's informing you strategically around the area, whether it's L.A., Orange County, San Diego and Inland Empire that they're looking to sell that you're sort of tapping the reception that they're getting, which sounds like it's been pretty substantial. Does it inform you about what you might do as a corollary to the process they're undertaking, whether it's as a buyer or a seller or anything? Angela Kleiman: Yes, Rich, that's a good question. As far as Southern California is concerned, it's part of our stable or it's a stable part of our portfolio. We have about 40% in SoCal and a little bit more in NorCal, maybe 45%-ish. And that allocation makes sense to us. We're in Southern California because it mirrors the U.S. and with more professional services and lower supply as a whole. And so other companies are going to make capital allocations differently than us. And I will say that Camden is a good company. It's run by smart people, but dynamics are different, right? Because having a handful of portfolios in a huge region, it's very tough to be efficient versus for us, 70% of our portfolio -- of our properties are within 3 to 5 miles for each other. We can run it incredibly efficiently. And so it's just very different reasons why people make portfolio allocation decisions. Operator: This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Good afternoon, and welcome to the Ethan Allen Fiscal 2026 Third Quarter Analyst Conference Call. [Operator Instructions] Please note that this conference is being recorded. It is now my pleasure to introduce your host, Matt McNulty, Senior Vice President, Chief Financial Officer and Treasurer. Thank you. You may begin. Matthew McNulty: Thank you, operator. Good afternoon, and thank you for joining us today to discuss Ethan Allen's fiscal 2026 Third Quarter Results. With me today is Farooq Kathwari, our Chairman, President and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open up the call for your questions. Before we begin, I'd like to remind the audience that this call is being webcast live under the News and Events tab within our Investor Relations website. A replay and transcript of today's call will also be made available on our Investor Relations website. There, you will find a copy of today's press release, which contains reconciliations of non-GAAP financial measures referred to on this call and in the press release. Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our most recent quarterly report on Form 10-Q. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. With that, I am pleased to now turn the call over to Mr. Kathwari. M. Kathwari: Thanks, Matt, and thank you all for participating in our third quarter financial results call. As we reported, despite many challenges, we performed reasonably well. We were mainly impacted by a reduction of business from our State Department contract, primarily due to government shutdown, lower international sales and to some extent, sluggish demand for home furnishings. Our written sales in North America were flat compared to last year, while our wholesale orders declined 7.6% from reduced, as I mentioned, governments -- U.S. government sales and slowdown in our international business. Tariffs also impacted our earnings, especially the unexpected tariffs on our Mexico manufacturing products. The increased tariffs during the quarter of about $4 million were mainly -- were the main reason of our reduced earnings. Matt will now provide more information. And after Matt, I will review our initiatives. Matt? Matthew McNulty: Thank you, Mr. Kathwari. Our third quarter financial performance was highlighted by strong operating cash flow and a robust balance sheet despite operating in a challenging macroeconomic environment. Our consolidated net sales of $136 million benefited from a higher average ticket price, increased clearance sales and fewer returns. These increases were offset by lower contract sales, a decline in delivered unit volume and inclement weather. Retail segment written orders were flat versus last year, while our Wholesale segment declined 7.6% due to macroeconomic challenges, reduced government activity and a slowdown in our international business. Demand levels were choppy and the pace of written orders declined slightly throughout the quarter. Our retail written trends were strongest in July despite adverse weather, which slowed traffic late in the month and continued into February. There was a pullback in demand during March following the Iran conflict, but we are excited for the introduction of several new products this spring and believe they will complement the current home furnishings Ethan Allen has to offer. We ended the quarter with wholesale backlog of $42 million, down 23% from a year ago. Lower U.S. State Department and international business, combined with improved customer lead times helped reduce our wholesale backlog. Our consolidated gross margin of 59.4% was impacted by incremental tariffs, delivering out orders with increased promotional activity and higher clearance sales, partially offset by a change in sales mix, lower inbound freight, reduced headcount and a higher average ticket. Our adjusted operating income was $6.8 million with an operating margin of 5%. Lower operating margin was driven by higher tariffs, incremental digital and technology spend, fewer U.S. government sales and delivering out orders with higher promotions. Disciplined spending, cost control initiatives and lower headcount helped to drive SG&A expenses down 3% and offset additional investments we are making in our business. At quarter end, we had 3,105 total associates, a decrease of 6% from a year ago, with decreases noted in both wholesale and retail. Adjusted diluted EPS was $0.24. Our effective tax rate was 24.2%, which varies from the 21% federal statutory rate, primarily due to state taxes. As noted earlier, our business has been impacted by the current tariff environment, which remains dynamic and uncertain. Since the beginning of 2025, the U.S. government has announced several different measures regarding tariffs. More recently, in February, the U.S. Supreme Court invalidated certain IEEPA tariffs introduced last year. Shortly thereafter, a new 10% global import tariff under Section 122 was made effective and last until mid-July of this year. Our current exposure is concentrated on the 25% tariff that took effect in October 2025 under Section 232, which is on upholstered wood products produced and exported out of our Mexican manufacturing facilities. Our remaining exposure is under the aforementioned Section 122 tariff, which applies a 10% tariff on furniture manufactured and exported out of our Honduras facility as well as on imported wood furniture from Indonesia, select fabrics from Asia and imported home accents. In total, we estimate our current tariff exposure to be in the range of $15 million to $20 million annually. In the past month, the U.S. Customs and Border Protection Agency released guidance regarding IEEPA tariff refunds, including last week's April 20 launch of software that will process IEEPA refund claims at scale. We are currently working through recoverability of previously paid IEEPA tariffs and expect refunds to take up to 80 days to receive. Now turning to our liquidity. We remain debt-free with substantial liquidity to support long-term growth. We maintain a robust balance sheet and ended the quarter with $181 million in total cash and investments. During the just completed third quarter, we generated $15 million in operating cash flow, up from $10 million a year ago due to improved working capital. Through the first 9 months of fiscal 2026, we have generated $22 million in free cash flow. In February, we paid a regular quarterly dividend of $10 million or $0.39 per share. Also, as just announced in our earnings release, our Board declared a regular quarterly cash dividend of $0.39, which will be paid this May. We continue to view our dividend as an attractive use of cash and a positive return to shareholders. As I conclude my prepared remarks, we are pleased that our business model helped deliver another quarter of profitable growth. Our efforts to identify ways to leverage operating expenses are constant. We seek to properly balance investing in future growth while managing ongoing costs. Ethan Allen's vertical integration and focus on one brand are core differentiators that will help us navigate through these current industry headwinds. With that, I will now turn the call back over to Mr. Kathwari. M. Kathwari: Yes. Thanks, Matt. As I mentioned, we have continued to take steps to strengthen our unique vertically integrated structure, including strengthening our product offerings. During the last 6 months, focus has been to introduce new relevant product programs, strengthening our retail network. We have continued to reposition our retail network in North America, design centers numbering 172 locations with smaller footprint with major introduction of technology to help our talented interior design associates. continued strengthening our North American manufacturing, which produces about 75% of our furniture, almost all made custom on receipt of orders. Continued strengthening our North American national and retail logistics, which enables us to deliver our products with what we call white glove delivery at one delivered price to our clients in North America. And importantly, combining personal service of our interior designers and our manufacturing associates with technology has been a game changer. This has helped us provide great services while reducing costs. And with this brief overview, happy to open for any comments and questions. Operator: [Operator Instructions] And our first question comes from Taylor Zick with KeyBanc Capital Markets. Taylor Zick: Well, I just wanted to first ask kind of about the retail written orders. You gave some good color here, trends slowed a little bit in February and then you saw a pullback in March, I assume, related to the geopolitical situation. Any sense of how retail written orders are trending here so far in April? I assume there's some Liberation Day noise in there as well, but maybe if you can kind of touch on that? M. Kathwari: Yes, it's a good -- it's an important question. First is that in this quarter, despite all these challenges we have had in the economy, our retail, retail -- I mean, our written retail held up. In fact, our retail division basically where written orders were about the same as last year, which tremendously important. As Matt also mentioned, the decline was mostly due to the international issues and the State Department issues. So our business has held up. And now in April, it's actually -- it's been positive. There has been positive news so that we will continue the progress that we saw despite all these challenges last quarter. We maintained our retail. And I think in April, so far, it has been positive. Taylor Zick: Great. And then maybe if I can ask maybe on the tariff side, and maybe I can wrap two questions in one here. You also gave some great color on the tariffs and where you're exposed. You called out, I think, $15 million to $20 million of exposure on an annual basis. Can you kind of just talk a little bit about how you plan to mitigate some of those tariff expenses? And then related to that, maybe if you can touch on the gross margin as well because we also have rising diesel costs and increasing foam prices as well. So if you don't mind touching on. M. Kathwari: I'll say a few words, and Matt can also join. Our tariffs are -- the impact of tariffs are on our products coming, of course, from imported products, which is mostly Asia. And then recently, last year, there were tariffs imposed in our North American operations, both in Mexico and in Honduras. And interestingly, Mexico has been close to what 25%? Taylor Zick: Correct. M. Kathwari: 25% and Honduras is 10% -- so they were -- and that really is interestingly, especially in Mexico. The advantage we have, of course, in Mexico to some degree to some degree has mitigated because we operate and own the manufacturing operations. And according to Mexican law, we can ship the products from Mexico to the United States at a relatively small margin. I think it was about 5% or so, 5%. So 5% if that was not the case, we had to buy all those products, nobody would be able to operate 5%. Even with the 5% margin that we have, we still were impacted substantially with the impact of Mexico, to some degree, Honduras. And then, of course, our products that come from Asia there, the margin -- I mean, the tariffs have gone very, very high. But now in the last 6 months, tariffs have been reduced from Indonesia, from India and other places, even in China. So I think that we do hope that there is some resolution to what is taking place with the United States and Mexico. It's nothing to do with business. There's a lot of politics that has resulted in those high tariffs. Matthew McNulty: Yes. That's a great answer. And I'd just like to add a little bit more on to that for you, Taylor. The -- your first part of your question was what steps have we taken? And I think in my prepared remarks, I said the tariff situation is dynamic and ongoing, meaning that the rules and the regulations continue to change. The Section 122 of the 10% global tariff rate was a 150-day set tariff rate, which is set to expire in July. So the rules may again change in July. But we got to play with what the rules are as of today. So we took certain steps and we continue to take certain steps to mitigate the tariffs. Those include partner sharing or sharing of costs with vendors, sourcing diversification, identifying alternative sources for products if possible. Third is absorb some of the costs. We know we can't pass along all of them or have our vendors absorb all of them. So we do absorb some ourselves. And last is price increase. We mentioned on the previous call last quarter that we took about an average 5% price increase in October and November of 2025. So those have helped mitigate some of that incremental tariff exposure that I quantified of $15 million to $20 million. M. Kathwari: Yes. But those tariffs really impacted our operating margins. I mean, when you take a look at our operating margins coming down, it's mostly because of those tariffs. Our retail business in the United States held up. All right. Next, any other questions? Taylor Zick: No, I think we covered it here. I'll pass it along. Operator: [Operator Instructions] Your next question comes from Cristina Fernandez with Telsey Advisory Group. Cristina Fernandez: I had a couple of questions. The first one is on the State Department contract and just the whole wholesale contract side of the business. It's been a pressure point now for at least a year. What is your outlook from here on that part of the business? Do you think it's near reaching stabilization? Or should we expect weakness for the rest of 2026? M. Kathwari: Cristina, a number of factors. First is that we have had a fairly long-term contract with the state department. And recently, just in the last few months, the contract has been up for renewal. So we had to bid, and I'm sure others have bid on it, too. So the bidding has taken place and the state department is right now reviewing all those bids, and we do expect to hear from the state department. And depending on what happens, we do have an opportunity, which we have done to increase some of our prices based on these issues of tariffs. But I think in the next few -- I think hopefully, in the next couple of months, we will know about the new contract. Right now, we do have the current contract where we are getting business, not at the level we did last year, but the business is coming in under the current contract. Cristina Fernandez: Then the second question I had was on the impact of promotions you mentioned during the quarter. Is that mostly related to the increased promotional activity back in the second quarter and those deliveries being made now? Or did you offer incremental promotions to consumers during this current quarter versus a year ago? M. Kathwari: So there are two factors. First is we decided to increase our marketing spend, both in our -- especially in our digital mediums. And so we increased that. And that's -- when you look at our advertising, a lot of it was done because of the fact we increased it. Now which is the right thing to do because our digital mediums are tremendously important. So that is what you look at it as not because of the -- not only because of the existing promotions, but we expanded in a very strong manner in our digital mediums. And that has helped us and will continue to help us. And we do have the flexibility as we go forward in determining how much we spend. But last quarter, we spend more relative to the sales. That's why our percentage of marketing was higher. Cristina Fernandez: And then the last question I had was on the real estate plans on the press release, you noted a couple of new locations planned for this year. Do you still see opportunity, I guess, mostly in the U.S. to enter newer markets that you're not in? Or are most of these store openings relocations or updates to existing stores? M. Kathwari: It's both. We -- in the last couple of years, we have -- 3 years, we have spent a great deal of effort, resources to reposition our existing network. At that existing network, the repositioning has involved, first, investing in the -- our existing design centers to make sure they project well and also reducing the size. We have been able to overall reduce the size of our design centers by at least 25% to 30% because of the technology that we are able today to utilize in helping our designers work with clients. So that's tremendously important. The second is we do have a number of locations that we actually currently are working on about 5 new locations in the United States. And we also have opened up one or two locations in Canada. So we'll continue to open up new locations, but also relocate the current ones. And as I said, we have had a major, major impact of taking our current locations, repositioning them in both in size and also in the new products. So one of the factors we've got to keep in mind is that our -- and that affected to some degree, our margins is the fact that bringing in lots of new products meant we had to sell what we have. That had somewhat of an impact on our margins because those products we had to sell, and we're still selling them. All right, Cristina, any other questions or comments? Operator: Sir, there appears to be no additional questions at this time. So I'll hand the floor back over to Mr. Kathwari for closing remarks. M. Kathwari: Well, thank you very much. And as I said, on one hand, we are going through challenging times, but the good news is we have continued to position ourselves well. We have -- every week, I focus on five important things. First is talent. We are blessed with very, very strong talent in our vertically integrated enterprise from our manufacturing, to our logistics, to our merchandising, to marketing, logistics. The second thing is, as we look at after talent is technology. Technology has played a tremendously important role in everything we do today. Third is marketing. Marketing is important at national level, at the retail level. And fourth is our whole focus on making sure that we provide great service. And fifth and tremendously important is social responsibility. Those five things are critical and I think has helped us maintain a strong presence in all our operations. Thank you very much for participating and look forward to our continued -- making sure we continue to focus on our business and to grow our business. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.
Operator: Good afternoon, and welcome to the Redwood Trust, Inc. First Quarter 2026 Financial Results Conference Call. Today's conference is being recorded. I will now turn the call over to [ Natasha Spaduri ], Senior Vice President of Finance. Please go ahead, ma'am. Unknown Executive: Thank you, operator. Hello, everyone, and thank you for joining us today for Redwood's First Quarter 2026 Earnings Conference Call. With me on today's call are Chris Abate, Chief Executive Officer; Dash Robinson, President; and Brooke Carillo, Chief Financial Officer. Before we begin today, I want to remind you that certain statements made during management's presentation today with respect to future financial and business performance may constitute forward-looking statements. Forward-looking statements are based on current expectations, forecasts and assumptions, which include risks and uncertainties that could cause actual results to differ materially. We encourage you to read the company's annual report on Form 10-K, which provides a description of some of the factors that could have a material impact on the company's performance and cause actual results to differ from those that may be expressed in forward-looking statements. On this call, we may also refer to both GAAP and non-GAAP financial measures. The non-GAAP financial measures provided should not be utilized in isolation or considered as a substitute for measures of financial performance prepared in accordance with GAAP. Reconciliation between GAAP and non-GAAP financial measures are provided in our first quarter Redwood review, which is available on our website, redwoodtrust.com. Also note that the contents of today's conference call contain time-sensitive information that are accurate only as of today. We do not intend and undertake no obligation to update this information to reflect subsequent events or circumstances. Finally, today's call is being recorded. It will be available on our website later today. With that, I'll turn the call over to Chris for opening remarks. Christopher Abate: Thank you, and good afternoon, everyone. Before I turn the call over to Dash and Brooke, I want to share a few thoughts on our first quarter performance and what it says about Redwood's position as we move forward in 2026. As you all saw by now, Redwood generated a third consecutive record operating quarter with mortgage banking volume surpassing $8.5 billion for the first time and earnings available for distribution coming in a bit above last quarter at $0.21 per share, once again covering our dividend. Operating progress should garner some attention as our results came amid a broader mortgage market that has been stuck in neutral with mortgage applications running close to 40% below pre-pandemic levels and jumbo mortgage rates having risen from the recent February lows in large part due to the conflict in the Middle East. To zoom out and offer some context, our $8.5 billion of first quarter volume exceeded residential mortgage production at 3 of the top money center banks during the quarter. Our volume also clocked in at 10x our March 31 reported GAAP book value, a very high capital turnover ratio. This means the loans we hold in short-term warehouse facilities are moving quickly and getting replaced with fresh production. All told, we completed 11 securitizations in the first quarter, another in-house record for Redwood. High turnover also indicates the tremendous operational efficiencies we've implemented in recent quarters, in part due to our strong adoption of AI across the enterprise. In the first quarter alone, we executed over 2,500 agentic workflows, spanning technology platform expansion to support both Sequoia and Aspire in a single unified platform, as well as automated QC and the elimination of significant work previously performed by outside vendors. In the quarters ahead, we aim to continue unlocking addressable market share by leveraging the many network relationships we've spent years cultivating, something that is neither easy nor cheap to replicate. Our longer-term objective of 20% market share or more for our primary products will require both capital efficiency and significant growth capital. We believe there is a compelling opportunity for common shareholders to participate in that growth alongside us in advance of the next monetary regime and mortgage rate cycle. In the meantime, we continue to see tremendous demand from alternative asset investors who are eager to partner with us and speak for the high-quality assets we source. Just this morning, we announced a major Sequoia capital partnership with Castlelake, a blue-chip global investment firm specializing in asset-backed credit. This partnership brings approximately $8 billion of incremental purchasing power to Sequoia as it scales and reflects growing institutional demand to access our platform and the assets we create. We view this as an important step in a broader strategy to pair our origination capabilities with third-party capital at scale. To that end, we've also been hard at work on an Aspire-focused joint venture and hope to announce a similar JV in short order. Such capital partnerships are timely as we're growing more optimistic about macro trends that could positively impact the housing sector with the obvious caveat that the conflict in the Middle East seems far from resolved. As we like to say, mortgage was among the first sectors to be impacted by the Fed's historic tightening cycle to combat inflation in 2022, and we think mortgage could be among the first to benefit now with the prospect of a more accommodative and housing-focused Fed. Based on recent publications and testimony, the presumptive new Fed Chair, Kevin Warsh, seems to prefer the policy combination of lower rates and a smaller Fed balance sheet. While the reduction of QE had certainly removed the demand stimulus from the mortgage market, the prospect of a smaller Fed balance sheet should help reduce long-term inflation expectations and hopefully support lower long-term rates. The wildcard for mortgages continues to be spreads, which are still meaningfully above pre-COVID levels and still trying to find equilibrium. We expect any monetary policy tailwinds to be further supported by evolving regulatory dynamics, most notably the recently reproposed bank regulatory capital rules, also known as the Basel III Endgame. The proposed rules would ease the cost for banks to hold higher quality mortgages and mortgage servicing assets, a necessary step for banks to consider allocating more capital to their go-forward consumer mortgage operations. But lowering the capital rules is just one precursor for banks to reenter the mortgage space. The ultimate decision, we believe, remains risk-based and not profit-based. We consistently hear from bank C-suites that having a partner like Redwood to assist in the management of their interest rate and asset liability risks is a huge differentiator, especially because our support does not undermine their customer retention goals. Having the option to transact with Redwood when rates change quickly or priorities shift is the value differentiator we've now established throughout the banking system and another example of the moat we've built around our franchise. Finally, before handing the call over to Dash, I want to remark on recent headlines stemming from the private credit sector. As we all have seen, pockets of weakness in underlying fundamentals are emerging for certain aspects of private credit and constraints on liquidity and asset price visibility are, in some cases, impacting broader market sentiment. It's a timely moment for us to humbly champion Redwood's public credit model, where you can gain exposure to innovative mortgage banking and credit strategies, coupled with the liquidity that a publicly traded stock offers. We also strive to provide great transparency through the utilization of annual external audits, quarterly 10-Q filings, proxy statements and perhaps most importantly, mark-to-market accounting through our income statement. It's times like these that we take pride in our shareholders knowing not only what they own, but also knowing what they don't. With that, I'll turn the call over to Dash to discuss our operating results. Dashiell Robinson: Thank you, Chris. Our first quarter operating performance reflects continued momentum across our mortgage banking platforms, supported by record Sequoia volume, ongoing growth at Aspire and strategic progress at CoreVest, including evolution of our production mix. Even against a more volatile backdrop beginning in March, our full quarter results demonstrated the scalability of our model and the additional operating leverage still to be unlocked. Sequoia once again headlined our results, logging another record quarter with $6.5 billion of locks, up 22% from the fourth quarter. That volume was generated in a housing environment that remains well below historical norms, underscoring the market share gains we continue to make across our originator network, now enhanced by several new products to complement our core jumbo offering. Cost per loan improved 30% from the fourth quarter to below 20 basis points, aided by automation initiatives that we estimate will free up close to 6,000 hours per year that our team members can utilize more productively. Capital turnover also improved quarter-over-quarter with continued efficiencies expected from the new joint venture dedicated to Sequoia's jumbo production that Chris described. Gain on sale margins in the first quarter were 96 basis points, at the high end of our historical target range despite substantial TBA underperformance into quarter end, much of which has retraced thus far in April. Margin resilience was driven in part by strong execution on $5.5 billion of dispositions, including $4.6 billion across 9 securitizations. As Chris articulated, the recently reproposed Basel Endgame rules represent a potentially meaningful tailwind for the business. While flow volume represented the majority of first quarter production, we are currently evaluating on an exclusive basis close to $5 billion of seasoned bulk pools from banks, underscoring our view that more benign capital charges against high-quality mortgages will promote more 2-way flow of bulk pools, a positive for Redwood given our market positioning as banks continue to prioritize prudent asset liability management. Away from bulk opportunities, our sourcing channels remain well diversified overall with average flow lock concentration by seller of less than 1%. Product expansion also continues to support growth. During the quarter, we launched a new loan program focused on medical professionals, locking nearly $300 million of such loans on a flow basis during the quarter and later in the quarter, successfully securitizing a bulk pool of MedPro loans we acquired from a bank, a first-of-its-kind transaction. In all, our expanded offerings represented 14% of total lock volume in the quarter with over 100 of our sellers now actively selling us at least one new product. Aspire continued its growth trajectory in the first quarter, adding several new origination partners while further deepening our value with existing sellers. Aspire lock volume increased to $1.6 billion with April lock volume ahead of that pace. Approximately 70% of Aspire's first quarter volume came from sellers already active with Sequoia, a significant competitive advantage for the platform that also is indicative of its growth potential. More originators are now recognizing the strategic benefit of non-QM products that serve a growing cohort of borrowers outside the traditional W-2 profile, including self-employed consumers and smaller scale housing investors. We estimate Aspire's first quarter market share to be approximately 4%, which we expect to at least double by the second half of this year. As Aspire remains a relatively early-stage platform, an ongoing priority remains scaling operations ratably with volume growth and maintaining the cost discipline that supports long-term profitability. Aspire's gross margins were 73 basis points in the first quarter, impacted by spread widening in the pipeline at quarter end that has since largely reversed. The platform's inaugural securitization in March was an important milestone for the business, broadening distribution, improving capital efficiency, including through accretive distribution of the risk retention and subordinate tranches to a third party and establishing Aspire as a programmatic issuer alongside Redwood's other leading securitization shelves. At CoreVest, first quarter volume totaled $432 million, down modestly from the fourth quarter, but with continued progress in our smaller balance residential transition loan, or RTL and DSCR products. In partnership with our borrowers, we managed the pipeline carefully in March as volatility increased, which reduced monthly volume but positioned customers to lock loans in April at more favorable all-in rates. CoreVest's origination and distribution strategies are improving capital efficiency, reducing market risk and aligning the platform with areas of demand well supported by our capital partners. Most notably, this includes our joint venture with CPP Investments, to which we have now distributed over $2 million of CoreVest production life to date, generating upfront fee income and building a recurring income stream as the joint venture grows. The broader housing investor market remains focused on a pending piece of legislation that may impact institutional ownership of rented single-family homes over the medium to long term. While the final outcome remains uncertain, we believe parts of the eventual framework could create longer-term opportunities for the platform, both within our smaller balance loan programs and if the new rulemaking ultimately impacts the GSE footprint for single-family housing investors. Alongside record mortgage banking activity, we continue to pace with our reallocation of capital away from legacy investments, which stood at 15% of total capital at March 31, down from 19% at year-end. While segment returns were once again impacted primarily by net interest expense, resolution activity during the first quarter, combined with an accretive securitization, reduced legacy bridge loans to approximately half of the legacy segment and 8% of our total capital overall. 90-day plus delinquencies were roughly flat versus year-end in the legacy portfolio as we prioritize efficiently winding down the segment through outright dispositions or other structured sales that we believe will lead to the best outcomes through time. I will now turn the call over to Brooke to discuss our financial results. Brooke Carillo: Thank you, Dash. Turning to our first quarter results. We reported a GAAP net loss of $7 million or $0.07 per share compared to GAAP net income of $18 million or $0.13 per share in the fourth quarter. Book value per share was $7.12 at March 31. The 3% decline from Q4 was driven by noncash market-related valuation changes and certain nonrecurring expense items rather than underlying operating performance. Book value also reflected the $0.18 dividend paid to common shareholders. On a non-GAAP basis, consolidated earnings available for distribution, or EAD, was $27 million or $0.21 per share, up from $0.20 per share in the fourth quarter. Core segments EAD was $37 million or $0.28 per share, representing a 19% return on equity. This performance was driven by strong mortgage banking volumes, efficient loan distribution and capital turnover, particularly during the more volatile period in March, and disciplined capital deployment into attractive, income-generating investments, which supported net interest income and margins. The difference between core segment's EAD of $0.28 and consolidated EAD of $0.21 primarily reflects the legacy portfolio, which reduced consolidated EAD by approximately $0.08 per share in the first quarter. As capital allocated to legacy continues to decline, we expect that drag to further moderate. Our mortgage banking platforms generated $37 million of GAAP net income in the quarter, representing a 38% annualized return on capital. Capital efficiency improved with capital required per dollar of volume declining by approximately 10% quarter-over-quarter to 1.1%. Just to note, this quarter, our segment returns reflect a full allocation of unsecured interest expense based on average capital deployed with capital reduced by the corresponding allocation of corporate debt. The Redwood review presents segment results on both this basis and our prior methodology, which reflected these items within corporate. Sequoia generated $38 million of GAAP net income in the first quarter. Heightened flow activity represented 61% of production with a growing contribution from newer products such as ARMs, closed-end seconds and medical professional loans. As volumes scale, we continue to see strong earnings conversion and benefits of scale with cost per loan declining to 18 basis points, a highly efficient milestone. We also see a deep and growing pipeline of attractive opportunities with demand exceeding available capital. The joint venture announced today is designed to capture more of that opportunity in a capital-efficient manner by incorporating third-party capital alongside our own. Based on current expectations, the structure has the potential to contribute approximately $0.12 to $0.15 per share of incremental annual earnings as it scales with additional upside through structured economics. Aspire generated $2 million of GAAP net income in the first quarter. As the platform scales and expands distribution, we are beginning to see improvements in capital efficiency. Margins were impacted by late quarter volatility but have largely recovered post quarter end. CoreVest generated a GAAP net loss of $3 million in the first quarter, including approximately $5 million of onetime restructuring charges related to organizational changes that position the business for profitability in 2026. Excluding these items, our net cost to originate declined from 95 basis points last quarter to 79 basis points in Q1, reflecting improved operating efficiency. Redwood Investments generated GAAP net loss of $8 million. Portfolio-related marks were primarily driven by widening in the TBA basis and credit spreads, combined with the impact of higher interest rates late in the quarter. The cost of funds for our investment portfolio improved as we refinanced higher cost debt and optimized our financing mix, supporting net interest margin. Legacy investments recorded a GAAP net loss of $13 million, improving from a $23 million loss in the fourth quarter. The improvement was driven by lower net interest expense on legacy bridge loans, reflecting improved financing terms and lower balances as well as higher HEI income as capital markets conditions for the asset class improved. Total G&A was $49 million in the first quarter, up from $41 million in Q4, reflecting onetime costs associated with the previously discussed organizational streamlining initiatives as well as typical seasonal expense patterns. Excluding these items, run rate G&A was approximately $40 million, essentially flat to slightly below the fourth quarter. We continue to scale with discipline as first quarter volume growth exceeded expense growth by nearly 2x, driving our expense to volume ratio down to 66 basis points. With a largely fixed cost structure tied to production, we see meaningful upside in incremental volume converting into earnings, reinforcing our confidence in ROE expansion as the business scales. Liquidity remains strong with $202 million of unrestricted cash and approximately $3.9 billion of excess warehouse capacity as of March 31. Recourse debt increased modestly to $4.7 billion at quarter end, driven by higher warehouse utilization supporting record mortgage banking activity. Our ability to efficiently turn loans and inventory was evident in the first quarter with 11 securitizations completed across $5.2 billion of collateral alongside improved financing efficiency through tighter spreads and better advance rates, driving an approximate 50 basis point reduction in our cost of funds over the past 12 months. Over that same period, we increased warehouse capacity by 30% to $7.1 billion and renewed $5.7 billion of facilities, reflecting continued support from our lending partners. And finally, there are no corporate unsecured debt maturities over the next 5 quarters, and we maintain meaningful flexibility within our unsecured debt structure. With that, I'll turn the call back to the operator for Q&A. Operator: [Operator Instructions] Our first question is from Mikhail Goberman with Citizens JPM (sic) [ JMP ]. Mikhail Goberman: Congrats on another record quarter of banking volume. If I could ask, start with the new joint venture announcement this morning. I see in your slide deck, you mentioned you're expecting a meaningful annual EPS accretion for yourselves. Is there a target range that you guys are thinking about in terms of a number? Brooke Carillo: Yes, we are anticipating that it has a potential for roughly $0.12 to $0.15 of incremental earnings. This joint venture will really, as Chris noted in his prepared remarks, allow us to grow volume by another incremental 1/3 or 30% kind of add double-digit ROEs without raising other capital to source that. So given our incremental margin significantly outweighs our incremental cost to source, we're really excited about the partnership and its dedicated distribution channel that really kind of aligns with our high capital turnover model that we've evolved into. Mikhail Goberman: As far as your comments on the call about a potential Aspire JV being announced in the near future, is there a size that you guys are thinking about there? I see the Castlelake deal is about $8 billion. What are you guys thinking about in terms of size of a JV for Aspire? Dashiell Robinson: It's Dash. We'll have more to say when the details get finalized, but I think we are expecting a joint venture of this type to probably support 25% to 30% of Aspire's annualized production. That's probably the best way to quote it for now just in terms of all the other initiatives we have with distribution, including securitizations and whole loan sales. Obviously, we need to finalize what we're working on, but that's the context I would give you as a percentage of Aspire's overall production mix. Brooke Carillo: Mikhail, I'd also add, obviously, we've had joint ventures with CoreVest up to this point. And so I think the in-house knowledge is pretty high. And so our ability to continue to add these to the platform is getting progressively more streamlined. So we want to continue to find partners to the extent we need capital and it's available. And hopefully, again, we'll have more to say on Aspire, as Dash mentioned [Technical Difficulty] quarter. Operator: Next, we'll hear from Crispin Love with Piper Sandler. Crispin Love: So you had another record quarter for mortgage bank production. Can you just discuss some of the momentum there and what you're seeing in April? Mortgage rates peaked around quarter end, a little bit better now. So curious what you're seeing in April and what you might expect throughout the year? Dashiell Robinson: Well, I think on the one hand, vol. came down earlier in the month as we kind of settled into where we're at with the conflict in the Middle East and energy prices. So mortgage rates came in a bit. Obviously, the 30-year ticked 5% today, the 10-year is back up to 4.40%. So that's not a positive for mortgage rates. So I think that we're going to continue to expect to see some volatility here in rates. But I think the initial shock that occurred in March with this conflict in Iran, the market has somewhat processed that. And we've been much more business as usual, I think, as a sector these past few weeks. So from that standpoint, we've obviously got great inroads to taking market share. I think we've demonstrated that the last few quarters late in the first quarter, early in the second quarter, we've added a few more regional banks from a flow perspective. We continue to unlock market share for the platform. And I think we're quite excited about the prospect of the Basel III Endgame and being more or less an exclusive partner to a number of banks who work with us today. It's ironic that with the Basel III Endgame, some of the capital changes pertain to credit, but I think many banks would tell you that the largest risk they're focused on with respect to mortgage is convexity, and that's what we help manage asset liability risk, interest rate risk. That's the big need right now. So that doesn't go away. And in fact, if the capital charges go down, I think, having a partner like Redwood to manage that, our business case just gets stronger and stronger. So we feel good about the momentum. The only thing we don't feel good about is the volatility in the macro economy, and we're doing our best to manage through that. Crispin Love: Great. And then just for Sequoia, you called out the cost per loan improving to 18 bps a couple of times during the call. Can you discuss some of the drivers there? Is part of it volume-related tech, AI? I believe you mentioned the automation initiatives. So curious on a little bit of detail there. And then are there additional efficiencies that you think you can drive that even lower in the coming quarters? Dashiell Robinson: Yes. I mean, we feel really good about our combination of hustle and hard work with adoption of tech and AI. I think we have in the review that our volume growth is outpacing our expense growth by 2x, which I think really demonstrates the scale of the platform at this point. We're operating very, very efficiently. During the quarter, we mentioned 2,500 agentic workflows. We're eliminating vendors who have done a lot of QC for us or document intelligence. We're smarter on due diligence reviews. We're able to create a lot of efficiencies between Sequoia and Aspire using AI for our consumer platforms. So across the board, it's been kind of full frontal on just finding efficiencies in the platform and making sure that each dollar is used wisely, and we're leveraging our team and the tech that we're building. Operator: Next, we'll move to Marissa Lobo with UBS. Ameeta Lobo Nelson: Just looking at the slide, it noted that bank sourced volume at Sequoia was about 30%. I believe this is lower than 4Q. Could you just comment on your outlook for that contribution going forward? And the Castlelake JV, does this reactivate any recurring Sequoia program in the second half of 2026? Christopher Abate: Yes. I think the bank percentage ticked down maybe on a percentage basis but continues to rise. We had another record quarter of volume and a lot of that can be influenced by bulk one way or the other. So in the first quarter, we had some large, bulk transactions with certain independents. We have added some additional regional bank partners on flow, as I mentioned. And so we continue to expect that volume mix to evolve. I think we've got really durable partnerships on the bank side. It represents about half our network today, more or less. And while we can't necessarily cuff it because I think bulk has such a big impact on that quarterly percentage, we expect it to continue to grow. Ameeta Lobo Nelson: Some of your peers have noted institutional capital entering the non-QM market and the broader residential credit market. Are you seeing that competition manifest in your whole loan acquisitions or through tighter spreads on the AAAs? How is that impacting the ROE and securitization? Dashiell Robinson: It's Dash. I think that's largely been to an advantage for us as we continue to deepen our distribution channels. First quarter, a big milestone for Aspire was completing the platform's first securitization. We're actually in the market today with its second, which is really important because it shows institutional investors that the platform is going to be in the market regularly, which obviously helps primary and secondary liquidity. We've sold whole loans out of the Aspire platform to now close to 10 discrete different counterparties, including a couple of banks, which is a very big deal. And so I think from a supply-demand perspective, the amount of institutional capital coming into the space is a net advantage for us, because there are some players in the space that have been established. But again, Aspire is really leveraging not only the new sellers we're bringing in, but also obviously, the foundation of sellers that we've been working with for years in Sequoia. I think we said in the prepared remarks that about 70% of Aspire's production is from sellers that we've already done business with, are doing business within Sequoia. That's good news for a couple of reasons. One is we're leveraging our existing seller base and becoming an even more relevant partner to them with these added products in addition to all the products that Sequoia is now offering. But it also reflects the room to the ceiling for Aspire in terms of growth because there's a lot of sellers that we're not engaged with right now that want to do business with us that we anticipate onboarding between now and end of the year. We estimate our market share in Aspire at about 4% in the first quarter. We want to double that in the second half of the year to a run rate that will probably be close to $1 billion a month of locks. So the momentum on volume is there. The business is obviously still building, but I think a lot of the table stakes premise for getting into the business in a full-throated fashion 1.5 years ago are definitely coming to fruition. The amount of capital that is coming into the space but can't really put that sort of risk on themselves and relies on us to do that, I think it is a net tailwind for us. Operator: We'll move on to Jason Weaver with Jones Trading. Jason Weaver: I was wanting to ask about the legacy wind down within CoreVest. You took capital allocation down to 15% in one quarter. What do you think about the realistic finish line here to get below 10%? Is that end of year? And what sort of residual assets are sort of stickier on that resolution time line? Dashiell Robinson: We have stated we want that percentage to be well below 10% by the end of the year. One thing to unpack on that, Jason, and thanks for the question, is the legacy portfolio is, at this point, about 50-50 legacy bridge loans and then HEI. Legacy HEI we purchased a number of years ago, some of which, as you know, we've disposed of over the past year or so. We're pretty optimistic that we can recycle a fair amount of that HEI capital later this year. As Brooke articulated, capital markets execution for that asset class has continued to improve. Just this morning, there was an announcement that a new institutional investor was putting a few hundred million of capital towards new production with a different originator. But the point is that capital is continuing to flow into that space, and that's translated to more optimal securitization execution. So that's definitely front burner. On the bridge side, we are down to a few real focus line items, which will move the needle, which we are very focused on resolving in Q2, if not early to mid-Q3. That combination there will get us below 10%, and then we will continue to wind the position down from there and keeping with our goal of getting it below 5% by the end of the year. Brooke Carillo: If I could add just one thing on the financial impact of the wind down as well. I think the legacy book was around $240 million of capital at the end of March. That 5% or so translates to be below $100 million of capital by the end of the year. Every $50 million or so of capital that we free up, just given the drag from the legacy book is about a $0.05 quarterly -- would expected to be about a $0.05 quarterly improvement in EAD as it's redeployed into mortgage banking. And we've seen that the legacy contribution was about $10 million better than we saw in the fourth quarter as well. So that is starting to translate into continued EAD trajectory. Jason Weaver: That's great color. And then I wonder if you could talk about the comparative economics between the Castlelake JV and the CPP fee structure, risk retention, retained margin per loan. Dashiell Robinson: They're very different asset classes, obviously, jumbo versus BPL. I think they are conceptually very, very similar. Much like CPP, we're the minority of the capital in the Castlelake JV. The economics to Redwood include certainty of upfront economics at time of transfer into the JV, as well as a running essentially asset management or loan administration strip. So I think the economics are conceptually similarly. They do differ numerically, obviously, because the underlying assets are different. But the structures are very similar in that they're both sort of living, breathing ecosystems. We would intend to securitize out of the Castlelake JV, much like we've done out of the CPP JV. We could sell loans out of it, et cetera. So they're structurally very, very similar, but understanding there's nuances because of the underlying asset class differences. Operator: Bose George with KBW will have our next question. Bose George: Just wanted to ask about trends at CoreVest in April. And then can you just talk about the pipeline discipline in March, the volatility there, what drove that? And is the sort of backdrop a lot better now in April? Dashiell Robinson: Yes. I mean, Bose, as you know, CoreVest of our different strategies has kind of the most credit sensitivity. And as things got volatile in March, I think it was pretty prudent to not spread lock too far in advance of outcomes that we were kind of waiting on from a macro perspective. So there, too, the vast majority of that distribution is kind of spoken for with CPP and others. And so we kind of have somewhat baked economics in some respects. And so we decided to be a little bit more cautious there. I think that was the right call. Coming out of quarter end, similar to the consumer business, things have picked back up, and it's very much business as usual. So there, it's a little bit different than how we think about certainly Sequoia, which is a much more rate sensitive, less credit-sensitive business and Aspire, which is kind of a little bit of both. Bose George: Then actually, on the marks on the Redwood Investments, since quarter end, have you seen reversals of some of those? Dashiell Robinson: Yes. We've seen some reversals. Our business is quite a bit different than most others in the mortgage REIT sector, but I think book is probably up 1%, 1.5% based on kind of where the portfolio has evolved. But it's also still very early in the quarter. And I think what we learned in the first quarter is the last month of the quarter can have a pretty big sway. So we're early in the second quarter. And hopefully, things continue to kind of stabilize, and we're pretty happy with the credit profile of the book. Operator: We'll move on to Doug Harter with BTIG. Douglas Harter: Brooke, you mentioned that kind of pipeline adjustments negatively impacted kind of the gain on sale that you were able to achieve in the quarter. Just wondering if you could size that. And I think I just want to make sure I heard that you said that that has largely reversed in April. Brooke Carillo: Yes. So we saw a decent amount of TBA widening throughout March. That probably had about -- we saw them about an 1/8 or so wider and our execution widened a bit relative to where we were at the beginning of the quarter. A lot of that has since reversed in April to date. And so I think it was a portion of the delta between where we were in the fourth quarter on gain on sale. I think we quantified at the time, we had about 25 bps of margin outperformance in the fourth quarter due to TBA tightening, and we probably saw at least half of that in terms of the quantum of the impact from TBA widening on jumbo margins in March. Douglas Harter: Great. And obviously, with Dash's prior comments in mind that it's still early in the quarter, but all else being equal, you would see some outperformance from TBA tightening. What you've seen so far? Brooke Carillo: Yes. I think we still guide to the high end of our historical range in terms of expected margins for Sequoia in the quarter. Dashiell Robinson: Yes, Doug, I would say similar for Aspire. The Aspire pipeline was definitely impacted at 3/31 by empirical spreads in the securitization market. Those are probably 20 to 30 bps tighter today than they were at March 31, which specifically to Aspire is probably worth about $0.02 to $0.03 of EAD in terms of where that pipeline was marked at 3/31 versus where we ultimately expect to potentially execute or at current market conditions. So that would be sort of the Aspire part of the answer as well. Operator: We'll move on to Don Fandetti with Wells Fargo. Donald Fandetti: Can you talk a little bit about the sort of ramp-up of the Castlelake JV, how quickly you could get to that sort of incremental earnings contribution that you talked about? And then is there any offset, meaning like cannibalization or less of your core mortgage banking business, or should we think of this as additive? Brooke Carillo: I'll start. I think the answer is definitively additive. Chris mentioned the amount of opportunities we're seeing out of both regional banks on a slow basis as new partners and also seasoned opportunities. So I think we are highly excited to have this up and running. The joint venture will use warehouse lines and other things that just operationally need to set up in the second quarter. This is fully expected to really be incremental volume for Sequoia. Operator: We'll move on to Rick Shane with JPMorgan. Richard Shane: I actually don't think I heard the answer to Don's question, which was one of mine. Given that this is a -- the constraint seems to be capital, and it sounds like you have the pipes in place, should we expect a very quick ramp to that $0.12 to $0.15 per year accretion, or how many quarters should we be thinking about here? Brooke Carillo: Yes. I think you can think of that somewhat linearly over the next 4 quarters as we ramp fully. Richard Shane: I want to understand a little bit better the G&A expense allocations this quarter. We saw Sequoia go down. There was a pretty significant increase at CoreVest on a relative basis and an increase at the corporate level. And I just want to understand what's driving that and how we think about that going forward, so we can model the different business lines efficiently. Brooke Carillo: Yes. No problem. Expected this one, just given there's a lot of movement in the quarter. So just at a high level, let me start with some of the movement in G&A, and then I can talk about allocation as well. So G&A was $49 million in the first quarter versus $40 million in the fourth quarter. Predominantly most of that was $8 million associated with the reorg costs and other about $1.5 million of that as well with seasonally higher benefits that we actually always see in the first quarter. The run rate from here should really be inside the fourth quarter levels. The area where most of that came from was within both kind of corporate and CoreVest, which is why you saw CoreVest contribution impacted, which is we disclosed both our GAAP contribution as well as EAD for CoreVest, just so you can see what really the run rate of that business looks like, excluding the onetime costs in the quarter. The other corporate expense reallocation that was done on the quarter was really taking -- which we showed on Page 9 in the Redwood review, our segment returns, both pro forma for this presentation for what we presented both last quarter and this quarter. We were really just allocating our $777 million of corporate debt by segment rather than having it sit in a corporate segment so that you can see the impact of that interest expense proportionately for each segment. So that is why if you look on Page 9, our mortgage banking ROE under our prior presentation would have been 23%. It's 38% just given the impact of that capital coming out of the otherwise kind of dedicated working capital for each segment. Operator: There are no further questions at this time, and this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.
Operator: Hello, everyone. Thank you for joining us, and welcome to Extra Space Storage Inc. Q1 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Jared Conley, Vice President of Investor Relations. Please go ahead. Jared Conley: Thanks, Karen. Welcome to Extra Space Storage's First Quarter 2026 Earnings Call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, April 29, 2026. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. I would like to now turn the time over to Joe Margolis, Chief Executive Officer. Joseph Margolis: Thanks, Jared, and thank you, everyone, for joining today's call. We are pleased to report first quarter core FFO of $2.04 per share, up 2% year-over-year. Our solid performance demonstrates the strength and resilience of our diversified portfolio and best-in-class platform as we navigate an improving operating environment. Operationally, we delivered positive same-store revenue growth of 1.7%, which exceeded our internal projections. We ended the quarter with same-store occupancy at 93% compared to 93.2% in the prior year, with the year-over-year occupancy delta improving 50 basis points since year-end. We did this while continuing to achieve positive rate growth to new customers during the quarter, and our systems continue to optimize for total revenue with no preference for move-in rate or occupancy. We are seeing encouraging broad-based revenue improvement across our markets, driven primarily by declining new supply. The sequential new customer rate gains we have been achieving over recent quarters are now translating into revenue growth. These positive operating trends position us well as we enter the leasing season. Our diversified external growth platform continues to be effective across multiple channels. We continue to review a high volume of acquisition opportunities while maintaining a disciplined approach given current asset pricing relative to our cost of capital. We are projecting $200 million in total acquisitions for 2026, under the assumption that we will close materially more in total transactions, primarily in asset-light joint venture structures. Our bridge loan program continues to perform well, maintaining an average balance of approximately $1.5 billion in Q1 2026. This program not only generates attractive interest income, but also serves to expand our management business and provides an opportunity for future acquisitions. Our third-party management platform added 84 stores in the quarter with net growth of 60 stores, bringing our total managed portfolio to 1,916 stores. The consistent demand for our management services demonstrates the value we deliver through superior property performance, operational expertise and our data and technology platforms. Overall, we are encouraged by our first quarter performance. The sequential improvement across our portfolio gives us confidence in our ability to capitalize on continued supply moderation and strengthening fundamentals as we progress through 2026. I will now turn the time over to our CFO, Jeff Norman. Jeff Norman: Thanks, Joe, and hello, everyone. As Joe mentioned, we are off to a good start in 2026, and we are especially pleased with our store-level operating performance. Same-store revenue accelerated 130 basis points from 0.4% in the fourth quarter of 2025 to 1.7% in the first quarter of 2026, and same-store NOI growth improved 110 basis points from 0.1% to 1.2%. We are seeing the benefit of multiple quarters of positive new customer rate growth begin to flow through to revenue growth, and our pricing models continue to utilize rate, occupancy and marketing spend to drive total revenue. We also had solid expense control, with all categories in line with our estimates, outside of utilities and repairs and maintenance, which ran higher than expected primarily due to snow removal and other weather-related items. Excluding the above budgeted portion of weather-related expenditures, total year-over-year expense growth would have been 1.5%. Our ancillary businesses also delivered strong performance during the quarter. Management fee and other income grew over 9% year-over-year, reflecting our expanding third-party management platform. Net tenant insurance growth was over 5%, and our bridge loan program produced steady fee and interest income. All components of our diversified revenue model are performing well and contributing to our overall results. Our balance sheet remains in excellent shape, with 83% of our total debt at fixed interest rates, a figure that increases to 93% on an effective basis when accounting for our variable rate loan receivables. Our weighted average interest rate stands at 4.3%, and we currently have approximately $2 billion in capacity on our revolving lines of credit, providing us with strong liquidity and plenty of growth capital. We are maintaining our full year 2026 core FFO guidance range of $8.05 to $8.35 per share, as well as our same-store performance outlook. While our Q1 performance exceeded internal expectations and we're encouraged by the sequential improvements we're observing, we believe maintaining our current guidance range appropriately balances the positive momentum we're experiencing with the uncertainties that remain in the broader macroeconomic environment. We will revisit our annual guidance with our second quarter earnings after the leasing season has played out. In summary, we're encouraged by the acceleration in same-store NOI and the strong performance across all parts of our business, driving positive core FFO growth. The combination of our operational strength, talented team and diversified growth platform gives us confidence in our ability to continue delivering long-term shareholder value through 2026 and beyond. With that, operator, let's go ahead and open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Goldsmith with UBS. Michael Goldsmith: First question, positive move-in rates over the past year seemed to carry the same-store revenue growth to a much higher level in the first quarter with the same-store revenue growth of 1.7%. Now that move-in rates are moderating, should that weigh on same-store revenue growth for the balance of the year? And is that reflected in your same-store revenue growth guidance that implies moderation from here? Just trying to understand the impact of street rates flowing through the algorithm. And does that imply a decel later in the year? Jeff Norman: Yes. Thanks for the question, Michael. No, not necessarily. So while same-store -- or excuse me, new customer rates are an important part to driving same-store revenue growth, obviously, all the other revenue levers are also important. So we did see new customer rate growth moderate from 5% to 6% in January and February to, call it, a little over 1% in March. And then that averages for the quarter at about 2.5% because of the higher volume that you see from a rental standpoint in March. But over that same period of time, particularly in March, we actually picked up occupancy. And as we've always said, we're much more focused on just driving revenue and not focusing on any particular lever. While we're on the topic, I should probably also mention, you probably noticed we converted that metric from reporting new customer rates on a per unit basis to a per square foot basis. While similar, they aren't exactly apples-to-apples, and that reduces the number by about 100 basis points. So on a like-for-like basis, move-in rates would have averaged about 3.5% for the quarter. On a per square foot basis, it was closer to 2.5%. Michael Goldsmith: Got it. And while we're on this topic, Jeff, do you mind providing an update on what you've seen -- we're almost done with April now, but what you've seen so far in April from a street rate occupancy perspective? Jeff Norman: Yes, continuation of what we saw in March largely where we continue to see improvement in occupancy from both a sequential standpoint and a year-over-year standpoint where that continues to tighten. And then a new customer base from a new customer rate standpoint, modestly positive. Joseph Margolis: And continuing to be ahead of budget. Jeff Norman: Yes. Yes. Operator: Your next question comes from the line of Samir Khanal with BofA Securities. Samir Khanal: I guess, Joe, maybe to start off, how would you characterize sort of top of funnel demand today? Maybe compare that to last year. And at this time, as we start the leasing season, curious on your thoughts. Joseph Margolis: I think demand is steady, if I had to characterize it. I don't think we've seen any material improvement or any material degradation in demand. Our systems, our platform, our customer acquisition abilities allow us to capture more than our share of demand that's in the market. So we continue to be the highest occupied of any of our peers at the highest rates. And that's a good spot for us to be in. Samir Khanal: And maybe as a follow-up on the other side of it, I mean, it certainly feels like commentary is more of optimism. Is that primarily from sort of the lower supply you're seeing? Maybe expand on that, please? Joseph Margolis: Yes. That's a good follow-up. So yes, the demand being steady, the -- correlated to that is we are seeing improvement in the supply situation. And many of the markets that were particularly impacted by supply in the Sunbelt, we are starting to see improvement in those markets. So that's very encouraging for us, particularly because we have disproportionate exposure to the Sunbelt, which we believe long term is a positive. That's where the growth is going to be in our country. But in the recent past has been a headwind for us. Operator: Your next question comes from the line of Brendan Lynch with Barclays. Brendan Lynch: Maybe you could give us some high-level thoughts on the competitive impact to the market from PSA and NSA being combined? Joseph Margolis: Well, I mean, we compete with all of those stores now. So we'll continue to compete with them in the future. I think PSA is a very good operator, and I'm confident those stores will do better under one unified platform than the system NSA was pursuing. So we'll continue to compete with them. They've been a good competitor in the past. They'll be a good competitor to us in the future. And it's one reason we never stop trying to get better, never stop trying to sharpen our tools because we know we have good competitors who are doing the same. Brendan Lynch: And then maybe just on the volume of transactions and your expectations for an improvement there or growth there. Can you talk about how seller expectations have changed, if at all, or if there's something else that's driving the increase in volume that you anticipate going forward? Joseph Margolis: So it's a really good question. I would tell -- I mean, there is activity in the market. There are things being sold. I would tell you, the last 2 material transactions we saw priced at -- on our numbers, sub-5 initial cap rates without enough growth to make them interesting in the future. And that's pretty aggressive. And I think capital buyers in the market are seeing that we're in the beginning of this recovery cycle and are underwriting that into their numbers. So we have a fairly modest acquisition guidance for this year on a net basis, on an EXR dollar basis. Well, as I said in my remarks, I think we'll close a lot of deals, but many in joint venture structures to make them accretive to our shareholders. But I'll also tell you that we've had a lot of years where we've put out an acquisition number, and we end up finding interesting off-market typically things to do. And we're very active and we have a lot of relationships, and we can be creative and innovative. And I know the team is anxious to try to do that again this year. Operator: Your next question comes from the line of Ravi Vaidya with Mizuho. Ravi Vaidya: I wanted to dig a little bit more at the same-store revenue range. You had a strong first quarter, exceeding the top end of the range. Can you walk us with the upside and downside scenario for the full year? And maybe some color on how you expect the cadence of this will continue throughout '26? Jeff Norman: So from a -- first of all, I appreciate the question, Ravi. And it makes sense. Given where we ended the first quarter relative to our stated same-store revenue range, it makes sense. I think probably the point I want to make most clear is our lack of adjusting guidance isn't a call from our perspective on expected performance for Q2 through Q4. I think we view it more from the standpoint of it's early in the year. We haven't completed our busy leasing season. And combining that with some of the macro factors that are in the background, it seems to make sense to wait 1 more quarter, see how the leasing season plays out and make those adjustments at that time. All of that said from a guidance -- cadence standpoint, so far throughout the year, we've continued to see revenue outperform our internal expectations, and it has accelerated. And we -- but we do know we have harder comps as we move deeper into the year. So if we combine all of those factors, very optimistic about where we stand today versus our stated range, and we'll look to update it in -- after the second quarter. Joseph Margolis: I'd just like to add that Jeff appropriately points to the risks associated with macro factors, higher gas prices, inflation, consumer confidence. We haven't seen any of that flow through to our business yet. Customer behavior is unchanged. Customers are still accepting ECRI at the same level they have in the past. Bad debt is down actually to 1.5%. Vacates remain muted compared to historical numbers. And we see this across all different demographic markets. So that's very positive for us. So our caution isn't because of anything that we've actually seen. It's more of an unknown, and we just feel it's prudent to wait for the leasing season in another quarter before we revisit guidance. Operator: Your next question comes from the line of Eric Wolfe with Citi. Eric Wolfe: Can you just talk about the reason for the change in the definition of move-in rate growth? And what explains the delta between the 2.4% you reported? And I think you said mid-3s on the other definition? Jeff Norman: Yes, you're exactly right. Thanks, Eric. The reason for the change was really just market feedback. We had heard that from both buy-side and sell-side analysts, I think, for consistency with disclosures from other peers and wanted to accommodate that request. And in terms of why the delta between the 2 approaches, what it comes down to is volumes, rental activity between larger and smaller units and pricing power within those units. So on the margin, saw stronger pricing power in some of the larger units within the quarter, creating the delta. Eric Wolfe: Got it. And you mentioned that I think across both definitions, the rent growth came down a bit in March and April. Can you talk about whether that was just from sort of tougher comps or something changed in the environment? I know you're always trying to optimize for the best revenue growth. So I guess I'm asking why the system determined that sort of lower asking rent growth was the best revenue maximizing decision at that time. Jeff Norman: Yes, I think it's possible that it's a few of the factors you mentioned combined. So certainly are lapping harder comps, so those continue to become more difficult throughout the year. And I think the model is always evaluating price elasticity and seeing where is the optimal balance for total revenue. So in March, we did see it lean a little more into occupancy and take more occupancy, closing that gap on a year-over-year basis. And as we've always said, we're happy with either as long as we feel like we're getting the right revenue outcome. And based on the results, we're really pleased with how it's gone through the first quarter. Operator: Your next question comes from the line of Nicholas Yulico with Scotiabank. Viktor Fediv: This is Viktor Fediv on with Nick. I have a question on your bridge loan book. So you originated only $5.5 million this quarter. Last year, it was more than $50 million in Q1. So what was the driver behind that slowdown on a year-over-year basis? Was it just the slower activity or interest rates not attractive for you? Joseph Margolis: So I don't think this program, just like our acquisition program is going to produce steady volume quarter after quarter. There will be some volumes that are higher and there are some volumes that are lower -- some quarters, excuse me, that have higher volume and some quarters that have lower volume. So we did have a quiet quarter in terms of originations. We did have a good quarter though with respect to approvals for future loans. Overall, I think the business is a little slower due to transaction activity and lesser development, right? A portion of our loans are for newly delivered properties. And as the number of those goes down, the number of lending opportunities goes down with it. There's also more competitive lenders, right? There's others who kind of followed us into this business. But overall, we're comfortable and happy with our volume and our ability to make loans and continue with this program. Viktor Fediv: Got it. And then as a follow-up. So given that your loan book serves as a potential acquisition pipeline, so out of your $200 million kind of guidance for this year, how much do you expect to get through this [ funnel ]? And how does the pricing differ from what's kind of available on the market otherwise? Joseph Margolis: So we don't assume we'll buy anything out of the loan program. That would be additional volume that we could get. And our pricing discipline is the same regardless of how the acquisition comes to us from the management business, from a joint venture, from the bridge loan program are on the market, we still want to make accretive transactions given our cost of capital or structure the acquisition such that we can make it accretive. Jeff Norman: And while we don't specifically model or guide towards a specific volume of acquisitions through the bridge loan program, our experience has been that those opportunities end up coming to fruition. Historically, we've purchased about 25% of the underlying collateral of loans that we've originated. And I don't see any reason that we wouldn't continue to see quite a few acquisition opportunities from that program. So we don't model it, but to Joe's point, I think we'll see our fair share. Operator: Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just hoping, Joe or Jeff, if you could talk a little bit about the length of stay and how that's trending, typically talk about over 12 and 24 months? And if you've seen any change in vacates or churn? And if ECRIs have played any part in that? Joseph Margolis: So we'll answer it in reverse order. So as you know, we do monitor real carefully, our ECRI-induced churn, and we haven't seen any change in that level of churn. So that program still seems to be working as designed, and customer behavior has not changed with respond to that. With respect to length of stay, current tenants over 12 months is about 64% of our tenants. And that's 167 basis point improvement from prior year, year ago March. Current tenants over 24 months is about 46%, and that's a 190 basis point improvement from a year ago. So tenants are staying longer. Our systems continue to do a better and better job targeting and attracting tenants who are more likely to stay longer. And it's a great benefit to the business, particularly where we have steady -- kind of steady and price-sensitive demand. Jeff Norman: And Juan, I would add, you mentioned churn. Churn was really flat for the quarter. So rental and vacate volume on a year-over-year basis Q1 '25 compared to Q1 '26 is basically flat. And that's comping almost all-time lows. So churn is still relatively muted compared to average historical number. Juan Sanabria: Thanks for that context. And just on the third-party management, maybe just following up on the bridge loan question. Have you seen any impacts from new entrants, either REITs or some of the larger privates looking at managing assets themselves either on their own behalf or for third parties in terms of squeezing fees or margins or anything of that for that third-party management business? Joseph Margolis: We really haven't. I mean, one, we're not changing our pricing at all. We are the highest priced option in the market because we produce the best results and have the best platform and provide the best service. So our growth in this, another 60 net in this quarter is much faster than any of our competitors. And to us, it's the market speaking. The market is choosing the best platform even if they have to pay more for us. So we have not seen any impact on our business from new entrants. Operator: Your next question comes from the line of Michael Griffin with Evercore ISI. Michael Griffin: Maybe circling back on your points earlier, Joe, around revenue optimization, and I realize you're not going to give us the secret sauce. But as you think about the interplay between rate and occupancy, I mean, what are the signals that you're looking at, that the team is looking at to say, "Hey, now is a good time to push rate over occupancy?" You've highlighted a number of times about how highly occupied the portfolio is. If you have a market to say hits 95% occupancy as an example, are you really going to try to push there? Or how should we think about the puts and takes between the interplay of those two? Joseph Margolis: So the way you asked the question makes it seem like Jeff and I and a bunch of the other folks on the team sit around the table and say, "Let's get 50 basis points more occupancy." It really doesn't work that way. We have several proprietary algorithms that were built with our extensive data set that price every unit type in every building every night. So we'll look at the 5x5s on Main Street in Philadelphia and look at historical vacates and many dozens of factors and decide for that unit price, that unit type, it's going to drop price because that's how it can maximize -- get the right number of rentals to maximize occupancy. And that happens for 2.8 million units every night. And that rolls up into something where we say the system is leaning a little bit more towards occupancy. But that doesn't mean that's the case with every unit type, every building, every market. Now while that's going on, we do have data scientists looking at it and kind of checking it and making sure that there's nothing new in the environment that the algorithm doesn't know that we need to take a second look at or test. But that's the level of human involvement, not making individual decisions about rate or occupancy. Jeff Norman: And Griff, maybe I would just tack on to that. And with our scale and as the tools continue to get better, you can see that data in much shorter time periods to make those decisions, and the system can recalibrate faster than it ever has before as the data and tools improve, which is a significant advantage for the large operators. Michael Griffin: I certainly appreciate the helpful context there. Maybe next, just on the same-store expense growth and the cadence. It seemed like the quarter was pretty down the fairway relative to the guide. But Jeff, as I'm thinking about it, I know there were probably some more elevated operating expenses in the middle part of last year, call it 2Q, 3Q. So can you maybe walk us through or if you can give us some color on expectations of cadence? Is it easier comps in the second and third quarter? Just how should we think about sort of same-store expenses on a quarterly basis for the balance of the year? Jeff Norman: Yes. I think it's more of a first half, second half comp differential. So first half, you had easier comps with property taxes in particular being the real standout. And we'll lap that in the back half of the year and have more difficult comps, but still anticipate similar performance. As you mentioned, relative to the guide, we're well within it. Outside a couple of those weather-related exceptions that I mentioned, all of our expenses came in really right in line with what we expected. Maybe one specific call out, Griff, that would be helpful just because it's a little larger in magnitude and timing based is our insurance expense, which in Q1 was over 10%. We renew our insurance policies in the end of May. And all of the feedback we're getting so far, we're actively negotiating that renewal right now is that it's a favorable environment for insureds. And we expect that to come in relatively flat, if not better. So we were optimistic that we also have some opportunity with insurance, which was already factored into our guidance. We figured that would be the case. Operator: Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Great. Just 2 quick ones. Staying with expenses. I know philosophically, you guys have had a little bit of a different view in terms of the -- sort of the service associates that are in the stores and the ability to sort of optimize the revenue with that person there. But I guess my question is just as you're thinking about the next couple of years, is there more opportunity to take expenses out of the structure? Or is it pretty much as optimized as you can get? Joseph Margolis: I think there's always opportunities to take expenses out of the structure. And I think there's several factors that will lead us to that. One is growth in densification. As we get more stores in a market, it becomes more efficient, and we can run those stores with fewer people and supervisory people, right? If a district manager has to fly to 3 different markets, he can cover fewer stores than if all of these markets are in 1 store and he can drive to them, he or she can drive to them. So that growth is one. Second is AI. And certainly, we're looking at lots and lots of opportunities for reporting and analysis and audit and all sorts of different things that we can get more efficient through using AI tools. And then third is customer preference. Right now, we like to have managers in the stores more than our competitors because the customers want that. 39% of our customers end up signing a lease by choice, sitting across the table from a store manager. 28% to 30% of those have never interacted with us on the web or on the phone. And they all have phones, they all have computers. They could call the call center. They can do a transaction totally online. They're choosing to come to the store for a reason. They want to see the 5x5. They want to see how clean it is. They don't understand how to get into the gate, et cetera. So as long as the customers want that, we'll provide it. But we also know that when you look at the demographics, the younger customers want that much less than the older customers. So as our customer base ages, we imagine that demand by customers will get fewer and fewer. And at that point, we will need fewer and fewer people on site. So yes, sorry for the long answer. But yes, there's always opportunities to continue to gain expense efficiencies. But at a high-margin business, we will always keep an eye on the revenue line item and make sure that nothing we're doing on the expense line item is going to damage the revenue line item because that is of much more importance. Ronald Kamdem: Great. That's really helpful. And then my second question, if I may, is just on the revenue line item when you sort of talked about the algorithm that's pricing 2.8 million units sort of every night. If you think about sort of the -- with AI coming in, the amount of data on the customer is only going to go up exponentially. I guess I'd love to hear some thoughts on how you integrate that new wave of data on the customer? And how does that sort of plug into this algorithm to maybe even make it more efficient? Joseph Margolis: So our algorithms have had what we used to call machine learning in them for a long time. So I guess that's a form of artificial intelligence. And I wish I knew the answer to your question. I think there's lots and lots of opportunities. And the biggest challenge with implementing AI is triaging the opportunities, understanding them and then implementing them in an effective and safe manner. And luckily, we have a lot of smart people here who are focused on that. I don't have to be the expert on that because it's -- there's not one clear road map. And I think we and other large companies have the ability, technology, resources to focus on that and effectively implement AI in our pricing models and in lots of other areas of our business. And I think it's just going to increase the kind of gap between the large and small companies and how they can operate their businesses. Operator: Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Todd Thomas: In terms of the first quarter outperformance relative to your budget, which you mentioned has carried into April, the same-store revenue growth and the improvement you saw was relatively broad-based across the portfolio. Where did you see the wins or the outperformance? Is there anything specific that you can point to that resulted in the better results in the quarter? Jeff Norman: Yes. So some of your stronger markets, Todd, you can see in the results include Chicago, Washington, D.C., a lot of the Midwest and coastal markets. And as we've talked about for a long time, the strongest correlation seems to be new supply. Places where there was less pressure from supply earlier are the areas where we got pricing power earliest, which is now flowing through to revenue. And then you've seen some of that pricing benefits starting to roll through to other stores. So I think Joe mentioned earlier in the call that in some of our Sunbelt markets where we had experienced a lot of headwinds from a new customer rate standpoint in '24 or '25, where we're starting to get a little more traction as well. So no specific tailwind that I'd say is driving outside of improvement in fundamentals driven by supply. Todd Thomas: Okay. And then, yes, I guess following up a little bit. My second question was about the Sunbelt. I'm just curious, do you think the Sunbelt is sort of out of the woods here? There were some of the largest sequential moves in the quarter were in some of the Texas markets, Atlanta, Phoenix. I mean, do you see those trends continuing in the near term? And then I know that you've integrated the Life Storage portfolio now for a couple of years, but are you seeing any greater momentum in that portfolio now that the conditions are starting to recover? Joseph Margolis: So the Sunbelt doesn't operate as one market. It's hard for us to say the Sunbelt is doing this, the Sunbelt is doing that. And we are big believers in diversification, and the markets act differently, and we want to have exposure to lots and lots of good growth markets. There are some Sunbelt markets that performance has significantly improved. Atlanta, Austin, Dallas, Miami, Phoenix are some examples of those. Southwest, Florida, Tampa, still facing some headwinds and some difficulties. Houston is another one I'd put. So we are seeing recovery in many markets, but not in all markets. The LSI stores, to the extent that they were disproportionately in the Sunbelt are having that experience. But overall, their performance is akin to Extra Space stores now. Jeff Norman: And Todd, you asked, are they -- are those markets out of the woods, so to speak. I think we continue to still see a relatively price-sensitive new customers. So it's not like we are able to push double-digit new customer rate growth across the board. And as Joe mentioned earlier, you see that down to the property type, unit type where different products moving better and then that rolls up into markets and eventually the whole portfolio. So it's pretty granular. I think we'll need to keep working through supply in some of those markets. But directionally, it's certainly improving. Operator: Your next question comes from the line of Salil Mehta with Green Street Advisors. Salil Mehta: I'd just like to touch quickly back on move-in rates here. But you've been able to achieve a positive move-in rate growth for consecutive quarters now, which is great. But I guess the question I have here is, how sustainable or how far can we expect this positive pricing momentum to continue without the lack of the housing market recovery? Is the positive momentum that we're seeing for the last 2 quarters is more of a function of easier comps? Joseph Margolis: But I think easier comps are a factor. But I also think with steady demand and reduced supply is another factor, right? So it's kind of 2 sides of the coin, right, if demand stays the same, but if supply reduces, that's positive for us. Jeff Norman: And Salil, I think I'd add that with our original guide, we did not factor in an improvement in the broader housing market to achieve our range. So our assumption coming into it was a relatively flat housing market to what we've seen year-over-year. And if we were to see some acceleration from the housing market, that certainly would be a tailwind for us and could accelerate the recovery. I think absent that, we'll still see a recovery. It just -- it's probably a little flatter slope. Salil Mehta: Great. And just another follow-up here on the housing market. Nationwide, the country is definitely still struggling, but are you guys perhaps looking at any market specifically that are, for us, recovering better than average or could be better positioned when home sales eventually or hopefully rebound? Joseph Margolis: Yes, it's a difficult analysis. And when you say looking, I assume you mean from an acquisition standpoint. We found it's really hard to target acquisitions to say we would love to be in Seattle, right? So we think we're underexposed in Seattle. But we find when we go and identify stores in Seattle and cold call the owners, they put prices on the table that are pretty aggressive. So we need to be a little more reactive to what's on the market as opposed to targeting markets. We've tried that in the past and have not had a lot of success. Operator: Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Caitlin Burrows: We've talked a lot about the impact that supply can have, and it seems like it's coming down. So that's good. I guess, can you give any insight on what you're seeing across the industry on new starts and the current expectation of how kind of supply will compare in '26 for '25, but then maybe visibility on those starts and what it could mean for '27? Joseph Margolis: Yes, sure. I think we have really good visibility, maybe better than anyone else, primarily through our third-party management business because we get an extraordinary number of inquiries from people saying, "We want you to manage this development, would you take a look at it for us?" And many, many of those end up not happening, but we do get a sense for the volume of that and whether it's increasing or decreasing, it is decreasing, and what the deals look like. We also look at Yardi data, right? Yardi, I think, produces good data. They -- their data says that national starts are going to reduce from 2.8% to 2.3% of total stock between '25 and '26. Another data point we use is number of our same-store square footage that is having a new competitor delivered in its trade area. And that, in '21, '22, '23, it was in the high 20%, 84% over those 3 years. It went down to 13% in '24, 8% in '25, and we think it will be 6% in '26. So clearly, new supply is not going to 0, but it's clearly moving in the right direction, and we're feeling the effects of that. Jeff Norman: And pointing out the obvious, but with the lease-up time since we can't pre-lease these properties, this is generally on a rolling 3- or 4-year basis. And so every year that you tack on, another one of these single-digit delivery years using the numbers that Joe provided versus 2023, that was well into 20s, there's a material benefit from that. Caitlin Burrows: Got it. And then I think on the previous question, you were just talking about the acquisition environment and that if you seek somebody out, maybe then the pricing is too high. So I guess could you talk a little bit about what you're seeing come to market? Is there anything on the portfolio side? And I know you said that you mentioned that you might do more on JVs versus 100% ownership. But yes, what kind of opportunities you're seeing? Joseph Margolis: There are opportunities on the market. I think I referenced earlier in the call, the last 2 sizable opportunity [ graded ] numbers that were initial yields of sub-5 and didn't have sufficient growth in them to get to numbers we would consider accretive in a reasonable period of time. Most deals we're seeing in the 5s somewhere on initial yield. And I know initial yield is not really the most important factor, but it's a good comparative we can all talk to. So again, I'm sorry to repeat myself. We're really allergic to growing for growth's sake. When we invest our shareholders' dollars, we want that to be an accretive strategic transaction. And if we can't do that, we are willing to be patient. Operator: Your next question comes from the line of Eric Luebchow with Wells Fargo. Eric Luebchow: Just one on capital allocation. So Joe, you're just talking about how acquisition cap rates are still pretty aggressive from what you've seen. So does it change at all, your strategy to consider maybe more potential asset sales or potentially buying back even more stock as opposed to going after deals? Joseph Margolis: Yes. So asset sales for us is more an effort to improve the portfolio to sell assets that either want to reduce our market exposure or we don't think have growth rate -- future growth rates that are attractive to the portfolio or maybe require a bunch of capital that we don't think we'll get a return on. And so we're typically selling those at cap rates appropriate for the properties that are at the bottom of our portfolio. And it typically is short-term dilutive, depending on what we use the money for, I guess, if we put in bridge loans or value adds, it's not. So it -- we wouldn't accelerate that as a source of capital. Stock repurchase as a use of capital is not something we're allergic to at all. We bought about $140 million worth of our shares in the fourth quarter at a little bit below $130. We continued that into the very early part of January and bought this quarter, $1 million or $1.5 million, something like that, of stock. The stock price then got volatile. It went up. We stopped buying and it went back down to the level we were buying at. But at that period, we felt we had material nonpublic information. So we didn't feel it was appropriate or fair to buy stock in the market while we possess such information. So we didn't continue that program. But that's not to say in the future, if that's -- if the stock reaches a point that we feel it's an attractive and good use of capital, we absolutely will use that tool. Eric Luebchow: Okay. Great. And just a quick question on L.A. I think you were targeting a 40 basis point headwind from the rent restrictions. Just wanted to confirm that's still what you're expecting that's in line with your initial guide? And when that restriction is ultimately lifted, I think how quickly do you think you can get rates back to market? Joseph Margolis: Yes, we do expect a 40 basis point headwind assuming that the state of emergency is in play for the entire year. When this -- unfortunately, since COVID, we've had lots of experience with states of emergency and them getting lifted and what the appropriate strategy is after that. And when that happens, we'll get the right people around a table and look at the facts and situation as it is then and make a decision on what the appropriate strategy is. Operator: Your next question comes from the line of Michael Mueller with JPMorgan. Michael Mueller: Just one question here. There's been a lot of volatility over the past 5 to 7 years. So I'm curious, what do you think is a normal level of same-store revenue growth in a normal environment? Jeff Norman: Yes, it's a great question, Mike. It certainly has been an unusual handful of years with the highest of highs, and then some periods that were relatively flat same-store revenue growth. If you look long term, it would be in the 4s range. That includes a few periods post the financial crisis where development was very suppressed for a long time and we were taking a lot of rate and occupancy in times. So maybe that's a little higher than the sustainable long-term average, but we certainly would target it being something above inflationary over time. And it's been relatively steady throughout that 20-plus year look as we've been a publicly traded company. Outside of the COVID years, there's not been a huge amount of volatility. Operator: Your next question comes from the line of Eric Wolfe with Citi. Eric Wolfe: Thanks for taking the follow-up, and sorry if I missed it. But on L.A., I know you said a moment ago that you still expect a 40 bps dilution, if you will. But I guess if you look at the fourth quarter, you're like negative 1-ish, now you're positive 1. I guess, what caused the sort of jump between the fourth quarter and the first quarter? And I guess, given your comments, like, I guess you would expect it to come back down for the rest of the year, like what would cause that? Joseph Margolis: So the 40 basis points is a reference to the state of emergency in L.A. County. And our reported results have to do with the L.A. MSA. We have 122 stores in L.A. MSA, and 73 of those are in L.A. County. So our performance is driven largely by the stores outside of L.A. County, where we're restricted with what we can do with rates. Jeff Norman: And that kind of speaks to the acceleration that you're mentioning, Eric, being driven by those non-L.A. County properties. One observation that maybe is interesting is while we haven't seen rate growth at the same level in those L.A. County stores given the restrictions, we have seen occupancy build in L.A. County. It's approximately 96% already, and we haven't even started the leasing season. So I think it shows the impact of those artificially suppressed market rates, which has also reduced churn in those properties since they're priced well below market. So that headwind from the L.A. County properties will continue and increase throughout the year and the longer this remains in place. But fortunately, the properties throughout the rest of the MSA, as Joe mentioned, are performing really well and ahead of expectations, frankly. Operator: We have reached the end of the Q&A session. I will now turn the call back to Joe Margolis, CEO, for closing remarks. Joseph Margolis: Great. Thank you. Thank you, everyone, for your time and your interest in Extra Space. Great questions, good conversation. As we said, we're very encouraged as the first 4 months of this year, we're running at a schedule, and the systems are working, and we're optimizing our performance. So we look forward to speaking with you after the second quarter. Thank you very much. Operator: That concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to RJET Q1 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Keely Mitchell. Please go ahead. Keely Mitchell: Thank you, Cara, and thank you, everyone, for joining our earnings call. On with me today are David Grizzle, Chairman and Chief Executive Officer; Matt Koscal, President and Chief Commercial Officer; and Joe Allman, Senior Vice President and Chief Financial Officer. In the Investor Relations section of our website, you will find the earnings press release and slide presentation to accompany today's discussion. This call is being recorded and will be available for replay on our Investor Relations website. Today's discussion will include forward-looking statements regarding Republic Airways future performance, strategic initiatives, and market outlook. These statements reflect our current expectations and beliefs based on information available to us today, but they are subject to various risks and uncertainties that could cause actual results to differ materially from our projections. The aviation industry operates in a dynamic environment with inherent risks, including regulatory changes, economic fluctuations, weather-related disruptions, and evolving market conditions that can significantly impact our operations and financial performance. Additionally, our business is subject to the operational and financial health of our major airline partners, labor market conditions, aircraft availability, and other factors beyond Republic's direct control. For a comprehensive understanding of the specific risks and uncertainties that may affect our business and financial results, I encourage all participants to review the detailed disclosures in our filings with the Securities and Exchange Commission, including our Form 10-K on file with the SEC. These documents provide important context and detailed information that supplement today's discussion and are or will be available on both the SEC's website and in the Investor Relations section of Republic's website at rjet.com. Throughout this webcast, we will also present and discuss non-GAAP financial measures. Reconciliations of our non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures, to the extent available and without unreasonable effort, appear in today's earnings press release and accompanying presentation, which are available on our Investor Relations website. And now I will turn the call over to David. David Grizzle: Thank you, Keely, and good evening. Before we get into our prepared remarks, I'd like to update everyone on the anticipated leadership changes. The Board promoted Matt to the position of CEO effective June 15. Additionally, effective at the same time, the Board promoted both Joe Allman, our CFO; and Paul Kinstedt, our Chief Operating Officer, to the position of Executive Vice President, and I will continue in my role as Chairman. This completes our succession plan for Republic following its merger with Mesa and return to the public markets. We are blessed to have such a seasoned leadership team. I've had a chance to work very closely with these talented executives during the last year. I have tremendous respect for them and Republic is well positioned for the future. Our people and our culture are the backbone of our success, and we have an outstanding team. The first quarter of 2026 marked a couple of significant milestones for our company. First, this is our first fiscal quarterly reporting period following the merger with Mesa last November. And as a reminder, our quarterly results from Q1 2025 do not include any Mesa results. We reported Q1 2026 adjusted net income per diluted share of $0.73. Revenues were $527 million, and adjusted pretax income was $47 million, or an 8.9% pretax margin. These strong financial results demonstrate the resiliency of our business model to weather the storm. The first quarter is generally our lowest quarter of block hour production due to seasonality. This year, our operations were impacted by severe winter weather in January and February. Winter Storms Fern and Hernando had a direct impact on our operations in the Northeast and Mid-Atlantic regions. As an example, during 1 day of Fern, we were unable to operate 87% of the airline because of weather, which in turn created large crew positioning disruptions. I want to thank our frontline crew members and operations center associates that worked tirelessly through these multi-day disruptions and still delivered an exceptional product to all of our passengers and partners. While our full-up completion factor was 3 points lower, or 94%, versus the prior year Q1 result of 97%, our controllable completion rate remained exceptional, and we were still able to achieve 80 days, a perfect -- that is to say, 100% controllable completion factor performance in the quarter. I am continually impressed by the professionalism and dedication of our team as they serve our partners and passengers. The second significant milestone is the conclusion of our fleet transition efforts at United. We took delivery of the last 3 new E175 aircraft to conclude our fleet transition by swapping 38 new E175s for the 38 E170s at United. We started this fleet transition program back in November 2022, and we now have all of the new aircraft in position and in service with United. 31 of the 38 E170s removed from service have been redeployed to another partner, either in revenue service or under long-term leases. The last 7 E170s removed from United are currently unallocated, meaning not assigned to any of our partners, and will be used for ad hoc charters and other support. As a reminder, substantially all our revenues are generated from capacity purchase agreements with our 3 airline partners, American, Delta, and United. Our business model also protects us from fuel price increases as our partners are responsible for fuel, ground handling, and managing the passenger ticket pricing and demand management. We are responsible for providing safe, reliable, and cost-efficient operations. Now I'd like to turn the call over to Matt to provide an update on our strategic focus and the ongoing integration efforts related to the merger. Matt? Matthew Koscal: Thank you, David, and good evening, everyone. I want to begin by expressing how deeply humbled and grateful I am for the opportunity to lead our more than 8,400 dedicated Republic associates. It is a tremendous privilege to serve alongside such an exceptional team that shares a steadfast commitment to our culture of excellence, a culture that has defined who we are and enabled our continued success. As we look ahead to our next chapter of growth, I am fully committed to building upon this strong foundation and further strengthening it together. I would also like to sincerely thank our Board of Directors and David for their trust and confidence in me and our executive leadership team as we carry Republic forward. Turning our direction to the demand environment. Despite the uncertainty that persists in the broader market and its effects on oil prices and ultimately jet fuel costs, the demand signals from our partners are cautiously optimistic and focused on smart capacity deployments. As such, the demand for large multi-class regional aircraft remains strong, particularly in the high-value hubs we service, and we don't expect that to change. Historically, our aircraft have actually seen increases in utilization even during uncertain economic conditions. Our aircraft provide our partners the flexibility to deploy a lower seat density aircraft to right-size or match expected passenger demand and still capture business, premium, and basic economy fares. Earlier this month, an FAA order capped daily flights at Chicago O'Hare at 2,700 beginning in June. This presented another example of our agility and how we work closely with our partners. While we expect to see some adjustments to our O'Hare schedule in June, we don't expect any material long-term impacts to our flying, as many of those hours will be redeployed in other areas of our partners' networks. We remain in constant communication with our partners to ensure we are ready to shift flying where they desire and protect the expected block hour production and schedules. Before I move to discuss the status of the integration, I think it's important to acknowledge that while the Northeast bore the brunt of winter weather this year, it was helpful for us to have some new geographic diversity in our network. The addition of Houston to our network as a result of the Mesa merger helped offset some of the lost flying days we had in the Northeast, and we look forward to expanding positively on this trend as we increase utilization at Mesa over the next couple of years. Now let me turn my attention to our integration efforts. We've made substantial progress during the quarter on integration. We remain focused on executing our 4 clear workstreams: consolidation of the back-office functions, IT systems integration, fleet harmonization, and regulatory operating certificate harmonization. Regarding the first 2 workstreams -- consolidation of corporate functions and the integration of our IT systems -- we have made great progress on both fronts in the quarter. We are slightly ahead of plan on the back-office integration, and we expect that work to be substantially complete by Q4 of this year. On the IT front, we continue to make investments across legacy Mesa to further enhance both hardware and software capabilities, and we believe these investments are already providing tangible benefits across the airline. This workstream is a multiyear process that doesn't fully wrap up until we complete the operating certificate harmonization process in 2028. Lastly, we were pleased to receive approval from the FAA to recognize our Carmel training campus as an approved Mesa training facility. This puts us 1 step closer to being able to train all of our crews at our state-of-the-art training campus in Carmel, Indiana. On the fleet side, we are in the early stages of moving the Mesa fleet onto our standard maintenance cycle with full harmonization of our E175 programs. Completion of this process will allow us to drive maximum utilization, compliance consistency, and improved maintenance and inventory management across the combined fleet. In Q1, we achieved our first milestone on reduced heavy maintenance turnaround times, which is an early example of how legacy Republic can leverage planning and supply chain resources to unlock future value across the Mesa operation. This early improvement gives us increased confidence that we will achieve our target of completing the fleet harmonization work in late 2027. The fourth workstream, the process of bringing 2 operations into a single harmonized airline with the FAA, coupled with associated technology and systems alignment, is expected to continue into 2028. The process will involve the filing and approval by the FAA of 5 revision cycles. The first revision cycle addresses the alignment of our safety systems and processes, and we anticipate submission of this in early May. The overall goal of the harmonization process is to create a unified airline from an FAA perspective, with aligned manuals, maintenance programs, training, and operational oversight. Lastly, let me speak to our progress with our labor unions. In December, we reached a joint collective bargaining agreement or JCBA, with the 2 flight attendant labor unions, and the teams have spent considerable time on preparing for implementation of the JCBA throughout the first quarter. I want to acknowledge all the work and support that both the IBT and AFA provided to deliver an agreement. We appreciate the focus and energy those teams demonstrated in achieving the joint collective bargaining agreement. With respect to the pilots of IBT at Republic and ELPA at Mesa, we continue to have productive dialog and negotiations. I would like to thank everyone for their continued hard work in this area, and we look forward to providing you updates on our progress in the future. On the staffing side of the house, we entered this year with slightly elevated staffing levels to ensure that we could deliver an excellent operation to our partners while we work through Mesa's integration. We are well positioned to meet the needs of our partners, both now and in the future, and we are reaffirming our block hour guidance that we will produce more than 865,000 block hours this year. 2026 continues to be a transformational year. Our investments in training infrastructure, technology, and our future aircraft delivery positions with Embraer put us in a position to serve our partners' needs well into the future. To recap, we are on track with our integration targets and remain focused on continuing to deliver an exceptional operation for all of our partners. Once the aircraft maintenance harmonization process concludes, we expect to see an improvement in aircraft availability for schedule as heavy maintenance normalizes. We remain committed to successful execution of these initiatives and look forward to sharing updates with you as we progress throughout the year. We believe the end state will support greater operational efficiency, which will drive stronger margins and shareholder returns. Now I'd like to turn the call over to Joe to walk us through Q1 financial results. Joe? Joe Allman: Thanks, Matt, and good evening, everyone. Total revenue for the quarter was up 34% to $527.4 million due to a 30% increase in block hour production. This was our first full quarter of Mesa's operations. We incurred $9.5 million of merger and integration related costs during the quarter. These are the costs associated with the integration and harmonization efforts that Matt just covered. We will continue to separately report these costs, and as the integration and harmonization activities begin to subside, we also expect the associated costs to subside. Our adjusted pretax income was $47.1 million, up 15% over Q1 2025. And adjusted EBITDAR for the quarter was $100.1 million, up 14% over the prior year period. The improved Q1 2026 financial performance is attributable to the growth in operations from the Mesa transaction, as well as the growth of Republic's fleet following the fleet transition David highlighted earlier. Focusing on cash flows and our balance sheet, we generated $58 million in cash from operations this quarter. Our cash outlay from investments in aircraft, property and equipment, including predelivery deposits, increased to $95 million, driven by the acquisition of the 3 E175 aircraft. We received proceeds from new debt of $64 million and made scheduled principal repayments of $49 million during the quarter. Our adjusted net leverage was flat from year-end 2025 at 2.7x. We expect our net leverage to continue to improve over the balance of 2026 as we remain focused on our initiatives to reduce net leverage below 2.2x by year-end 2026 and with a longer-term target of below 1.5x. We believe it is prudent to continue to strengthen our balance sheet and reduce debt as this will best position our airline for the future. We recently reached an agreement with Embraer to reschedule our aircraft delivery positions. Originally, our next delivery was expected in February of 2027. With the adjustments from Embraer, we now expect our first delivery in April of 2028. This revised delivery skyline timing allows us the opportunity to match deliveries to expected demand from our airline partners. We appreciate the longstanding partnership and relationship with the team at Embraer. Turning our focus to guidance. We issued full year 2026 guidance 8 weeks ago on March 4. At that time, the conflict in the Middle East was 3 or 4 days old. Since that time, we have seen an escalation of hostility and more volatility and uncertainty. Meanwhile, our discussions with our airline partners have been very positive and indicate a strong demand for our products. Therefore, we are reaffirming the guidance we previously issued. We expect revenues in excess of $2 billion and adjusted EBITDAR in excess of $380 million on block hour production of at least 865,000 hours. Capex is anticipated to be $170 million, which is mainly driven by aircraft and engine CapEx, the completion of our campus and training center construction projects, and other general maintenance CapEx. We expect to repay $165 million of principal and receive proceeds of new debt of approximately $75 million. Despite the uncertainties that exist in the broader market, we remain confident in our ability to achieve these targets. Lastly, we are focused on ensuring an efficient integration and harmonization of the Mesa operation and continuing to deliver on our brand promise of industry-leading operational performance and outstanding customer service to our airline partners and their passengers we carry. We are well positioned for the future, and now I'll turn the call over to David. David Grizzle: Thank you, Joe. I'm very proud of the whole Republic team as they've been able to maintain our impeccable operating performance and deliver strong financial performance despite the challenges that come with winter weather. In addition to improving weather, which will allow us to fulfill our flight segments as scheduled, the demand signals from our partners for the remainder of the year remain quite strong. We believe that the headwinds faced this quarter will continue to subside and the company will be in a position to achieve positive momentum and significant growth throughout the rest of 2026. We appreciate the support of our associates, our partners, and our shareholders, and we look forward to continuing to deliver our commitments and promises to all our stakeholders. Thank you again for joining us today and for your interest in Republic. Cara, we are ready to open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Savi Syth with Raymond James. Savanthi Syth: I know it wasn't controllable factors, but I was curious with these severe weather impacts that you've had this quarter. Was there a notable impact on earnings that maybe is not normal that we should consider as we think about the earnings power here? Matthew Koscal: Savi, it's Matt. Thanks for the question. Thanks for joining the call. You're spot on. The impact was significant over what we saw last year, about 3 -- a little over 3 full points. That's not typical for us in a quarter. We didn't break out the impact. But in a more typical seasonal environment, we would expect the business to perform more robustly. Savanthi Syth: Understood. And maybe on the -- United has shown some creative thinking with the CRJ-550 a few years back and now the CRJ-450. Just wondering if there's an opportunity to do something like that with the E170s or even the E145s that you've operated in the past. Matthew Koscal: Great question. So as you look at it, I think we have a history of being a solution provider for our partners, right? And that has evolved throughout the years. We are positioned incredibly well. We're sitting here today with a strong plan for 2026 going into 2027. It's fully focused on a successful and flawless Mesa integration. Today, as you heard on our prepared remarks, the team is just performing exceptionally well in that regard. We're ahead of schedule on each of our workstreams, and we could not be more proud of their efforts there. As we continue to deliver on that and we strengthen our balance sheet, we believe that positions us incredibly well to continue to have flexibility to respond to our partners' needs, and we'll continue to have those conversations with them and be ready to respond to their needs as they evolve. Operator: Your next question comes from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just wondering longer term, I appreciate the commentary on the deferrals, but how are you thinking about putting the order book to work? And would you think about those in terms of growth? Or do you expect them to be primarily for fleet replacement by your customers? Matthew Koscal: Duane, thanks for the question. And if you look at our past deployment, I think it's been a combination of both, right? We've found opportunities to deploy certain aircraft in a purely growth positioning. And then we've also found ways to do fleet replacements and then redeployment of other aircraft to other partners, just as we've done in this completion of the E175 order at United. The beauty of the order book that we've had as we've had it for several years now is we've got ultimate flexibility. We've got a great relationship with Embraer, and we continue to be in dialog with our partners to find the best deployment of those assets as opposed to just a deployment in the original order slots. And that's what we think that this deferral allows us to do, is it allows us to find that ultimate best solution with our codeshare partners on a future deployment for them. Duane Pfennigwerth: And then just for my follow-up, the presentation is very clear with the expected debt paydown over the balance of the year. But I wonder, as you look out longer term, do you see opportunities to refinance a portion of that debt as well, now that you have probably a different and improved credit profile? Joe Allman: Duane, this is Joe speaking. It's a great question. Look, our focus right now is on just continuing to strengthen the balance sheet. We have a lot of unencumbered assets, though, as you referenced -- as we referenced in the presentation. 70% of the fleet today is free of financing. Now some of those aircraft come from our partners, but we have a number of E175s and E170s that are debt-free at this stage. So we believe that flexibility as we move forward will put us in the best position to find unique and strategic ways to work with our airline partners and find the solutions that Matt referenced in his response just a second ago. Operator: Your next call comes from the line of Michael Linenberg with Deutsche Bank. Michael Linenberg: Congrats, Matt, on your promotion. Question here just on the guidance for the year. When you look at what you have for block hours and what you have for EBITDAR, I mean, it looks like despite all the intensity and complexity of the March quarter with the weather, it looks like that you're actually running well ahead of plan. And so the question is, are you ahead of plan? Do you feel like you're ahead of track? Are there things that we need to consider in this year where maybe you take a temporary hit to block hours or maybe there's some seasonality piece, even though I know historically you don't see as much seasonality with the regional carriers? Something for us that maybe I'm not looking at because it does seem like you're well ahead given what was a challenging quarter for everybody. Matthew Koscal: Michael, this is Matt. Thank you very much. Appreciate the congratulations. And it is a great observation, a great question. And look, in any other environment that we're sitting here talking to you today after the quarter that we put together and what we're seeing in our block hour demand going into Q2, Q3, we would be taking up our guidance. Considering the macro uncertainty today, we just think it's prudent to get a little bit further into the year and see how things develop and go from there. But we had an incredibly strong quarter, you're right, a lot of challenges, and we'll provide you updates as we get further into the year. Michael Linenberg: And then just my second question, as we think about the improvement in your leverage, it does look like that the CapEx should come down because of the deferrals or the next airplane coming in the spring of 2028. I realize you're still on the hook for predelivery deposits. How can we think about CapEx, though, as it trends where we are today over the next, I don't know, 3 to 4 quarters? It does seem like it's going to slope down, and maybe it actually hits a bottom sometime in early '27 before starting to pick back up again. Joe Allman: Thanks, Mike. This is Joe speaking. You're correct. We should see CapEx subside as we move throughout the year. The first quarter was our heaviest quarter, predominantly related to the aircraft deliveries. We'll come up on the conclusion of the construction in our Carmel training campus. And just general maintenance CapEx -- and I should say the CapEx associated with the investment that we're making at Mesa. And those opportunities will come and continue to present themselves as we progress throughout the year. But you're right, it's a downward slope from the first quarter. Operator: Your next question comes from the line of Savi Syth with Raymond James. Savanthi Syth: I was curious, I think a couple of months ago, when you talked, you were expecting normal levels of attrition versus an abnormal year last year. And I was wondering what you've seen, especially as some of the mainline airlines are cutting capacity here. And just related to that, just what your plan is for the LIFT Academy in terms of how much of your needs that pipeline will deliver? Matthew Koscal: Savi, thanks. This is Matt. I'll answer the second part first. LIFT Academy is positioned to satisfy about 20%, 25% of our hiring needs in a normal hiring year. So nothing changes in the throughput that we're planning to put through LIFT this year. It's been a great program, and the candidates that come through that perform exceptionally well and are incredibly loyal to the airline and their career path. As we look at the attrition trends, very much a status quo to the update we provided to you just a few weeks ago. Attrition remained through the quarter at normalized trends, going back to a pre-COVID standard, healthy level of attrition, going to the [ career ] carriers that we would like to see, healthy captains attriting on to our codeshare partners and the like. We would expect to see, and we're seeing just a little bit of the beginning of a slowdown in the attrition, just a seasonal slowdown as we go into the summer months. So right on plan. Our attrition curve and our hiring curve have been right on plan for us. Operator: We've reached the end of the Q&A session. I will now turn the call back to David Grizzle, Chairman and Chief Executive Officer, for closing remarks. David Grizzle: Thank you, Cara. Thank you all for joining us this afternoon. As you've heard, we are very pleased with how our people are working to execute our plan and achieving results of which we are very proud. We are grateful to all of you for your continuing support. Have a great evening. Thank you very much. Operator: That concludes today's call. Thank you, everyone, for attending. You may now disconnect.
Operator: Good afternoon. My name is Kevin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Holdings First Quarter 2026 Financial Results Conference Call. [Operator Instructions] I will now hand the conference over to Josh Yankovich, Investor Relations. Sir, please begin. Josh Yankovich: Thank you, operator. Good afternoon, everyone, and thank you for joining us today. With me on the call are Matt Flake, our CEO; and Jonathan Price, our CFO. This call contains forward-looking statements that are subject to significant risks and uncertainties, including, among other things, with respect to our expectations for the future operating and financial performance of Q2 Holdings and for the financial services industry. Actual results may differ materially from those contemplated by these forward-looking statements, and we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct. Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in our periodic reports filed with the SEC, copies of which may be found on the Investor Relations section of our website, including our quarterly report on Form 10-Q for the first quarter of 2026 and the press release distributed this afternoon and filed in our Form 8-K with the SEC regarding the financial results we will discuss today. Forward-looking statements that we make on this call are based on assumptions only as of the date discussed. Investors should not assume that these statements will remain operative at a later time, and we undertake no obligation to update any such forward-looking statements discussed in this call. Also, unless otherwise stated, all financial measures discussed on this call other than revenue will be on a non-GAAP basis. A discussion of why we use non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most comparable GAAP measures is included in our press release, which is available on the Investor Relations section of our website and in our Form 8-K filed today with the SEC. We have also published additional materials related to today's results on our Investor Relations website. Let me now turn the call over to Matt. Matthew Flake: Thanks, Josh, and good afternoon, everyone. Thank you for joining us today. I'll start by sharing our first quarter results and highlights from across the business. I'll then hand the call over to Jonathan to discuss our financial results in more detail and provide our outlook for the remainder of the year. Starting with the quarter. We delivered a strong start to 2026 with financial performance that reflects continued execution across our key priorities. In the first quarter, we generated revenue of $216.5 million, representing 14% year-over-year growth. We also delivered adjusted EBITDA of $60 million or 27.7% of revenue and generated free cash flow of $44.2 million. Overall, we're pleased with our performance to start the year, including continued strength in our subscription model, ongoing demand for the mission-critical solutions we deliver to our customers and meaningful progress in our AI journey, which I will provide more detail on momentarily. Starting with sales. We had a strong quarter of bookings activity to start the year, building on the momentum we carried out of 2025 with a record bookings performance for our first quarter. Our performance was highlighted by 9 total Tier 1 and enterprise wins across the portfolio. And as we've seen in recent quarters, our bookings execution continued to be characterized by a balanced mix of net new and expansion activity as well. We saw particularly strong performance in both our Digital Banking and our Risk and Fraud solutions. I want to highlight a few deals from the quarter that exemplify some of the themes that have defined our recent sales performance. First, we closed a significant digital banking expansion driven by an M&A transaction involving existing digital banking customer, Synovus, who merged with Pinnacle Financial Partners. Following the merger, the combined institution selected Q2 as the go-forward platform for commercial digital banking and commercial fraud management solutions. We continue to view bank sector M&A as an opportunity for our business and an area where our platform strategy differentiates us. In scenarios like these, customers are making long-term strategic decisions, and we're proud to be selected as a platform of choice in a highly competitive and complex environment. Second, we also signed the largest fraud deal in our company's history in the quarter. This was a win with a new enterprise customer and represents another example of the growing scale and importance of fraud solutions within our portfolio. As we've discussed in recent quarters, the cost and complexity of fraud continues to increase across financial institutions. What we're seeing now is that fraud is no longer episodic or confined to a single channel. It's becoming a continuous enterprise-wide challenge and one that is driving increasing levels of investment from our customers. This deal is particularly notable because of its size, and it marks another quarter where we've delivered a fraud booking of magnitude, reinforcing both the strength of our solutions and the urgency of this problem for our customers. So from a sales perspective, we were very pleased with the breadth and quality of our bookings performance in the quarter. We're seeing continued demand across our platform, strong engagement from both new and existing customers and increasing alignment between our product portfolio and the strategic priorities of financial institutions. Of note, we're also seeing the term length of expansion deals increase compared to historical averages, which we view as a signal of our customers' long-term commitment to us as the partner of choice as they navigate their AI and digital transformations. On AI, we announced 2 product sets in recent weeks, and I want to update you on our strategy and where we're executing. As we've discussed on prior calls, there are 3 key differentiators we see for Q2 in the current wave of AI innovation, data, distribution and incumbency and trust. As AI lowers the cost of generating insights and writing code, we believe the value shifts towards platforms that can apply those insights in a trusted, compliant and operationally sound way. That's where we believe the platform we've been building gives us a real advantage. First, on data. Last quarter, I described Q2 as the system of context for our customers. While the core processor is the transactional system of record, Q2 sits in the flow of every digital interaction, seeing every log-in, transaction, alert, message and user decision. That gives us the context of behavior, not just ledger entries. We see log-in patterns, navigation paths, hesitations, retries and the full path a commercial payment takes from initiation through approval to execution. We believe that's the kind of banking-specific context AI needs to be useful, and it's a meaningful differentiator for us. Second, on distribution. We have an established customer and partner network ready to consume AI as we deliver it. That network took more than 2 decades to build and operate at scale, and it matters because AI is only valuable as the places it can actually be deployed. Lastly, on incumbency and trust, our customers are coming to us for direction on AI because of the trust we've built with them over many years. And because AI and banking has to be highly secure and compliant from day 1, we have the infrastructure, the technical know-how and the long-term customer relationships needed to deliver bank-grade AI at scale. Our customers are eager to adopt AI, but we have also seen an increase in customer conversations around the importance of managing data, privacy and access. Customers are turning to Q2 to help them work through this transition. And we believe that choice is continuing to show up in our bookings results as they make long-term strategic commitments to Q2 as their AI and digital transformation partner. Importantly, we are already converting those strategic advantages into tangible outcomes and innovation for our customers. Our near-term product focus is in 3 areas: improving efficiency for bankers, strengthening fraud detection and prevention, and driving deeper personalization for account holders. We announced 2 new products in those areas over the last few weeks. The first is Q2 Code, our AI-assisted development capability, which improves efficiency. It embeds AI directly into the development experience, allowing customers and partners to build on our platform using natural language while leveraging the full power of our SDK. The second is a new set of AI-driven fraud capabilities focused on account takeover. We're using AI to continuously monitor user activity, identify signs of compromise and intervene in real time. That shifts fraud management from after-the-fact detection to real-time prevention inside the platform where the transaction is happening. Looking ahead, AI is moving toward more agentic models where systems take action on behalf of users. In financial services, that will require trust, transparency and control. The platforms that win will combine context, execution and compliance. We believe that Q2 is uniquely positioned to be one of them and that we can capitalize on the value this creates for our customers. When you combine the progress we're making on our AI journey with our continued sales momentum, we're pleased with our start to the year. We believe that our sustained bookings performance, particularly coming off a strong second half of 2025, suggests that the demand environment remains healthy. And even with the continued sales execution, our pipeline is strong, giving us confidence in our ability to continue executing in 2026. With that, I'll hand the call over to Jonathan to walk through our financial results in more detail and provide our outlook for the remainder of the year. Jonathan Price: Thanks, Matt. We're pleased to announce first quarter revenue in line with the high end of our guidance and adjusted EBITDA meaningfully above. We also delivered record results across revenue, gross margin and adjusted EBITDA. The strategic investments we've made over the past several years helped to drive our best ever first quarter bookings performance and reinforces our confidence in the durability of this model. With that, let me start by discussing our financial results in more detail, and I'll finish with our updated second quarter and full year 2026 guidance. Total revenue for the first quarter was $216.5 million, an increase of 14% year-over-year and 4% sequentially. Our revenue growth was driven by subscription-based revenues, which grew 17% year-over-year and 5% sequentially, resulting largely from the delivery of new customer go-lives and expansion with existing customers. Subscription revenue as a percentage of total revenue continued to increase, ending the quarter at 83%, highlighting the ongoing shift in our revenue mix towards this higher-margin revenue stream. Total non-subscription revenues increased by 3% year-over-year, driven by a 12% increase in services and other revenue, which benefited from higher professional services revenues, primarily related to core conversions as well as an easier comparison versus the prior year. These increases helped offset ongoing declines in more discretionary professional services offerings, which remain under pressure. Total annualized recurring revenue or total ARR grew to $945 million, up 12% year-over-year from $847 million at the end of the first quarter of 2025. Our subscription ARR grew to $802 million, up 14% from $702 million in the prior year period. Our year-over-year subscription ARR growth was largely driven by bookings from new customer wins as well as expansion with existing customers. Our total ARR growth remains below subscription ARR growth, driven by the trends we previously discussed related to nonsubscription-based revenue. Our ending backlog of $2.7 billion increased by $46 million sequentially or 2% and $444 million year-over-year, representing 19% growth. The year-over-year and sequential increases were supported by booking success across new, expansion and renewal activity. As we have mentioned previously, the sequential change in backlog may fluctuate quarter-to-quarter based on the renewal opportunities available within that quarter. Gross margin was 62.1% for the first quarter, up meaningfully from 57.9% in the prior year period and 58.6% in the previous quarter. Both the year-over-year and sequential increase in gross margin were primarily driven by the completion of our cloud migration in January as well as an increasing mix of higher-margin subscription-based revenue. Total operating expenses for the first quarter was $81.7 million or 37.7% of revenue compared to $77.2 million or 40.7% of revenue in the first quarter of 2025 and $78.9 million or 37.9% of revenue in the previous quarter. The year-over-year improvement in operating expenses as a percent of revenue reflects scaling primarily within sales and marketing and G&A. Total adjusted EBITDA was a record $60 million in the first quarter, up 47% from $40.7 million in the prior year period and up 17% from $51.2 million in the previous quarter. Adjusted EBITDA margin was 27.7%, expanding approximately 630 basis points from 21.5% in the prior year quarter and up approximately 310 basis points from 24.6% compared to the fourth quarter. The year-over-year and sequential improvement was driven by a combination of the completion of our cloud migration and revenue growth. We ended the quarter with cash, cash equivalents and investments of $379 million, down from $433 million at the end of the previous quarter, driven by the repurchase of $97 million of our stock in the open market in the quarter, for a total of $102 million repurchased to date against our $150 million authorization announced in November of 2025. We generated cash flow from operations of $56 million in the first quarter, driven by timing of annual invoicing, collections and overall profitability and delivered $44 million of free cash flow. Let me finish by sharing our second quarter and full year 2026 guidance. We forecast second quarter revenue in the range of $214 million to $218 million and full year 2026 revenue in the range of $875 million to $882 million, representing year-over-year growth of approximately 10% to 11%. We continue to expect subscription revenue growth of at least 14% for full year 2026. We forecast second quarter adjusted EBITDA in the range of $57.5 million to $60.5 million and full year 2026 adjusted EBITDA in the range of $237 million to $242 million, representing approximately 27% of revenue. In summary, we delivered strong results to start the year, finishing at the high end of our revenue guidance while also driving significant profitability expansion above our guidance. This performance, coupled with our outlook for the remainder of the year has given us the confidence to raise our full year guidance on both revenue and adjusted EBITDA for 2026. We intend to continue to execute on our profitable growth strategy by balancing investments to sustain durable subscription revenue growth and drive operating leverage over time while prioritizing effective capital allocation. With that, I'll turn the call back over to Matt for his closing remarks. Matthew Flake: Thanks, Jonathan. I'll close by stepping back and putting the quarter into perspective. We're pleased with our performance in the first quarter, which reflects a strong start to the year across both financial results and bookings execution. We're seeing continued demand across our major product areas, including Digital Banking and Risk and Fraud, and that demand is showing up in both new customers wins and meaningful expansion with our existing base. As we highlighted earlier, expansion continues to be a defining characteristic of our business, and our customers are increasingly choosing to deepen their partnerships with Q2 as they look to address some of their most important priorities. One of those priorities is AI, where we are continuing to execute against the strategy we outlined last quarter, embedding new capabilities like Q2 Code and our latest fraud innovations directly into the platform to deliver real measurable value for customers. As we look ahead, we do so with a strong pipeline, a durable business model and a clear strategy for continued execution. We remain confident in the demand environment and in our ability to deliver profitable growth while continuing to invest in the areas that matter most for our customers and our long-term success. With that, operator, let's open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Andrew Schmidt with KeyBanc Capital Markets. Andrew Schmidt: Matt, Jonathan, Josh, great results here. It's good to see the top and bottom line execution. I wanted to ask a question just on the demand you're seeing. And I hear you on the strong pipeline bookings execution. But if we drill down a little bit and we look at the funnel, it just seems like we're hearing a lot more urgency out there in terms of tech investment, especially on the commercial side. And then also it seems like part of that is obviously AI driving it. Are you seeing more opportunities in the funnel as a result of that? I'm just curious if you think about mid- and upper funnel, if the velocity or the volume has changed there? Matthew Flake: Yes, Andrew, thanks. We are seeing -- we saw the top of the funnel increase quite significantly in the first quarter and the sense of urgency. I wouldn't characterize it as AI at this point, although we're having a lot of those conversations. I would characterize it as our banks are doing really well. Their stocks are doing well, and they're wanting to invest in technology to go get the -- have the technology to be able to go pick up the businesses and consumers in their communities that they work in. And as I talked to a customer the other day, it's going live in a month, he just -- he said to me, I can't tell you how excited I am to get this product up and running so I can go take some of these bigger customers in our geographies because I'll have the tech to go do it. And I think that's really proud when I hear that, but that's really what the opportunity for them is right now is to go pick up these commercial accounts with this platform and all the feature functionality we have around the commercial functionality as well as the retail piece when they get off those old legacy systems. So it's -- the demand environment, if you look at Q3, Q4 and Q1, it's it certainly is strong. And if I look at the second quarter and the back half, it looks good as well. So top of the funnel looks good and the opportunities look good for us, and we're doing really well out there. Andrew Schmidt: That's awesome, Matt. That's great to hear. If I could ask a question just on AI and clearly, good job rolling out the AI products. But if we think about the pipeline of products, what things can we think about? There's obviously Agentic orchestration, there's MCP, threat access. I'm just curious, do you think you have everything in the portfolio you need to kind of serve future demand in that respect? You need to sort of emphasize different areas that might be below the watermark? Matthew Flake: Yes. I think it's so early. We have a long ways to go, and we spent a lot of time with customers and prospects talking about AI and how they think about it. The one thing that in this industry, I think it's important to understand is the diligence around regulatory compliance and security is a significant lift. You got to go through all how you're using it, the security around it, entitlements, rights, all those things. And so right now, I would say most of the customers are looking for AI tools that can help them run the bank as opposed to change the bank. Our Q2 Assistant, Q2 Code are in those areas. And then also fraud is a big part of that. And that's obviously where our road map has played out. But personalization, cross-selling products, understanding customers and what their next needs are, are definitely part of the road map we're going to begin to attack. But we want to get these right, and we want to get them in their hands and we want to get them happy with it, and we want to distribute and then continue to build on it. But there's a lot of opportunity, and it's early, and we feel like we've got some first-mover advantages. Operator: And your next question comes from the line of Ella Smith with JPMorgan. Eleanor Smith: So first, many of your customers might be fraud tech customers, but not digital banking customers or vice versa. What are the benefits for customers if they use Q2 for both digital banking and fraud tech? And how well do customers understand those benefits? Matthew Flake: Yes. So it's a good question, Ella. The value of combining the platform when you're using our digital banking system and you couple it with our fraud products, some of those products were built natively on the platform and others, we've partnered with people and then we built them separately is the data that you get is -- you get the payments, who's logged in, how they logged in, who they pay, when they pay, the Fed districts they pay in. We get all of that information in a real-time way when you're using the platform as opposed to if you're using a separate digital banking system. We may not have that information, it may not be as clean. It may not be as formatted the way we like it. So there's a lot more work when you're using a different digital banking system than a different fraud system. And so the value of putting it together makes you a more secure bank. And so if you look at it, I think 30%, 35% of our digital banking customers use our fraud products. And even the 30% and 35% that are using the fraud products, there's additional products we can add to them. So there's a huge cross-sell opportunity there. And the stand-alone fraud product customers, we are actively using sales reps to go call them and talk to them about exactly the value that I just mentioned in why they should look at our digital banking platform. So it's -- there's a lot of synergies there, and we continue to leverage them in conversations and marketing. Eleanor Smith: Very clear, Matt. And for a follow-up, do you think in the coming years that digital banking implementation could happen faster either from technology development or your own efficiency? Or do you expect the implementation process to remain fairly long and intensive? Matthew Flake: Well, I've always said that it takes 9 months to make a baby and it takes 12 months to deliver digital banking. So I think that may not be a truth in a couple of years. But right now, what I think we're looking for is to make our teams more efficient to where maybe a delivery team can handle 3 projects at one time now where they can handle 4 or 5. The banks have a buying pattern and a project management approach, which usually revolves around a year before the contracts up, they begin going through an RFP process. They make a decision a year out from the go-live and then the project is kind of forced into that time frame so that they can get off of this other system and get on our system at the same time, so there's not duplicate paying in months. That's largely in the bottom of Tier 1 and Tier 2 and Tier 3. But I do think we will become more efficient. It will be -- hopefully, there will be less work involved in it, not only for us, but for the bank as we begin to use tools that make it easier for the bank to do these conversions. But speeding them up, I think it's going to take a little time for us to have proof points around going and finding prospects that say they want to do it fast and we do it and we do it safe and it's -- they're able to -- a lot of these people do a digital banking conversion, and they got to do their day job at the same time. So I wouldn't pencil in speeding up the delivery process in the next year or 2, but I do think you're going to begin to see more efficiencies out of us. Operator: And your next question comes from Terry Tillman with Truist. Terrell Tillman: Hi there Matt, Jonathan and Josh. Can you all hear me okay? Matthew Flake: Loud and clear, Terry. Terrell Tillman: Awesome. So first, really intriguing to hear about this enterprise bank, largest fraud deal ever. I'm curious if -- how that kind of stacks up with just a traditional maybe digital banking deal. And is this kind of more of the exception? Or are you going to see more potential enterprise banks going big with fraud? And then I had a follow-up. Jonathan Price: Yes, Terry, it's Jonathan. From a dollar perspective in terms of the ASP, this would be akin to a Tier 1 digital banking deal, if not bigger. It is a really sizable opportunity. And yes, there are more of those in the pipeline. And whether you're talking about the size of the institution or the size of the deal, both exist where we have deal opportunities that are this size, sometimes even with smaller institutions. But also, as you know, with the fraud product, we are targeting our entire customer opportunity, both down market and upmarket. So those are bigger deals. They have longer sales cycle, but we certainly see those opportunities out there. And wins like these, once they're live and become referenceable, just become arrows in the quiver for the sales team. Terrell Tillman: Sorry, I'm learning the technology here. I could use an agent maybe to help me. But Matt, you talked about efficiency, fraud and personalization customer engagement. To me, with all the contextual data you all have, all that digital exhaust, it does seem pretty substantial in terms of that personalization and customer engagement. I don't know how much of this would be through Innovation Studio partners versus organic. But when do you actually see that potential unlock? Again, I know this stuff with AI and agents is early, but it does seem like that's to change the business type opportunity. And what do you think of timing on that? Matthew Flake: That's a tricky question, Terry. I'd like to get a couple more quarters before I get ahead of myself on that, the timing perspective. I think what's important is to know that we're working on it. We're talking with customers about it. I just don't want to get ahead of myself. Hopefully, you can understand. Operator: And your next question comes from Matt VanVliet with Cantor. Matthew VanVliet: Curious on how much Innovation Studios, not only penetration within the existing customers, I think we've gotten to the point where basically everyone is using something. But are you finding deeper penetration, more use cases in there? And how much of that is influencing some of these larger deals for things like fraud, where you're just fully ingrained in their ecosystem and using their preferred platform is -- makes sense from both an effectiveness and a cost perspective for them? Jonathan Price: Yes. Matt, I mean it's a little bit of all of that. We're seeing, like you said, the financial institution customer base is largely adopted, but they're very early in their adoption cycle of how many products are they consuming and then how penetrated are they with those products within the customer base. Those latter 2 points is where we've seen a lot of progress just in the last 2, 3 quarters. And so we're seeing really good penetration of these products where we're seeing FIs get more than one product live sometimes when they're going through implementation or sometimes as a cross-sell, they're buying multiple products and taking them live. And then we have a lot of work and AI is helpful around the idea of end-user marketing and how we're actually pushing these products out to the customer base. So we're seeing it have an impact. And yes, you mentioned the fraud arena. That is one area where it is bolstering our value proposition around the fraud intelligence story. And the combination is sort of akin to what Matt talked about earlier. When you marry the data and the signals from our platform, our fraud products and the partner products, you get a better fraud outcome for the financial institution. And so that is really salable to the customer base. Matthew VanVliet: Helpful. And then as you look at the Helix business, it seems as though while the regulatory environment in the financial services has remained relatively unchanged, the ability to build products is certainly being curtailed in terms of timing. Are you seeing more interest in your digital core products? Are you seeing any sort of [indiscernible] buys or alternative institutions looking to build something that is more nimble and can support maybe alternative use cases going forward? Has that picked up at all? Jonathan Price: Yes. I mean where I think it's picked up is the use cases that revolve around the traditional FIs as opposed to the Helix business, which was largely built around the fintech and brands when the BaaS space was more in vogue and was growing faster. So for us, we think that's a real opportunity over the coming years to bring that Helix product closer to the financial institutions with use cases, especially around the retail banking space. And so you're right. And within Q2, that's one of the teams that's being the most innovative and aggressive in terms of how we're structuring to build with AI and we think that's going to pay dividends in our ability to move quickly in that market and show the FIs a value prop that's different than what they've historically seen from the course. Operator: And your next question comes from Alex Sklar with Raymond James. Alexander Sklar: Matt, on the Q2 Code announcement, can you just elaborate on what that incrementally unlocks relative to what's available in Innovation Studio today? And is that a solution you expect to monetize over time? Or is this kind of used as a competitive differentiator or something that can drive higher customer retention longer term? Matthew Flake: Yes, it's separate from Innovation Studio. So it allows the financial institution to write code faster at a lower cost and experiment and personalize their experience in a simple, elegant way that we're seeing more engagement on that largely upmarket. There's some Tier 2s that are playing with it as well. But what it does is it allows them to really leverage -- they may have a product that's specific to them, maybe a credit union with a certain member base where they can roll out products that are specific to them where they don't have to rely on us or work with on our time frame. So it gives them a lot of freedom to do that. And they continue to leverage the platform. We get a deeper relationship with them and they do more and more. And so we're encouraged by the early adopters of it so far. Jonathan Price: And just to add, that is a -- the products that we talk about, these new AI products, so in the case of Q2 Code, this is a discretely monetizable product SKU. So they shouldn't be confused with AI features built into an existing product. And so obviously, it's early. We're in the early adopter phase. We're working with these beta customers around pricing models and building an idea of what monetization and revenue models could look like in the long run, but this is discretely monetizable product. Alexander Sklar: Okay. Jonathan, maybe then a follow-up for you. Just on the gross margin beat, you've got a few months under your belt now running fully in the cloud. Was there any part of the Q1 upside that was onetime in nature? And then how are you thinking about that opportunity now to really press on further optimizing some of the existing cloud deployments as we think about subscription gross margin? Jonathan Price: Yes. Thanks, Alex. Yes, we're really pleased with the outcome when it comes to the overall project. The teams did a phenomenal job completing the cloud migration project and finished on time. And obviously, from an expectation standpoint, we're ahead of it when it comes to the gross margin outcome in the quarter, and you see that sort of as you think through what we'll talk about and what we put in the press release for the rest of the year. But so no, that's not onetime in nature. That is the outcome of exiting the data centers and really operating now cleanly for almost the entire quarter in AWS. And so that is complete now. We feel good about that. To the second part of your question, as we think about the next leg, once we have time to operate in this environment over the coming months and quarters, we do think as we get into '27 and '28, there's a potential future step function upwards when it comes to another gross margin opportunity as we optimize working in that environment, understand scalability, more automation, more tooling, understanding where we need to rebuild architecturally to get better scale in the cloud. And so that's all coming. It's hard to quantify, and I would not expect that to impact 2026. But to your point about onetime, the step-up to the 62% level, that is where we expect gross margins to be for the remainder of 2026, right in that ballpark. And we will continue to work on the stuff I mentioned in terms of the '27 and '28 opportunity that comes with being in that environment. Operator: And your next question comes from Parker Lane with Stifel. J. Lane: Maybe to go back to Q2 Code. Matt, we've heard from other software companies about more forward deployed engineers and a lot of services folks involved in bespoke Agentic offerings. Do you envision a world where with Q2 Code, you have less reliance on that or less of a need to go in that direction? Or will there be instances in the future where some of that work is supported by you guys and a lot of it is in the IT departments and the hands of the customers themselves? Matthew Flake: Yes. I think that's definitely a possibility that you see less services work from us and they're able to move faster and they get more deeply embedded in our platform by using those tools. So for me, it's definitely a good thing to get the higher-margin revenue and kind of get out of the services business, but we're still going to have a component of that for a while. J. Lane: Got it. And then, Jonathan, maybe one for you. Can you remind us what the renewal cadence looks like for this year, if there's anything in particular we should be mindful of or things that have changed relative to when you first guided 2026? Jonathan Price: Yes. I mean we -- as we think about the rest of the year, it looks pretty standard. I would say more of the renewal volume exists later in the year as we think about -- we had a pretty strong Q1. As we think about the last 3 quarters of the year, Q4 is definitely the most volume, but there are opportunities all throughout Q2 and Q3. So it's just a question of execution on those and making sure if there are other opportunities, we can execute on ones that may be outside that period. But we feel good about -- we talked about at the beginning of the year. Really, we looked at it as a 2-year cohort because that's how we always talked about '24 and '25. And when we looked at '26 and '27 as we headed into this year, they were very comparable in size, both in terms of the number of opportunities and dollars in play. And so now that we're into '26, we had a good start with Q1. And as we think about the year, it's -- yes, it's a little bit heavier on the Q4 side, but there are real opportunities available within each of them. Operator: And your next question comes from the line of Michael Infante with Morgan Stanley. Michael Infante: Just on subscription ARR, is there any color you can provide in terms of whether there were any notable churn impacts in the quarter? And if so, maybe how that compared to the more concentrated churn you saw in 2Q of '25? I'm just trying to understand the bridge between the strong bookings activity you're seeing, including on the fraud side and the path to subs ARR acceleration from here as the recent bookings begin to convert? Jonathan Price: Yes. No, there really wasn't, Michael, when it comes to outsized churn activity in the first quarter, and we really don't see a quarter like that in 2026, like what we saw in Q2 of 2025. So no, the churn targets that we put out at the beginning of the year still hold true. We're doing everything we can to execute to beat those targets when it comes to both total churn and digital banking churn itself and feel good about where we're at so far through 3 months. Michael Infante: That's helpful. And then just a quick follow-up on the professional services side. Jonathan, you obviously called out the durability of the professional services revenue you highlighted related to the core conversions. Does that change your posture on the negative mid-single-digit non-subscription revenue growth for the full year? Jonathan Price: No, it doesn't. It really does not because -- well, 2 things. Number one, as we talked about when 2025 was evolving, M&A activity started to pick up. And so unlike Q1, where we had a very favorable comp, we're seeing the same type of elevated M&A activity here in 2026, but Q1 was a very favorable comp. As we get into Q2, Q3 and Q4, you start to see that the services opportunities related to core conversions from M&A are comparable. And so you just don't see the growth relative to those quarters in 2025. So we are still convinced that you are going to see a different look of that services trajectory as we get through the rest of '26, in line with the original guide we gave. Operator: Your next question comes from the line of Adam Hotchkiss with Goldman Sachs. Adam Hotchkiss: I guess to start, this is a bit of a follow-up to Parker's question, but just maybe take a step back and help us understand your holistic relationship with customers as it relates to AI. Are they generally going about their own strategies where there's a mix of wanting to build things in-house and use Q2 for other things? Or given their size, are they generally totally reliant on you for AI road map and strategy and you guys are leading and they're following? How does that look for you? Matthew Flake: It's the latter. I haven't seen anybody taking their own AI initiative and doing it on their own. They're partnering with us, learning from us, and we're trying to learn the problems they want to solve and build products to solve them. Adam Hotchkiss: Okay. Super clear. Helpful. And then on the Q2 Code being monetizable, I know it's early, Jonathan. I don't want to hold you guys to anything, but just how are you holistically thinking about pricing? And what's been some of the customer feedback around that? And then on profitability, based on how that product is run, how should we think about how token costs, especially given token cost inflation in recent months could impact margins to the extent that begins to scale quickly? Jonathan Price: Yes. Like you said, it's early, but we're having real conversations with these customers. And I think there is an understanding that we're going to have to have a hybrid model and an evolution in our pricing model on these products to account for what you talked about in terms of the underlying cost model. What we're seeing on an early basis with some of these AI products is the concept of what we'll call is a credit, which includes underlying token utilization, but other infrastructure and the value prop that we're delivering through that product priced-in up to a certain cap of token usage. And then over time, if they exceed that, there would be incremental fees for the excess usage. So that's sort of where it sits today as sort of a vision and a target of what I'll just call a hybrid model because it's still a subscription fee with a lot of that value bundled in, in a base size. And then the excess comes from over that amount and then making sure that we have caps to ensure that we don't go upside down in the interim. So -- but it's going to be a really iterative process, and we're going to learn from initial adoption and usage. And -- but early indications are there's an understanding that it does look different from a pricing perspective than what we typically have seen in our industry with just straight digital banking historically. On the profitability side, again, we can put in some of those caps and those structures to protect us. But I think it's safe to assume that until we see this at scale, it's hard to imagine like traditional SaaS margins are going to look like that on these early AI products, at least until we figure out sort of an optimal way to scale that's also sort of acceptable to the customer. So long-winded answer there, but hopefully, that gives you a little bit of color. We're working through it, and we're excited by the opportunity, but there's a lot we don't know yet. Operator: And your next question comes from Joe Vruwink with Baird. Joseph Vruwink: Just to stay on Q2 Code, if something like this makes it easier, cheaper, faster to build the custom integrations and experiences, what extent do you think that maybe widens the addressable audience you typically go after? And I'm wondering, does it make the platform less intimidating, does faster time to value become a key selling point. So maybe those that have traditionally not thought about Q2 as their digital banking provider, maybe this widens the core demo a bit and they start becoming addressable? Matthew Flake: Joe, the size of our customers range from sub-1 billion to $400 billion on digital banking. And so when we continue to work our way up on the enterprise plus side of things, I think it definitely -- it doesn't hurt on these -- on deals bigger than that to have those tools so they can build the products that they want because they usually have a broader set of products or make them more customizable to them. We'll have to see in the sales process, whether we -- whether that's a differentiator for us, and we'll obviously tell you if it is. So I don't know the answer to that yet. We've got to continue to experiment with this. It's early, and we're excited about it, and the feedback has been extremely positive early on. So I think it's going to create more opportunities for us. It's just a matter of -- I'm not positive on way up market, how much that will do. Joseph Vruwink: Yes. that's good and I appreciate it so early. Just on raising the full year revenue forecast by $4 million. You're also calling out some pretty big deals on fraud, and I think those fraud deals can activate more quickly. Are those starting to layer into kind of the 3Q, 4Q outlook? Is that the right time frame to think about the fraud deals you're winning right now? Jonathan Price: I mean it can be. The big, big fraud deals can have implementation time lines that exceed 6 months. So that -- the one in particular, we talked about that could be tight in terms of any real impact in 2026. But I mean, yes, obviously, we are -- we roll through the beat and are raising on top of that. And there's lots of contributors to that. That goes beyond just the go-live time lines associated with nondigital banking products. I mean we've seen great success so far this year when it comes to, obviously, the net new side, we talked about on the call across both digital banking, fraud and other parts of the portfolio, strong renewals and then another good cross-sale quarter and Innovation Studio in particular, had a really, really strong quarter. And like you said, those go to revenue even faster. And so sort of a culmination of all of that has given us the confidence to raise the revenue guide beyond just the beat in the first quarter. Operator: And your next question comes from the line of Cristopher Kennedy with William Blair. Cristopher Kennedy: Can you give us an update on kind of new sales activity within Tier 1 -- or Tier 2 and Tier 3 clients? Matthew Flake: Yes. We had a really strong quarter in Tier 2 and Tier 3 and the pipeline, I think probably the second quarter is probably going to be dominated by the lower end of Tier 1 and Tier 2 and Tier 3s with the upper end of Tier 1 and enterprise picking up in the back half of the year. We've obviously closed a lot of Tier 1 deals over the last 3 quarters. So really good activity there. Win rates are holding steady. ASPs are up. It's -- we've got a lot of traction in the kind of the bread and butter of this business, which is banks and credit unions between $500 million and $10 billion. Cristopher Kennedy: Great. And then just going back to the gross margins. Is most of the uplift this year just eliminating the duplication of the costs? And then over time, you should get some nice scaling benefits? Or are we going to see that in 2026? Jonathan Price: Well, certainly, Chris, the uplift in the first quarter was -- that was a big driver. That was what we were expecting in terms of the step-up between the timing and the execution, it was even more than we expected, obviously, given the full year commentary last quarter, about 60% plus is the target. So I feel really good about that. There's also other contributors, though, to be clear. I mean if you think about revenue mix now above 83% subs, that's a big one. We think that's going to continue to move upwards throughout 2026. We have a lot of optimization around efficiencies and ongoing initiatives, obviously, pricing and renewal and packaging that we've been talking about for several quarters now that are all having an impact. And then like I mentioned earlier, when it comes to sort of the next leg of operating in the cloud and seeing another uplift from that specifically, that's more of an opportunity we see in '27 and '28. Operator: And your next question comes from Dan Perlin with RBC Capital Markets. Daniel Perlin: Matt, I've got a question to start on -- it sounds like when banks are considering core conversions, and I don't mean by M&A, I mean like the proactive stuff that's happening out there. It sounds like they're coming to you guys early. It's not first in many instances. And it seems to me like this AI opportunity for you guys as that becomes a bigger part of their budgets only accelerates that. So I guess there's 2 things. One is, what are you seeing in relation to core conversion activity and appetite in the market currently? And then secondly, can you just remind us how that benefits you guys? I feel like it creates a lot of opportunities, but I oftentimes forget all the incremental products that kind of can get attached and things get switched sometimes. So that would be helpful. Matthew Flake: Yes, Dan, I'm not [ sure ] on that. I don't think I've seen an increase in the number of core conversions that are going on. I don't really know. I think one of the things that we provide and one of the reasons that people go with us is because they have the freedom to go with whatever core they want because we have all the integrations. We have a lot of them to all the ancillary systems, not just the general ledger. And so banks and credit unions, when they get to a certain size, want somebody that wakes up every day and thinks about a customer experience, speed, performance, simplicity, security in the user interface. And they want to get some leverage on not just the core processors, but us so that they can have freedom to go if they switch out the digital banking, then they can later on switch the core out a lot easier than having to replace the front end and the back end. So for us, for years, it's been a driver of deals for us, which is they pay a little more to go with us, but then they have some leverage in the negotiations on the back end with the core providers. So -- but I don't know. I haven't seen a ton of change in the amount of core conversions that go on. That's Fiserv, FIS and Jack Henry share that every quarter, I guess. I don't know -- I would think. Daniel Perlin: It's a hot topic. Yes. Just a quick follow-up. So I'm trying to make sure I understand the go-to-market motion that you guys have with the introduction of like Q2 Code and others. Like I know it's fully ingrained throughout the organization, but is it the relationship managers that are leading with this? Do you have kind of a SWAT team that's bringing this to market so that all the clients are aware of this? Is it a client conferences? Anything on that would be helpful. Matthew Flake: Yes, it's all that. I mean it starts with product marketing, identifying the marketing with the products, how they're differentiated, how they work and then the marketing team goes and takes that information and puts it in the market. We train our sales reps, net new and our success team, the relationship management team to understand the value of these and why it's differentiated and how we built it. And then it's incorporated in every sales pitch to our prospective customers and our strategic reviews with our quarterly or semiannual strategic reviews with all of our customers. We have a client conference coming up at the beginning of June, where, obviously, we're going to talk a lot about these products. It's going to be really interesting. We're going to have 1,000 of our closest friends there sharing what our road map and our future is, which we're excited about. So we'll have a lot of feedback in the August call or whatever the call is the second quarter call to kind of give you the feedback we got from it. But it's all hands on deck, all in on talking AI. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, and welcome to the First Quarter 2026 Earnings Conference Call for Amphenol Corporation. [Operator Instructions] At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin. Craig Lampo: Thank you very much. Good afternoon, everyone. This is Craig Lampo, Amphenol's CFO, and I'm here together with Adam Norwitt, our CEO. We would like to welcome you to our first quarter 2026 conference call. Our first quarter results were released this morning, and I will provide some financial commentary, and then Adam will give an overview of the business and current market trends, and then, of course, we'll take your questions. As a reminder, during the call, we may refer to certain non-GAAP financial measures and make certain forward-looking statements so please refer to the relevant disclosures in our press release for further information. The company closed the first quarter of 2026 with record sales of $7.6 billion and GAAP and adjusted diluted EPS of $0.72 and $1.06, respectively. First quarter sales were up 58% in U.S. dollars, 57% in local currencies, and 33% organically compared to the first quarter of 2025. Sequentially, sales were up 18% in U.S. dollars and in local currencies and up 4% organically. Adam will comment further on trends by market in a few minutes. Orders in the quarter were a record $9.435 billion, up a strong 78% compared to the first quarter of 2025 and up 12% sequentially, resulting in another very strong book-to-bill ratio of 1.24:1. This impressive book-to-bill was driven by robust bookings in all of our end markets with every end market having a positive book-to-bill this quarter. GAAP operating income was $1.8 billion in the quarter and GAAP operating margin was 24%. GAAP operating margin included $249 million of acquisition-related costs primarily related to the acquisition of CommScope, which closed at the beginning of January. These acquisition-related costs included $179 million of noncash amortization related to the value of acquired backlog and inventory step-up costs as well as a $70 million charge related to external transaction costs. Excluding acquisition-related costs, adjusted operating income and adjusted operating margin were $2.1 billion and 27.3%, respectively. On an adjusted basis, operating margin increased by a strong 380 basis points from the prior year quarter and was down 20 basis points sequentially. The year-over-year increase in adjusted operating margin was primarily driven by robust operating leverage on the significantly higher sales volumes, which more than offset the dilutive impact of acquisitions. On a sequential basis, the decrease in adjusted operating margin was primarily driven by the dilutive impact of acquisition, partially offset by robust operating leverage on the higher organic sales volumes. I'm very proud of the company's operating margin performance in the first quarter, which reflects continued strong execution by our team. Breaking down the first quarter results by segment compared to the first quarter of 2025, sales in the Communications Solutions segment were $4.5 billion and increased by 88% in U.S. dollars and 47% organically and segment operating margin was 30.6%. Sales in the Harsh Environment Solutions segment were $1.7 billion and increased by 34% in U.S. dollars and 23% organically and segment operating margin was 28%. Sales in the Interconnect and Sensor Systems segment were $1.4 billion and increased by 23% in U.S. dollars and 17% organically as segment operating margin was 20.2%. The company's GAAP effective tax rate for the first quarter was 42.7%, and the adjusted effective tax rate was 27%, which compared to 22.7% and 24.5% in the first quarter of 2025, respectively. As the typical practice, our adjusted tax rate excludes the tax effect of acquisition-related costs and the excess tax benefit from stock option compensation as well as other discrete tax items. Specifically, the first quarter includes $130 million tax accrual related to the previously disclosed tax matter in China. The company recently received unfavorable tax determinations from certain relevant tax authorities in China, and this accrual, together with the $100 million accrual, the company booked in the fourth quarter of 2025 covers the full amount of the tax payment notices received. In addition, as a result of this matter together with the continued shift in income to higher tax jurisdictions amidst the company's high levels of growth, the company increased its effective tax rate to 27% in the first quarter and expect that rate to remain for the remainder of 2026. The recent developments with respect to the China tax matter also resulted in the company reassessing certain tax-related assumptions applied to prior period results, not subject to the China tax inquiries. This reassessment resulted in an adjustment to our tax provision of $160 million, which is recorded in the first quarter. The $130 million accrual together with the $160 million additional tax provision have been excluded from the company's first quarter 2026 adjusted tax rate and adjusted diluted EPS. GAAP diluted EPS was $0.72 in the first quarter, up 24% compared to the prior year period. And on an adjusted basis, diluted EPS was a record $1.06 and increased by 68% compared to $0.63 in the first quarter of 2025. This was an outstanding result. Operating cash flow in the first quarter was $1.1 billion or 120% of net income and free cash flow was $831 million or 89% of net income. These were strong results for first quarter, which typically has somewhat softer cash generation. We continue to expect strong cash flow generation in 2026 with free cash flow conversion remaining within our typical range over time. From a working capital standpoint, inventory days, days sales outstanding and payable days were all within a normal range. During the quarter, the company repurchased 1.3 million shares of common stock at an average price of approximately $140. And when combined with our normal quarterly dividend, total capital returned to shareholders in the first quarter of 2026 was approximately $485 million. Total debt at March 31 was $18.7 billion, and net debt was $14.2 billion. Total liquidity at the end of the quarter was $7.6 billion, which included cash and short-term investments on hand of $4.6 billion plus availability under our existing credit facilities. As previously noted, we expect quarterly interest expense net of interest income to be approximately $200 million for the remainder of 2026. First quarter 2026 EBITDA was $2.3 billion and our net leverage ratio was 1.6x at the end of the first quarter. We are very pleased with the company's financial position. I will now turn the call over to Adam, who will provide some commentary on current market trends. R. Norwitt: Well, thank you very much, Craig, and I hope it's not too late to extend my welcome to all of you on the call today from a beautiful spring day here in Wallingford, Connecticut. As Craig mentioned, I'm going to highlight some of our achievements in the quarter with our very strong start here to the year in 2026. I'll talk about our trends across our served markets. Then I'll comment on our outlook for the second quarter. And of course, we'll have time for questions at the end. Look, I just want to say that our organization, the Amphenol organization drove outstanding performance here in the first quarter. Our results were stronger than expected, exceeding the high end of guidance in sales and adjusted diluted earnings per share. Our sales grew from prior year by 58% in U.S. dollars, 57% in local currency reaching a new record of $7.6 billion. On an organic basis, our sales increased by a very strong 33% with growth across nearly all of our served markets, and I'll talk about those markets here in a few moments. The company booked a record $9.4 billion in orders in the first quarter and that represented a robust book-to-bill of 1.24:1. Orders grew by a very strong 78% from prior year and were up 12% sequentially. I'm very pleased that our order growth in the quarter was broad-based with all of our end markets realizing book-to-bill of at least one, and this was driven in particular by strength in IT datacom, defense, commercial air and industrial. We're also pleased to have delivered adjusted operating margins of 27.3% in the quarter, an increase of 380 basis points from prior year and down just 20 basis points sequentially. These impressive results were achieved despite the margin dilutive impact of the CommScope acquisition in the quarter. I would just add, though, that we're very pleased with the CommScope acquisition, and we do expect the business' performance to continue to improve as part of the Amphenol family. Adjusted diluted EPS grew 68% from prior year and reached a new record of $1.06. And finally, as Craig mentioned, the company generated operating cash flow of $1.1 billion and free cash flow of $831 million in the quarter, both clear reflections of the quality of the company's earnings. I can't express enough how proud I am of our team here in this very strong start to 2026. Our results this quarter once again reaffirm the value of the drive, discipline and agility of our entrepreneurial organization as we continue to perform well amidst a very dynamic environment. Now turning to our served markets. I just want to comment that we're pleased that the company's end market exposure remains diversified, balanced and broad. And this diversification continues to create great value for Amphenol, enabling us to participate across all areas of the global electronics industry. All while not being disproportionately exposed to the volatility of any given application or market. I will say that there's no doubt that with the extraordinary investments being made in artificial intelligence, or AI, coupled with our team's outstanding work and capturing a significant share of this unique interconnect opportunity that this has resulted in the IT datacom market in the quarter, representing just over 40% of our sales. Nevertheless, we remain committed to continuing to broaden our portfolio across markets, customers, applications and products as we build on the company's momentum and we further strengthen Amphenol's position across all areas of the global electronics industry. The defense market in the quarter represented 8% of our sales, and sales grew from prior year by a strong 44% in U.S. dollars and 25% organically. I will say this is driven by really broad-based growth across virtually all segments of the defense market and all of our served geographies. Sequentially, sales grew by 2%, which was in line with our expectations coming into the quarter. And as we look into the second quarter, we expect sales in the defense markets increased in the high single-digit range sequentially. We remain encouraged by the company's leading position in the defense interconnect market, where we continue to offer the industry's widest range of high-technology products. Amidst the current dynamic geopolitical environment, countries around the world are increasing their investments in both current and especially next-generation defense technologies. With our expanded product offerings, both in discrete connectors as well as value-add interconnect, as well as the significant capacity expansions we've made in recent years, we're positioned better than ever to capitalize on this long-term demand trend. The commercial air market represented 4% of our sales in the quarter, and sales in this market increased by 22% in U.S. dollars and 20% organically from prior year and that was really driven by broad-based strength across commercial aircraft manufacturers. Sequentially, our sales moderated by 3% from the fourth quarter, which was better than our expectations coming into the quarter. As we look to the second quarter, we expect a slight sequential -- a slight further sequential moderation in sales. I'm truly proud of our team working in the comm air market. With this ongoing growth in demand for next-generation aircraft, our efforts to expand our product offering, both organically and through our acquisition program continues to pay real dividends. And we look forward to further capitalizing on our expanded range of product solutions for the commercial air market long into the future. The industrial market represented 20% of our sales in the quarter, and our sales to industrial increased by 52% in U.S. dollars and 16% organically as we continue to see accelerating demand across most segments of the diversified industrial market. In fact, virtually all of those areas of the industrial market that we service grew organically in the quarter, and we also saw organic growth in all three major geographies. On a sequential basis, our sales were up 29% from the fourth quarter as we benefited from the addition of CommScope's building connectivity business. Organically, sales were up a strong 6% from the fourth quarter, better than our expectations as we entered the quarter. Looking into Q2, we expect sales in the industrial market to increase in the high single digits from these already strong first quarter levels. I would just comment that we remain encouraged by the company's strength across the many diversified segments of the important industrial market. And with the addition of CommScope, we're now seeing new opportunities for growth in the exciting building connectivity market. Over the long term, I'm confident in our strategy to expand our high-technology interconnect antenna and sensor offerings, both organically and through continued complementary acquisitions. This strategy has enabled Amphenol to capitalize on the many electronic revolutions that continue to occur across the diversified industrial market thereby creating continued opportunities for our outstanding team working in this important space. The automotive market represented 11% of our sales in the quarter. Sales in automotive grew by 7% in U.S. dollars and 2% organically, as organic growth in North America and Europe was somewhat offset or partially offset by somewhat softer sales in Asia. Sequentially, our sales declined by 7% from the fourth quarter, which was a bit better than our expectations coming into the quarter. For Q2, we expect sales to increase modestly from these first quarter levels. I remain very proud of our team working in the global automotive market. While there are clearly some areas of demand uncertainty, our team continues to be focused on driving new design wins with customers who continue to increase the content of new electronics being integrated into their next-generation vehicles. We look forward to benefiting from our strengthened position in the automotive market for many years to come. The communications networks market represented 12% of our sales in the quarter, and sales in this market grew from prior year by 91% in U.S. dollars and that was really driven by the additions of ANDREW and CommScope. On an organic basis, our sales were flat from prior year as growth in wireless applications was offset by some moderations in broadband demand. Sequentially, our sales in the quarter grew by 57% from the fourth quarter, driven by the addition of CommScope. On an organic basis, sales were flat to prior year -- or to prior quarter, which was better than our expectations. As we look into the second quarter, we expect sales to remain at these first quarter levels. With our expanded range of technology offerings following the acquisitions of both CommScope and ANDREW, we are very well positioned with both service provider and OEM customers across the communications networks market. Our deep and broad range of products coupled with our global manufacturing footprint, have positioned us to support customers around the world. As the accelerating volume of data traffic drives demand for expanded and upgraded networks in the future, we look forward to enabling these systems for many years to come. The mobile devices market represented 4% of our sales in the quarter, and sales in this market grew by 2% in U.S. dollars and 1% organically from prior year as growth in laptops and accessories was somewhat offset by moderating demand in handsets and wearables. On a sequential basis, our sales actually -- while declining by 22% was a better-than-expected decline compared to the fourth quarter as we had expected. Looking into the second quarter, we expect a modest sales decline from these levels on typical seasonal patterns. I'm very proud of our team working in the always dynamic mobile devices market as their agility and reactivity has once again enabled us to outperform our expectations in the quarter. I'm confident that with our leading array of antennas, interconnect products and mechanisms that are designed in across a broad range of next-generation mobile devices, we are well positioned for the long term. And finally, the IT datacom market represented, as I mentioned earlier, 41% in the fourth (sic) [ first ] quarter. Sales in this market grew by a very strong 99% in U.S. dollars and 81% organically. And this was driven by the continued acceleration in demand for our products used in AI applications, together with continued strong growth in our base IT datacom business. On a sequential basis, our sales increased by 27% from the fourth quarter, which was substantially better than our expectation for a low double-digit increase. On an organic basis, our sequential growth reached 16%, a very strong number. And virtually all of this organic sequential sales growth was driven by growth in AI-related products. Looking ahead, we expect a further sequential sales increase in Q2 in the low teens level as investments in AI data centers accelerate and its enterprise and cloud customers continue to expand their demand for traditional IT datacom products. Just want to say that we're more encouraged than ever by the company's position in the global IT datacom market. Our team has just done an outstanding job, both of securing future business on next-generation IT systems with a very broad array of customers but also in executing on these exciting programs. The revolution in AI continues to create a unique opportunity for Amphenol, given our leading high-speed and power interconnect products. And now with the addition of CommScope, we have the industry's broadest range of high-speed copper, power and fiber optics interconnect products, all of which are critical components in these next-generation systems and in the next-generation architectures of our customers. This creates a continued long-term growth opportunity for Amphenol. Turning to our outlook and assuming current market conditions as well as constant exchange rates, for the second quarter, we expect sales in the range of $8.1 billion to $8.2 billion and adjusted diluted EPS in the range of $1.14 to $1.16. This would represent strong sales and EPS growth of 43% to 45% and 41% to 43%, respectively, compared to the second quarter of prior year. I remain confident in the ability of our outstanding management team to adapt to the many opportunities and challenges in the current environment and to continue to grow Amphenol's market position all while driving sustainable and strong profitability for the long term. Finally, I want to take this opportunity to thank our entire global team for their truly outstanding efforts here in this very special first quarter. And in particular, I just want to express my gratitude to the folks working in our factories around the world. This growth doesn't come easy. And the folks working on our factory, those amazing Amphenolians, they continue to amaze me and delight our customers with their extraordinary and hard work. And with that, operator, I'd be very happy to take any questions that there may be. Operator: [Operator Instructions] We have a question from Mark Delaney with Goldman Sachs. Mark Delaney: Congratulations on the strong results. I appreciate that Amphenol is able to address data center customer need, both for copper and optics, especially post the CommScope acquisition, and that's certainly apparent with the orders and revenue that you reported for the IT datacom segment. However, I'm hoping, Adam, you can help investors better understand implications for Amphenol as CPO plays a bigger role over the next 2 to 4 years. And specifically, as Amphenol is engaged with customers on designs that will utilize CPO, what does that mean for Amphenol's revenue and profit potential on a directional basis relative to current designs, especially now that you have CCS. R. Norwitt: Yes. Thanks so much, Mark. I appreciate the question, and thanks for your kind words here. Look, I mentioned earlier, and I'll just reiterate that we now have the broadest range of products for customers in the IT datacom market. And that starts with high-speed products. It continues on with power products, which are very, very important products for all architectures, current and next and the next after that generation. And now with CommScope, together with previous and prior capabilities that we already had in optics, we now have a very, very broad suite of products in optics and capabilities, capacities. And so we now sit in a unique position with customers where we're really a leader across the board in all the technologies that they're thinking about for the future. And I can just tell you we're working with all the players here up and down the stack of the AI ecosystem from the folks who are spending the money and outfitting the data centers and also in many cases, designing their own architectures to the systems manufacturers, the equipment makers who are participating very strongly all the way down through to the chip makers who are also creating their own unique architectures. And we worked very strongly across that entire ecosystem on current next and next generation thereafter. Very specifically, as you allude to CPO and the potential evolution of things towards higher speeds and towards optical solutions. And you can imagine, we're working with customers on a broad array of solutions, including CPO for the future that create great opportunities for Amphenol in the long term. What are our customers trying to achieve? Our customers are trying to achieve higher bandwidth, lower latency, higher density, higher transfer speeds so that ultimately, these AI systems can operate much as a human brain can do. Comparing everything to everything else and doing that in extremely fast time periods. And when you see the evolution of how these AI systems are, we're really enabling those systems today, and we're working with our customers on future generations, years and years from now, kind of generations both on copper and on optical solutions. And what does that mean in terms of the quantum of the business? I mean, that all, I think, remains to be seen, but what's very clear is as we talk to our customers and even as our customers speak publicly, our customers are not talking about these kind of either/or solutions. What they're talking about is more interconnect, no matter what. And so as we approach them with now that broader suite of products, we also approach them with another advantage in our back pocket, and that is the proven ability to execute. I mean what you see this quarter, growing 81% organically. What you saw last year with us growing our IT datacom business by 124% year-over-year. And obviously, AI growing even faster than that. These have not been trivial initiatives to ramp up and meet the moment for our customers. And we have proved that time and time again with customers up and down the stack. And so you can imagine that as our customers, think about the future, whatever that architecture may be, Amphenol is going to have a very strong seat at the table in all of those architectures, not just because we have the suite of products but also because we have the proven capability of executing and making sure that they can hit their incredible aspirations and that our products don't become a bottleneck in that. And so that combination of the suite of products, the proven execution capability, we think puts Amphenol in a very strong position for the future. And look, who knows what the cadence of AI investments will be and when and whether it will be ups and downs, of course, there will be ups and downs. But I think the long-term prospects for this industry and for this market and for Amphenol's position are very strong. Operator: We have a question from Andrew Buscaglia with BNP Paribas. Andrew Buscaglia: I just wanted to, along the lines of the discussion, hear a little bit more about what these customers, the hyperscalers are saying to you intra-quarter and as the year progresses, do you think you should see continued acceleration of growth in that segment as presumably you have increased share or content in future generations. And then maybe project out to '27 or so and talk about what you think the implications are of your fiber portfolio will be on the next generation. R. Norwitt: Yes. Look, I mean I'm going to be careful not to give guidance beyond the quarter that we've talked about here in the second quarter. But you can imagine, I mean, we've had very strong orders, really strong across-the-board orders here in Q1, I mean, interestingly, you can imagine we had strong IT datacom orders, but they actually weren't much stronger than, for example, the orders we had in defense in terms of the book-to-bill. But we have had strong IT datacom orders. We had strong orders also in the fourth quarter where we had a book-to-bill even higher than this very unique 124 that we had here this quarter, I think 131 in the fourth quarter. And so we have good momentum really across the board and including in IT datacom. And all I can tell you is when we talk to our customers across the board in the IT datacom market, in particular, those customers who are heavily focused on these next-generation AI build-outs, they want more product. And I think our team's ability to satisfy that has really been a fabulous asset to the company. Look, in terms of 2027, I'm not going to try to give a prognosis for 2027, except what I will say is this. We look at the CommScope business today and its performance. And it's also performing as a company very, very strongly. I mean I would just tell you that obviously, we bought the company, not right on January 1. But on a like-for-like basis, in the first quarter, CommScope growth was largely similar to the organic growth that we had across Amphenol. And that's a business that is a diversified business across data center and communications networks and industrial. So they have very, very strong performance here in the quarter, and we're really pleased and proud with their performance. And that's performance really in the here and now because they're opening up to us, a complementary part of the data center opportunity that we hadn't participated as strongly in before. And that's connecting from rack to rack and across the data center and even, of course, between data centers through the networks and that's really exciting for us. And again, going back to sort of how I talked about the first question, that makes us again more important to our customers because as soon as the signal gets into the building, we're helping our customers move that signal around, across and within the racks and ultimately helping to create these unique AI architectures. So I think CommScope puts us in a very strong position going forward. And I'll just reiterate, our customers make a lot of trade-offs as they think about their architecture, and we can sit with them at the table and help them make those trade-offs with expertise and a breadth of an expertise that's really unique in this industry. Operator: We have a question from Amit Daryanani. Amit Daryanani: Really impressive set of numbers here. Adam, one of the things we're starting to see a lot in the AI ecosystem is hyperscalers are engaging in these long-term capacity expansion plans with the suppliers to really ensure they can get whatever capacity they need across the tech stack. And I think you've seen this from a lot of companies, I think Corning talked about three such large deals on their call. As you look at this unprecedented growth you're seeing in IT datacom, I think you said 81% organic growth. How do you think about funding the capacity for these ramps as you go forward? And to the extent you can talk about it, are Amphenol, CommScope being approached for these multiyear capacity agreements, how do you view them? And would they ever make sense for Amphenol? R. Norwitt: Yes. Thank you very much, Amit. I really appreciate the comments and the question. I mean, look, you know that in our company, you followed us for a very long time. We pride ourselves on agility and the ability to react quickly to our customers. And that generally means that our customers can rely upon us, whether or not they give us kind of a long-term agreement, so to speak. Now all that being said, and we've talked about this in the past, we have talked about the fact that there are more meaningful investments, and you've seen that in our capital spending, which still is very reasonable as a percent of our sales. But our sales run rate has doubled here over a 2-year period from Q1 of '24 to Q1 of this year, we've more than doubled in our size. And so our CapEx has also increased substantially. And so you can imagine that we work with customers when we make these kind of investments to make sure that we have security around those investments and that can mean participating in the investments, and we're very grateful to our customers for their willingness. To do that in certain cases, it can also mean opening the aperture of orders and the commitments that they make to us. So are those long-term supply agreements, I wouldn't call it that, but I would call it more commitments that our customers are making, which then give us the confidence to make the capacity increases that we have, the massive increase in automation for these ultra high-precision products for example, that we are making. And so I would say that there's more of that going on today than there has been in the past. I mean you're probably not going to hear us talk about it very explicitly, but no doubt about it. We're working hand-in-hand in partnership with our customers as they do this incredible thing called enabling AI. Operator: We have a question from Joe Spak with UBS. Joseph Spak: Maybe I wanted to build on some of that prior commentary, Adam, because just as the entire value chain for data center expands and matures, I'm just wondering how you're sort of thinking about a desire from some, ultimately, customers to sort of really bring in new players, maybe diversify some of their risk. So how are you thinking about that? How does your relationship change there? I know you're in there helping them sort of design that and maybe, in some cases, that leads to licensing opportunities for you. But does that meaningfully change your sort of profit opportunity here as that ecosystem expands? R. Norwitt: Yes. Thanks very much, Joe, and I will correct your name, Joe Spak. We all know that very well. Sorry for the mispronunciation of your surname there. Look, this is not a new phenomenon. I mean we have always worked in this market and many others in a world where our customers want to mitigate risk. And that's no different. That's -- we have been doing that all along here as we prosecute these unique opportunities that have arisen through AI. I mean we are not a sole source in any respect. But what we are is we're very uniquely able to execute. We do have a lot of unique technology that creates value for our customers. And so we welcome actually other participants in the market. And again, there are plenty of participants in the market. We partner with those companies. And yes, sometimes we have licensing agreements with them. But the end of the day, that unique Amphenolian ability to execute is ultimately what our customers value equally to the technology that we offer them. And so we don't see any meaningful change to that. This is no different from how we've always prosecuted our business. We've always gone out and had to win business. We've always had to go out and out-execute our competition and thereby satisfy and even delight our customers, and we can just continue to do that. You can imagine, we've also built extraordinary capabilities right now. Over the course of these last 3 years, as we've been managing through these extraordinary ramp-ups and 81% organic growth here in this quarter, 124 last year, we have built an extraordinary capability around the world to support customers in these unique technologies. And fortunately, we're in that virtuous cycle where the company does generate strong profitability. We convert that profitability into cash, and we reinvest that cash into product development, number one, capability development, number two, and capacity, number three, that ultimately allows us to be more important and to meet the moment for our customers. And so look, we welcome more participants. We also welcome that when you have more participants, that also mitigates in some ways, the risk of volatility for everybody, and that's a good thing. And that's how this industry has worked for a long time, and we've prospered in that environment for many, many, many years, decades really. Operator: We have a question from Samik Chatterjee with JPMorgan. Samik Chatterjee: Adam, if I can just ask you more specifically around CCS. Obviously, you sounded pretty positive in terms of what you're seeing for demand there. If you go back to the time when you announced the acquisition and gave some guidance around it, I think you were assuming more sort of mid-teens growth for this year. How are you seeing sort of that demand progress relative to those early milestones that you gave us? And are you seeing any supply constraints when it comes to sort of bare fiber or preform in relation to your ability to sort of meet some of the customer demand that you see for the CCS business? R. Norwitt: Well, thanks very much, No, you're absolutely correct. When we announced this deal, I think we did talk about it at the time as roughly a $3.5 billion, maybe $3.6 billion business with sort of mid-teens growth expectations. And as I mentioned, here at least here in the first quarter, they achieved a growth level, largely at the same pace of Amphenol's own organic growth, which is really impressive and really outperforms what we would have thought back when we signed the deal. And we continue to expect the company to deliver this year, as we said, roughly $4.1 billion in sales and $0.15 of accretion. I can tell you the team, this is a team of fighters. I mean it's so amazing. I mean they came from a very different culture, obviously, a very different corporate background over the 50 years that CommScope has been around. But the thing they have in common is this just desire to win. I mean this is a team of extraordinary capable individuals who want to win. And that means knocking down whatever impediments may come along, along the way. And look, you mentioned there's no doubt a lot of demand for fiber right now around the world. And I can tell you that our team is doing a fabulous job of supporting their customers' demand, meeting kind of the expectations that we had growing the company by a very significant extent. And they're doing that by being real entrepreneurs. And that's a phenomenal thing. And it's really satisfying to see that for a group of people who've only been part of Amphenol for now less than 5 months. And so I have really high expectations for them in the future. There's no doubt that they will manage through whatever dynamics arise in the marketplace. And now I will just say this, they're now part of a company that has a very different balance sheet, a very different approach to growth than what they may have had in the past. And so we are very much willing to support their growth with investments as we always have in Amphenol, getting them on that same virtuous cycle that our organization has been on for so many years, what I described earlier and no doubt about it, the folks at CommScope are really excited to have such a supportive -- to be part of such a company that's so supportive of their growth aspirations and their growth aspirations are pretty significant. Operator: We have a question from William Stein with Truist Securities. William Stein: Congrats on the great results and outlook, really excellent as we've grown accustomed to from you. But the question I have is that it's not just co-package optics we tend to hear about from some of the bigger customers in the AI data center supply chain. It's various trade-offs between passive copper, active copper. And then within optical, we hear all the buzzwords about pluggables, near package optics, silicon photonics, co-package optics, even optical interposers and then some of these technologies being used in scale up, some in scale out. Should Amphenol have -- should we think about the company as having similar ability to succeed in all of those technologies? Or are there certain ones of those where your opportunity will be more limited or would potentially accelerate? R. Norwitt: Thanks, Will. Well, look, let's -- we'll talk about this one more time, and I think you alluded to one aspect of it that we haven't talked about, which is the active aspect. We certainly have a broad array of active and passive product offerings in both copper and optics. And I think I didn't mention the active piece of that with the other several questions on this topic. But there's no doubt. I mean, we have developed that active capability both on copper very strongly and also through our acquisition program on optics. And so when I talk about the breadth of products that we have to offer to our customers, it's not just that we offer high-speed copper, power and passive optics, but we also offer active copper. We also offer active optics. Now do we have every single part number that exists in the universe? No, of course, not. But we have a breadth of capabilities across those -- all of those categories, if you call them sort of the two categories of copper and optics in the subcategories of passive and active. And I would just say that there's really no company, at least that I can think of here on the spot who can say that, who can say that they have that breadth of offering to help the customers as they face this sort of amazing smorgasbord of different choices that they're facing. Now is each sort of dish on the smorgasbord going to have the same impact to our company. Are we going to have the same part numbers, that's very hard to give a prognosis about that. But what I do know is what I said earlier. No matter what, there's going to be more interconnect. There's going to be more connections, more synaptic connections across these neural networks. And that's going to lead to a higher degree of interconnect products, which is going to be good for the whole industry. And then it's up to us to continue to execute with the breadth of our products to take more than our fair share of that. And so far, we've been able to do that. And the building blocks of why we've been able to do that are still very strongly, if not more strongly than ever in place. And so that gives me a dose of confidence for however these architectures evolve. And then the last thing I'll say is, I think we should be very careful that there is not just going to be a single architecture, a single moment. Customers are looking at lots of different things. They're looking at lots of different directions, and we'll have a lot of different customers doing a lot of different things architecturally in the future which is, again, why we believe it's very important to be with those customers with the full breadth of offerings for them as they approach these next generations. Operator: We have a question from Asiya Merchant with Citigroup. Asiya Merchant: Great set of results here. If I can, there's been a lot of talk about component, energy, inflation. You guys delivered very strong margins here. If you could talk a little bit about prices -- pricing ability to pass through those costs. And if you saw, there was more ability to raise prices here relative to historical. And if I can squeeze one more on just the book-to-bill in orders and lead times here. Very strong book-to-bill again, similar to last quarter. Are we seeing like extended lead times here? Just help us understand on the book-to-bill, what's driving that. Craig Lampo: Yes. Thanks, Asiya. I think I'll take the first part and maybe let Adam talk about the book-to-bill here. But I think in regard -- certainly, we're super happy with our margins here in the quarter, 27.3%, just slightly under kind of record margins we had in the second half of last year. And that's inclusive of CommScope, which had a great quarter, but ultimately, certainly still as a margin -- has some margin dilution. And as we would expect. And over time, we certainly are very confident that we'll get them closer to the company average. But this 27.3% in the quarter was just an outstanding result, given some of that pressure. That resulted in a few things, and I'll talk about costs in a second. But I mean, certainly, we just executed really well in the quarter on that really strong growth we continue to have. And that execution, combined with the cost discipline we have within the company, has just enabled us to leverage at a pretty impressive level from a margin perspective across our business, including places like that serve the defense market, industrial, otherwise, I mean you see this across our segments and the improvement in the margins we've had there. So it's really just been kind of, I would say, almost across the board margin improvement story here. And certainly, the ones that are growing faster than some of these markets are certainly contributing strongly as well. The cost environment certainly hasn't been supportive. I mean, I wouldn't say -- I would say on the margin, that's been, I guess, forgive the term there. I mean kind of on the -- to a lesser degree, that's been some impact. But I think we've done a great job of offsetting most of that through things we do in the factory productivity, things with our vendors. And certainly, as we kind of drive those other levers, the last lever is pricing. And pricing is just a function of ultimately the value you bring to your customers with the technology, with the execution with all these other things that Adam has talked about. And we've been able to offset some of the things around cost, tariffs and otherwise over time. With these things, our general managers have just done a fantastic job. Some businesses are more impacted than others in some ways. And that we don't do this from the top level. We let their general managers kind of make the decision to make relative to each of the businesses. And that's the result of kind of what you see in our margin line. So super proud of that. And certainly, we expect going forward, as you can see in our guide, we certainly expect strong margins going forward. R. Norwitt: And just real briefly on book-to-bill. I wouldn't tell you that we see anything categorically with the only kind of proviso being that as I talked about earlier, we do have some customers who, because of investments that we're making, have opened up their order apertures. And that's something we've talked about for a number of quarters. But I wouldn't say anything more broadly about extended lead times. Operator: We have a question from Steven Fox with Fox Advisors. Steven Fox: Adam, I was wondering if you could talk a little bit about commercial buildings. You highlighted in your prepared remarks now with CommScope being there. You also mentioned antennas and sensors. So how do you think 1 plus 1 equals 3 between you and CommScope as you now include commercial buildings in your portfolio? R. Norwitt: Yes. Thanks so much, Steve. No, we're -- actually, this building connectivity business, as we call it and as they call it, is something really exciting, and it is really complementary and new to Amphenol. There's no doubt that we're sitting in our old building here. And as many of you who have come to Wallingford, would not be surprised to hear. I wouldn't say that we have a "smart building" here in Wallingford, but many companies who are less cheap than we are about their headquarters building are really making new investments and all the new functionalities that you can bring into a building. And when you say building, you're talking about residential, you're talking about commercial office. You're also talking about factories and smart factories and all of the like. And so what we're especially excited about is not only the leading position that CommScope has in that market but the channel that they have because it's a very unique channel with unique distributors. They sell into nearly every country on earth. I think it is more than 150 countries at least. Any place where they're building buildings, they need the connectivity to enable all of these next-generation things that go in a next-generation smart building. And with CommScope's position, what we're very excited is that there are other interconnect products, and you mentioned specifically antennas and sensors where we have a very strong position and where we haven't necessarily had that open door into a market like this where I do think long term, that can create value creation for Amphenol, the kind of 1 plus 1 equals 3 that you alluded to. So it's a really exciting area, and we look forward in the years to come to getting to know that market better getting to forge the strategic distribution relationships that they have on a broader basis across Amphenol and ultimately taking advantage of the revolutions that are happening in this area. Operator: We have a question from Wamsi Mohan with Bank of America. Wamsi Mohan: Amphenol work with the leading GPU player in the market on design for scale up connectivity and has earned that leading market share over there in copper-based scale up. So as you think about this transition to optical, there are many more players there. Maybe there's a later start date within underinvested CommScope portfolio, which I'm sure you will change. But how are you thinking about the share and competitive landscape and the potential to have perhaps similar share in scale-up solutions in optical over time? R. Norwitt: Yes. Look, Wamsi, let me just say this. I mean we are not the only player in copper or high-speed copper interconnect. But we have executed in a way that has ultimately led to us taking more than our fair share of that opportunity. And you mentioned one company, and we obviously have done that with many companies. And so to the extent that some of those architectures evolve into optics or some hybrid solutions, we will have also competition and maybe it will be the same or maybe it will be different, but we've always had competition, a very healthy competition, let me say, where we have to go earn that business every day of the week. And our team will go out there and work to earn it just as they have on the copper side. Operator: We have a question from Scott Graham with Seaport Research Partners. Scott Graham: Congratulations on another great quarter. I really just wanted to talk about industrial, where your organic was plus 16%. And in the past, Adam, you've been kind enough to unbundle a couple of the pieces of that. I'm hoping you can do that again, maybe delineate for us which end markets within there may be led and perhaps the 1 or 2 markets where the organic was less than the 16%. R. Norwitt: Well, thanks, Scott, and thanks for your kind words. Look, industrial has been really on a great momentum here in the recent quarters. And like I mentioned earlier, we're seeing that kind of accelerate with 16% organic growth. And one of the things that I find most encouraging is we look at a lot of different subsegments of the industrial market internally. And the vast majority of those subsegments actually have grown organically on a year-over-year basis. I mean, where did we see the strongest performance? I mean, a lot of different places. We saw that in instrumentation. We saw that in electrification. We saw that in oil and gas, even areas like lighting, medical, we saw strong performance, heavy equipment, factory automation, I mean, those are all like strong double-digit organic growth. I mean where did we see a little bit less. I don't know we saw a little bit less performance in like an RMT, marine, but pretty modest. And then there's this category which we call Other. And it's funny, Other is a big category inside industrial where it goes into just the vast universe of harsh environment applications from companies large, medium and small, and that grew very strongly in double digits as well. And so I think what we're seeing is a real broad-based reacceleration of the adoption of electronics in harsh environments in what we call the industrial market. And that's what ties all of our industrial together is it's unique electronic applications in places that aren't very hospitable. Everything from an operating theater to a corn field to an offshore oil well to a train going 400 kilometers an hour and everything in between. And so it's very broad-based growth, in fact. Operator: We have a question from Luke Junk with Baird. Luke Junk: Adam sitting in front of what seems really like a once-in-a-generation supply chain restocking event in both the U.S. and Israeli defense industry. Just hoping you can help us understand Amphenol's leverage within your defense electronics platform, especially thinking of interceptors, munitions, those sorts of things that are going to be exposed to the supply chain dynamic? R. Norwitt: Yes. Thanks very much, Luke. I mean, look, let me just start by expressing my hope that the current ceasefire in the Middle East holds. We continue to monitor our employees who are in the Middle East, whether in Israel or in the Gulf region, and we've continued to support them and hold them in our thoughts because it's not easy being in a war zone for a couple of months here. And I know that's been stressful for many. But there's no doubt that the world is not a safer place today than it was 5, 10 years ago. And there's a particular focus on things like missile defense on things like smart munitions. And we saw that during the Ukraine war, which tragically continues as we sit here today. And there's also a question that in the current very dynamic geopolitical environment that countries around the world are planning, are making but are also planning long term significant upgrades in their own military spending and also in the nature of what they're spending their money on. Spending it on next-generation technologies. And by the way, not only from traditional defense contractors, but from a whole new generation of defense contractors who are really kind of the disruptors in this market, and if we look at our position as the world leader in defense interconnect, having expanded significantly the scope of that position with the acquisition of Trexon and others over the years expanding to more advanced RF interconnect active and passive and all of what we have done, we have just become more important to all of our customers in all those regions. Both existing customers as well as the next generation of customers with whom we're working very intensively. And I think we've done a very smart thing along the way, which is we have invested not only in bringing new products, broadening our suite of products, but also in the capabilities to build those products and the capacity to meet the demands of our customers now and into the future. And when you see now the urgency with which many of these defense departments ramp up their own procurement budgets and that includes potentially here in the United States. We sit in a relatively unique position as a company that has the breadth of products but also the capacities and the capabilities to meet that demand. And our team takes up very seriously, not just because it's a good thing for Amphenol's business, but we know that lives depend on it. And there is a mindset across our entire team of folks working in the defense interconnect market that this is more than just delivering numbers and revenues and profit, but we're also delivering critical things to our customers. And I'm really proud of what they've done. I mean growing that business as we have done, 25% organically last year for the full year, 21% organically. It's not a trivial initiative because making these products requires an enormous amount of technology. There's regulations of how you open new things. There's qualifications and all of the like. It's not as simple as just adding some machines and off you go. So look, we look -- we're very proud of our defense business. We're excited for the future. And to me, it feels like this is potentially a long-term structural shift in the demand dynamics in a market where we position ourselves very well to take advantage of that. Operator: We have a question from Joe Giordano with TD Cowen. Joseph Giordano: I know we're not going to get into specific numbers here, but there's a lot of questions that people are trying to struggle with when you think about new architectures and data centers and on racks from -- as you move into higher voltages and what are the -- like the interplays between price -- like ASPs that you guys can charge versus like the pounds of wire or the lengths of wire. And can you maybe just talk generally like as you get into these more complex, more streamlined types of architectures like the interplay between what the value of those products are versus like what might be going away in terms of, like I said, like pounds of copper or length of cabling in that sense. Like how do we get to a net of all that? R. Norwitt: Yes. Look, Joe, I'm probably going to frustrate you here with my answer. I'm not going to -- because I couldn't give you kind of the fill in the spreadsheet so to speak, on pounds of this and length of that. But you mentioned one thing. And you mentioned that there's new architectures with new approaches. You mentioned, for example, higher voltage. And there's no doubt about it that our team is working to enable these next-generation systems which will need new energy. And we talk a lot about the data part of AI data centers, but I think we should also talk a lot about the power part of them. And again, we come into that with the broadest array of power interconnect from discrete connectors to very complex power cable assemblies, bus bars, liquid cooled bus bars. And you can imagine that our team is doing an enormous amount of things, making sure that as our customers shift to higher and higher power capacities inside their racks, inside their data centers, that Amphenol is their core partner. And I'm really proud of what the team has done there. And we'll continue to see great opportunities across the board. But I'm not going to be able to give you a pound and length kind of metric here. Operator: That concludes our Q&A session. So I will hand back to Mr. Norwitt for closing remarks. R. Norwitt: Well, thank you all very much. We truly appreciate everybody's interest in the company today, and we look forward to talking to you all here in 90 days, and I hope you all have a wonderful spring and start to your summer. Thanks so much. Thank you. Operator: This concludes today's call. Thank you for joining. You may now disconnect your lines.
Operator: Good afternoon, and welcome to PROCEPT BioRobotics First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Bacso, Vice President, Investor Relations, for a few introductory comments. Matthew Bacso: Good afternoon, and thank you for joining PROCEPT BioRobotics First Quarter 2026 Earnings Conference Call. Presenting on today's call are Larry Wood, Chief Executive Officer; and Kevin Waters, Chief Financial Officer. Before we begin, I'd like to remind listeners that statements made on this conference call that relate to future plans, events or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. While these forward-looking statements are based on management's current expectations and beliefs, these statements are subject to several risks, uncertainties, assumptions and other factors that could cause results to differ materially from the expectations expressed on this conference call. These risks and uncertainties are disclosed in more detail in PROCEPT BioRobotics filings with the Securities and Exchange Commission, all of which are available online at www.sec.gov. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of today's date, April 29, 2026. Except as required by law, PROCEPT BioRobotics undertakes no obligation to update or revise any forward-looking statements to reflect new information, circumstances or unanticipated events that may arise. During the call, we will also reference certain financial measures that are not prepared in accordance with GAAP. More information about how we use these non-GAAP financial measures as well as reconciliations of these measures to their nearest GAAP equivalent are included in our earnings release. With that, I'd like to turn the call over to Larry. Larry Wood: Good afternoon, and thank you for joining us. Over the past 6 months, we have taken decisive actions to reset the organization. We have sharpened our focus on operational excellence, accountability and commercial discipline. Our first quarter performance reflects the early impact of these efforts. We are encouraged by our Q1 results and the momentum we are building, having reported total revenue of $83.1 million, representing an annual growth of 20%. Starting with procedures. We completed approximately 12,200 U.S. procedures in the first quarter of 2026. While our commercial realignment initiatives modestly affected Q1 procedure growth, performance was largely in line with expectations. The team is adapting well, and we expect the full benefit of these changes to materialize in the second half of 2026. Regarding handpieces, we believe field inventory levels and customer purchasing behavior have normalized with handpieces sold representing approximately 95% of procedures in the first quarter. On a weighted average basis, we continue to expect approximately a 1:1 ratio of handpieces to procedures for the full year. Turning to U.S. systems. We sold 49 Hydros systems, which included 2 replacement systems. We remain confident in our full year system plan and are encouraged by the early positive customer response to the AQUABEAM replacement program. With regards to pricing, as we emphasized in our last earnings call, establishing price discipline remains fundamental to long-term value creation. In the first quarter of 2026, U.S. Hydros system average selling prices of approximately $485,000. This represents an all-time high and a 14% increase compared to the fourth quarter of 2025 despite what is typically a seasonally challenging quarter for capital. Given our increased pricing discipline across the organization and strong first quarter pricing, we now expect full year 2026 system pricing to be modestly above our initial guidance range. Additionally, U.S. handpiece average selling prices were approximately $3,500, representing a 5% increase compared to the fourth quarter of 2025 and a 10% increase year-over-year. Now I'll provide an update on our commercial organization. We previously described 2 key changes that we believe are strategically important for long-term performance. First, we realigned our commercial team into an integrated regional structure where our clinical and sales functions now report to a common regional leader. The new structure creates a single point of accountability at the regional level to ensure clinical and commercial activities are coordinated around customer success and procedure growth. Second, we are continuing to advance our dedicated launch team to drive more consistent launches, reduce variability in activation and accelerate procedure volume ramp for customers. We view launches as a key lever for improving downstream utilization and overall performance. The realignment of the commercial organization and implementation of the launch team was finalized in early Q1 and as expected, resulted in some short-term disruption in the first quarter. We view this as a normal transition period as teams ramp, establish account relationships and standardize new operating processes. Most important, we believe these changes, along with our marketing programs, better position us for sustained high growth. We will continue to manage through the transition thoughtfully, and we expect the benefits to build as the organization settles into the new model. Now let's look at gross margins and how we are progressing towards profitability. In the fourth quarter of 2025, we reported gross margins of 61% and indicated this level was temporary. We guided to full year 2026 gross margins of approximately 65%, reflecting expected improvement. Driven by increased price discipline and better leverage of our cost structure, we delivered first quarter gross margins of 65%. With this strong start, we expect gross margins to increase modestly on a sequential basis throughout the year. We will also continue to manage operating expenses as we work toward achieving positive adjusted EBITDA in the fourth quarter of 2026. Turning to regulatory and clinical updates. In March, at the 41st Annual European Association of Urology Congress in London, the EAU updated clinical guidelines to give Aquablation therapy a strong recommendation as a surgical treatment for men with BPH and moderate to severe LUTS, reflecting the high quality of evidence and favorable patient outcomes. The therapy is now recommended as an alternative to TURP, especially for patients seeking to preserve ejaculatory function. This upgrade for prostates 30 to 80 milliliters and the additional notes for treating prostates greater than 80 milliliters is supported by multiple clinical trials, including WATER and WATER 2, all of which demonstrated durable improvements in urinary symptoms, preservation of ejaculatory and urinary function and effectiveness across a wide range of prostate anatomies. A strong recommendation from one of the most respected global guideline bodies reflects the strength of the clinical evidence supporting Aquablation therapy and reinforces its role as a modern surgical option for physicians seeking to deliver durable symptom relief while preserving quality of life outcomes that matter most to patients. At EAU, we also announced the first international launch of Hydros in the U.K. This milestone marks the beginning of a broader global expansion. Specifically, in the first quarter, we sold 7 new Hydros systems in the United Kingdom at an average selling price of over USD 400,000. Building on the recent approval and strong clinical momentum, including the rapid adoption at high-volume NHS hospitals, our U.K. capital pipeline continues to grow nicely. We have also received FDA clearance on our second-generation FirstAssist AI software, an advancement in personalized image-guided planning for Aquablation therapy. This milestone further strengthens the capability of the Hydros robotic system and enables more precise identification of prostate anatomy and more complete treatment planning to help surgeons plan with greater confidence and consistency. We remain deeply committed to advancing the standard of care in urology through our continued innovation for the millions of men affected by BPH. Lastly, we are approaching the completion of patient enrollment in the WATER IV study and based on current trends, expect to be fully enrolled by the end of May. We have been very pleased with the pace of enrollment, which is on track to be completed in less than 18 months. For a clinical trial of WATER IV size and complexity, the speed of enrollment highlights strong surgical interest and a patient willingness to participate, factors we believe will ultimately translate into broader market adoption post approval. Based on current time lines, we expect to present the WATER IV primary endpoint at AUA in the spring of 2027. With that, I will turn the call over to Kevin. Kevin Waters: Thanks, Larry. Total revenue for the first quarter of 2026 was $83.1 million, representing 20% year-over-year growth. U.S. revenue for the quarter was $72 million, reflecting 19% growth compared to the prior year period. Turning to U.S. procedures. We completed approximately 12,200 U.S. procedures in the first quarter of 2026, representing approximately 30% year-over-year growth. The percentage of handpieces sold to procedure volume was approximately 95% with handpiece average selling price of approximately $3,500. As a result, total U.S. handpiece and other consumable revenue was $43 million in the first quarter of 2026, representing 13% growth compared to the first quarter of 2025. Turning to U.S. systems. Total U.S. system revenue was $23.4 million in the first quarter, representing 25% year-over-year growth. We sold 49 Hydros systems at an average selling price of approximately $485,000 for new U.S. systems. Additionally, the 49 systems include 2 replacement systems, representing the early stages of what we expect to become a growing replacement cycle. We exited the first quarter of 2026 with a U.S. installed base of 765 systems. International revenue in the first quarter of 2026 was $11.1 million, representing year-over-year growth of 25%. Moving down the income statement. Gross margin for the first quarter of 2026 was 65% compared to 64% in the first quarter of 2025 and 61% in the fourth quarter of 2025. The improvement was driven by increased pricing, cost discipline and favorable product mix. Total operating expenses for the first quarter of 2026 were $86.6 million compared to $71.6 million in the prior year period. The increase reflects continued investment to support commercial expansion, ongoing innovation across our BPH platform technology and increased funding for our WATER IV prostate cancer trial, positioning us to drive long-term growth and expand our clinical and technology leadership. Net loss for the first quarter of 2026 was $31.6 million compared to a net loss of $24.7 million in the first quarter of 2025. Adjusted EBITDA was a loss of $18.1 million in the first quarter of 2026 compared to a loss of $15.8 million in the prior year period. Cash, cash equivalents and restricted cash totaled $249 million as of March 31, 2026, providing a strong balance sheet to support our strategic priorities. We expect cash usage to improve throughout the year, driven by greater operating leverage and improvements in working capital. Moving to our 2026 financial guidance. We continue to expect full year 2026 total revenue to be in the range of approximately $390 million to $410 million, representing growth of approximately 27% to 33% compared to 2025. This guidance range continues to assume international revenue to be in the range of $50 million to $51 million. Additionally, we continue to expect 2026 total U.S. procedures to be in the range of 60,000 to 64,000, representing growth of approximately 39% to 48%. With respect to new U.S. system pricing, we now expect pricing to range between $450,000 and $460,000 for the remainder of the year, depending on customer mix between individual accounts and large IDNs. While first quarter U.S. system revenue and pricing exceeded expectations, and we remain encouraged by both pricing and sales momentum, our focus is on ensuring this performance is sustainable. Based on current trends, we have strong confidence in our full year total revenue guidance. We will provide further detail on these metrics as the year progresses. Turning to gross margins. We continue to expect full year 2026 gross margin to be approximately 65%. This includes $5 million to $6 million of tariff expense compared to $1.3 million in fiscal 2025. Our gross margin guidance does not reflect any potential benefit from previously paid tariff refunds, which could provide upside to 2026 gross margins. We continue to expect full year 2026 adjusted EBITDA loss to be in the range of $30 million to $17 million. This guidance reflects positive EBITDA in the fourth quarter of 2026 at both the low and high end of the revenue range. In the second quarter of 2026, we expect total revenue to be in the range of $91 million to $95 million, representing growth of 15% to 20%. I would now like to pass it back to Larry for closing comments. Larry Wood: Thanks, Kevin. In closing, while we have undergone significant change over the past 6 months, we believe these steps are essential to driving sustainable, high growth and to establishing a clear path to profitability. In summary, while we are mostly complete with our U.S. commercial realignment initiatives and expect more consistent commercial execution over the course of the second quarter as reflected in our total revenue guidance. We have established pricing discipline across the organization, which we believe is critical to our long-term success. The U.S. capital pipeline continues to build, increasing our confidence in the sustainability of higher average selling pricing and the conversion of this pipeline into sales. Lastly, WATER IV enrollment is ahead of schedule, and we expect to complete enrollment in May. In closing, I want to thank our employees, customers and shareholders for all their support to help us along our journey to becoming the standard of care for BPH. At this point, we will be happy to take questions. Operator? Operator: [Operator Instructions] And our first question comes from Matthew O'Brien of Piper Sandler. Matthew O'Brien: The first one is just a broader question kind of on the puts and takes that we saw here in Q1, the strength on the capital side. I'd love just to hear about where that originated plus the ASP benefit that you're getting. And then on the handpiece side, I don't know, Larry, if there's a way to kind of frame up some of the disruption that you saw this quarter and then kind of how long it should linger and when we should be past that? And then I do have a follow-up. Larry Wood: Yes. Thanks, Matt. I think the capital quarter was pretty broad-based. We didn't really have a lot of large IDN orders or anything like that. So it was pretty broad-based. And I think that also contributed to the ASP upside. But we did certainly implement pricing discipline, much like what we did with handpieces, we implemented that on capital as well. And so that's just an important part of our journey toward profitability. On the handpieces, the realignment of the sales force has been complete. And I think we're just in a very just natural transition phase where we're reestablishing account relationships and backfilling some of the key positions for people that have moved over to the launch teams. But we expect the momentum on procedures to build throughout the quarter -- sorry, throughout the year. And we remain, I believe, on track related to our guidance, and those are certainly our goals. So we're not where we want to be yet, but I think we've made the changes we need to make and we're building. And I think the team is going to continue to grow into these roles, and I'm excited about what the future looks like. Matthew O'Brien: Okay. I appreciate that. That's very helpful. And then on the second question on the guide side. Just if I'm looking at the roughly -- I think it was $93 million midpoint of the range for Q2. Just talk about plus all the -- again, the ASP benefit you're going to get on the system side. Just talk about the confidence in the -- especially the back half, it seems like it's a little bit more loaded than normal to get to the midpoint of that range and just the confidence there getting to the midpoint or even higher just again, given the ASP benefit that you're talking about on the system side? Kevin Waters: Yes, Matt, I'll take that. So regarding Q2, in our prepared remarks, we did say that we are guiding to new systems in the $450,000 to $460,000 range even with the strength that we saw in the first quarter. And I would definitely suggest our confidence in executing within our guidance range this year has increased with our Q1 performance. But we did just feel it's prudent to maintain current expectations as we continue to emerge from the recent commercial realignment. But look, we feel good about the full year across all metrics. And as I said in my prepared remarks, it will probably be the end of Q2 where we start to formally update some metrics around pricing and volume given what we've seen in the first 6 months here. Operator: And our next question comes from Nathan Treybeck of Wells Fargo. Nathan Treybeck: So procedures were flat quarter-over-quarter. Is there any way to quantify how much of this is driven by disruption from the commercial or changes in the inventory destocking? And I guess, have you seen any underlying softening in demand or referral funnels? Larry Wood: No. I think what we saw in Q1 was just sort of some normal seasonality that we see when we start the year, and that's not uncommon for us. And so I think that was all pretty normal. It's hard to quantify the sales force part of it in terms of people growing into their new roles and just sort of the normal seasonality we see in Q1. But we're going to continue to drive procedures throughout the course of the year. And we had strong system placements and the combination of strong system placements along with our launch teams. We think [indiscernible] is going to be a contributor to procedures as we get deeper in the year, and we have more launch team systems in the field, and we think that's going to help us. Nathan Treybeck: Great. And for my follow-up, so handpiece sales were below your target of 1: 1 procedures. You mentioned inventory rightsizing is completed, but can you help us understand how much residual destocking impact there was in Q1? And could handpieces fall below procedures in upcoming quarters? Larry Wood: Yes. No, we tried to guide that for the full year, we're going to be 1:1 on handpieces, and we still remain very confident that that's going to be the case. And I think the bottom line is we have -- if we're 95%, I'm not going to really apologize for it. And if we're 105%, we're not going to brag about it. I think handpiece sales are always going to fluctuate a little bit based on the number of systems we launch and all these other sorts of things. So I think that it's normalized. The number that we're focused on are procedures because eventually, procedures and handpiece sales have to equalize out over time. It's not going to be about how much inventory people carry. It's going to be how many procedures we drive. So we feel like that is largely normalized now, but we remain confident in the 1:1 full year ratio that we provided at our investor conference. Operator: And our next question comes from Mike Kratky of Leerink Partners. Michael Kratky: Maybe just one quick one. You mentioned the $450,000 to $460,000. Was that the full year average? Or was that for the remainder of the year? Kevin Waters: I would classify that as for the remainder of the year. You could put in -- that puts the full year average more towards the upper end, probably around $460,000 when you average that out, Mike. Larry Wood: Yes. And just to add to that, part of our thinking on this is we didn't have a lot of big IDN orders in Q1. And when we get larger IDN orders, that can sometimes have a little bit more effect on price. But I think even broader than that, we don't want to get out over our skis on ASP commitments because there are certain places where we want to maintain some flexibility. But we are driving price discipline across the organization, and we're going to continue to do that. Michael Kratky: Understood. And maybe just as a quick follow-up. But Kevin, totally appreciate your comments on the prudence and maybe some conservatism for now given it's early in the year, but you're reiterating your U.S. systems revenue guidance in the backdrop of the higher ASPs. Is there anything fundamental from a number of units sold perspective that is maybe changing? Or is this really just as usual? Kevin Waters: Look, I don't think it's changing, but I definitely believe the Q1 performance gives us greater conviction and confidence around achieving our full year guide. That should be implied with our performance. But at the same time, we're just coming off a Q4 shortfall. We're coming off a commercial realignment. And we just want to make sure that we maintain current expectations and not get out over our skis, as Larry mentioned, but our confidence in executing the full year on systems, particularly with the Q1 performance is higher today than it was when we gave guidance in February. Operator: And our next question comes from Richard Newitter of Truist. Richard Newitter: Maybe just to start, I'm trying to get a sense for -- of the new initiatives or the kind of the way you're approaching the market and the selling organization that you outlined. Can you highlight where you're seeing or where we should expect to see the proof points or the benefits show up fastest? Like are there -- I think there were 3 main ones that you had. Like where are you seeing the improvements show up most meaningfully and soonest? And I get that you're pointing more to the back half, but I'm just curious where it's most evident that the progress is going the way you want it to be going in the first half? Larry Wood: Well, I think we have a lot of confidence in our launch teams. I think we moved some of our more senior people over there with a lot of experience. And I think the key thing there is the more systems we put in the field that we do under the launch team model, which is going to build throughout the year that we will continue to see benefit of that. And I think that's one that we have great confidence in. The patient awareness activities, we're running multiple pilots on that. And when those pilots read out, it will help us really prioritize what things are most effective and what things we should be driving. And I think that's just a prudent way to approach some of these new marketing programs. But I think it's also really important for people to understand that there's always just going to be a lag between driving patient awareness and a patient getting a procedure. It's not that patient gets new information, they get an e-mail, they see something on social media or maybe they hear a radio ad and they show up at a doctor and they get treated the next day. They have to come in, they have to schedule their appointment, they have to go to work up. I think most systems in the country probably schedule people a month out or so. So there's always going to be a natural lag between some of these initiatives and actually seeing the patients get treated. But we're encouraged by all of the things. I think we spend a lot of time with the sales team, and I think people have good conviction about the changes we've made and the new roles that we have for people. But it still just takes time for people to reestablish account relationships and to get some of the new people trained to backfill some of the launch teams. But I think these are all very natural things. They're not like -- they're not things that we think are going to be a struggle, but that's why we've always modeled, and we tried to be really clear about this at the investor conference. These things are going to contribute more in the back half of the year than they are in the early part of the year. Richard Newitter: Got it. That's really helpful. And then just -- this is now the first quarter or the first few months that you've been able to really see how physicians would react to kind of the physician fee payment changes that happen to all respective procedures going down, including yours. I guess what are you hearing and seeing out there? Do you feel better or worse unchanged versus kind of the way you were talking to us before we obviously have these changes in place. Larry Wood: I think we had pretty much factored those things in, in February when we spoke before. And I don't think anything has remarkably changed from what we talked about in February. I think the economics for all these procedures are what they are. It is really about driving the clinical benefit and making sure patients understand how differentiated our procedure is versus competitive procedures. And I think when physicians understand that as well and patients understand it, I think that's what drives therapy adoption and taking share from competitive procedures. But I don't think anything has meaningfully changed on that. Operator: And our next question comes from Josh Jennings of TD Cowen. Joshua Jennings: Nice to see the solid start to the year. I wanted to start off and just follow up on the reimbursement question. And just is there any way you could help us frame up the potential for Aquablation procedure to kind of move up in the APC level as we go through these proposed rules and then final rules over the next couple of months? Larry Wood: Yes. We haven't built that into our modeling. And I think one of the important things to remember, Josh, is that even when these codes change, they always collect actual costs. Medicare doesn't pay for value, they pay for resource consumption. And so that's just not -- I think if you make our economics the primary part of the story here, you're always going to be sort of chasing those ghost. So what we're focused on is at the current levels of reimbursement exists, how is this an economically solid procedure for hospitals and then how do we drive patients in. And I think the other part about it is how do we help hospitals be efficient with the procedure? How do we help them be efficient with procedure time? How do we help them be efficient with discharge, be efficient in avoiding complications. And when we do that, I think the economics for this procedure work well. But we haven't factored anything into our guidance about changing APC levels. If that happened, it would be certainly an upside to reimbursement. Joshua Jennings: And then just a follow-up. Sorry if I missed this in the earlier remarks, but sounds like there was more positive reception than anticipated for replacement systems, Hydros replacements. Any new outlook just in terms of how replacements kind of factor into -- through the rest of 2026? And maybe just remind us why you expect replacements to pick up next year. Larry Wood: Yes. Thanks, Josh. Yes, I think just in simplest terms, given a typical capital cycle, and we just really launched our replacement program kind of at the beginning of the year, the fact that we got 2 replacements already in, I think we were very encouraged by. And I think we've had a lot of customers now that they realize they can get a trade-in value for their legacy system, which helps them with a replacement strategy. I think we just probably feel confident that replacements are going to be something that we're going to really hone the program in this year. And I think it's going to be a much bigger part of our story in 2027. But we're encouraged with our early start, and we just got to continue to drive execution on that. Operator: And our next question comes from Chris Pasquale of Nephron Research. Christopher Pasquale: Besides all the moving pieces you guys had going on, there was also quite a bit of severe weather during the quarter. These cases are reschedulable if the need arises. Did you see procedures getting pushed from 1Q into 2Q because of that? Or was all of that disruption sort of contained within February and March? Larry Wood: Yes. Thanks. Chris, I mean certainly, there were some severe weather in the year, and we know that there are some case cancellations and whatnot. How many of those cases came back on the schedule and how many of those patients got something else. I think it would be really difficult for us to say. I think most of that's probably out of the system at this point because most of that happened early in the quarter. I don't think it materially impacted our quarter. And I'm sort of just not really inclined to attribute anything to weather or weather-related issues. Our numbers are our numbers. They have to stand alone. If there's severe weather and cases get canceled, it's our team job to make sure that they get rescheduled and they get done. So we just don't really make any allowances for that here and just keep people focused on the execution that we control. Christopher Pasquale: Yes. Fair enough. I'd love to hear a little bit more about the U.K. opportunity and what that looks like. International, small part of the business today has been a consistent outperformer. Can you talk a little bit about sort of what you think the denominator is for that particular market? And are there other areas that you're excited about in terms of next steps internationally? Larry Wood: Yes. When I stepped into the role, I really felt there's opportunities in international. But international isn't a very homogeneous place. There's a lot of variation, obviously. And so some countries have really solid reimbursement and the capital opportunities there are solid. And so we focus on those places and the U.K. is certainly our biggest place in Europe. We were excited to launch Hydros. I think we had a great showing at the AUA and combined with the latest guidelines, I think it was an overall very positive meeting for us. We continue to evaluate what other markets in Europe that we should be looking at as opportunities, but it's not going to be everywhere. But I think over time, it's Europe and international is going to become a bigger and bigger part of our story, but that's going to just take time to develop. Operator: And our next question comes from Stephanie Elghazi of Bank of America Securities. Stephanie Piazzola: I wanted to ask on Q1 procedures were a little light of the Street and grew 31%, and you're still expecting a ramp in procedures to 50% growth in the second half. So can you remind us what's driving that acceleration and your confidence in that? Larry Wood: Yes. Thanks for the question. I think we always expected the first half of the year to be slower than the second half of the year. And we always expect to see a little bit of seasonality in Q1, and we certainly did see that, but it was pretty much at expected levels. We implemented all of our organization changes in the sales force early in the year. And so people are growing into those roles and they're reestablishing account management. The launch teams are starting to launch systems under the launch team model. They started in the quarter. But it takes time for those to build and for those to contribute. So I think it is a combination of people maturing the roles, reestablishing these account relationships. I think in the back half of the year, we start seeing more benefit from some of our patient activation activities. And I think we get the full benefit of all of our newly launched systems this year and those contributing at a higher level than what we've seen historically. But the more systems you place under that model and the better they do, the more that builds for the back half of the year. So that's what's driving that. Stephanie Piazzola: Got it. And then on the Q2 guidance, the midpoint of $93 million is a little below the Street at $95 million. So maybe could you help us understand that? I'm just curious what's changed on your view of Q2, maybe it's some of what you had just talked about, but is there more lingering disruption from the commercial organization changes than you thought or anything else? Kevin Waters: No, this is Kevin. Nothing has really changed in our thinking. If anything, as I said earlier, I think we feel more positive in our initial guide today than we did when we provided that a few months ago. And we have never provided Q2 guidance as part of Investor Day. So this is really the first time and really just sticking with the philosophy right now that we think it's prudent to keep expectations reasonable and give us a chance to outperform as opposed to getting out ahead of ourselves. But there's nothing unique or different in Q2, and we continue to feel good about the trajectory on both systems, procedures and our international business. Operator: And our next question comes from Suraj Kalia of Oppenheimer. Suraj Kalia: Larry, Kevin, congrats on a good start to the year. So Larry, a lot of commentary on handpieces and procedures. Maybe if I could ask one question slightly differently. So of the 47 (sic) [ 49 ] Hydros systems, right, you've given your site numbers in the U.S. Our rough math, Larry, is suggesting it's around the 17-ish number of procedures per site per quarter, roughly in that ballpark. Maybe if you could talk to what are you seeing in utilization in your sites? Where do you think your share capture is within those sites? And is this the bogey that we should be thinking about as we map out the year and new store same-store sales? Larry Wood: Yes. Thanks for the question. We talked about this a little bit at the investor conference. Our sites are highly variable. And so trying to create averages and trying to create average utilization, especially when we have a mix of AQUABEAM and a mix of Hydros. And going forward, we're going to have a mix of kind of our launch team launch systems and some of our legacy systems. I just think it's hard to be able to create an average. And I appreciate why everybody wants to do that because it's easy to just plug into a formula. But I think what people should be focused on is just our pure procedure growth. We put our procedure numbers that we expect to do this year. We put our ASP numbers, we put our system numbers on the board, and that's what we just have to go drive to. So the key for us is showing growth quarter-over-quarter on our procedure growth. And that's what we're going to be driving to. And I think I'm certainly not focusing the team on -- go to our lowest utilization places and trying to bring into the mean. We map out literally every system in the country and say, where are the biggest opportunities, where are their under-usage, where are there share shifts, where are there motivated people. And so that's just our focus. But I would just continue to focus on procedure growth quarter-over-quarter. Suraj Kalia: Fair enough. And Larry, one follow-up question on WATER IV. So you'll have a readout in spring '27. Let's assume it's positive, right? Logic tells you there would be a collateral pull-through both on the BPH side and on the prostate cancer side, right? But Larry, should we think about, is it going to be a symmetric payoff? Or do you envision there could be some level of asymmetricity? In other words, let's say, superiority, there is some kink somewhere. Does it impact BPH? So how are you all thinking about that? Larry Wood: Yes. That question may be about my education level. I'll say like I don't know the WATER IV data. Nobody knows the WATER IV data at this point. And I don't want to speculate about data. But I think just broadly speaking, the more positive that data is, the more disruptive it has the potential for being -- for patients with prostate cancer. And obviously, anybody that already has a system that's already trained would be able to adapt quickly to treating those patients, and we would certainly do everything we could to facilitate that. But I think it's just going to matter most of the strength of the data and how doctors interpret that as it relates to where this fits in treating patients with prostate cancer. All of those things being said, we think it's a perfect adjacency for us. It's rare that you can get this kind of leverage out of the same exact system, the same exact handpiece and largely the same users, and that gives us leverage all of our sales force as well. So we're just focused on running a great trial and then presenting that data when it comes out at AUA next year. And we're all cautiously optimistic it's going to be positive. But we'll have a lot more view once the data is public and we can talk about it and be more granular. Operator: And our next question comes from David Rescott of R.W. Baird. David Rescott: I wanted to ask on procedure utilization. I think at the -- I recall at the Analyst Day, you had called out different levels of procedure contribution from that class of systems sold pre-'25, those sold in '25 and those expected to be sold in 2026. And so just curious on the progress you've seen so far in Q1, maybe how that level of contribution from the different groups have stacked up relative to your initial expectations? And then what your expectations are through the rest of the year from that segmentation perspective to get to the lower end, the midpoint or upper end of the procedure guide for the year? Larry Wood: Yes. I'll just say that we're still early in the launch model and the ability of those systems to contribute significantly to our overall total number is just very limited at this point. I will say we remain extremely confident in the launch team model. And I think when we saw the readout from our pilot that we shared at the investor conference, and I think we -- for all the same reasons, we continue to believe that, that's going to be a very important part of our story. And it really just comes down to making sure as many systems we sell as possible start off great because our view is when they start off great, they tend to stay great. And they tend to get established and they become a huge part of how BPH gets treated in those accounts. But we don't want to get too far ahead of ourselves, and I think it's too early to declare victory on any of our programs yet. We just remain laser-focused on all of them and making sure we're tracking the metrics. We're tracking the progress that we're making, and we're driving our procedure numbers and doing that to the very best of our ability. So that's our focus now. We're just sort of head down and trying to drive the organizational excellence that we need to get where we need to go. David Rescott: Okay. And then maybe on this system ASP in the U.S. that you delivered in the quarter and then the subsequent guide through the remainder of the year. You called out this pricing discipline maybe as being a factor for the higher ASPs you saw in the first quarter, but obviously also shows that there clearly is an appetite maybe at least from the centers' perspective of paying a higher price for some of these systems. So maybe can you help reconcile why the guide for the second half of the year -- or sorry, for the remainder of the year would assume an ASP below what you delivered in the first quarter? And is there a potential for what you saw in Q1 to maybe be a more realistic number as you go through the year from a system ASP perspective? Larry Wood: Yes. I think as Kevin said earlier, a little bit of it comes down to customer mix. We talked about it a little bit in our Q4 number. We had probably more IDN sales in Q4. And so that took our ASP down a little bit from what we've seen earlier in the year last year, and we had less IDNs in Q1. We are going to continue to drive price discipline, and we're going to continue to try to get the highest ASP that we can, and we think our value proposition is very strong. But we don't want to react to one quarter and get out over our skis for what the whole year ASP is going to be. So what we're just trying to do is be measured about that. And that's why Kevin covered that we're now thinking that you can model at $450,000 to $460,000 for the remainder of the year, and we think that that's a good modeling number. We'll certainly update that quarter or next quarter where we land. And depending on how that quarter lands, I think it will give us a lot more confidence in how durable the pricing ASP is going to be. But I'm very pleased overall with the operational discipline that we're showing. We guided -- if you go back and look at handpieces, we guided handpieces this year that you should model in $3,500. We were able to achieve that in Q1. And so I think that bodes well for us for the rest of the year. We're going to continue to drive that same sort of transition on systems. But as Kevin and I both said, we just don't want to get out ahead of ourselves. Operator: And our next question comes from Mason Carrico of Stephens. Mason Carrico: I'll keep it to one. Could you characterize, I guess, what percentage of the sales funnel today is being driven more by bottoms-up surgeon champion versus top-down admin of these larger systems? Are you seeing the new launch team attract more surgeon champions to deals that are sourced top down today versus, I guess, where you guys were 6 months ago? Larry Wood: Well, yes, I'll start and then maybe I'll ask Kevin to add a little bit of color because he's very deep on our capital cycle and for some of those things. One of the things that is core to what we're doing on the capital side, though, is we don't want to sell a system to anybody, frankly, if there's not a surgeon champion who's established. We want people to always be standing on the dock waiting for the system. We want to have our launch team ready to go. We want to have patients prescreened and we want to drive that system very, very quickly. And I think historically, we just were much looser on that process. If somebody wanted to buy a robot and we haven't identified a champion yet, it showed up on the dock, then the team would start working on that process. And now we just have a much more integrated approach on that, of making sure like when we sell a system that there's a home for it and there's a champion who's ready to go, and then we bring the launch team in and we try to drive case excellence from the very first cases we do with that system and try to establish it as a core therapy within their urology program. And I just think we're just so much tighter about that now organizationally, and we're still building that muscle that that's going to be what I think really differentiates the organizational performance as we move through time. I'll ask if Kevin wants to add anything on customer mix or some of these other things. Kevin Waters: Yes. I'll just add a follow-up point that I think it is a common misconception where we have said and we are seeing great relationships now with the top down with large IDNs. But at the same time, that does not mean we don't have the bottoms-up surgeon support within that IDN network. But historically, we only had the surgeon support, whereas now we're definitely being viewed as a viable technology across a much broader hospital network. And that is what we're seeing. But to remind you, our Q1 results did not have any of those large IDN sales. So that's just another factor as well that gives us confidence in the full year system guidance. Larry Wood: Yes. I guess just to finish the thought, it's really both. If you have top-level administrative support, you don't have a surgeon champion, you can get the capital sale, but you're not going to get the pull-through on procedures that you want. If you have a surgeon champion that you don't have the administration that's supporting, bringing a new therapy in, then you're going to struggle with the capital sale and that cycle is going to go a lot longer. And I think what we're just really trying to do is just be super integrated about that and drive to where we have both pieces of those puzzles because when those 2 things come together really strongly, I think that's where we really drive utilization to where we want it to be. Operator: And our next question comes from Brandon Vazquez of William Blair. Max Kruszeski: It's Max on for Brandon. I'll just do one quick one as well. First quarter gross margin was 65%. You guys reiterated the full year expectation of about 65%. Can you just walk us through some of the puts and takes given some of the revenue mix and ASP dynamics on the year and how that relates to gross margin and how we should be thinking about cadence for the rest of the year? Kevin Waters: Yes, I can walk you through the year. Good question. So you pointed out in Q1, we did deliver 65% gross margin. That was driven sequentially by higher handpiece and system pricing and just our overall ability to leverage our overhead expenses. And as we move throughout the year, Q2 and Q3, you should think of very modest expansion in the next 2 quarters, somewhere in the 10 to 20 basis point range over the next 2 quarters. But when you get to the fourth quarter, you have a multitude of factors. You have favorable revenue mix towards higher-margin handpieces. We have improved overhead absorption. And then just in general, we have total revenues, and we should be exiting the year in the 66-plus percent range, but that will still translate to a full year margin at 65%. And definitely coming off of Q1, landing at our full year guide in Q1 at 65% gives us a greater degree of comfort with our full year margin guidance. Operator: Thank you. This concludes our question-and-answer session and also today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good day, everyone. My name is Leila, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Chief Investor Relations Officer. Lynn Tyson: Thank you, Leila, and welcome to Ford Motor Company's First Quarter 2026 Earnings Call. With me today are Jim Farley, President and CEO; and Sherry House, CFO. Joining us for Q&A is Andrew Frick, President of Ford Blue and Model e, Alicia Boler-Davis, President of Ford Pro; Kumar Galhotra, Chief Operating Officer; and Cathy O'Callaghan, CEO of Ford Credit. Jim will give a high-level overview of the business, and Sherry will provide added texture on the financials and guidance. We'll be referring to non-GAAP measures today. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck at shareholder.ford.com. Our discussion also includes forward-looking statements. Our actual results may differ. The most significant risk factors are included on Page 19 of our deck. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS and free cash flow are on an adjusted basis. Upcoming IR engagements include Navin Kumar, CFO of Ford Pro at the Deutsche Bank Global Auto Industry Conference in New York on May 19. And now I'll turn the call over to Mr. Farley. James Farley: Thank you, Lynn, and thanks to all of you for joining us. I wanted to thank the Ford team, all of our dealers and our partners for a strong start to this year. Our results this quarter, $43.3 billion in revenue, $3.5 billion in adjusted EBIT, reflect a sharp execution and the momentum we are building for our Ford+ plan. Accordingly, we're raising our full year adjusted EBIT guidance to between $8.5 billion and $10.5 billion. These results are encouraging, but the bigger story is the modern Ford that's now taking shape. For 5 years, we have relentlessly built the foundation of Ford+. We strengthened our industrial system, made real progress on quality, cost and advanced our software capability and customer experience. Earlier this month, we took the next step in that evolution by establishing an end-to-end organization, product creation and industrialization. We unified our advanced technology, digital and design teams with our global industrial system. This change aligns with the most intensive product and software rollout in our history. By 2030, almost all of our global volume will feature next-generation electric architectures and in-house software. This applies to every propulsion type as we deliver and scale high-quality software-defined vehicles. This new organization allows for faster decision-making and reduce complexity. This is the moment we integrate the digital soul of the vehicle, the software or the silicon and the user experience with our world-class industrial execution. Among other things, this alignment will support our high-margin software and physical services revenue, which was over $15 billion last year. And we expect to grow that $15 billion nearly 8% annually through the end of the decade. This service growth is driven by offering customers indispensable digital experiences and investing in aftermarket sales with a focus on customer uptime, expanding our parts catalog and enhancing our service network. We're also learning -- we're also leaning into the Skunk Works model to improve all of Ford. They've done an incredible job creating the UEV platform, which represents a step change in efficiency and cost, especially for the EV market. But at Ford, we're now integrating these Skunk Work breakthroughs back into our mainstream products and processes. We're applying their advanced tools and physics-based cost modeling to the highest volume internal combustion and hybrid lines. This, of course, will reduce our costs and improve quality across the board. Our product pipeline is aggressive. Between now and '29, we will refresh 80% of our North America portfolio and 70% of our global portfolio by volume. This includes the next-generation F-150 and Super Duty, among many others. It also includes the launch of our universal EV platform in 2027 from our Louisville assembly plant in Kentucky. We are scaling that plant for significant volume to accommodate a variety of vehicles off that single platform. And speaking of electrification, our strategy remains focused on powertrain choice, not nameplate complexity. By the end of the decade, 90% of our global nameplates will offer electrified powertrains, including advanced hybrids, extended range electric vehicles and full EVs. Our financial health is driven by a leaner, more effective industrial system. We're on track to deliver another over $1 billion in material and warranty cost improvements this year, and we will never stop. Our focus on quality is paying off. J.D. Power has recently ranked Ford #4 in the 2026 U.S. Customer Service Index, our best performance in 30 years. Finally, we remain resilient in the face of global uncertainty regarding the conflict in the Middle East. Of course, our priority is our team and the safety of them. We're monitoring the situation and working to minimize risk and find opportunities in much the same way we have navigated the pandemic, the semiconductor shortage, tariff headwinds and others. We have the muscle memory to find cost offsets, adjust our product mix quickly and proactively manage our supply chain in times of stress and crisis. My main message today is this, Ford is a fundamentally stronger, more modern company. We have a foundation built on industrial fitness. We have the technology, and we now have the unified organization to not just deliver but to compete to win. Ford is focused on execution, quality and thrilling our customers. Over to you, Sherry. Sherry House: Thank you, Jim, and hello, everyone. Before I walk you through the details of our performance this quarter, let me start with a few items I know are top of mind for you. First, in Q1, we recognized a $1.3 billion benefit related to IEEPA tariffs. This onetime adjustment largely benefits Ford Blue and Ford Pro at about $700 million and $500 million, respectively. They are related to IEEPA tariffs paid between March 2025 and February 2026. Second, our Novelis recovery is progressing as expected. We still expect a $1 billion improvement in EBIT year-over-year weighted towards the second half. This is net of $1.5 billion to $2 billion of onetime incremental costs to secure alternatively sourced aluminum until the Novelis facility is operating at full throughput later this year. Third, relative to U.S. inventory, we expect to remain within our target of 55 to 65 retail days supply for the year. F-Series sales remain healthy as inventory recovers from the Novelis supply disruption. America's best-selling truck delivered year-over-year retail share improvement of 30 basis points in March, and we are carrying that momentum into Q2. Our team is effectively managing tight retail day supply by helping dealers fill inventory gaps while ensuring high demand trim levels are in ample supply. We are also producing a richer mix of product as we continue to ramp Novelis. And importantly, on average, we are spending less on incentives than our competitors. In fact, for the quarter, F-150 had the highest retail share, highest average transaction price and the lowest incentive spend per unit versus our key competition. Now turning to the quarter. We delivered adjusted EBIT of $3.5 billion or $2.2 billion, excluding the impact of the IEEPA. The strength in the quarter versus our original guidance was primarily supported by a change in calendarization of cost improvements and timing of investments, growth in software and physical services and higher net pricing. Our global revenue grew by over 6% despite a nearly 4% decline in volume, which was expected as we exited low-margin products like Escape in North America and Focus in Europe. In the U.S., we had our highest Q1 share of revenue in 5 years, led by large utilities and trucks. Adjusted free cash flow was a use of $1.9 billion in the quarter, more than explained by unfavorable timing differences, higher net spending and changes in working capital. On a full year basis, we expect timing differences and working capital to be favorable. Our balance sheet is strong with $22 billion in cash and over $43 billion in liquidity, and we remain committed to our investment-grade rating. We repaid our convertible debt without refinancing it and also relaunched our anti-dilutive share repurchase program, which we completed in the quarter. And earlier this month, we successfully renewed our $18 billion corporate credit facilities for another year. Our strong liquidity position provides us with the flexibility to manage in this dynamic environment and invest in higher return growth opportunities like Ford Energy. It also allows us to pay consistent shareholder distributions. In fact, yesterday, we announced the declaration of our second quarter regular dividend of $0.15 per share payable on June 1 to shareholders of record on May 12. Now turning to segment highlights. Ford Pro achieved EBIT of $1.7 billion against the backdrop of Novelis-related production disruptions. Ford Pro continues to deliver higher margins through a powerful ecosystem of vehicles, software and physical services. We are scaling rapidly and increasing recurring revenue, which bolsters resiliency. In fact, paid software subscriptions grew to 879,000, a 30% year-over-year increase. By integrating innovations like Ford Pro AI, we can help commercial fleet managers instantly identify maintenance needs, leverage large data models on fuel usage to lower costs and optimize routes amongst other features, all designed to provide better predictability, productivity and profitability, which our customers require. As we look ahead, the 2027 model year order books are just starting to open, and we are seeing positive early indicators. Ford Blue delivered $1.9 billion in EBIT, supported by the sustained sales performance of F-Series and go-to-market discipline, evidenced by Q1 incentive spend below industry average. Additionally, our off-road performance trims now account for nearly 1/4 of U.S. sales and Maverick and F-150 continue as the best-selling hybrids in their segments. Importantly, Ford Blue's Q1 performance highlights the strength of the underlying business and excluding IEEPA, is representative of its ongoing run rate. For Ford Model e, EBIT was a loss of $777 million as we now start to benefit from the portfolio changes announced in December. In addition to investing in a leaner, more profitable portfolio, we are actively matching supply with demand globally to optimize profitability. And in the quarter, we benefited from a nearly 35% improvement in our Gen 1 losses. We also continue to step up our incremental $1 billion investment in UEV platform and Ford Energy as we progress throughout the year ahead of their launches in 2027. As a result, we expect first quarter to be the strongest quarter for Model e this year. Ford Credit delivered a solid quarter with EBT of $783 million, up $200 million, reflecting improvements in financing margin and enabled by a high-quality book of business. Results also benefited from favorable performance on our derivatives. Our portfolio performance is strong, and we maintain a highly disciplined approach to capital reserve and risk management practices. So let me turn to our 2026 outlook. For the full year, we now expect company adjusted EBIT of $8.5 billion to $10.5 billion, adjusted free cash flow of $5 billion to $6 billion and capital expenditures of $9.5 billion to $10.5 billion, which reflects our shift toward higher return growth opportunities, including $1.5 billion for Ford Energy this year. Our guidance does not include the potential impacts of a sustained conflict in the Middle East or a significant downturn in the U.S. economy, which could have a material impact on industry demand. Our full year segment outlook stays steady with Ford Pro EBIT of $6.5 billion to $7.5 billion, Model e losses of $4 billion to $4.5 billion, Ford Credit EBT of about $2.5 billion. And for Ford Blue, we have increased our guidance by $500 million to $4.5 billion to $5 billion, driven by a stronger underlying business. Our guidance continues to assume a U.S. SAAR of 16 million to 16.5 million units and flat industry pricing. Now some context and important puts and takes for the year. We have the $1.3 billion one-time IEEPA tariff benefit, but we now expect commodity headwinds of just above $2 billion, about $1 billion higher than our previous estimate, largely due to higher aluminum pricing driven by global supply constraints. Note, though, this excludes Novelis-related aluminum costs. The impact of ongoing tariffs is unchanged at about $1 billion and is now a part of our run rate costs. This excludes the IEEPA benefit and Novelis temporary costs. As Jim mentioned, we're on track for $1 billion improvement in material costs and warranty reductions on top of the $1.5 billion of cost reductions we delivered in 2025. We continue to expect a net $1 billion improvement from the Novelis recovery. And as I mentioned earlier, about $1 billion of incremental investment in Model e to support the ramp of UEV platform and Ford Energy. Our Q1 performance highlights the benefits of our Ford+ priorities, rigorously optimizing revenue across every segment through leading products and high-growth services, improving operating leverage and exercising smart, accretive capital allocation decisions. The increase in our full year adjusted EBIT guidance underscores these benefits. Thank you. And I'll now turn it over to the operator so we can take your questions. Operator: [Operator Instructions] Your first question will come from Joseph Spak with UBS. Joseph Spak: Sherry, maybe just to pick up right up on the commodity increase. You mentioned about $1 billion. I'm just trying to contextualize what you're assuming here because I think in the past, you talked about, call it, an $8 billion steel aluminum buy, I think 40% of that is aluminum. There's been some hedging, and this is really only 9 months. So I know prices have really gone up, but it looks like a pretty big number. So I just want you to help understand what you're thinking for the balance of the year? And then how you would advise investors to sort of think about that rate heading into '27. Sherry House: Sure. Well, it's going to be a bit hard to be able to predict 2027 at this point given the volatility that we've seen in the commodities. But let me just tell you in the near term, what I'm seeing. So with respect to steel and aluminum, in particular, even before the Middle East situation started, we were already seeing global industry shortages, and that was first. Then you had the Middle East. And then you have to remember that Ford also has the aluminum supply shortage with respect to our primary aluminum supplier, which is Novelis. These costs are not related to Novelis. We package those separately. We talk about those separately. And when I talk about a $1 billion year-over-year improvement due to Novelis, that includes all the tariff costs. But this is related to the exposures that we have in aluminum and steel predominantly. Joseph Spak: Okay. And then I guess just a second question, maybe -- is there any update you could provide us on the Novelis timeline? I mean, I think there was some preliminary thought it could come online in the summer. Are we sort of on track there? And if that happens, how are you thinking about that headwind you mentioned? I'm just trying to sort of figure out the phasing timing because I guess my prior assumption was that most of that Novelis headwind would have been more in the first half if it was sort of expected to ramp through the year. But I'm not quite certain that, that's sort of still the case. So maybe you could just help us with some of that cost phasing timing. Kumar Galhotra: Yes. Joe, this is Kumar. Your assumption is correct. We are still expecting the hot mill to restart in May. There are two aspects to bringing any mill back online. There's the restart itself and then there's the ramp-up. So all the enablers for both of these aspects are on track. In the event the relaunch doesn't go according to plan, we do have contingency plans in place. That means we have additional aluminum supply to ensure our plant production schedules aren't interrupted. So the mill should be back online. And if we have any hiccups, we have contingency plans for the rest of the year. James Farley: And Joe, as you would expect -- it's Jim, we have by grade, we have several grades by step in the process. We track it every day. We know exactly the situation we have, the float we have. And we also have learned how to back up the aluminum supply, as Kumar said, in case the mill ramps slower or the actual start date is later. Operator: Your next question will come from Dan Levy with Barclays. Dan Levy: We know within the guidance that effectively the IEEPA refund is being offset by the raw mats. So really, the net of the guidance improvement coming from improved operations. Maybe you can just [Technical Difficulty] in the improved operations beyond the warranty material, which looks like that's consistent. And how much runway do you have on this? And can this offset any increases in raw mats that you might be seeing in '27 just given the staggering of costs that are going to be hitting? Sherry House: Yes. So as we look at kind of what's the -- basically the basis of our $1 billion raise versus guidance, it's going to be software and physical services is one of the biggest components there. The Ford Pro business continues to have very high paid subscribers. We now are up at 879,000, as I said in some of our prepared remarks, that's 30% on a year-over-year basis. The enterprise is also doing quite well across the physical services and the software. The other item that was really big for us in Q1 was the net pricing. As we said, the share of revenue, highest in 5 years. And this was really led, as we said, by full-size utilities and trucks. And then we did have some timing differences in cost. So some items hit in Q1 that we were expecting to hit in Q2, and that was very favorable for us. So we took all that underlying performance into consideration, we felt that $0.5 billion was the amount to be able to pull through for the full year, and that's why our guidance reflects that. Operator: Your next question will come from Andrew Percoco with Morgan Stanley. Andrew Percoco: I did want to come back to the guidance here, and maybe I'm missing some of the moving pieces. But if I just look at your first quarter performance, $3.5 billion of adjusted EBIT. I think you had been essentially signaling sequentially flat, which would have been like $1.1 billion for the first quarter. So you essentially beat by $2.5 billion in the first quarter, of which a little bit over $1 billion is from IEEPA. But that would imply like even though that's offset by some incremental cost headwinds on the commodity side, it would imply downside or some incremental costs elsewhere if your guide is only increasing by $500 million. So can you maybe just help us break down some of those moving pieces in case I'm kind of missing anything in that bridge? Sherry House: Yes, I don't think you're missing anything in the bridge. It's just as I said, we had the three components that were really driving this performance, and we're pulling through the amount of it that is sustainable. Some of it was timing differences. So we didn't want to put timing differences into a guidance raise. Andrew Percoco: Okay. Got it. And then, Jim, maybe one for you. There's been a lot of headlines recently around some potential partnerships between Ford and some of the Chinese OEMs. And even outside of Ford, there's just a lot of focus in the marketplace around some of these vehicles coming out of China eventually potentially making their way into the U.S. Can you just give us your updated thoughts on what that could look like and maybe any involvement that you might be interested in doing there? James Farley: Sure. I'm sure glad there is a lot of focus on it. As America's largest auto producer, we are totally dedicated to a thriving U.S. auto industry and, of course, safeguarding our country's industrial base. And that's just not economic vitality. It's also national security as a country. And when we see China and Japan and South Korea, they've really prioritized their domestic auto industry and manufacturing for the same reasons that I mentioned. I would say, to answer your question, we leverage global partnerships and even IP sharing, including with the Chinese OEs to grow our business around the world. And -- but we are really fully committed to a level playing field here in the U.S. and also safeguarding our home market because of the importance of the auto industry and our industrial base. So how I would think about it is Ford continues to be a global company. We want to have the rights to win around the globe. We need IP and partnerships outside the U.S. to do that. And when it comes to the U.S. industry itself, we are extremely protective as we should be like China, South Korea and Japan are. What that means in specific policies that will play out in our strategy as a company. But as America's #1 auto producer, you can understand our perspective. Operator: Your next question will come from Alex Perry with Bank of America. Alexander Perry: In the materials, I thought it was interesting. I think you said the off-road performance trims account for 25% of the overall sales mix. Can you give us a little bit more on the strategy here and a little more color on how this has trended historically? Is the strategy to prioritize some of these higher-margin trims while production remains constrained? And maybe just remind us on the profitability of some of these off-road trims versus company average. Andrew Frick: Yes. Thanks. This is Andrew. Thanks for the question. Yes, that is part of our strategy. It's a big piece of why our Blue business is doing well, overall. In fact, if you look at our wholesales this past quarter and the first quarter, they were relatively flat, but we had an improved mix of Explorer and Expedition. We phased out Escape. We're in the sell-down of that and our F-Series remains strong. And we actually -- we grew our share in the off-road space, 25% of our volume, but our share actually grew by 0.7 point, which was really important. So -- and that's because we're able to lean into across multiple vehicles now, series like Tremor and Raptor and really drive those mixes. So it is relatively more profitable, and it all plays back to our overall strategy of leaning into our profit pillars and winning with passion products. James Farley: No boring products. Alexander Perry: Perfect. Really helpful. And just a follow-up on commodities. Can you just remind us how you're sort of hedged across the various commodities? And with the $2 billion commodity headwind, does this assume that prices sort of stay where they are today? So if they were to come down, this would provide a little bit of cushion in the guide? Sherry House: Yes. The forward forecast that we gave you does -- the guidance we gave you assumes that they stay where they are, which, as you would know, the forward curves are up. We have a large number of contract types that we use. We have -- in some cases, we have fixed costs, other contracts, multiyear contracts. We have a lot of contracts that are based on indices and the impact is a quarter lagging. So you're going to have a range there. We also look at natural hedges that we have in our business as well. So when we look to hedge, we're taking the entire portfolio into consideration. And we feel that we've got a pretty good handle to be able to provide you what we did in terms of commodities for the balance of the year. If they go up substantially from here, we obviously will be back sharing that with you. But you're right, if they go down, that will be a net positive to the business. Operator: Your next question will come from Mark Delaney with Goldman Sachs. Mark Delaney: I was hoping to start on the comments the company -- spoke about in his prepared remarks on software and physical services. I think you said you expect the $15 billion of revenue coming from those areas to grow at a nearly 8% rate annually through the end of the decade, which is a pretty good outlook over several years. So can you help investors to better understand what's driving that degree of revenue growth over the coming years? And more importantly, what does that mean for EBIT? James Farley: Sure. This has been a critical part of our path to 8%. And we've been planning for many years. As you can imagine, before I answer your question directly, we've had to invest a lot in our advanced electric architectures, and our dealers have had to invest a lot in dealer capacity for the service. Really, our focus is on two key areas. We have a lot more focus than these two, but these are the ones driving our business. The first is our aftersales parts business. This is a really key focus for the Ford team. We see growth in Pro. Our dealers are massively investing in capacity for Pro, but we are also becoming a lot more successful in wholesaling parts from our dealers to third-party repair shops throughout the U.S. As I mentioned, we're going to expand our parts catalog in terms of price and diversity, and we're going to start to focus on not just Ford parts, but multi-make parts. And I think the other key distinguishing element for Ford is that we have started to really get good at remote service. Almost 20% of all Ford's repair now is done outside the dealership at our customers' location. And for our Pro customers, they're especially excited about this because they don't have to come in the dealership. And this has really expanded our revenue on aftersales. Inside the company, we're very focused on improving our repair order duration that gives our dealers more capacity, so to speak, without having to build any more capacity. I think you know our growth in ADAS, our growth in Pro Intelligence that Sherry mentioned are both signature parts of our integrated services that seem to be growing about 30% to 40% a quarter with very high margins. When you look at the margins of the part business and the software business, this $15 billion that will be growing at 8% a year is highly profitable for the company. It also has a different revenue risk than our vehicle business. It's more of an annuity and a lot of it tends to be anticyclical. That means that when the car business goes down, people tend to repair their vehicles. So this fitness we're developing on the parts side will help us on the anticyclical side. That gives you, I think, some window. And hopefully, we'll be giving you more and more insights as to our ADAS strategy and Pro Intelligence product rollout in the coming years. Mark Delaney: That's very helpful. My other question was on the pickup market. And Ford obviously has a very strong franchise in that segment with the F-Series, but you've also spoken to adding more product with the UEV-based pickup model coming in and then also the ICE truck you've talked about coming out of the Tennessee factory. We've also seen competitors lean into that segment more. So as you think about all the new models coming into the pickup space, maybe talk more on how much of the market you think pickups can make up in the future? And then as you think about more supply coming into pickups, what are implications for profit margins in that important category? Andrew Frick: Yes. Thank you for the question, Mark. This is Andrew. And I think it's important when you talk about the truck business, maybe to look at it through the lens of both retail and commercial because they're both really important parts of those -- of both customer groups. On the retail side, the truck business has historically been with the full-size pickup and medium pickup. But what we've been able to do is really expand that -- the pickup segments themselves. Maverick has created a whole new segment. And we've been able to really take advantage of that. In fact, we've -- if you look at the trends in the market, you've seen a lot of car buyers go into truck and even utilities go into truck. And we think that trend will continue, especially with the type of packaging that we're going to be able to provide. It worked on Maverick, and we are really excited about the UEV pickup and the packaging that, that has to really appeal to not just truck buyers, but to source from SUV buyers as well. So we see the pickup market growing, and it's really growing across segments and price points on the retail side. And Alicia, maybe on the commercial side. Alicia S. Davis: On the commercial side, I'll just ask -- I'll just comment similar to what Andrew said. we have commercial buyers that buy pickup trucks from Maverick size all the way up to our F-750, and we have products in those segments. And we also have diverse powertrains, and we see that continuing to grow. We continue to have strong orders for 2026 right now from fleet customers, and we continue to see -- we just opened our '27 model year order books, and we're starting -- we're seeing some early indicators. So we know the demand is there, is strong, and we want to make sure that we have offerings from the very beginning, Maverick all the way to the higher pickup trucks. James Farley: How we like to think about it is that we want to future-proof our truck business. To do that, we want to offer customers more choice on the powertrain side and tie the powertrains to other benefits that a truck customer would want like a hybrid for Pro power on board. And part of protecting is not just having an affordable electric pickup or hybrid throughout our lineup, but it's also having a flow of customers that move through our lineup over time. On the Pro side, it helps us with adjacency sales. But on the retail side, those Maverick, those UEV sales, they are a juggernaut for loading our whole pickup business and the strength over time because we haven't seen our competitors invest like we have. I think the other thing that gets maybe overlooked about Ford's pickup strategy is our global strategy. Ford is really #1 or #2 in most markets around the globe. There are large pickup markets in Thailand, Africa, the Middle East and South America. And Ranger is #1 or #2 in every one of those segments, and we are future-proofing those lineups now as we speak with different powertrains and even more affordable options. And this is critical because we're seeing new competition in those markets from the Chinese. And so our pickup strategy is a global strategy. We're trying to learn from the past where we're trying to future-proof it in a way from oil shocks or movement of powertrain to actually price points. Operator: Your next question will come from Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: Could you give us a sense of expected cadence of earnings over the rest of the year? And in particular, maybe drivers of the much lower pace of earnings over the rest of it. With having done $3.5 billion in the first quarter, that means you're guiding at midpoint for $6 billion combined over the next 3, which is quite low, I guess, by historical standard. I understand that commodities is obviously going to get sequentially quite a bit worse, but then I would have thought the Novelis cost would also start going away in the second half. So maybe some of the puts and takes and the cadence, please? Sherry House: Yes. So as you move into the next half, Obviously, one of the big things is you're not going to have the repeat of IEEPA, it's $1.3 billion. Positive, as you said, with respect to Novelis as we start to gain more volume, but we are going to be hit more as we're more towards the end of the year on commodities, as I alluded to earlier. And also, the other thing is we are investing more in our launches right now, and that's going to be in BESS, our battery electric stationary storage business, the UEV platform and also Oakville in Canada. So we have those investments that are going in and ramping as we exit the year. And that's -- there's cash elements of that, too, not just CapEx. So that in commodities, non-repeat by IEEPA, but then the positive is Novelis. Emmanuel Rosner: Okay. And cadence-wise, sorry. And then I have another follow-up question, but any sense on -- is the degradation mostly in the second half? Or is the second quarter ex-IEEPA also quite a bit lower? Sherry House: Fairly consistent, I would say, it's Q2, Q3 and Q4. Emmanuel Rosner: Okay. And then my second question is on free cash flow. Can you give us a bit of color on why free cash flow was almost a burn of $2 billion when EBIT was quite robust even ex-IEEPA. But I think most importantly, in the guidance, you're not flowing through any of the improved EBIT to the full year free cash flow guidance, even though it seems to be driven by better underlying performance. Why is that? Sherry House: Yes. So let me hit your first question first. So with respect to the $1.9 billion usage in the quarter, it's very typical for us as you move from Q4 to Q1 to have a usage of cash. And that's because of the higher working capital that is needed. We're typically at that point, you are drawing down on inventory. You're not typically producing as much the last couple of weeks of the year. That was amplified for us with the Novelis disruption as well, and you're paying out your payables. So you're going to have that negative start. In addition, for us, this quarter, our net spending was up. And as I said, we're investing in our future. We've been really transparent about $9.5 billion to $10.5 billion this year, and you're spending on UEV, you're spending on BESS, we're spending on the future. And then also, there's timing differences in there, and we pay our compensation bonuses in Q1. You also have timing differences associated with marketing and incentive spends that are taking place as well. So those are the big components. We do expect this to reverse. We do expect our free cash flow guidance to stay at $5 billion to $6 billion. The big change, as you know, was the IEEPA tariff of the $1.3 billion, and that we don't have certainty as to when that is going to come in. So we did not put that in the guidance at this time. If we get certainty that, that's going to be sooner, then we will certainly update accordingly. And we thought it's a little bit early to be pulling through some of the other cash items given some of the volatility that we're working through. Operator: Our next question will come from Edison Yu with Deutsche Bank Research. Xin Yu: I wanted to come back to something that, as you mentioned earlier about the U.S. industrial base. How sensible or how realistic is it for Ford to play a bigger role in the kind of defense complex in terms of supplying the Pentagon? James Farley: Well, thank you for your question. As a most American company, Ford has always called the answer to duty to support our country. It was ventilators in COVID, and of course the arsenal of democracy. We work with -- as you know, we are very successful with our government sales and business in Pro. And so we have very close relationships through the vehicle side. What I'd be able to say at this point is two things. First of all, we are in early discussions with the U.S. government on some defense-related projects. We're not going to go into details of those today. In addition and I would say equally important is Ford's role as an anchor customer on onshoring critical minerals and many other supply chain vulnerabilities we have in our country. And I think you should expect Ford to play an outsized role in manufacture-grade semiconductors, critical minerals like batteries and rare earths. And our supply chain is heavily engaged not only with our government, but new companies that are starting to emerge in our country to onshore some of this capability. And I think maybe perhaps in the short term, that's the biggest role Ford can play in helping our country. Xin Yu: Understood. Understood. And then a separate topic, just coming back to autonomy. It seems in robotaxi, there's a lot more appetite now for some of these tech companies like Uber and NVIDIA sort of quasi-subsidize the OEMs. Has your kind of thinking about robotaxi maybe evolved over the last 3 or 4 months? James Farley: I would say, yes, not just over the last 3 or 4 months. It's something we've been, frankly, watching carefully as it evolves because we were involved in Argo and are very well aware of both managing the fleet and the SDS system itself and the progress. We kind of knew from Argo what to look for as robotaxis became -- the SDS itself became more proficient, and we're starting to see that now. I think how you should think about Ford's approach is that we are completely focused on having the most efficient EV and the lowest cost of ownership in North America, number one. And number two, because of our Pro business, we have the most fit, repair and fleet management capability for new fleets -- all fleets. And that capability can be applied to all sorts of different fleets. That's how we think about the market as it emerges. And I think that's all we're prepared to say at this point. Operator: Your next question will come from Ryan Brinkman with JPMorgan. Ryan Brinkman: Is there an update you might be able to provide on the relatively recently announced Ford Energy business? Has there been maybe proactive outreach to Ford from companies that you have existing B2B relationships with on the Pro side of the business? How would you characterize that interest? And maybe just remind on potential timing there. James Farley: Thank you, Ryan. Well, as you know, we are committed to over 20 gigawatt hours of capacity starting in the fourth quarter of next year. That will be mostly Kentucky 1 and a little bit of Marshall. Marshall will be really focused on UEV, but has some capacity for our energy business. So that's the timing starting fourth quarter next year. The plants are coming online. We are on track in the industrial manufacturing capability of doing DC block. It's not just the batteries themselves, it's the containers, it's the management of the battery. That's all coming together as we expected. We are very active in contracting customers as we speak. We've had a lot of inbounds and a lot of interest in Ford because they understand that we have the best tech. We have a lot of advantages financially, and we have a great service and sales capability. And of course, the company has deep relationships with a lot of these as vehicle customers. So they know us. They know through Pro that we're a reliable company. And all I would say, Ryan, is that the energy business is a key element of our bridge to 8% margin. Ryan Brinkman: Great. And then just as my follow-up, around the same time that Ford Energy was announced, you also broke news of the new strategic partnership with Renault. So I was just wondering if there might be any kind of update you can provide there, too, given that the first vehicles that were announced were electric vehicles, and I think that's an important piece of solving the puzzle in Europe, but I met with Hans Schep during the quarter. He is super energized about Renault on the commercial vehicle side in Europe. What do you think the broader potential for collaboration there might be? James Farley: Thank you, Ryan, for your question. It's very pertinent. At this point, all we would say is that we believe that on the passenger car side, Renault has fully cost competitive platforms. And we intend to take advantage of that as Europe continues to electrify amidst the Chinese competition on passenger cars. On commercial, we have a very successful relationship, as you know, with Volkswagen, both on the pickup and the van side. And we have nothing to announce today, but certainly, John, myself and the whole team are very focused on taking advantage of the Renault relationship across all of our businesses. And our commercial business at this point is still very profitable in Europe. We see it as the core of our profitability in the future on the vehicle side. And so we will do everything we need to, to maximize our scale and our cost advantage on commercial in Europe. Operator: Our next question will come from Colin Langan with Wells Fargo. Colin Langan: Just if I'm looking at Slide 10, there's a $900 million of other. It's kind of unusual to have such a large item. Any color on what that is? And then also looking on that slide, cost is only $700 million positive and includes the IEEPA. I think the target is that you're supposed to get $1 billion of cost benefit for the year, which would mean underlying cost is actually worse year-over-year in Q1. So what is driving the weaker Q1 cost? Sherry House: Well, first off, let me just hit on your question on other. That's really related to services, both physical and software. So that's where that's showing up. Colin Langan: So you had $900 million of software EBIT? Sherry House: So we also had compliance benefits, services, physical and software credit as well. Colin Langan: Okay. And then the cost piece, is that just the cost savings pick up in the second half of the year? Sherry House: This cost savings, if you're on Slide 10, was related to the -- you're talking about the Q1 bridge going from $1.3 billion in Ford Pro to the $1.7 billion? Colin Langan: Yes. Well, I was just saying in the bridge, it's $700 million positive, but that includes $1.3 billion of IEEPA -- for the year. Sherry House: That's right. Colin Langan: So that mean ex-IEEPA, it was negative. So I'm just wondering why it's negative if the target for the year is $1 billion positive. Sherry House: You have Novelis in there as well. Colin Langan: Okay. And then just lastly, if I go to Slide 18 and I add up all the items, it does seem like it's a little short of some good news. It seems like about $900 million short of all the items listed on that slide. What is that? Is that volume? You didn't mention regulatory savings, just other cost savings that we're kind of missing in the walk? Sherry House: I would say, yes, it's a variety of other savings throughout the company as well. So we thought that really, it's -- cost is fairly flat on a year-over-year basis. We're really presenting very close to what we presented in the past. The big changes as we've gone into this guide is we have the $1.3 billion resulting from the IEEPA Supreme Court ruling, then we had the increase in the commodities, which is offsetting. So when you look at all of that together, you're really looking at a pretty flat picture year-over-year because we already had a number of items that were offsetting. Operator: Your next question will come from James Picariello with BNP Paribas. We can hear you, please go ahead. James Picariello: So I first want to ask about what's the level of confidence behind the 150,000 Novelis recovery units based on what you've seen in your own production through the first quarter? Just where are we at on that? And then as we think about the raw materials, right, the $2 billion now in core commodities plus the $1.75 billion in alternative aluminum sourcing, what was captured in the first quarter on that combined bucket for raw mats? And just how should we think about the cadencing for the rest of the year? Kumar Galhotra: So on the Novelis recovery and the rebuild of the mill, I would say the confidence is high. As Jim and I stated earlier, the restart date is on track. All the enablers for the ramp-up are on track. And belt and suspenders, if anything does go off, we have contingency plans, which means we have additional aluminum supply to ensure production. So we feel good about the second half aluminum supply. James Farley: And not only our supply perspective, but also, as Andrew said in the speech, we have -- we're in a really good stock situation, too. So we're very confident we're going to need those units. Alicia S. Davis: And I can just comment as well from a Pro perspective, we still have very strong '26 model year orders. We just opened up '27. Those are we're seeing positive indicators. And when you think about the Novelis impacts, we really postponed fleet orders, and they're going to be required and needed in the second half, and we haven't lost a customer. So we are very confident in the demand in the second half of the year. Sherry House: Yes. And I guess I would just say that... James Picariello: Just on the cost side... Sherry House: Yes. We continue with respect to Novelis to expect a total cost of between $1.5 billion to $2 billion. We're tracking on target with respect to that. I think you had a specific question in Q1 related to temporary cost to source aluminum. It's about $300 million. So that would include tariffs, expedited freight and warehousing as well. These things aren't straight line, and there's just a lot of factors that are involved. James Picariello: Got it. That's helpful. And then just as we think about the $1 billion in the UEV platform and the Marshall plant, is that more second half weighted or pretty ratable through the year in terms of just the investment, and that's still tracking towards the $1 billion, right? Sherry House: So it's going to be -- the UEV investments, we're already making some of those. We're going to continue to make them through Q2, Q3 and Q4. They will go up a bit as you get to Q3 and Q4. And then we also -- as I said, we've got BESS in there as well, and we also have the Oakville launch during that period of time also. So three major items that are increasing in terms of investment. Operator: Your next question will come from Itay Michaeli with TD Cowen. Itay Michaeli: Just a couple of questions on the UEV platform. I'm just curious sort of what's left to do here as you prepare for next year's launch? And maybe thinking even out to 2029 towards your breakeven or profitability objective for Model e, how should we think about roughly the number of top hats that you're planning to launch on that platform? And maybe just lastly, if I can sneak it in. In the past, you've mentioned using some new suppliers for UEV. Any more updates you can share on how that's going? Kumar Galhotra: So Itay, this is Kumar. Answering your first question on the, let's say, the industrial launch of the product, there are four major pieces to it. There's the hardware of key new parts like mega castings UEV has its own software platform. So development and testing of that platform. Third is the readiness of our suppliers with all the parts that are coming from suppliers. And lastly, number four is equipment installation at our plant. We're in the middle of all four of these right now and all enablers and all indicators, early indicators of these four work streams are on track. So we feel good about it. Your second piece of question, number of top hats. As we've mentioned, it is a platform. We plan to have high volume at Louisville. But I think it's -- we don't want to give away our plan to competition by talking about how many top hats or which top hats. It would be too early to do that. James Farley: The launch is bigger than the industrial launch. So we want to give you a little bit of insight into the demand creation because that's critical for us. Andrew Frick: Yes. This is Andrew. We're confident on our launch plan. In fact, we're right on track to share our plans with dealers and take customer orders later this year. And what we're really excited about is some of the EV market trends that we're seeing and the EV volume really heading towards the affordable space, which really favors this affordable UEV platform, positioning us right in the heart of the market. So we're really pleased with that. James Farley: I think the market is already predisposed to this price point. But now it feels like in the U.S., the EV market is moving even closer to the UEV platform. And there's really not much choice on a fully specced, highly capable technological vehicle platform that's really affordable. There's not a lot of choice for customers. A lot of compliance vehicles, but this is a real legitimate fully capable product for customers. So we think the market is really moving, and we understand that. That's why we're working so hard on the demand creation. I think UEV is on -- as far as the new suppliers, do you want to mention anything about the new suppliers, Kumar? Kumar Galhotra: Yes. I would say that the UEV team took a very interesting approach. We did the toughest and the most complex commodities. We designed them in-house. This gives us a lot of control over those commodities, and it gives us the ability to source those commodities at the highest quality and the best cost price points from new suppliers. And these new suppliers have been great partners, and we are working towards using that capability, both the process as well as the new supply base in the rest of our portfolio. James Farley: What's exciting for me is to see the team's pollination of the UEV process, new suppliers, new way of developing a vehicle, new IT tools that the development team uses, it's really starting to spread across the company. And to me, that's very encouraging to see because the greatest gift for UEV will likely be what it gives our -- all of our other models and our team as a whole. Operator: This concludes the Ford Motor Company First Quarter 2026 Earnings Conference Call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the LXP Industrial Trust First Quarter 2026 Earnings Call and Webcast. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Heather Gentry, Investor Relations. Please go ahead. Heather Gentry: Thank you, operator. Welcome to LXP Industrial Trust First Quarter 2026 Earnings Conference Call and Webcast. The earnings release was distributed this morning and both the release and quarterly supplemental are available on our website in the Investors Section and will be furnished to the SEC on a Form 8-K. Certain statements made during this conference call regarding future events and expected results may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. LXP believes that these statements are based on reasonable assumptions. However, certain factors and risks, including those included in today's earnings press release and those described in reports that LXP files with the SEC from time to time could cause LXP's actual results to differ materially from those expressed or implied by such statements. Except as required by law, LXP does not undertake a duty to update any forward-looking statements. In the earnings press release and quarterly supplemental disclosure package, LXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures. Any references in these documents to adjusted company FFO refer to adjusted company funds from operations available to all equity holders and unitholders on a fully diluted basis. Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of LXP's historical or future financial performance, financial position or cash flows. On today's call, Will Eglin, Chairman and CEO; and Nathan Brunner, CFO, will provide a recent business update and commentary on first quarter results. Brendan Mullinix, CIO; and James Dudley, Executive Vice President and Director of Asset Management, will be available for the Q&A portion of this call. I will now turn the call over to Will. T. Wilson Eglin: Thank you, Heather, and good morning, everyone. Following the successful execution of our key strategic initiatives in 2025, including strengthening our balance sheet, increasing occupancy and resolving our big box vacancy. This year, we are focused primarily on creating value in our land bank and addressing our near-term expirations and existing vacancy. We've executed 3.2 million square feet of new leases and lease renewals year-to-date, highlighted by the successful outcome at our 1.1 million square foot facility in the Greenville-Spartanburg market. Additionally, we leased over 300,000 square feet of vacancy and extended the lease on an 850,000 square foot facility in San Antonio for 10 years. Industrial fundamentals continue to trend in the right direction with first quarter U.S. net absorption of approximately 40 million square feet, representing the strongest first quarter in 3 years. Our target markets made up approximately 29 million square feet or 72% of U.S. net absorption, demonstrating continued strength in our markets, particularly in Phoenix, Indianapolis, Houston, Dallas-Fort Worth, Atlanta and Columbus. These positive trends are reflected in our strong leasing momentum year-to-date as well as our forward pipeline in which we are in active discussions on 7.4 million square feet of development and redevelopment leasing vacancy and expirations through 2027. Leasing activity continues to be the strongest for large-format facilities, especially for those of 1 million square feet or more. We are also seeing increased demand from data center-related tenancy and manufacturing suppliers and industries in our markets. Leasing volume of 1.8 million square feet during the quarter included the extension at our 1.1 million square foot facility in Greenville-Spartanburg, which added considerable value. We renewed this lease for an additional 4 years to 2031, following the initial 2-year lease signed in May 2025. This extension enhanced the 8% initial cash stabilized yield on the development project with the new cash rent representing a 5% increase over the prior rent and 3% annual rental bumps. On the remaining 700,000 square feet we leased during the quarter, we achieved base and cash-based rental increases of 34% and 24%, respectively. Construction is underway at our 1.2 million square foot Phoenix development project that we announced on our last quarterly call. Since then, the remaining 2 million square feet in the West Valley has been leased, leaving no million square foot buildings currently available in the market. We are in discussions with a prospective tenant, and we are well positioned if they proceed with a lease in the West Valley market given the limited supply of million square foot buildings. We are evaluating other development opportunities in our land bank, including in Columbus, where we have 69 acres at our Aetna land sites, which can support 3 facilities totaling roughly 1.25 million square feet. In the last 12 months, net absorption in the Columbus market was 10 million square feet, resulting in a decline in vacancy of over 300 basis points. Columbus continues to be a strong distribution market with increasing demand across product sizes, particularly in the large format space and has seen an influx of tenant activity that supports data center and advanced manufacturing facilities. To the extent we move forward with future development projects, we intend to fund them through opportunistic asset sales in our nontarget markets. As we have noted previously, acquisition activity will be selective and will be funded via 1031 exchange transactions to defer gains on dispositions. I'll now turn the call over to Nathan, who will provide a more detailed overview of our financials, leasing activity and balance sheet. Nathan Brunner: Thanks, Will. Our adjusted company FFO in the first quarter was approximately $47 million or $0.80 per diluted common share, representing 2.6% growth over the first quarter 2025. Same-store NOI growth was 2% for the quarter, which was in line with our expectations. Our stabilized portfolio was 96.6% leased at quarter end and 97.1% leased proforma for new leases signed in April, in line with year-end 2025. We are maintaining both our 2026 adjusted company FFO guidance range of $3.22 to $3.37 per common share and 2026 same-store NOI growth guidance range of 1.5% to 2.5% with regard to the cadence of same-store growth for the remainder of the year, we anticipate that second quarter same-store NOI growth will be lower than the first quarter, reflecting the impact of first quarter move-outs and timing of lease commencement for new leases signed year-to-date. These new leases are expected to contribute to higher same-store NOI growth in the second half of the year. G&A in the first quarter was approximately $10.3 million, with full year 2026 G&A expected to be within a range of $39 million to $41 million. Turning to leasing. We continue to make good progress on 2026 expirations and have addressed approximately 3.7 million square feet or 57% of our total 2026 lease roll with an average cash rental increase of approximately 25%, excluding 2 fixed rate renewals. Will highlighted some of the larger leases that we executed year-to-date, and I'll touch on a handful of other notable leasing outcomes. During the quarter, we renewed 352,000 square feet at our 640,000 square foot facility in Charlotte, North Carolina for a 3-year term with 3.5% annual escalators, representing a 42% cash rental increase. We are actively marketing the remaining 288,000 square feet of the property, which expires in October 2026. Subsequent to quarter end, we extended the lease with the tenant that occupies 270,000 square feet at our multi-tenant facility in the Savannah market, which was a July 30 expiration. The 10-year lease extension with 3% annual escalators represents a cash rental increase of 19% over the prior rent. With respect to 2027 expiration, post quarter, we extended the lease at our 850,000 square foot facility in San Antonio for a 10-year lease term with 2.75% annual escalators. The lease extension commences in May 2027 with a 25% cash rental increase. We're encouraged by the active discussions underway on 4.6 million square feet of the 2026 and 2027 lease roll, including several of our larger facilities. We've leased 330,000 square feet of vacancy year-to-date. During the quarter, we leased 85,000 square feet in Indianapolis to a tenant involved in data center development, achieving a 34% cash rental increase. Post quarter, we leased our 250,000 square foot facility in the Houston market for a 7-year term with 3.75% annual escalators. The new Houston lease commences in June and represents a 25% cash rental increase. LXP's balance sheet remains in great shape with net debt to annualized adjusted EBITDA of 5.1x at quarter end. We had $1.3 billion of cash on the balance sheet at quarter end, and our $600 million revolving credit facility was undrawn and fully available. As we highlighted on our last call, the recast of our $600 million revolving credit facility and $250 million term loan in January extended the company's debt maturity profile and reduced interest costs, further strengthening the balance sheet and providing financial flexibility. Finally, we repurchased 325,000 shares in the quarter at an average price of $48.70 per share. With that, I'll turn the call back over to Will. T. Wilson Eglin: Thanks, Nathan. In summary, we're pleased with first quarter results and our strong leasing outcomes year-to-date. As we move through the year, we will remain focused on executing our strategic priorities, including disciplined capital deployment, pursuing value-enhancing growth opportunities, leasing our Phoenix spec project and remaining vacancies and driving mark-to-market rent growth. As the leasing market continues to improve, we're confident that our forward leasing pipeline of over 7 million square feet will result in numerous attractive leasing outcomes that produce strong mark-to-market results. With that, I'll turn the call back over to the operator. Operator: [Operator Instructions] Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Todd Thomas: A couple of questions. One, on the -- you talked Will, about the lack of big box space in some of your major markets, including Phoenix, where you broke ground. Can you talk about how that's impacting the market? Are you seeing that translate into pricing power, better discussions around prospective rent growth or urgency from tenants? And then would you look to sort of derisk and pre-lease that development project? Or do you think it probably affords better return opportunities to hold off until it's closer to completion and delivery? T. Wilson Eglin: Yes, sure. Thanks, Todd. I think as we expected in Phoenix since our last call, the last 2 million-foot competitive buildings have leased. So we're essentially in a great position on that facility that we've started. We do have a prospect that we're working fairly closely with, but nothing to report today. I think we would prefer to pre-lease and derisk the investment and lock in a profit and then move on because there are other good opportunities in the land bank. You mentioned Columbus, that's another one that we think sets up pretty well for us. The big box demand is doing very well. And at the moment, we're quite optimistic about the outcome on Phoenix for sure. Todd Thomas: Okay. And then, Nathan, you indicated 57% of the 26 expirations have been addressed. I think that included some of the activity that occurred in April. Can you just provide an update on the remaining 26 expirations in terms of your expectations there, if there's any known move-outs? James Dudley: Todd, this is James. I'll take it. We've got really good activity on the remaining 2026 and the majority of which we're expecting to renew. We do have a few small known move-outs that are remaining. We've got a 97,000 square foot space in our multi-tenant building in Columbus, where we're expecting the tenant to move out. We're marking that to lease. We've got good activity on that one. And then I guess touching on a couple of the new vacancies that we had, too. We had the Tampa move out, the 230 that we've got some decent activity on recently and also the 120 that just moved out in the first quarter as well in Greenville-Spartanburg that we've got really good activity on. And then we've also got a very small lease in Greenville-Spartanburg of 70,000 square feet that we expect the tenant to potentially move out of and another one for 163,000 square feet in Greenville-Spartanburg that move out. So small move-outs, good activity in a strong market and the Greenville-Spartanburg stuff is concentrated mostly around the park that we own. So we've got a lot of different things we can do there from a size perspective and moving tenants around, we're talking to the tenants that are in or around in that space in the park currently trying to figure out if some want to expand. So again, good activity on that upcoming vacancy and the vacancy that we had in the first quarter. Todd Thomas: Okay. That's helpful. And just lastly, I guess, the 1.8 million square feet of vacancy, that opportunity in the portfolio, you estimate it to be about $0.32 a share. Is there anything embedded in guidance related to the lease-up of that vacant space that would hit or that's included in the guidance this year? Brendan Mullinix: Yes. Todd, maybe the way I'd frame that is back to kind of the underlying drivers of the guidance. And they're pretty much unchanged versus our Q4 earnings call. That is average occupancy for the portfolio at the midpoint is about 96.5% which is essentially in line with where we finished Q1 or a little above that with some of the activity we had in April. At the high end of guidance, average occupancy be 97% and at the low end, average occupancy would be 96%. Operator: Our next question comes from the line of Anthony Paolone with JPMorgan. Anthony Paolone: Given the comments on Columbus, what's the likelihood that you start a project or two this year? Brendan Mullinix: It's Brendan. Nothing to announce today, but as has been noted, the fundamentals in Columbus are very positive today. We've been seeing a lot of demand from both data center-related uses and manufacturing as well as the demand drivers that have existed in that [indiscernible] market for some time. At the moment, we can -- we're -- in order to position ourselves with the most flexibility, we're doing predevelopment work, including design work on 3 different sized buildings there. We can build a total of 1.25 million. And that will just allow us the maximum flexibility to respond to where we see the most favorable supply and demand. Anthony Paolone: Okay. And is the pipeline outside of what you have on your balance sheet right now for things like build-to-suits and development? Has that changed much? Is there much activity there with any other developers that you might be working with right now? Brendan Mullinix: Well, I should have also added too, just with respect to the existing land bank, we are additionally responding to build-to-suit interest at both our Columbus sites and our Phoenix sites. So there's that build-to-suit opportunity in the land bank as well as considering speculative development if the fundamentals are there and remain there. With respect to other opportunities, yes, we do have conversations with the merchant builder relationships that we have from time to time about build-to-suit opportunities outside of our land bank as well. But nothing imminent to report on today on that front. Anthony Paolone: Okay. And then just last one, the stock buyback, just you've done a little bit there. What's the appetite at current levels? And just how does it fit into the capital allocation right now? T. Wilson Eglin: Development is a better investment from our standpoint with respect to creating shareholder value. So we have some liquidity that we can use for buyback opportunistically. But what's happening in the development there, especially in Phoenix is a much larger driver of value creation. Operator: Our next question comes from the line of Vince Tibone with Green Street. Vince Tibone: A question for Nathan. I'm curious within guidance, how much new leasing is kind of baked into the low end, high end? Because it sounds like you have a pretty good pulse on known move-outs and retention rates. So just trying to get a sense of do you need to lease another 300,000 square feet of existing vacancies or move-outs to hit the midpoint? Or is it lower? Just trying to get a sense of the kind of different outcomes besides just move-outs on the new leasing side that could move the numbers within guidance, whether it be same-store or FFO. Brendan Mullinix: Yes, Vince. So going back to James' answer a little earlier in the Q&A here. We have 3 known move-outs essentially in the second half, which is roughly 550,000 square feet. So in the context of our earnings guidance at the midpoint, we're essentially saying that on average during the year, including Q1, occupancy will be 96.5%, which is in line with Q1. So the guidance at the midpoint essentially assumes that we have new leasing activity with regard to all of that move-out activity. And then so if you look to the high end of guidance where average occupancy is 97%, there's obviously incremental new leasing beyond the 550 of move-outs. Vince Tibone: No, that's helpful. And just a follow-up. It looks like just some quick math. It looks like the retention rate is going to be higher than we previously projected. Is that fair? I think on the last call, you indicated it would be about 70% and it looks like just given the first quarter move-outs and the 500 you mentioned there, it looks like retention will be yes, closer to 90%, if my math is right, in the 80s. Is that -- is my logic correct there? Brendan Mullinix: We're building in some buffer for unknown situations that they come up. There's always something that comes up in the back half of the year that you're expecting. So there's some buffer. Our guidance is still based on 70% to 80% retention. Vince Tibone: Got it. And then just last one from me. Just on the -- you mentioned if you're going to proceed with any new developments, you would likely fund it with dispositions -- is there any chance you look to sell out of the cold JV or the remaining net lease office JVs? Or kind of what's the strategic rationale to hold on to those joint venture assets that are now very different from the rest of the portfolio? T. Wilson Eglin: Well, yes, there's not much left in the office JV, Vince, and we have been sort of liquidating that as quickly as the market will bear. In the other industrial joint venture, we're a 20% partner there. So it's -- with the majority partners entirely up to us. We do have some opportunities to make some good sales in that portfolio. So we do expect that it will shrink modestly over time. But it's an investment that produces a pretty high return on equity for us, and it keeps us with a modest exposure to the manufacturing business, which gives us some insights into the logistics demand in some of those manufacturing hubs that we're invested in. Operator: Our next question comes from the line of Jim Kammert with Evercore. James Kammert: I think, Nathan, you mentioned 4.6 million square feet or so of lease renegotiations for new lease expirations. How much or does any of that encompass you guys two big Nissan deals in early '27 and then 1 million square footer in Jackson, Tennessee. Any color or updates on those would be appreciated. I didn't know if that was in your 4.6 million square feet. James Dudley: Jim, it's James again. I guess I'll touch on the 2027. Yes, we've got a number of chunky leases in 2027, and we're in advanced negotiations in some cases and definitely talking to all the tenants for these large boxes and expect a very high rate, if not 100% renewal on the big boxes that we have that includes Nissan. Operator: Our next question is from the line of Mitch Germain with Citizens Bank. Mitch Germain: I think, Will, you mentioned any new development would be matched with -- or new potential development would be matched with asset sales. Is that -- are you going to sell ahead of the project commencement and kind of sit on those proceeds like you've done at the end of 4Q with Phoenix? Or how should we think about the cadence regarding how that process could play out? T. Wilson Eglin: No, I think it's preferable to match fund sales with stabilized outcomes for development. So we had some disposition activity last year that left us in a very strong cash position to fund the project in Phoenix. But I think we would prefer to hold on to the income from the assets that we might sell to fund development and try to match things better. Mitch Germain: Got you. And then last one for me. Obviously, a significant amount of demand acceleration happening in the industrial sector. You mentioned a 7-plus million square foot pipeline. Any sort of themes, industries that you're seeing that are driving more demand versus others? James Dudley: Brendan touched on it a little bit. We've seen a big uptick in data center adjacent demand in a number of our markets, and we're fortunate to be placed well for those potential tenants as well. You've seen a couple of big leases get done for Meta and for AWS in Phoenix that took down a couple of the big boxes there. There's been a lot of new activity in Columbus that's data center related as well. And then we've got our Richmond redevelopment where there's a big Google data center campus going in next door. So I think that's one of the things I would point out. There's also continue to be growth in supplier demand for advanced manufacturers that we're seeing continue to grow and develop their different opportunities. I'll bring Phoenix up again with TSMC moving along and some of the ancillary demand that's popped up there. So we're starting to see a pickup there. So manufacturing and data center adjacent, I think, has definitely been the recent theme and a big pickup in the demand. Operator: [Operator Instructions] Our next question comes from the line of Jon Petersen with Jefferies. Jonathan Petersen: Just one quick question for me. The senior notes that are due in '28, the $160 million with a 6.75% interest rate. Can you remind us, are those callable early? Like should we think about you taking those all the way to maturity? Or should we assume you're able to refinance those early? Brendan Mullinix: They have a make call structure. So they're technically callable, but it requires the payment of premium. Operator: Thank you. And at this time, we have no further questions. I will now turn the call back over to Will Eglin for closing remarks. T. Wilson Eglin: We appreciate everyone joining our call this morning, and we look forward to updating you on our progress over the balance of the year. Thanks again for joining us today. Operator: This concludes today's conference call. You may now disconnect your lines. Have a pleasant day.