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Operator: Good day, and welcome to the Red Rock Resorts First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Stephen Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts. Please go ahead. Stephen Cootey: Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resorts First Quarter 2026 Earnings Conference Call. Joining me on the call today are Frank Lorenzo Fertitta, Scott Kreeger and our executive management team. I'd like to remind everyone that our call today will include forward-looking statements under the safe harbor provisions of the United States federal securities laws. Developments and results may differ from those projected. During this call, we will also discuss non-GAAP financial measures. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release Form 8-K and investor deck, which were filed this afternoon prior to the call. Also, please note this call is being recorded. Let's start by noting that the first quarter represented another strong quarter for the company across all key measures. Our Las Vegas operations delivered the highest first quarter net revenue and the second highest first quarter adjusted EBITDA in our history while maintaining near record adjusted EBITDA margin. This performance was achieved despite several headwinds later in the quarter including higher gas prices, air travel-related disruption and temporary construction impacts at and around several of our properties, underscoring the strength and resilience of our business model. In addition to delivering strong first quarter results, we remain very pleased with Durango's performance and the successful revenue backfill at our core properties. Durango continues to expand in the Las Vegas locals market and drive incremental play from our existing customers reinforcing its position as a meaningful growth driver in our portfolio. Since completing our December expansion, adding more than 25,000 square feet of casino space, the premier high limit slot area, and nearly 2,000 additional covered parking spaces. We've continued to see strong financial performance alongside positive guest feedback. With more than 4 months of operating history for the new high limit slot area, results continue to validate our strategy of investing in premium slot and table offerings across our portfolio. Building on Durango's momentum, we continue to advance the next phase of the property's master plan, the Durango North expansion. With more than 6,000 new households expected with a 3-mile radius over the next few years, this expansion is designed to broaden Durango's customer appeal and strengthen its competitive position. The project will add more than 275,000 square feet on the north side of the property, including nearly 400 additional slot machines and other gaming along with new amenities to drive repeat visitation, highlighted by a 36 lane bowling facility, luxury movie theaters and new dining and entertainment venues, including our partnership with Moonshine Flats, which brings its signature Country Western Bar and live music concept to Las Vegas for the first time. The project is scheduled to open in the summer of 2027 with a total cost estimated at approximately $385 million. Now let's take a look at our first quarter. With respect to our Las Vegas operations, our first quarter net revenue was $499.5 million, up 0.9% from the prior year's first quarter. Our adjusted EBITDA was $232.4 million down 1.5% from the prior year's first quarter. Our adjusted EBITDA margin was 46.5%, a decrease of 113 basis points from the prior year. On a consolidated basis, our first quarter net revenue which includes $4.7 million from our North Fork project, was $507.3 million, up 1.9% from the prior year's first quarter. Our adjusted EBITDA, which includes $2.9 million from our North Fork project, was $212.6 million, down 1.2% from the prior year's first quarter. Our adjusted EBITDA margin was 41.9% for the quarter, a decrease of 129 basis points from the prior year. In the quarter, we converted 50.3% of our adjusted EBITDA into operating free cash flow, generating $107 million or $1.03 per share. The significant level of free cash flow was strategically deployed to support our long-term growth initiatives, including our most recent projects at Durango, Sunset Station and Green Valley Ranch and returning capital to our stakeholders through dividends and share repurchases. As we begin 2026, we remain focused on our core local guests, which continue to grow our regional and national customer segments across our portfolio. Compared to first quarter last year, we saw continued strength in Carter slot play across the majority of our database, robust spend per visit and net theoretical win across our local, regional and national customer segments, helped drive the highest first quarter gaming revenue and profitability in the company's history. Turning to our non-gaming operations. Both the hotel and food and beverage divisions delivered a strong quarter, achieving near record revenue and profitability. The hotel operations performed well, generating near record results, driving higher ADR across the portfolio despite the loss of room nights at Green Valley Ranch due to the renovation of our hotel product. Not to be outdone, the Food & Beverage division delivered its second best first quarter revenue in our history and its third best first quarter profit in our history, supported by higher cover counts and higher average guest checks across our outlets. In group sales and catering, our teams delivered their third highest first quarter revenue in our history. And if we exclude the lost room nights from our Green Valley Ranch room renovation, we continue to see positive momentum into the first half of 2026. As we look ahead into the second quarter, we are seeing stable trends in our core slot and table business across the Las Vegas locals market and within our gardens database, consistent with a return to more typical seasonal patterns, but we continue to where we expect continued near-term disruption from our ongoing construction at and around Durango Sunset Station and Green Valley Ranch, and we're actively managing these impacts to minimize operational disruption. We remain highly confident in both the strength for our business and the investments we are making at these properties, which we believe support our long-term growth trajectory. Now let's cover a few balance sheet and capital items. Company's cash and cash equivalents at the end of the first quarter was $134 million, and the total principal amount of debt outstanding was $3.6 billion, resulting in net debt of $3.4 billion. As of the end of the quarter, the company's net debt-to-EBITDA ratio was 4.07x. During the quarter, we made total distributions of approximately $139.9 million to the LLC unitholders of Station Holdco, including a distribution of approximately $82.1 million to Red Rock Resorts. The company used its portion of the distribution to fund its previously declared special dividend of $1 per Class A common share, its previously declared quarterly dividend of $0.26 per Class A common share and to fund a portion of the repurchase of approximately 635,000 Class A common shares at an average price of $6.32 per share under its previously announced $900 million share repurchase program, reducing total shares outstanding to approximately 104.4 million. When combining the dividends and the share repurchases made in the quarter, we returned approximately $170.5 million to shareholders. demonstrating our ongoing commitment to disciplined capital allocation and delivering sustainable long-term value to our shareholders. Capital spend in the quarter was $117.2 million which includes approximately $87.2 million in investment capital as well as $30 million in maintenance capital. For the full year 2026, we expect to spend between $375 million and $425 million, which includes $275 million to $300 million in investment capital as well as $100 million to $125 million in maintenance capital. In addition to our continued investment at our Durango property, we're making significant investments at our Sunset Station and Green Valley Ranch properties. At Sunset Station, we continue to make strong progress on the podium refresh. The $53 million renovation is well underway and includes an all-new country Western bar night club, a new Mexican restaurant, a new center bar and a fully renovated casino floor. Customer feedback and performance from the completed portion of this project have been encouraging, reinforcing our confidence in the direction of the renovation and the underlying demand in the property. The project remains on budget with the remaining amenities expected to come online throughout 2026, including the iconic gouty bar, which is expected to reopen in the coming weeks. Building on this momentum, we are advancing the next phase of Sunset Station designed to further strengthen the property's competitive position and broaden its customer appeal, positioning it to capitalize on the continued growth in Henderson market, particularly from the master planned communities of a Skye and Cadence. This phase will continue with the comprehensive casino refresh, including the expansion and enhancement of the movie theaters as well as the relocation of the temporary bingo area to a new permanent location. Upon completion of Bingo relocation, the former buffet space will be converted into a new Highland steakhouse and the high limit table games room leveraging a proven strategy that has consistently generated strong returns across our portfolio. Work in this space is expected to begin this quarter with the remainder of the project commencing in the back half of 2026 and extending into 2027. The total cost of this phase remains approximately $87 million. At Green Valley Ranch, we continue to make strong progress on the comprehensive refresh of our guestrooms, suites and convention spaces, align the hotel experience with the recently renovated and well-received high limit table and slot rooms at the property. Renovations to the West Tower and convention spaces are now complete with both the tower and convention areas have reopened to strong customer views and encouraging financial performance despite ongoing property disruption. Renovations to the East Tower are well underway and are expected to extend into late summer 2026. Continuing with Green Valley Ranch long-term development -- redevelopment strategy, we're advancing the next phase of enhancements of this resort. This phase is designed to further strengthen the property's competitive position as one of the premier resort destinations in Las Vegas and broaden its customer appeal through a fully refreshed casino floor, along with upgraded food and beverage and entertainment offerings. These enhancements build on the performance we are seeing from the high limit product and the renovated room and convention inventory and our intent to drive increased visitation and deeper customer engagement. Work in the space is underway and is expected to extend into 2027 with the total cost of this space estimated at approximately $56 million. Turning to North Fork. Construction continues to progress. The facility now is permanent power, and we're working toward turnover of the first phase of the casino floor in late June, keeping us on pace for an early fourth quarter 2026 open. Total all-in project cost remains approximately $750 million and the project is fully financed. As of the end of this quarter, Red Rock's outstanding note balance due from the Tribe was approximately $80.6 million. We remain excited about this best-in-class development and are pleased with the continued progress of construction and look forward to providing further updates on future earnings calls. The company's Board of Directors has also declared its regular cash dividend of $0.26 per Class A common share, payable on June 30 to Class A shareholders of record as of June 15. With the first quarter behind us, we remain highly confident in the strength and resilience of our business model, as well as in the recent capital investments we have made across the portfolio. Durango continues to validate our long-term growth strategy and underscores the value of our owned development pipeline and real estate bank which includes more than 450 acres of the developed land in the highly desirable locations across the Las Vegas Valley. Combined with our portfolio of best-in-class assets in premier locations, this pipeline positions us for significant long-term growth and enables us to capitalize on the favorable demographic trends and high barriers to entry that define the Las Vegas locals market. Looking ahead, we remain focused on executing our development pipeline, maintaining operational discipline and delivering enhanced shareholder returns through a balanced, consistent and disciplined capital allocation strategy. Before we wrap up, we'd like to sincerely thank all of our team members for their continued hard work and dedication. They are the heart of the company and the driving force behind the exceptional guest experiences to keep our customers coming back time and again. In recognition for their efforts, we are proud to share that Station Casinos has been recognized by Forbes and Statista as one of America's best large employers in 2026. We are also proud to have been recognized for the sixth consecutive year as Top Workplace in Nevada. In addition, we've earned national recognition as USA TODAY Top Workplace for the third consecutive year and for the first time as a top workplace in the hospitality industry. Lastly, as we approach our 50th anniversary, we extend our heartfelt gratitude to our loyal guests for their unwavering support. We are deeply thankful for the trust they place in us and look forward to continuing to serve our communities for many years to come. With that, operator, we'd be happy to open the line for questions. Operator: [Operator Instructions] And our first question for today will come from Trey Bowers with Wells Fargo. Zachary Silverberg: This is Zach Silverberg here filling in for Trey. In your prepared remarks, you mentioned a couple of headwinds. I'd like to touch on the first 2, the higher gas prices in their travel. Could you quantify those 2 buckets what the impact was in 1Q and kind of what you're seeing in 2Q thus far? Stephen Cootey: No. I mean I can qualify -- I mean clearly, we're experiencing higher gas prices in Nevada. I think we're in early days. as judged by our Q1 performance and what we're seeing in April, we've seen no impact from higher gas prices. And what was the second one, Zach? Zachary Silverberg: The air travel? Stephen Cootey: The air travel, given the fact, while 87% of our hotel guests are generally out of town, the majority of these folks are driving from the regional states. So the TSA impact has been de minimis. Zachary Silverberg: Okay. And just -- I appreciate the color. And just for the follow-up, just on seasonality for 1Q to 2Q. Could you remind us of the typical cadence? And are there any one-timers to call out either last year or this year that could affect performance? Stephen Cootey: Yes, sure. I mean I think generally, seasonality, Q1 is definitely our peak quarter moving from Q1 to Q2, generally were down 8% to 9%. And from a onetime -- there's no real one timers other than the $9 million disruption number that we've previously quoted in our last call, which still stands. And given some of the construction delays we're seeing at Green Valley. We're expecting another $9 million of disruption to occur in Q2. And then as we start bringing cranes, cement trucks and start erecting steel at our Durango site, we're anticipating another $2 million to $3 million of disruption starting next quarter. Operator: Your next question will come from Barry Jonas with Truist Securities. . Barry Jonas: Steve, just wanted to follow up on Durango. Obviously, you got a new slide in the deck somewhat detailing and there's a great video there, too. I was just curious, I think the projects in the vicinity goes through July of '27. How should we be thinking about disruption between now and then beyond the -- what you outlined for next quarter? Stephen Cootey: Sure. I mean, I think as you saw from the video and from the map, we did experience significant traffic disruption in the first quarter. I think the team on the ground did an exceptional job managing through that disruption that this is early days in a $385 million construction project. So now we start beginning the heavy lift and the cement has effectively poured. We're starting to mobilize cranes early this quarter. and we're going to start erecting steel. So this is why we're expecting a bit more significant disruption as we go through the main poor part of the build. So the $2 million to $3 million estimate for disruption sticks pretty much through the summer to the completion of the project. Barry Jonas: Understood. And just for a follow-up, tax refunds are sort of kicking in now. Curious if that's showing in your business at all, especially with the no tax on tips and some of the other positives in the one big beautiful bill? Stephen Cootey: I mean, Barry, I think the build is job. I think you saw where return processing was pretty constant. The amount of refunds this year versus last year was almost $43 billion to the United States economy up 17%. And the average refund was up almost $333 or 11%. So the build did have its intended consequence of providing more discretionary income into the economy from our perspective where there's a lot of moving parts in the quarter, as you know. But I think we clearly demonstrated we had a great quarter in Q1, our second best Q1 on record. And then what we're seeing in April, we like what we're seeing in April. Operator: Your next question will come from Joe Stauff with Susquehanna. Joseph Stauff: Steve, on your comments about, say, the new phases at Suncoast and GVR. I was just wondering what the update is on the greenfield project and how you think about maybe when those might layer in at this point? Lorenzo Fertitta: I want to comment on Suncoast. Stephen Cootey: Well, the sunset and the Green Valley projects, Joe, I think as I articulated in the marks, we are progressing on said we are progressing well. We're going to open the Gaudi Bar in the weeks and then we expect the rest of the menus in our phase to open up throughout 2026. In terms of Green Valley, the West Tower and the convention center have been open, and we have seen very promising financial results, even though they're early days. the East Tower, we're limping along a little bit, and so we're expecting kind of the suite product and the final rooms to be delivered in mid-September. Lorenzo Fertitta: Yes. This is Lorenzo. Look, we're continuing to work through the pipeline that we have. We're currently working on what is a potential to add rooms at Durango, rooms, spa, handsome additional meeting space -- in addition to that, we're actively working on 2 additional new greenfield projects going through the process of working on the plans, the scale of the project, working on pricing -- and as that process goes, it's really not something that you can necessarily rush. There's times when we go through it and we sit back down and start over again because it's not perfect. So we are making progress, and we don't have anything to announce now or necessarily in the very near future. But as we kind of turn the corner into next year, I think we'll have more visibility into what the development plan is going to look like. I mean we do have 6 development properties here in Las Vegas, plus 1 up in Reno for a total of 7, which is, we believe, the most robust pipeline anybody has in the gaming industry. So we're very bullish on it. We just want to make sure we get things right. It takes time to develop these projects. Operator: Next question will come from Dan Politzer with JPMorgan. Daniel Politzer: It's been a few months since you opened the new part of Durango. Can you talk about what you've seen there and how you're thinking about the returns? I know it's still relatively early, but at this point, you should have, I think, probably a good idea of how that's progressing. . Scott Kreeger: Dan, this is Scott. Yes, we're really happy with the early results of the Durango expansion. If you recall, we not only increased the casino floor with slot machines, but also added the new slot limit room. And just about every quarter Steve have been reporting on what we call the Durango zone. And that area saw notably increased net deal for the quarter over last year. And it really is confirming the thesis that continued capital investment in Durango is a good thing. And that's with the team fighting through some of this disruption that you probably see on the investor deck with the traffic situation. So we're really encouraged with what's going on there. Daniel Politzer: Got it. And just for my follow-up, just to clarify, the disruption for the second quarter, you said $9 million for GVR and then an incremental $2 million to $3 million related to Durango. So just 11% to 12%, correct? Just clarifying that. Stephen Cootey: That is correct, Dan. . Operator: The next question will come from John DeCree with CBRE. John DeCree: I would love a little bit more detail on the EBITDA margin declines year-over-year, trying to unpack what might be attributable to disruption in the quarter and transitory versus perhaps a little bit more persistent OpEx inflation? Stephen Cootey: Not a problem. But one thing I did want to point out that from an EBITDA perspective, we feel very comfortable with our margins given some of the structural changes we've made over the last several years in terms of -- and proud to say that Q1 represented the 21st quarter of the last 23 since Cove where Las Vegas operations was about 45%. But then to get to your question, I think we've done a great job managing payroll. Payroll is probably up a little under 3%, which is in line with the Valley COGS, which is another large cost flat to down, really, the majority of the EBITDA margin degradation can be contributed to the really-the Green Valley hotel disruption. -- which is probably almost half of that margin degradation and then a few uncontrollable such as we had elevated utilities costs this quarter as well as loss and some loss of damages. John DeCree: Great. And just as a quick follow-up, -- any insight into hotel demand at the renovated Green Valley Ranch rooms or the business more broadly as we think about differentiating that hotel customer from the strips hotel customer that's facing some weakness right now? Scott Kreeger: This is Scott. Let me take the broad-based performance. We were really happy with the performance in the hotel for the overall brand. Now you have to caveat that we had about 27,000 room nights offline or about 10% of our inventory at Green Valley Ranch. Given that we still were positive year-over-year in hotel revenue. So the rest of the portfolio did a nice job of addressing some of the headwinds that Steve talked about with TSA issues, fuel prices and then, of course, those units being done. As far as the West Tower that is available and the new banquet space, customer feedback, both from a transient customer and from a sales customer standpoint, it's been phenomenal. And it's our view that those rooms are probably the nicest rooms in town right now. from a competitive standpoint and a quality standpoint. We're seeing increased ADR growth as we expected out of refreshing those rooms. And really, the story for Green Valley is to get through the rest of the room remodel and call it, late September to kick in to maximizing the full capital investment where we've got all the rooms up and running and we've got the banquet space. And so we look forward to that happen soon. As far as general health going forward, we like where we are in April relative to hotel -- it's early in the summer booking window. But if you kind of look at competitive set, let's call it, on the 60-day booking window, we are seeing green shoots in core and 5-star hotel ADRs. And we do like the fact that the strip is addressing some of the tourism concerns around value. There's a lot of inclusive packages available in the market for that customer that's seeking value. So we're optimistic about the summer, but it's really early in the booking window to come. Operator: Your next question will come from Grant Montour with Barclays. Unknown Analyst: It's Christie off for Brad. I just wanted to clarify on the seasonality from 1Q to 2Q. I just want to make sure I heard that right that you said it was typically down 8% to 9%. And then in terms of -- I appreciate the color on the 2Q disruption costs of $9 million at GVR and $2 million to $3 million at Durango I just wanted to clarify, what was that in 1Q? I think last quarter, you mentioned it was $9 million for GVR. Stephen Cootey: Yes. So the clarification point, you did hear the seasonality, right, typically going back that we are down 8% to 10% between -- excuse me, 8% to 9% between the first quarter and the second quarter. On terms of -- or, I'm sorry, I lost your second question again, my apologies. . Unknown Analyst: The -- I appreciate the color on the 2Q disruption costs, but how did that compare to 1Q for GVR and Durango? Stephen Cootey: 1Q GBR was -- we previously announced $9 million that you came in pretty much spot on $9 million and Durango, despite seeing a lot of traffic disruption the teams kind of managed through it to have just a marginal impact. . Unknown Analyst: And then switching over to North Ford. Can you guys provide any color how you expect that property to ramp? I think in the past, you have seen a potential to be similar to Gun Lake? Scott Kreeger: Yes. I think -- look, I think just optically looking at ramps, we're pretty good at understanding these traditionally -- each market has its own competitive pressure. Certainly, there are 3 competitive properties in the area. We expected in the early days that they might be promotionary in how they approach our opening -- but we expect in the typical projects, it may take a couple of years to ramp up and to really get the database acclimated and to grow that database. But given our location, given the quality of the product and our knowledge of that kind of, call it, mid-California market and the team that we have there, we expect to do quite well. Lorenzo Fertitta: Yes, we would expect the property to be profitable from day 1. So it's just a matter of fine-tuning it and growing the revenue base and managing the expenses on a go-forward basis. So probably a little bit of a shorter ramp than, say, Las Vegas typical . Scott Kreeger: Two years maybe . Lorenzo Fertitta: Typical Las Vegas as I think so. . Stephen Cootey: Yes. And then -- and I think we've articulated maybe several quarters ago that stabilization this is about a $40 million to $50 million revenue product for us. Operator: Your next question will come from Stephen Grambling with Morgan Stanley. Stephen Grambling: Maybe a follow-up just on GVR and the room renovations. What does the total spend of somebody who's staying on property there kind of compared to the average. I mean when you're quantifying that disruption, is that purely the hotel revenue that's come out? Or are you able to kind of decipher what other netting, you can see if you get that customer coming back somewhere else or getting other spend? Stephen Cootey: Yes. You can actually -- it's pretty much by the room. So you can pretty much nail this. From a disruption standpoint, this is absolutely not an exact... Frank Fertitta: Room revenue and gaming revenue. Stephen Cootey: It's come a -- that's what I was going to say. And so -- well, an exact size when it comes to rooms, there's more science to it. And so where Frank was getting to it's a combination. The majority is going to be room revenue majeure. And then the second point is going to be convention revenue and catering, right? You'd expect that given the rooms that are out and the catering spaces are out. but then it's all -- then there is a significant portion of food and beverage and gaming that are associated with those rooms. Stephen Grambling: Right. And so I guess you're including that in that disruption as part of that estimate because I guess what I'm trying to think through is as we bring those rooms back, I imagine that's a higher spending customer, perhaps the benefit that you get is when it comes back, should be theoretically much bigger than the disruption that you're describing. Yes. Frank Fertitta: Once we get it dialed in. Yes, absolutely. That's right. Operator: Your next question will come from Jordan Bender with Citizens. Jordan Bender: Steve, I want to go back to the higher gas price comments. You kind of made it sound like April were back to normal, and the consumer is acting normal. Were those comments in March, you were seeing higher gas prices impact foot traffic into the casino? Or how should we think about that? Stephen Cootey: I mean, I think as we kind of go through the progression of the quarter, right, January was strong, February was strong. March was impacted by everything you read in the news, which included some higher gas prices. And then -- but we were very happy with the way April right now is tracking to be 1 of the best Aprils on record. So far, gas, but we haven't seen too much of an impact from higher gas prices. . Lorenzo Fertitta: Yes, March was a -- it wasn't a bad month. It was fine, but we think it was affected by that, by gas, by the war, the uncertainty as well as just the TSA situation was a bit untenable. The goodness it's over and behind us, at least it seems. But for that 2- or 3-week period, I think people just were hesitant to get on a commercial airline because they didn't want to wait in the airport for 2 to 3 hours to get on their flight. So it definitely affected things. But in no way was it a bad performance money. Jordan Bender: Got it. And then the other part, the construction disruption that you're seeing around town -- are you able to capture those players at other properties via your database? Or are you just losing those visits from those players to specific properties? Scott Kreeger: This is Scott. Yes, I think you hit it on the head. We have quite a broad distribution of properties in very convenient drive times of each other, and we kind of call it crossover play. And what we'll see is if we can't mitigate that disruption with the customer, they'll typically land in an adjacent property of ours. And we watch that very closely from a database perspective as well. So if we see decline in any known customer. We certainly have programs to address that. . Operator: Your next question will come from Chad Beynon with Macquarie. Chad Beynon: You mentioned that you're starting to do some of the early work on additional greenfield projects. So with the outline CapEx that you have going on over the next 18 months, in the current leverage, what's the maximum leverage that you'd be comfortable levering up against in this market? Stephen Cootey: We kind of articulate right now, we're about 4.07x. The balance sheet is we feel it's very strong. Interest expense has come down for the past 4 quarters in a row right now. There's no short-term maturities and the credit agreement is incredibly flexible. And as we said in the past, Chad, that while we'd love to keep maintaining leverage on and around 4 for the right opportunities that we would spike leverage up. I think once you start topping -- that's really where you start kind of -- kind of you start getting a little concerned Doria project . Frank Fertitta: Look, we have North Fork coming on. We have a note receivable from North Fort around $80 million we expect that thing to be profitable from the day that we opened it up. And we're going to continue to have some of these new investments come online where we're upgrading the properties we have at Sunset, Green Valley, et cetera. So... Lorenzo Fertitta: Durango [indiscernible] the summer. So like Frank said, our expectation is that we'll be getting a return on the capital is currently in the ground. So our expectation is that EBITDA will grow. And then we're going to make a decision on what property or what project is next and how we're going to layer these things in. But I think we're very comfortable with... Frank Fertitta: While you're on reproduction. Stephen Cootey: And knowing that as you're investing in new assets, you're going to generate new EBITDA, which is going to once they open, obviously, get you back in line to where you want to be long term. Chad Beynon: Okay. Yes. That makes sense. And then you kind of touched on this a little bit with the database and what's going on the strip with some of the all-inclusive deals. But are you starting to see strip operators start to market locals in a way that we haven't seen for several years, whether it's slot credits or hotel rooms or anything else that could increase the promotional or competition landscape? -- in the near term. Scott Kreeger: Yes. We don't see anything that would cause us to change what we're hearing or expect that it was anything different than what's happened in the past. Lorenzo Fertitta: Yes, ship operators historically have always taken a shot at local some maybe with more success than others, but nothing has necessarily changed that I've seen. You haven't seen anything, Scott, right? Scott Kreeger: No. Operator: Your next question will come from David Katz with Jefferies. David Katz: Heard some earlier this week commentary from a hospitality company on a little bit of change in the shape recovery and seeing some strength in the lower end, which has shown up in some of the hospitality numbers. Are you seeing anything like that? Because it's as though we've talked about the bottom of your database being a little pressured for quite a while. Scott Kreeger: I think the place to look for any kind of change there is in the absolute discretionary. So if you look at eating out I'll reference food and beverage and entertainment -- we had a great quarter. We were up year-over-year. We increased cover count. We increased average check. Overall revenue and profit in Food and Beverage is up. And to me, that's probably 1 of the more absolute discretionary items in our business, and it's kind of a bellwether for us as to the health of that customer. And like Steve said, we had a record gaming quarter. So they're also here plan slots and other gaming casino games. And so right now, it looks healthy. Frank Fertitta: It's not that our low end has been under pressure for a while. It's Post-COVID, we changed our business level. And we've really reinvested in high limit slot rooms, high limit table games. We're not in the promotion business anymore we're relying on our best-in-class locations, best-in-class buildings, having the best employees to take care of the guests. And it's just -- it's been a pivot from what used to be a very promotional market. And it's just where our focus is. It's not that it's under pressure. Scott Kreeger: Yes, I think that saying that customers basically doesn't have the discretionary income is probably not the way we look at it. We do have customers that seek value. So it's kind of a bit of a magic recipe as to how to provide what a customer perceives as value based on their demographic tier. And so we think we do a really good job offering a value to just about every demographic in the spectrum. Lorenzo Fertitta: Yes. The art is having a hang in steakhouse under the same roof that you're serving $1.99 margaritas and balancing that. Frank Fertitta: So you appeal to all the segments and the market demographically. So the one thing that we've done is try to provide a lot of value propositions for the repeat local customers and give them real value. And I think we do a better job at that than anyone else in the market. . David Katz: Understood. And if I can just follow up quickly, do you -- are you seeing anything? Or can you talk to destination volumes that impact the business? Probably not the core, but on the margin, is there any notable impact or trends you can cite? Scott Kreeger: Well, look, I think the most finite place and measurable place to look is in our database out of town. And our database out of town, I don't know how many quarters it's been steep, but we are incredibly consistently growing that national and regional segment of our database, inclusive of the first quarter. So it continues to be an area of opportunity and growth for us. Stephen Cootey: At least 10 -- these 10 quarters Scott. . Operator: The next question will come from Steve Pizzella with Deutsche Bank. Steven Pizzella: First, maybe we can get an update on what you're seeing in the promotional environment? Scott Kreeger: Stable. I think just as we've said in previous earnings calls, you do have the single proprietary one-off casinos that their kind of core DNA is to be a bit promotional. But nothing has changed there. And the market continues to be very stable, and we don't intend on changing any of our current strategies as a result of anything we're seeing. Steven Pizzella: Okay. Great. And then just as a follow-up, curious if the World Cup has had a material impact in the past more visitation perspective for you guys at your properties? Scott Kreeger: Yes, the World Cup is unique this year, and we really got ahead of it. The fact that of where it's located, the time slots for viewing and the number of games creates a great opportunity. We have the best race and sports book experiences in town. Customers know to come to our books for that kind of communal viewing experience. And so the operating teams have a very comprehensive plan to put our best foot forward during the World Cup. Operator: And this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Stephen Cootey for any closing remarks. Please go ahead. Stephen Cootey: Well, thank you, everyone, for joining us. Take care. Operator: The conference has now concluded. Thank you for your participation. You may now disconnect.
Operator: Good afternoon. My name is Hillary, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Viavi Solutions Fiscal Third Quarter 2026 Earnings Call. Today's conference is being recorded. [Operator Instructions]. At this time, I would like to turn the conference over to Vibhuti Nayar, Head of Investor Relations. Please go ahead. Vibhuti Nayar: Thank you, Hillary. Good afternoon, everyone, and welcome to Viavi Solutions Fiscal Third Quarter 2026 Earnings Call. My name is Vibhuti Nayar, Head of Investor Relations for Viavi Solutions. And with me on today's call is Oleg Khaykin, our President and CEO; and Ilan Daskal, our CFO. Please note, this call will include forward-looking statements about the company's financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including the guidance that we provide during this call, and our expectations regarding the end market and acquired business are valid only as of today. Viavi undertakes no obligation to update these statements. Please also note that unless we state otherwise, all results discussed on today's call, except revenue, are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today's earnings release. The release as well as our supplemental earnings slides, which include historical financial tables, are available on Viavi's website at www.investor.viavisolutions.com. Finally, we are recording today's call and will make the recording available on our website by 4:30 p.m. Pacific Time this evening. With that, I would like to now turn the call over to Ilan. Ilan? Ilan Daskal: Thank you, Vibhuti. Good afternoon, everyone. Now I would like to review the results of the third quarter of fiscal year 2026. Net revenue for the quarter was $406.8 million, which is above the high end of our guidance range of $386 million and $400 million. Revenue was up 10.2% sequentially and on a year-over-year basis was up 42.8%. Operating margin for the third fiscal quarter was 21%, above the high end of our guidance range of 19.2% and 20.2%. Operating margin increased 170 basis points from the prior quarter and on a year-over-year basis was up 430 basis points. EPS at $0.27 was also above the high end of our guidance range of $0.22 to $0.24 and was up $0.05 sequentially. On a year-over-year basis, EPS was up $0.12. Moving on to our Q3 results by business segment. NSE revenue for the third fiscal quarter came in at $321.5 million, which is above the high end of our guidance range of $304 million and $316 million. Revenue from Spirent product lines was $54.2 million, which was in line with our expectations and included a few opportunities that were pushed out from the prior quarter. On a year-over-year basis, NSE revenue was up 54.4% primarily driven by the acquisition of Spirent product lines. We also saw strong demand for our level production and field products driven by the data center ecosystem as well as for our aerospace and defense products. NSC gross margin for the quarter was 65.3%, which is 220 basis points higher on a year-over-year basis and was primarily driven by higher volume and favorable product mix. NSE's operating margin for the quarter was 17.2%, an increase of 680 basis points on a year-over-year basis. NSE's operating margin was also above the high end of our guidance range of 15% to 16% as a result of a higher fall-through. OSP revenue for the third fiscal quarter came in at $85.3 million, also above our guidance range of $82 million to $84 million. On a year-over-year basis, OSP revenue was up 11.4%, primarily driven by strong demand for 3D sensing and anticounterfeiting and other products. OSP gross margin was 50.3%, down 130 basis points on a year-over-year basis, and it was mainly due to unfavorable product mix. OSP's operating margin was 35.3%, an increase of 140 basis points on a year-over-year basis. OSP's operating margin was in line with our guidance range of 34.8% to 35.8%. Moving on to the balance sheet and cash flow. Total cash and short-term investments at the end of Q3 were $508 million compared to $772.1 million in the second quarter of fiscal 2026. Cash flow from operating activities for the quarter was a use of $26.3 million versus $7.8 million that we generated in the same period last year. The cash flow was mainly impacted by the earn-out payments to Inertial Labs, timing of working capital and employee variable costs. CapEx for the quarter was $5.9 million versus $6.8 million in the same period last year. During the quarter, we successfully paid $49 million in cash for the remaining principal of the convertible notes due in March 2026, and we issued about 1.8 million shares for the conversion premium above par. We also prepaid during the quarter, $150 million of the Term Loan B. We currently have $450 million remaining for that loan. The prepayment is in line with our capital allocation priorities. During the quarter, we did not purchase any shares of our stock as we prioritize our capital allocation towards debt management. The fully diluted share count for the quarter was 249.5 million shares, up from 226.9 million shares in the prior year and versus 245 million shares in our guidance for the third fiscal quarter. Moving on to our guidance for the fourth quarter of fiscal 2026. We expect the fourth fiscal quarter revenue for Viavi to be up sequentially, driven by continued strength in many of our end markets across NSC and OSP. For NSC, we expect quarter-over-quarter revenue to be higher as a result of continued strong demand for our 11 production and field products driven by the data center ecosystem as well as for our aerospace and defense products. For OSP, we expect quarter-over-quarter revenue to be higher, driven by strength across all of the product lines. For the fourth fiscal quarter of 2026, we expect Viavi revenue in the range of $427 million and $437 million. We expect NSE revenue between $340 million and $348 million. OSP revenue is expected to be in the range of $87 million and $89 million. Operating margin for Viavi is expected to be 22.7%, plus or minus 50 basis points. NSE operating margin is expected to be 18.7%, plus or minus 50 basis points. OSP operating margin is expected to be 38.4% plus or minus 40 basis points. And EPS is expected to be between $0.29 and $0.31. Our tax expenses for the fourth quarter is expected to be about $10 million, plus or minus $500,000 as a result of jurisdictional mix. We expect other income and expense to reflect a net expense of approximately $12 million, and the share count is expected to be around 256 million shares. With that, I will turn the call over to Oleg. Oleg? Oleg Khaykin: Thank you, Ilan. The results of the third quarter of fiscal '26 exceeded our expectations and came in above the high end of our guidance. The strong year-on-year and quarter-on-quarter performance was driven by strong growth in many of our end markets. NSE revenue in Q3 grew approximately 54% year-over-year, primarily driven by strong demand from the data center ecosystem and aerospace and defense customers. The data center ecosystem, which includes high-performance semis, optical modules, NAMs, and the hyperscalers drove strong demand for 11 production and field instruments in support of AI data center build-out. We are seeing strong demand across all data center segments. Scale up, scale out and scale across. Acceleration of industry investment in ever greater communication speeds and chip-to-chip interconnect technologies are the principal drivers of strong demand for our optical transport silicon photonics and communication protocol and high-speed Ethernet test equipment. The Q3 growth was also helped by a recently acquired Spirent high-speed Ethernet product lines, which gave us access to a large installed base of enterprise customers. HSE performance came in line with our expectations. Given strong and growing customer demand, we expect the data center ecosystem revenue momentum to continue through the calendar 2026. Our Aerospace and Defense business also showed another strong quarter-on-quarter growth, driven by continued growth demand for our positioning, navigation and timing products. We expect this trend to continue through the calendar year. The service provider business, which includes field instruments, wireless and service enablement was in line with seasonality. As you may recall, the service provider business is seasonally weaker during the March and September quarters and seasonally stronger during the June and December quarters. Some notable on the service provider dynamics during the March quarter included early orders from cable operators relating to the new DAA architecture and continued weak but stable demand for wireless test products. We do not expect to recovering growth in the near term for wireless business. Now turning to OSP. OSP saw strong year-on-year growth, driven by strong demand for 3D sensing and anticounterfeiting products. Looking ahead to Q4, we expect NSE revenue to be up quarter-on-quarter, driven by continued strong and growing demand from the data center and aerospace and defense customers and seasonally stronger service provider spend. We expect OSP to be up also quarter-on-quarter, driven by strength across all product lines. In conclusion, we expect our data center and aerospace and defense end markets to be strong drivers for the foreseeable future. I would like to thank the Viavi team for its continued strong innovation and execution and thank our customers and shareholders for their continued support. With that, I will now turn it back over to the operator for Q&A. Operator: [Operator Instructions]. Your first question comes from the line of Ruben Roy from Stifel. Your line is now open. Ruben Roy: Great. Thank you. Hi, Oleg and Ilan. Congrats on the momentum here in the business. I guess to start, Oleg, maybe we could just drill into the data center momentum. And if you think about sort of the first half of the year and what you're seeing here with the beat here in the March quarter and the guidance for June. Can you detail out sort of a little more detail around the drivers by production field, and maybe just kind of what you're seeing in terms of visibility from your customers? Obviously, a lot going on with AI infrastructure networks and that type of thing. But just trying to get to a little more detail around lab production at field and how you see that sort of trending from here as you look ahead. Oleg Khaykin: Sure. Well, I mean, the -- on the lab side, it's your classical optical transport and PCIe express test products. So as you develop all these new AI chips for inference or the training, it requires, as you can imagine, very high speeds for all the ports and the overall traffic. So I mean, everybody who is working on any kind of product out there that's going to go into these next-generation systems, be it for AI training or inference is buying our optical transport and our protocol test solutions. So that's primarily lab, but also exactly same equipment is being bought by NAMs or building optical switches and all the other gear that goes into the systems. And that's kind of on the lab side. On the production, we are seeing a lot of momentum on this whole co-packaged uptick area, and that plays extremely well to the traditional Viavi strength with the old JDS Uniphase products that go into the production line where you're measuring spectral performance, the optical performance of all the various optics, but it's also -- we are selling now a lot of that equipment to the semiconductor vendors as they develop their integrated packaged optic solutions. So I mean, it's pretty much everything we do in that area relating to the advanced silicon for both training and inference applications and all the optical gear that goes into these data centers is playing perfectly aligned to our portfolio. Now on the field instrumentation side, as all these data centers come up, they are putting a lot of investment into ensuring peak performance. And I tell you, I mean, I've never seen so much demand for our fiber monitoring solutions. I mean, I'd say these data centers buying more equipment than regular service providers for the whole big network. So that is obviously driving the whole field instrument side of the business. I mean, it's now approaching cost to, let's say, 40%, 45% -- pretty soon probably maybe 50% of the field instruments is actually driven by the data center. So in that respect, it's a very good alignment between what the market needs and what we actually have. Ruben Roy: That's great detail. I guess for a follow-up on that. You had started to see some hyperscaler activity around 800 gig, I would assume last year, some of these things that you're talking about in answer to the question and on the call today, things like 1.60 co-packaged optics. They're actually just starting, it seems like. Is that the right way to think about it? And I guess the question... Oleg Khaykin: Go ahead. Ruben Roy: I was just going to ask the question, it would be sort of in terms of your mix here, is it -- I would assume it's still more weighted towards some of the older generation technology? Or is that the wrong way to think about it? And kind of how do you think 1.60 and some of these new products layer in, I guess, is the question. Oleg Khaykin: Yes, it's all. I mean the 800 is still very much a high volume driver. But a lot of the new development is using our 1.6. By the way, we released 1.6, 1.5 years ago. So you just see -- actually, ironically, it was initially the NAMs, the optical equipment vendors who deployed it first in development. And now it's spreading to the semis and the whole co-packaged optics. So yes, I mean, 1.6 is ramping in a lab. And we're also having some of the early production products to the module vendors. But there's no like one way or the other, it's actually both of these are -- one is ramping into volume, the other one continues to be strong in the volume. Operator: Your next question comes from the line of Mehdi Hosseini from SIG. Mehdi Hosseini: Yes. Oleg, congrats on execution. I want to get a bigger picture and looking more longer term I see your midpoint of your June quarter guide implying annualized earnings of $1.20 which is much higher than the prior peak from FY '22. And with that context, how should we think about company's earning power over the next 1 or 2 years. And I'm not asking for a guide, I just want to get a better picture of how these -- the new vector the demand factors that are materializing are going to enable you longer-term earning power. And I have a follow-up. Oleg Khaykin: No, it's a great question. So I think clearly, I would say our NSE business is now getting very close to 20% operating profit. It's all volume driven. So for every incremental dollar in NSE, I mean, you're getting about what to $0.45 dropping to bottom line. Ilan can give you a lot more detail on that. So clearly, that's driving up the operating margin. Our OSP has always had pretty high operating margin, but also with the higher revenue, and that it's now going from like was in a mid-60s to 70s. Now it's moving to high 80s to maybe low 90, while that gets you a couple of percentage points higher gross margin, which then obviously drops right down to the a couple of percentage points higher operating margin. So already at the blended average, we are, like, what, 23%, 24%. And as NC keeps getting stronger that will keep moving into the mid-20s and maybe higher. So in that respect, there is a tremendous operating leverage that comes with volume. And also, we've been able to weather pretty well any kind of the price increases due to components and component shortages, and as we probably will try to pass some of that increases to our customers, that will be an additional mitigation of the cost, which will probably give us a little bit more expansion on the gross margin. So clearly, a combination of keeping up with the price increases and passing around, maintaining healthy gross margins volume growing, driving significant operating leverage. And fundamentally, it scales very nicely from here this point on. I mean as our fixed costs fully covered, every incremental dollar is what, about 40%, 45%. Ilan Daskal: So for modeling, Mehdi. So on the NSE side, it's around today, the 40% level. And obviously, the top line, we assume will continue to drive as it continues to grow. So when you think about the operating leverage and the operating income, for NSE and the company? I mean... Oleg Khaykin: And I'll say last but not the least, we've talked a lot about our NOLs. Well, guess what? Now that we are generating a lot of profit and a lot of it falls in the U.S. jurisdiction because of where our IP and R&D is, I mean, all that incremental profit comes in at virtually 0 tax in the North America. Ilan Daskal: This quarter, for example, the effective tax rate is about 12%. So definitely another benefit there. Oleg Khaykin: I mean the only level -- you have is with the converts you get a little bit dilution as your price stock price goes up. So you've got to factor a bit higher share count in your calculations. Mehdi Hosseini: Okay. And my second question or follow-up. I want to come back to a scaling right now against midpoint of the June quarter implies about a 25% growth from the prior peak from mid-'22. And back then, 5G wireless was a big factor. I'm on your assumption that wireline, especially as we roll out 1.6 that subsequent to that 3.2% offers the bigger TAM. And given that setup, yes, you have been able to scale revenue through acquisition, organic growth. But where do we go from here? Is there any way you can help me understand the growth the growth from here, especially cannibalized by 1.6 and 3.2. Oleg Khaykin: Well, so I think the intensity of our equipment increases as you go into higher speeds for both not only the networking speed or bandwidth, but also with a chip-to-chip interconnect. And then on top of it, you throw in things like co-package optics or near package optics and all that. So actually, you're not only growing with the market, you are also having a broadening of areas where our equipment is being bought. I mean, for example, when you start making manufacturing multi-mode and hollow core fiber, you now -- before we never really sold into the manufacturing lines. Now the level of complexity in this product requires our instruments so we are now seeing opportunities emerging where we will be selling into the production environment on things like fiber manufacturing, right? Things like people making co-packaged optics or integrated optics while now you are selling optical equipment into the lab that before you only used for maybe fiber optic modules. Now they need to characterize and design these optical components and then all these optical components need to be tested in like multiple insertions because the yield is so critical when you build this whole module I mean if you have one device is bad, you throw away the entire once it's completely sealed, you can't rework it. So you have to test every component that goes into the module, then you test it again once you mount it. And only at the end, you put an ASIC on to the module. So in that respect, it drives a tremendous amount of test requirements in the manufacturing process. Mehdi Hosseini: I completely understand. I think your booth at OFC in March was illustrated at this increased test insertion points. But I guess back to my question, could this opportunities help you with the $500 million of the quarterly revenue? I'm not asking for a specific timing, but is the $500 million of quarter revenue a realistic target? Oleg Khaykin: I think it's entirely realistic. I mean, look, I think this quarter, we are at midpoint is well around 232. I mean, so it's moving in that direction. Remember, it's not only -- it's, I'd say, it's early on. We're seeing a lot of early demand in this truly as a lot of the next-generation optical equipment and components come into being. I mean you look at some of these new high-power Ethernet, which is a day embedding like optical photonic integrated circuits into substrates and OLED. So it's -- the scope of the market is expanding tremendously. And let's not forget our Aerospace and Defense business. It's also growing very nicely. So we don't talk much about it, but that business is like also driving the wave. And last but not the least, wireless will not be down forever. Eventually, we do need to consume all the data and all the through our wireless devices. So I think eventually, either the service providers or some other money will come in to take the wireless infrastructure and make it AI rent which will rebound the spend in that market. And today, our wireless business is down about 45%, depending on the quarter. And that alone could drive $20 million to $30 million additional quarterly revenue. Ilan Daskal: And maybe, I assume just to make sure that we are levering kind of the expectations here. I assume first you referred on the $500 million to the NSCP [indiscernible] Viavi but it's also not... Oleg Khaykin: I think he;s talking about [indiscernible] of Viavi. Ilan Daskal: So that's what I wasn't sure. But in any case, this is not necessarily kind of immediate next fiscal year. This is over kind of the next kind of upcycle. Operator: Your next question comes from the line of Ryan Koontz from Needham. Ryan Koontz: Terrific results, guys, just excellent. Maybe just a quick clarification on the data center customer mix there. It sounds pretty broad and diversified. But as you think about the different types, the semis, the optical, the NEMs, the operators, can you give us maybe an order of kind of which one of those customer segments is driving the are the biggest within the data center mix today? Oleg Khaykin: It's fairly well -- it varies quarter-by-quarter. I mean I mean, let's first way, the actual data centers are buying quite a bit. I mean, so it's -- if you only just take the one single segment, I would say the hyperscalers would be biggest bucket because they not only buy equipment for data centers, but they also run their own R&D, developing their own processors and modules and the ops right. And within the hyperscalers, I'd say there is the ones who are much more into doing their own staff are actually much bigger and some that are not so big. But it's percolating across, right? And the next big bucket would be the modules -- module makers and the system makers, right? People making optical modules and optical systems. And I would say the next bucket is the silicon vendors. And I mean I mean, I haven't really looked at it, but it's a fairly even balanced distribution. Ryan Koontz: That's great color. And maybe switching gears to Spirent. Obviously, they're a big part of your success here in data center as you build that momentum. Can you maybe talk about the synergies you're seeing with that business as it relates to both the product side of the house as well as the sales side? Oleg Khaykin: I would say the -- I mean, clearly, they come with a pretty big established customer base. I would say we are really upgrading the performance -- hardware performance of their products, which makes them much more competitive. But they have a very good established reputation and the, I would call it, application hardened software for all kinds of Ethernet traffic. So, in a way, it's a good combination, accelerating our hardware development to the ever higher speeds and bringing their software and combining it together. I'd say the first truly integrated product that we're going to have between them and [indiscernible] 3.2 terabits. But we are doing very well already leveraging our 800-gig position with their 800-gig Ethernet test and obviously expanding it to our customers who they did not have, but also getting access into their customers, which drives broader discussion and more strategic discussion around not only high-speed Ethernet, but all the other products that we bring into the mix. Ryan Koontz: That's great. Sounds like the cross-selling is already beginning there. And maybe just some of the emerging -- if I get one last one in here around emerging product areas, obviously, defense is one. How would you characterize where you are in winning share for this P&T with the growth in all the drones? And would you touch on maybe what you're doing in wireless in the satellite arena you see that as an emerging opportunity for LEOs. Oleg Khaykin: So the positioning, navigation, timing, actually, a lot of the revenue that we're seeing today and driving today, most of it was actually designs that were won before we acquired them. But we're now starting to see even things coming ramping up ever since we acquired it. But if I look at the funnel of wins in the last, let's say, 12 months, as these things kick in, that momentum will continue to drive that business. So it's all goodness and it's clearly drones is a big one, but pretty much anything autonomous, I mean, whether it's air, land, sea or undersea vehicles, is -- creates a great pool. And we are now winning some of the U.S. Tier 1s. I mean, traditionally, they were very strong with Tier 2s and a lot of international. And I would say in the past, year, we have really -- as we brought in a lot of the kind of discipline around the implementing ITAR and various secure access systems we are now being considered by U.S. Tier 1 players, and we are starting to play in much bigger leagues in that respect. So that was the aerospace defense. Your satellite question on wireless. Well, as I tell my wireless team, when the market is awful, focused on the next generation, and it's 6G, it's NTN and all these kind of applications. And we are very heavily involved with kind of the 5G plus 6G. And a lot of it is really focusing on the two types of communication, the AI RAN, which is basically running AI traffic through the advanced a wireless network and the ground to satellite communication. So this is what a lot of our advanced wireless applications are focused on today. Operator: Your next question comes from the line of Andrew Spinola with UPS. Andrew Spinola: I wanted to ask on the component shortages and some of the supply constraints. I'm just wondering if during the quarter, you were able to meet all of the supply or all of the demand rather or the supply constraints limited to you? And as a part -- sort of like an addendum to that question, we're starting to see a lot of long-term supply agreements in other areas in this industry to meet the hyperscaler demand and sort of increases in visibility a couple of years out. So I'm wondering what your visibility is like have you started to enter into any long-term supply agreements with some of your bigger customers? What's evolving on that side? Oleg Khaykin: Thank you, Andrew. Well, I mean, I don't think -- we don't have the volumes to enter into a long-term supply agreement. And remember, test and measurement, usually, it's you're leading a lot of the value market. So you have to buy the latest and greatest. So what's more important for you is not necessarily supply agreement, but the early access. It means you're accessing alpha silicon or beta silicon well before it's released. So you can develop the products there are available even before the qualified silicon is released to the market. So that is where we focus on. In terms of the availability, in Test and Measurement, you generally pay the highest ASP of their price distribution. So it's never a problem to get it. You just got to make sure you give them -- you get enough notice. So when you -- I would say, if we say supply shortage would not be because we would not give the material. We just didn't get -- we get an upside order with too little lead time to get it in. But generally, you pay more money, you always get the product. So -- and the nice part about being a bleeding edge of the test and measurement, people need the product that works and pricing is secondary in that respect. Now as you get into more mature products like field instruments, handhelds, yes, their cost is very important. And there, we generally maintain inventory. I mean we got a lot of headache from my CFO and our Audit Committee a few quarters back because we went in and put some product on the shelf because we anticipated the shortage coming in. And today, we look pretty smart as a result of it and nobody is complaining. So in the end, I mean, you got to manage your supply chain. And last thing you want to do is be pennywise and found foolish. And I mean if you don't pay, then don't complain, nobody is going to give you any availability. So far, we have -- I mean clearly, there is supply shortage, especially memories. I mean, listen, I think memory is going to be a deficit for the -- till 2030 according to some of the studies I've seen. But given our volume requirements, it's not such a big deal. I think having a product available ahead of everybody else and having early access is probably what's more important. Ilan Daskal: And I can add to that also, if you look at our balance sheet for March, you will see on the inventory level, it's up single-digit million. The majority of it was to secure some additional components for the [indiscernible]. Oleg Khaykin: And I mean -- and we look 2, 3, 4 quarters out, and we'll make some bets because it's not the issue if we don't get the product. It's really the lead time. and making sure we give adequate notice to the vendors. Andrew Spinola: Appreciate that color. One follow-up I wanted to ask. You talked about incremental margins earlier on the call of 40% to 45%. I think that makes a lot of sense. It looks like that's what's in your numbers. And for Q4 in your guide, and I'm trying to think about how to think about fiscal '27. And so my assumption is that you've got the 40% to 45% incremental on the core business as you scale. But what I'm really asking about is you announced last quarter, I think it was about $30 million of restructuring. I think you acknowledge some of that will probably get reinvested. But I'm wondering, at this point, if you could give us any color on maybe how much of that is going to drop to the bottom line? How much of that is going to be reinvested. And frankly, my assumption would be a good chunk of that is going to hit the bottom line. So maybe incrementals in fiscal '27 are closer to 50%. So I wonder if you could comment on that? Oleg Khaykin: Well, maybe I'll start and Ilan will give you details. So we're going to implement most of it by the end of our fiscal year, so the June quarter. And there's some remainder that probably will go through the end of the calendar year. And I think, Ilan, what is it roughly 1/3 of it gets reinvested. Ilan Daskal: Yes. And Andrew, the 40% fall-through that we see right now, we probably -- and there is a good reason to assume that it can go higher Specifically, if you think about the second half of the fiscal year next year, meaning 27, there is still the seasonality that Oleg mentioned in the prepared remarks. So if you think about the September quarter, usually it's a down quarter for us, et cetera. And we need all the restructuring to materialize, and that will take also until the end of the calendar year, this calendar year. So the increase in the fall-through from the 40% level it's fair to assume that with the top line kind of growth will be more visible in the second half of the fiscal year of next fiscal year, meaning it's the first half of the calendar year of '27. Oleg Khaykin: So one thing I just want to clarify. When he launches September quarter is a seasonally down quarter for us for service provider segment, that's what it is. So if you think about it, in the old days before we had this whole data center and aerospace and defense. If you look at the old Viavi, it's like March and September quarter would be the down quarters because that's the type of spending that of service providers. By the way, that pattern is still there, except now it's on a much smaller scale. But because of the Aerospace and Defense and our data center business is growing so strongly. It's more than offset but you still have that underneath it, you have that up and down. So you would see like a much bigger jump between March and June quarter because you have a tailwind from service providers. Conversely, you'll have a smaller increase in the September quarter because you have a headwind from the service providers. Then in December, you'll have a tailwind again. So I mean, this thing is still there. It's just becoming more and more muted from impact on the overall Viavi. Ilan Daskal: And on a quarter-on-quarter kind of trajectory overall, December is stronger versus September and September is still more muted relative to the June number. Oleg Khaykin: That's right. Operator: Your next question comes from the line of Michael Genovese from Rosenblatt Securities. Michael Genovese: Thanks. Exciting times, guys. Congratulations for being right in the middle of it.Oleg, I keep hearing now as we go to silicon, more silicon photonics and more co-packaged optics that the bottlenecks to the whole thing are moving to the packaging from the foundry players and to the test and measurement for the electronics, the optics, the engines and the ASICs. It seems like there's so much testing to be done with co-packaged optics. So my first question is, do you agree that testing is a bottleneck? And if so, how will you address that over time to take advantage of that? Oleg Khaykin: I'll say, Amen, Brother, you're absolutely right. So I mean, the whole test packaging used to be kind of a back-end afterthought. It is now the system. It's now a strategic asset. So you look at companies like, well, I don't want to name names, but all the leading semiconductor companies, the packaging expertise package is now the system. And you're looking at integrating glass substrates. You're looking putting photonic integrated circuits next to the electronic integrating circuits embedded into this whole coat chip on wafer on substrate, right? You're building this really complex thing. And then if you look at -- you're putting now all these copackaged optics on a periphery of the chip, this thing is starting to look more like a brick and some of them weigh -- I mean we're talking about the chemos of weight, right? So to me, that's like music to my ears because as you probably know, I started in the [indiscernible] I ran Encore. So it's like all the [indiscernible] field, you get no respect. Well, now the respect is like hugely and I mean, we are seeing now our technologies and our capabilities are being dragged into the straight into this whole value chain of testing from the individual optical components to wafer level packaging to the heterogeneous integration packaging all the way down to being integrated into major test platforms. And that's like a whole new business that we did not even have. And then last but not the least, this whole rack-mounted systems that are being built as custom test by leading players. We're supplying a lot of the guts and a lot of hardware that goes into those systems. So, as I was saying, I think is like from the old JDS Uniphase date, we still have all these products, and now there's a whole new life being injected into those products. And that's something we didn't even think about, I would say, 3 quarters ago. Michael Genovese: Great. And then just as a follow-up, just with newer things like OCS, where I think you're probably going to have very high market share for testing. And then for co-package optics, I mean are these in the numbers at all yet? Or is this is all in the future, I assume. And I guess maybe my question would be how do you define the foreseeable future when you're saying that you feel great about the foreseeable future. Like how far out is that? Oleg Khaykin: I would say it's -- in the current numbers, it's kind of the early sales. But I'd say foreseeable future, you probably you're talking 2 to 3 quarters when it starts ramping up. The future is not that far off. [indiscernible] selling right now is the early inning. Michael Genovese: Right. Just to clarify the foreseeable future question. I mean, in the press release, you said something like we feel great about growth into the foreseeable future. So is that multiple years that we're talking about? Oleg Khaykin: No, no, no. I mean generally, we, as a practice, don't want to go beyond end of the calendar year. So when I say foreseeable future like the next 3 quarters. Operator: Your next question comes from the line of Tim Savageaux from Northland Capital Markets. Timothy Savageaux: Congrats on some pretty spectacular results. It's pretty simple question to start with. Well actually a confirmation and a question and maybe I'll get a little more complex on there. So Spirent was 54.2% in the quarter. Is that right? Ilan Daskal: That's correct. Timothy Savageaux: Okay. So I guess the simple question is, what do you expect for next quarter for Spirent? Ilan Daskal: So Spirent benefited from a few orders that we mentioned already in the last quarter that got pushed out to this quarter. So this quarter, that's the reason that it's a little bit stronger than seasonality, we still expect on an annual basis, calendar annual basis, a similar run rate of around about the $200 million that we said with a split of around 45%, 55%. And -- so that takes you to normalize everything still back to just shy of the $50 million, maybe $48 million for the June quarter. Timothy Savageaux: Okay. Well, that's a good answer because that speaks to higher levels of organic growth in your NSE business? Would I see approaching 40% here in Q4. The way I'm dicing things up here and over 30% for the year. So I guess I'll try to tie the last question to this one and say when we see this type of environment for the foreseeable future, do you think you can see those type of organic growth rates, 30%, 40% for, call it, organic NSE continue over the next couple, 3 quarters. Oleg Khaykin: Well, I mean one thing about percentages, it's very hard to maintain same percentage. I mean because 30% on one number is much smaller than 30% on a much bigger number. But I think if you look at that growth in the absolute dollars, I mean that's what we're try to maintain. Ilan Daskal: And Oleg just mentioned earlier, the service providers, which is part of the core NSE. And so if you think again, the seasonality of September, traditionally does not enjoy the same growth rate if you bundle everything together. So I'm not sure that our assumption is exactly, I mean, right? I mean it's... Oleg Khaykin: I think he's talking about year-on-year. Year-on-year, when you have -- when you needed quarter -- same quarter, same dynamics, Yes, I wouldn't say -- I don't think you could say like a 40%, but I think still a high number should be realistic because 40% on $400 million is one number. 40% on $200 million is a very different number, right? Timothy Savageaux: No, I got it. Although I'd say consensus probably has you at high single digits right now given what you reported. So I could probably do a little bit better than that. [indiscernible] more for the full year of '27. I'm just making serious comments. I'm not asking you to guide anything. You've been very helpful in giving the breakdown at least some I'll ask for either 1 of 2 ways, which is kind of the data center, defense and service provider breakdown, if we can get an update there and/or growth rates in those categories estimated for what you saw here in fiscal Q3? Oleg Khaykin: Well, I'd tell you, if everybody spends what they claim they're going to spend, I mean, we still got a lot of growth to go on, right? So I mean, if you take those assumptions, I think we're -- I mean, the momentum, I'd say, we're still in the fairly early segment of the ramp. Timothy Savageaux: Message received there. Would you say data center, and again, this kind of with and without Spirent confuses thing. I assume with data centers saw solidly more than 50% of NSE revenue -- but what I was looking for is, however you want to break it down, I think you'd said 45, 15. 40 before. Oleg Khaykin: Yes. I think right now, the data center is -- I mean, the exit velocity this year is inching to the high 40s. The service providers are inching towards mid-30s and Aerospace and Defense is a little over 15%. So I wouldn't be surprised if data center in a not distant future, gets up to about 50% of our NSE revenue. Operator: Your next and final question comes from the line of Andrew Spinola with a follow-up from UPS. Andrew, your line is now open. Timothy Savageaux: I just wanted to ask a higher-level question about your drone business, your module business from inertial how is that business performing? Obviously, there's a lot of demand and new programs in that space. And I'm just wondering what you're seeing in terms of opportunities. How is that business positioned? Do you have all of the approvals and the ability to sell into all of the customers? How should we think about that opportunity over the medium term? Oleg Khaykin: It's a good question, Andrew. I mean so you can judge from it, the mere fact, Ilan said that we just paid out. If you look at our balance sheet, we paid out a pretty big earnout, means these guys have exceeded every forecast that they've given us. And as I tell you, in my career, I've made about close to 40 acquisitions. There's been only two of them have exceeded their first year forecast. Okay. This is the only one at Viavi. I mean that business is doing extremely well. And they make products anything from the basic sensors that go into the inertial navigation system, to fully blown inertial navigation system that does a sensor fusion of GNSS the location, the ground speed, the LiDAR and all these other things. So -- and we are engaged with pretty much every drone munitions subsystem vendor of interest out there, both in U.S. as well as in the rest of the world. Now clearly, there's a clear guidelines what constitutes control versus not controlled. When you [indiscernible] sensor, and it's within a certain level of accuracy that for that you need a export approval. If you are making a product that's more commercial, let's say, you're doing a surveillance drone or agricultural drone or something for mining industry. Those things are deemed to be commercial. So we have a very clear boundaries and how we define the products, how we grade them and obviously, how we price them. So all these things are some products so you can only export through the U.S. government export license others, you can just sell as a commercial product. Andrew Spinola: And just one follow-up on that. It sounds like there's particularly strong growth and demand for lower-cost drones. And I'm just wondering without knowing that market all that well. Would the inertial modules or some of those gyroscopes or sensors that inertial sells, would they be applicable for the lower-end drones for that opportunity? Oleg Khaykin: When you [indiscernible] drones, if you're talking something like $3,000 then no, if you're talking something like $30,000, then yes. Operator: There are no further questions at this time. I will now turn the call back to Vibhuti Nayar for closing remarks. Vibhuti Nayar: Thank you, Hilary. This concludes our earnings call for today. Thank you for joining everyone, and have a good afternoon. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and welcome to the Chipotle Mexican Grill First Quarter 2026 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead. Cynthia Olsen: Hello, everyone, and welcome to our first quarter earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. Additionally, supplemental investor information is available on our site as a reference for today's call. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Scott Boatwright, Chief Executive Officer; and Adam Rymer, Chief Financial Officer. After which, we will take your questions. Our entire executive leadership team is available during the Q&A assessment. And with that, I will turn the call over to Scott. Scott Boatwright: Thank you, Cindy, and good afternoon, everyone. Before we share our first quarter results, I want to begin by recognizing the extraordinary people who bring our purpose to life every day in our restaurants. Last month, we held our all Managers' Conference, bringing together nearly 5,000 restaurant and support center leaders. The energy was incredible as we celebrated their achievements, reinforced our commitment to developing world-class people leaders and sharpened our focus on delivering exceptional food and hospitality. I have seen that same energy in my recent visits with restaurants that are clean, well staffed and run by revenue crew members and executed at a high level with culinary that is outstanding. This is the standard our guests expect and it is exactly what we intend to deliver everyday across Chipotle. More importantly, it gives me confidence that the work we are doing is taking hold where it matters most, which is in our restaurants. Now turning to our results. Our first quarter performance exceeded expectations, and we are encouraged by the early momentum we are seeing in our Recipe for Growth strategy that is gaining traction and positioning Chipotle to win in any environment. For the first quarter, we delivered revenue growth of 7.4% to $3.1 billion, including positive comparable sales and return to positive transaction growth. In addition to improvements to in-restaurant execution, this performance was supported by the high protein line, the return of Chicken Al Pastor store and the launch of Cilantro-Lime Sauce, all of which helped drive incremental transactions. We also continue to invest in value for our gas pipe pricing low inflation because we believe reinforcing our value proposition is the right thing to do in this environment. Adam will take you through the financial details, but overall, we are encouraged by the momentum we are seeing, which has continued into April. Our recipe for growth strategy is built around what differentiates Chipotle and where we see the clearest path to stronger restaurant performance and long-term growth. As a reminder, the five pillars of our strategy include: connecting and strengthening the core by driving operational and culinary excellence to deliver exceptional value for our guests, modernizing our business model with industry-leading technology, including leveraging AI and relaunching our rewards program to elevate the experience for our guests and our teams, evolving the brand messaging and accelerating menu innovation and new occasions that drive demand in our restaurants, cultivating the best talent in the industry, energized and focused on speed and agility and expanding our global reach by scaling with intention to improve company-owned and partner operating markets as well as strategic new regions. Starting with protecting and strengthening the core. We continue to roll out our high-efficiency equipment package, including the [indiscernible], 3-pant [ rice cooker ] and high-capacity fryer. For crews who are often in as early as 6:00 a.m. to prepare fresh food every day, these tools are a game changer. They help teams complete prep on time and be fully deployed for peak, while also improving the consistency and quality of our culinary and creating more capacity to meet higher levels of demand. The equipment is now in over 600 restaurants, an increase of 250 versus the prior quarter, and we are on track to reach 2,000 by year-end. For now, we are reinvesting the time savings in the equipment back into our restaurants to strengthen throughput and hospitality. And in markets where it has been rolled out we continue to see benefits translate into hundreds of basis points of improvement in comp sales. Hospitality was a central theme at this year's all-manager conference because we know today's guests are more discerning than ever, and we need to be just as focused on how we make people feel as we are [ on ] the food that we serve. At Chipotle, this means extraordinary food, a clean restaurant, fast and accurate service and fairly teams that make every guest feel local. As part of this initiative, we are testing a new mystery shopper program to provide an independent view of our operations and validate our efforts. At our all Managers' Conference, we brought our focus on hospitality to life through on-stage competition that recreated the in-restaurant experience using real make lines, real food and guests moving down the line. Each region competed on throughput, accuracy and hospitality, and throughout the competition, we highlight in best practices our leaders could take back in their restaurants. This powerful visual of what rate looks like supports GM Learning in the most meaningful way. I want to congratulate our Mid-Atlantic region, which won the challenge. More importantly, the energy in the arena of electric and reinforced that our teams came out of AMC energized, ready to execute and committed to providing great hospitality. Turning to our second pillar. We are moving with speed to leverage technology and innovation to improve the experience for both teams and guests. Here are a few examples. First is our new digital makeline display we call Chipotle Kitchen. -- built by Chipotle for Chipotle, it is designed to enhance accuracy, speed and consistency. Unlike our prior text-based display, it uses clear visual cues for ingredients and makes it easier to introduce and integrate new menu items. This improved interface simplifies execution for our teams and reduces the potential for error during peak demand. It is now live in over 100 restaurants, and we anticipate completing the rollout across all locations by the end of the year. While still early, we are already seeing meaningful improvements in on-time performance, digital order accuracy and customer satisfaction. Second is leveraging AI and our restaurants to further support our teams. Avocado, our AI assistant continues to deliver real benefits by streamlining hiring and freeing up more time for our managers. Now we are expanding [ AVA's ] capabilities to assist our general managers with operational insights, scheduling treat planning and [indiscernible] guidance. We are also enhancing our facilities capabilities to triage equipment issues more quickly, reducing [ down ] on and improving restaurant performance. These enhanced capabilities received a standing ovation in our all managers conference and we anticipate having them in stage gate at the end of the year. Finally, our zip line pilot for drone delivery is showing encouraging early results, and we plan to expand the pilot for several more restaurants in second quarter. Taken together, these efforts reflect the speed and breadth of innovation happening across the company, all in service of helping our teams perform at their best and give our guests more reasons to choose Chipotle. Moving to our rewards refresh. We have an all-new look and feel, designed to widen the funnel, deepen our connection with guests and accelerate engagement. In 2025, loyalty ops meaningfully outpaced non-loyalty, reinforcing the power of the platform and the opportunity ahead. This next evolution builds on that momentum through expanded choice increased gamification and enhanced value. One of the [ best ] opportunities to widen the funnel in our in-restaurant business, where only about 20% of transactions are currently linked to rewards compared to nearly 90% of app transactions. This month, we launched an in-restaurant campaign featuring menu panels and QR code signers to make enrollment more seamless and support our goal of driving further engagement. We also incentivized our team to promote the enhanced program to guests in restaurant. So far, we are seeing strong results with nearly 25% increase in daily [ in ] release. And we are in the process of creating a single scan feature within our mobile app, allowing guests to both earn points and pay in one step further reducing friction. Now shifting to marketing and menu innovation. Our value proposition remains industry-leading and differentiating. Delicious food made with high-quality ingredients, prepared fresh [ using ] classic culinary techniques and served with generous portions of a [ speed ] and price, you can't give anywhere else. This year, we've increased the cadence of menu innovation, beginning with the high-protein line campaign, which broadened awareness across the full menu and the value we offer. Add-on protein reached nearly 1/4 of all transactions and has remained unleaded, reinforcing Chipotle is the go-to destination for high-quality clean protein. We also recently wrapped up the return of Chicken Al Pastor, the first limited time offerings we plan to launch this year. Our guests were excited to have it back and we saw strong momentum following the launch as it drove incremental transactions. Last month, we rolled out cilantro-lime sauce which is prepared fresh daily of our stops using chopped jalapenos that are roasted on the [ poncho ] and then blended with cilantro-lime [ sound ] treatment spices to create a creamy, bright soft with citrus and a little bit of a car. It was our first limited time sauce on the make line and the first launched with multiple size options, delivering higher incidents than both Red Chimichurri and a Adobo Ranch. Yesterday, we brought back Chipotle Honey Chicken, fan favorite that delivers a balance of smoky heat from Chipotle Peppers and a touch of sweetness from Pure Honey and is one of the best sellers with the highest order rate. As we look to the back half of the year, we will have two more LTOs and additional innovation planned around sides and beverages that we feel confident will keep Chipotle top of mind with our guests all year long. Shifting to group occasions. Following encouraging results in our initial Chicago catering pilot, including the launch of a third-party delivery platform, we have expanded the program into Boston. Assuming we continue to see similar guest response and strong execution in the restaurants, we expect to begin a broad rollout toward the end of the year. Build your own Chipotle, our family or group occasion for four to six people continues to resonate with our guests. Because the occasion has proven highly incremental, we are now testing a sharper pricing architecture and leaning into key marketing moments to build awareness. Today, catering and build-ing-ll Chipotle together represent over 2% of combined sales, yet we continue to believe they could become double-digit percentage of sales over time and a meaningful growth layer for the brand Now to our fourth pillar, our people. We remain focused on strengthening our position as a people-first company by developing world-class leaders and creating opportunities for growth. At the end of the day, our growth story is ultimately a people story. And we continue to see Chipotle change lives in meaningful ways. At our All Managers Conference, we celebrated a number of inspirational journeys, including one leader who joined Chipotle 17 years ago, looking for a steady job to support her family. He started as a crew member and has developed into a certified training manager. Along the way, she raised her children, built financial stability, including purchasing a home with proceeds for employee stock grants and discover a passion for coaching others. When she talks about why she loves Chipotle, she points to the pride in serving real food she believes in and enjoy in seeing people she train, move into leadership roles. Stories like hers are what makes Chipotle special. They show that our purpose to cultivate a better world comes to life in a powerful way through serving real food, creating real opportunity and helping grow the next generation of leaders. And because developing strong restaurant leaders is so critical to our success, we remain deeply focused on the general manager role and the pipeline behind it as we improve the role of our GMs and refine our apprentice program. The good news is that general manager turnover remains at historically low levels and stability is at a multiyear high. Against that backdrop, one of our priorities is ensuring that lunch and dinner each have manager coverage so that our restaurants are positioned to execute at the highest level during the busiest parts of their day. At the same time, we are aligning the apprentice role around a designated focus on hospitality. Our early read shows that this combination is improving execution while also strengthening the bench for the next phase of growth. I want to provide an update on how we are restructuring leadership to support our Recipe for Growth strategy. We are thrilled to welcome Fernando Machado as our new Chief Brand Officer. Fernando is an award-winning globally recognized brand leader. His experience includes 18 years at Unilever and more than 7 years leading marketing across Burger King, Popeyes and Tim Hortons at Restaurant Brands International, where he helped drive double-digit system sales growth and significant brand value expansion. His proven track record of building iconic brands, driving category-defining innovation and leading customer-centric marketing strategies is exactly what we need as we continue to elevate our brand, deepen guest loyalty, highlight the value of our real food and accelerate our long-term growth. We are also excited to welcome Arlie Sisson to Chipotle in the newly created role of Chief Digital Officer. Arlie has a strong track record of leading digital, data and loyalty at scale, most recently at Hyatt, where she led a global organization of more than 400 team members and advanced their digital and rewards ecosystem to drive stronger guest engagement and revenue growth. We believe she will play an important role in accelerating our digital platform and strengthening the connection between our guests and our restaurants. Together, this investment in talent will strengthen our leadership team and fuel our strategy. Finally, to our fifth pillar, expanding global access. Starting with our partner-operated restaurants in the Middle East, the well-being of our partners and their teams remain our top priority, and we are grateful that everyone is safe. Given ongoing geopolitical conditions, we expect some delays related specifically to restaurant openings in the Middle East this year. This may result in fewer partner-operated openings than anticipated. However, our long-term outlook for the region remains unchanged, and we continue to see the potential for hundreds of restaurants in the region over time. Outside of the Middle East, we continue to anticipate partner-operated openings in our new markets in Mexico and South Korea this year, while Singapore will likely open in 2027. In the U.S. and Canada, we opened 49 new restaurants in the first quarter and remain on track to open around 350 for the full year, with approximately 80% including a Chipotlane. New restaurant economics remain consistent and strong, and we are confident in our ability to reach 7,000 restaurants over time. In Europe, we recently opened a new restaurant at Westfield Stratford, one of U.K.'s busiest shopping destinations, and it delivered our strongest opening day sales in the region's history. We now have 29 restaurants across Europe and anticipate at least one additional opening in Frankfurt this year. Momentum in our European business continued into the first quarter with positive comps across all countries. This performance reflects our ongoing alignment with North American standards across culinary, training, systems and operations. We are further strengthening our foundation for future growth and continue to believe Europe represents a meaningful long-term opportunity for our company. To close, I want to reinforce the leadership culture that defines Chipotle. Our teams are energized, aligned and ready to execute, and this is showing up in the positive momentum we are seeing in the business. We know what it takes to win, be brilliant at the basics, stay close to our restaurants and guests and deliver exceptional food and hospitality with consistency every day. This is how we strengthen our value proposition and bring our strategy to life one guest, one team member and one restaurant at a time. I've never been more confident that we have the right team, the right strategy and a very long runway ahead as we continue building Chipotle into a global iconic brand. I will now turn it over to Adam. Adam Rymer: Thanks, Scott, and good afternoon, everyone. Our first quarter performance is an early indication that our Recipe for Growth strategy has started to translate into real results. We are seeing progress across the initiatives Scott outlined while continuing to manage the business with discipline. Our approach remains clear: reinforce guest value, support transaction-led growth and preserve the long-term strength and flexibility of our economic model. Turning to the quarter. Sales grew 7.4% to reach $3.1 billion, driven by a comparable restaurant sales increase of 0.5%. Digital sales of $1.2 billion represented 38.6% of total sales. Restaurant-level margin adjusted 40 basis points for legal settlement was 23.7%, down 250 basis points year-over-year. Adjusted diluted earnings per share were $0.24, representing a 17% decline versus last year. And we opened 49 new restaurants, including 42 Chipotlane. As Scott mentioned, our first quarter performance was ahead of our expectations. We saw strength following the high-protein menu launch, the return of Chicken Al Pastor and the launch cilantro-lime. For the whole year, our comp guidance remains about flat. Although we are trending higher than our guidance as our initiatives continue to gain traction, our guidance reflects a conservative outlook given the dynamic consumer environment. As it relates to pricing, we ran just under 1% in Q1 and anticipate pricing will be about 1.5% Q2. For the full year, we continue to expect it to be in the range of 1% to 2%. Before I walk through the P&L, I want to highlight a few encouraging trends we are continuing to see in menu innovation and rewards. Starting with the menu innovation. Our protein limited time offers typically generate a few hundred basis points of transaction it over the life of the promotion. The biggest benefit occurs during the first few weeks as we see increased frequency as well as more new guests. Also, we sustain part of this comp lift longer term as many of our new guys continue to dine at Chipotle after the limited time offer [ at ]. Sauces are showing a similar path. Beyond the mix benefit, they are effective in attracting new guests and increasing frequency. Taken together, these results reinforce that menu innovation is not simply a short-term sales driver, but a meaningful contributor to building our agent volumes over time and a core pillar of our recipe for growth strategy. And for rewards, we continue to see clear evidence that deeper engagement builds loyalty and drives comps. Loyalty-driven comps have now outpaced non-loyalty comps for several consecutive quarters, and the gap is widening. In the first quarter, loyalty as a percent of sales reached 32%, up 300 basis points versus the first quarter of 2025. That reflects both growth in active members and higher frequency among existing members, driven by programs like Summer of Extras and the expansion of Free. With the launch of our new rewards features, we are enhancing the benefits our guests already love while working to bring more in-restaurant guests into the program. I will now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 29.6%, an increase of about 40 basis points from last year. The benefits of lower dairy and avocado prices and menu price increases were more than offset by inflation, primarily in beef and freight as well as higher produce usage. Relative to our guidance, avocados remained favorable due to better-than-expected crop in Mexico. For Q2, we anticipate cost of sales to step up sequentially to about 30% of sales as the protein mix benefit and modest pricing leverage will be more than offset by higher costs across several items, most notably avocados, dairy and beef. Overall, we anticipate cost of sales inflation to be in the mid-single-digit range in the second quarter and will step down in the low to mid-single-digit range in the second half of the year as we lap elevated beef costs. This results in full year cost of sales inflation of around 4%. Adjusting for 40 basis points related to non-GAAP legal contingencies, labor costs for the quarter were 25.7%, an increase of about 70 basis points from last year. The increase was driven by wage inflation, lower average restaurant sales volumes and higher benefits expense, including performance-based bonuses, partially offset by the benefit of menu price. For Q2, we expect our labor costs to be in the low 25% range with wage inflation in the low synergy range. Other operating costs for the quarter were 15.6%, an increase of about 120 basis points from last year, primarily driven by higher marketing, utility and delivery costs. Marketing costs were 3.4% of sales in Q1, an increase of about 40 basis points from last year as we increased our marketing spend in the quarter to support menu innovation and to remain top of mind with our guests. We expect marketing costs to be below 3% sales in Q2 and for the full year. For Q2, we anticipate other operating costs to be in the high 14% range. G&A for the quarter was $204 million on a GAAP basis or $198 million on a non-GAAP basis. Excluding $3 million related to net restructuring costs associated with our Recipe for Growth strategy and certain legal contingencies and $3 million related to retention and equity awards granted to key executives in August of 2024. G&A also includes $142 million in underlying G&A, $24 million related to noncash stock compensation, $5 million related to payroll taxes on equity vesting and exercises and $27 million related to our All Managers' Conference, which was held in March. We expect G&A in the second quarter to be around $181 million on a non-GAAP basis, which will include $151 million in underlying G&A as we invest in technology and people to support our ongoing growth. And around $30 million in noncash stock compensation, although this amount could move up or down based on our actual performance. Depreciation for the quarter was $97 million or 3.1% of sales. For 2026, we expect it to remain around 3% of sales. Our effective tax rate for Q1 was 25.4% on a GAAP basis and 25.3% on a non-GAAP basis. For fiscal 2026, we continue to expect our underlying effective tax rate to be in the 24% to 26% range, though it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $1 billion in cash, restricted cash and investments and no debt. During the first quarter, we purchased $701 million of our stock at an average price of $36.14 and at the end of the quarter, we had $1 billion remaining under our share repurchase authorization. To close, I want to reiterate what makes Chipotle a special brand. We are able to invest in the highest-quality ingredients, offer accessible price points and still deliver industry-leading economics, a combination that is very difficult to replicate. Our recipe for growth initiatives further strengthen these advantages by sharpening execution, deepening guest engagement and continuing to build long-term demand for the brand. With a strong balance sheet, clear priorities and the team energized to win, we believe Chipotle is well positioned to build on that momentum to continue creating long-term value for our guests, our teams and our shareholders. And with that, I feel good up for questions. Operator: [Operator Instructions] The first question today comes from Danilo Gargiulo with Bernstein. Danilo Gargiulo: I'd like to start with a quick clarification and then the question. It seems that you have suggested some encouraging trends also in April. So I was wondering if you can help us quantify what you're seeing quarter-to-date in the early weeks. And the real question, maybe, Scott, for you is very exciting that you're hiring Fernando Machado. And I'm wondering what specific elements of his past broad-based QSR experience you're expecting him to bring into Chipotle. Adam Rymer: Yes, I'll start, and then I'll pass it over to Scott. So Danilo, so yes, it's specific to April, we saw a nice step-up in April. Part of it was the Easter shift. Easter was about 2 weeks earlier than it was the prior year, but a bigger part of it was the launch of Santer Lime sauce. It's really done an amazing job. It's actually outperforming red chimichurri, which was our most popular sauce up until that point and the incidence is about 2x. And then, of course, the rewards relaunch. So we believe all of those things contributed to a nice step-up in April. Scott Boatwright: Danilo, thanks for the question. As you can imagine, we went on a very comprehensive search for the exact right individual, and we found that in Fernando. And I'll tell you, beyond his deep global brand-building experience, his numerous awards and accolades, what he has accomplished in his career is really unprecedented. And I'll tell you, what I admired most was in my conversations with Fernando, even the earlier conversations we met several times before we made the decision to partner is his thinking of Chipotle, his love for the brand, his affinity for the organization, his love of high-quality fresh food and great culinary. And he's always been a fan, although be it from a distance of our great brand. And hearing him talk about what he has seen from our advertising historically and where he would take it to the next chapter, if you will, was groundbreaking for me. And so it was an easy decision. Again, he is an incredible marketer, and he will do well here at Chipotle Mexican Grill. Operator: The next question comes from Lauren Silberman with Deutsche Bank. Lauren Silberman: I guess if I could just start with -- I know there was a lot of noise during the quarter, I'm going to follow up on the comp side. Any color that you can give in terms of stative trends as you move through the quarter? And really encouraging to hear about the momentum in April. Any color on what your guidance beds for comp in 2Q? Adam Rymer: Yes. So I'll kind of walk through and then Scott, please add in. And so starting in January, I mean, we caught up on January in the last call. But just to reiterate, I mean, we saw strength in our protein menu and campaign. And it not only drove transactions, but we also saw a double-digit percentage increase in double protein and single tacos. And amazing part about this is it wasn't just during the campaign in January. That increase in double protein and single Tacos has really sustained even through April. And then we saw the weather impact. The weather impact in January was at one point, about half of our restaurants were closed. So that was about 100 basis points to the quarter. But then as we roll around to February once the weather impact subsided, we really saw our trends improve even further, and that was really around the launch of Chicken Al Pastor. This is the third time that we've had in our restaurants, but the incidence level is actually the highest compared to the first two. So that was really great to see. And then in March, there was a little bit of softening in our trends right around the time where the Iran conflict began, but then we saw the nice step-up in April that I talked about earlier on Danilo's question. And so when this kind of rolls into April and how we're looking at Q2, we're really anticipating comps probably somewhere in that plus 1% range. And that's kind of what our expense line guidance is based on in my prepared comments. And this comp estimate, I would say, includes a modest increase from Chipotle Honey Chicken, which launched yesterday. But we are excited about the momentum that we're getting so far from our Recipe for Growth initiatives so far this year, but we really just want to remain cautious on our outlook given the dynamic consumer environment. Scott, anything to add? Scott Boatwright: I think what we should highlight here is what we demonstrated in Q1 was really our ability to engage with our customer base in new ways and drive incremental sales and activate against a broad range of consumer segmentations, whether that's income or age group. Lauren Silberman: Great. And just a follow-up on loyalty. You talked about loyalty comps outpacing non-loyalty, I believe, in 2025. What kind of growth have you been seeing in membership in recent quarters? And I guess is the revamp of the new loyalty program really focused on bringing in new customers, bringing less customers or trying to drive engagement with the existing membership base. Scott Boatwright: Yes, I'll jump in here. So the relaunch -- since the relaunch, we've seen about a 25% uplift in new members coming into the funnel. So not only did we widen our main goal was really to enrich our engagement and deepen our engagement with the existing loyalty members. But what we found is we were able to widen the funnel, bring more users into the funnel, reactivate lapsed consumers in a really meaningful way with some of the journeys that we've talked about historically. And we've made great progress of really redesigning a program, removing the friction points that our customers told us existed in 2025. And the new benefits are obviously the chips & guac welcome offer, 3 monthly Chipotle drops. We heard loud and clear that's what our customers wanted. They want to be able to choose their own rewards. We call it rewards on repeat, and they could choose whatever reward and how they want to use their points. in the loyalty program as well as well as cleaning up some of the UX features that had friction points in them as well. We're able to simplify the in-app experience, so exchange, wallet, extra badges and history are just easier to find and easier to use. Operator: The next question comes from [ David Balmer ] with Evercore ISI. Unknown Analyst: I'm just -- I'm wondering how you're thinking about how this year might play out. And one of the things you seem to be saying here is that by doing more frequent LTOs or your protein windows that not only do you get a boost, but that boost sticks around. So the 2-year trend gets a lift each time. And that would certainly imply that with the comparisons we see ahead of you that comp trends would accelerate from here. Is that your base case? I know you want to be cautious about the underlying environment, but is your base case that seeing what you're seeing in terms of the performance of these LTOs that you will see comps climb through the year if the environment doesn't deteriorate? And I have a quick follow-up. Scott Boatwright: That's exactly right, David. And so what we learned through our demand map refresh last quarter, I guess, Q4 now is that consumers were looking for menu innovation, and they were screaming for greater innovation at a greater frequency. And we have doubled our cadence of LTO innovation and stage gate processing in our culinary center to solve that challenge, evidenced by what you will see here in 2026. They're also looking for deeper digital engagement, which I think we saw for in the app refresh and relaunch. And then they were looking for culturally relevant marketing, which we've done some of that in Q1 with a lot of success and expect to do more of that with Fernando joining here in the next couple of weeks. So I think we're targeting the right ways to activate against the core consumer and bring new consumers into our brand. Unknown Analyst: The other thing I wonder about is how you think about bringing an LTO that was around before, obviously, Chicken Al Pastor and honey chicken, you're bringing them more frequently, but they're familiar. They were successful, but they were stuff that you've done before. I wonder -- to what degree do you feel like doing new, new is going to be more important going forward? Is that something on the horizon? And I'll pass it on. Scott Boatwright: It absolutely is, David. We have a couple of things that are in process or in test as we speak that are new LTO center-of-the-plate protein items. We have a few more we'll test in the back end of the year that will inform the 2027 strategy. But that's exactly it. We need to come back to tried and true favorites occasionally, not every time and then pepper in new menu items that will drive interest, drive occasion that are on brand and uniquely Chipotle. But that's exactly the strategy. Operator: The next question comes from Brian Harbour with Morgan Stanley. Brian Harbour: Adam, can you just talk about the traffic and mix components of same-store sales and kind of what your outlook, at least on the mix side might be? Adam Rymer: Yes, sure. So with the comp of up 0.5%, transactions were up about 60 basis points and check was a slight decline, call it, about 10 basis points. Price was around 90 basis points and then mix was a drag of about 100 basis points to net to that check. And so when you're looking at mix, it's still driven by lower group size. This is kind of that continual normalization from that really high group size that we saw around COVID. And then there's also some other elements in there, for example, rewards when people come in and redeem a free entree, that's going to lower your group size as well as other more recent things that we've done around BYOC. For example, there's a little bit of cannibalization, not a lot, but that would be somebody coming in and getting 4 or 5 or 6 entrees previously is now only getting one item. So that's providing part of that drag as well as some of the other menu items like protein cups or single tacos. It's a smaller extent, but we are seeing people come in during like snack occasions to get those items. So that's also putting some pressure on group size. But on the flip side, we are seeing some nice offsets. So the extra meat, for example, from the protein campaign is providing a nice mix lift as well as sides. I mean, first, it was red chimmychurri kind of earlier in the quarter and then cilantro-lime sauce later in the quarter. And so when you kind of look at these going forward, I would expect mix to be closer to flat in Q2, and that's really thanks to the check benefit from cilantro-lime sauce. And then in the second half, it's really going to depend on a few factors. Really around LTOs, kind of the protein LTOs and the pricing around that as well as sauces. So we'll keep kind of you guys informed on a quarterly basis as we continue to really flush out our LTO strategy for the rest of the year. Brian Harbour: Okay. Got it. Scott, I know you've sort of been talking about hospitality for a while and just renewed focus on that. What -- I guess, what is it that's specifically changing? Or like at your conference, what did you kind of zero in on? And is this just -- is deployment something that kind of addresses it best? Or like are there other things that we might see change in the stores? And how would that show up? Scott Boatwright: Yes. It's kind of a broad answer, so I'll try to be brief. I'll tell you, the customer -- we learned last year that the customer was much more discerning on how they spend their cash and hospitality was a component that they were looking for probably in a more meaningful way than they have since COVID. And so we leaned into it pretty aggressively. [ Jason Kid ] and his team really rallied around this idea at AMC to deliver not only speed down the line and great culinary, which we do a pretty good job, I'd say a pretty darn good job. down the line, but also this idea to give the guest or treat the guests like a guest in your home. And so we really pushed on it at AMC. The team really bought in, and we saw the benefits of that coming out of AMC manifest in things like better KPIs on staffing, best at model levels we've seen in years, GM turnover at historical lows, taste of food and GSAT scores that are moving up and to the right. Now it's not to say we don't still have opportunities in pockets around the country. But on balance, I am really proud of our teams and how they've executed in Q1 and how they're leaning into Q2 in a really meaningful way and really driving this idea of great hospitality at Chipotle. Operator: The next question comes from Gregory Francfort with Guggenheim. Gregory Francfort: Scott, I think you guys have pretty good price points on your food. And I think the -- maybe you've had a little bit of a pricing perception issue over the last year or 2. I guess as Fernando has come on board, how much do you want to integrate value and price points into the marketing message? And how much are you testing with doing that? And just what could that look like? And how important is that to what he's tasked with? Scott Boatwright: Yes. It's a great question. Here's what I would tell you is we are open to testing many different ideas, and we won't handicap Fernando with historical thinking or entrenched thinking. But we won't do anything to detract from the overall brand health and brand growth. And I think I've said this many times, I believe we charge a very fair price point for what we offer the consumer, high-quality ingredients, the best ingredients in the world, prepared fresh with classic culinary techniques at a speed and abundance you can't get anywhere else and what I believe to be a great price point. And so we continue to grow our pricing power by underpricing the industry now for the second consecutive year, which we believe is right for the consumer as we try to protect or drive demand for our organization. We think it's the right thing to do. We're still a 20% to 30% discount to our fast casual peers, and we continue to grow that gap year-over-year. So that gives us pricing flexibility and pricing power that we could pull that lever at some point when the timing is right, whether that's a better entry-level price point like we did with the high-protein menu at $3.50 for a taco or test other innovative ideas. We're going to have a test here in a couple of weeks in one of our markets where we're testing a happier hour from $2 to $5 with tacos at $2.50. And so we're going to test ideas like that to understand where do we have pricing power elasticity, where may we have a challenged market from a pricing perspective and what levers can we pull to get consumers in our restaurants and feel like they're not getting good value, they're getting extraordinary value. Operator: The next question comes from Sara Senatore with Bank of America. Sara Senatore: I guess, data question and then a real question. Have you -- I know in the past, you were talking about perhaps softening younger cohorts also maybe not just lower but also middle income cohorts. I guess your comment about engaging customers across income and age groups, are you seeing the gaps converge there in terms of the transaction growth with those cohorts that had previously been under pressure between those and the rest of your customer base? Scott Boatwright: Sara, thank you for the question. Here's what I would tell you is in Q1, I think through targeted messaging and really driving culturally relevant moments, we're able to get the younger consumer more engaged with our brand in Q1 than we have historically or over the last year, I should say. And we're seeing an uplift and an uptick across all ages and all income cohorts for Q1. So I think we know at this point, what levers do we pull to ensure we're being thoughtful about engaging all of those individual cohorts the right way to keep moving the needle up into the right. And so I have a lot of confidence that is built into our Recipe for Growth strategy that does just that, and we'll continue to do that for many months and years to come. Sara Senatore: And then I guess the real or non-data question is actually about Europe. You mentioned seeing some of the highest volumes in terms of opening -- recent opening in that region. Can you update us on where kind of unit economics stand there or whether it's the AUVs or the middle of the P&L, I think those have been kind of the middle -- those have been kind of sticking points or hurdles to clear before you accelerate unit growth. So any update on that and whether that means perhaps you're at an inflection point where you can start to pick up the pace? Scott Boatwright: We absolutely are, Sara. So we're now in the double-digit range on margin, and we're seeing 40% restaurant -- new restaurant growth year-over-year -- I'm sorry, 40% return on investment in year 2, forgive me, on the new restaurants we're opening, which gives us a lot of confidence. Not only are we on track, but we need to begin to look for real estate in a more meaningful way in Central London and in Germany. I think we are released to go as quickly as we can go. Operator: The next question comes from John Ivankoe with JPMorgan. John Ivankoe: The question is on competition, but I want to go a couple of ways with this, if I can. On the chain basis, which is, I guess, can be tracked. It does seem like a lot of the competition is coming in chicken, Mexican, and I'll just say very broadly but kind of bulls on a top 500 chain basis. But on a local basis, certainly, one could make the argument or at least have the observation that it's very much the same, the same type of concept growth. So the question is, is there any opportunity to not just think about marketing on a national basis or kind of through the app, but even thinking about competition or marketing different locally to where different markets would have specifically different opportunities and different needs based on where competition is growing is the first part of the question. And secondly, and I don't know if it's fully related, it did look like to us, at least on our calculation that new unit volumes may have been a touch light in the first quarter. So I was wondering if there is some timing or other types of factors that could have influenced that? Or how the unit volumes were relative to your own expectations as we would have calculated on an implied basis in the first quarter? Scott Boatwright: Yes, I'll jump in here, and I'll Adam follow up on the second part of your question. We did a deep dive analysis on competition, specifically in New York and Florida, where our main competitors, albeit they're small today, are growing the fastest. And while we see some level of cannibalization when one of those restaurants opens up near a Chipotle in the first 6 months or so, it recovers pretty quickly in month 6, 7 and 8 and then climbs back to industry trends or Chipotle standard trends from there. So what we're seeing is when one of those competitors open up, they bring more consumers to the retail trade area, which is helping buoy our restaurant performance long term. And so obviously, we think about competition, we are concerned and keeping an eye on competition. But as it stands today, it's low levels of impact. As it relates to marketing spend, we know that our marketing dollars on return on ad spend work the hardest on the national level and to bifurcate that spend to attack something locally would be costly, and I don't know if it's the most efficient use of our dollars. Adam Rymer: Yes. And then to follow up on the store productivity, John. So we're seeing about 80%, which is where we've been in the last couple of years. So we're really proud of our Q1 openings and really where we've been trending over the last year. What you're probably looking at is you don't have the details on the cadence, so they may have been pushed a little bit later in the quarter versus kind of even spread throughout. But no, we're still kind of in that 80% of our comp restaurants in terms of where they're opening at. Operator: The next question comes from Jon Tower with Citi. Jon Tower: Maybe starting, I'm just curious, following up to Greg's question around value perception in the marketplace, I would argue maybe your delivery channel is one area where you get perhaps lower value scores than the in-store experience. So I'm just curious what you're thinking about there with respect to the premium that is currently charged for delivery, if that's an area you're exploring for an opportunity to improve the value scores. Scott Boatwright: John, yes. So we did some testing on different premiums in delivery across DoorDash and Uber and people use those platforms in different ways. They primarily use Uber as a discount platform and DoorDash as a premium faster order time, faster delivery time platform. So you have to market on those platforms very differently. But I will tell you, our prices even at an elevated NPI on marketplace are still below our peers in the channel. And so we did see another tick up in delivery this -- still in the teens, but another tick up in our delivery performance last quarter. What I'm most excited about is we surpassed 20% of order ahead in the quarter, which tells us our consumers being more discerning on how they spend those dollars and coming to the restaurant to pick up their orders versus having it delivered. And so that's encouraging for us as we think about the future of delivery long term. We will have Arlie Sisson starting next week, we will take a hard look at our third-party aggregators to see where we are performing well, where might we have opportunity. and really take the learnings from the testing we did last year to inform our go-to-market strategy in the back half of this year. Jon Tower: Great. And then just maybe on the labor side of the equation, it sounds like you're rolling out quite a few tools at the store level to help obviously GMs in the store -- the hourly employees become more efficient. I think some of the pushback that I consistently hear from investors is stores need better staffing over time. And I'm just curious to get your take on, we think the labor levels at the stores need to settle out if you're kind of fully staffed today? Or is there more opportunity to invest there? Scott Boatwright: I think there's more opportunity to invest, if I'm being honest. And here's how we're doing that. The heat program throws off an incremental couple of hours of productivity, which we're reinvesting back in the business. Other initiatives like the Chipotle Kitchen, things like the GM Assistant, avocado on the hiring side, all those hours are freeing up the manager and freeing up the team to be more efficient and deliver a better team member experience, which always ladders to a better guest experience. And we are reinvesting that time back into the business and not taking it out to further bolster the consumer experience, which will always lead to value creation. And we're also taking a hard look at our management complement to ensure that we have the right managers covering peak dayparts all 14 peaks. So think lunch and dinner every day of the week. I think we're challenged there today. Jason and his team have put a plan in place that they're executing against today to ensure that we have the right manager covering lunch and dinner every single day and not give up on Saturday and Sunday to ensure we have the best management coverage, which will lead to a better team member, a better consumer experience. So there are investments that we are making along the way to free up the manager to be more effective, train better, deploy better and leads to a better customer experience. Operator: The next question comes from Drew North with Baird. Andrew North: My question is on the margin trajectory, and I appreciate the color on Q2. But as we look further ahead, Wondering if you have any updated perspective on the shape of the margins as we get to the second half I know the expectation has been for pricing versus inflation and the gap there to narrow as the year progresses. So maybe just any thoughts on how you're thinking about the shape of the restaurant margin or what comp or traffic figure might be needed to see expansion as we exit the year? Adam Rymer: Yes. Drew, so you're right in the sense that kind of the first half of the year is when margins are going to be under the most pressure on a year-over-year basis. I mean the price that we're running, for example, in Q1 of 0.9% compared to inflation is kind of in that mid-3% range. So that's providing the majority of that dislocation. As we get to the second half of the year, inflation is going to drop down a bit, mostly because we'll start to lap kind of the elevated beef prices from the year before, and we'll continue to see pricing tick up with a slow and measured approach that we're going forward with. So I would expect towards the end of the year for that dislocation to be minimal based off the trajectory we're on right now. And going forward, at that point and going forward, really the flow-through on being able to get margins higher is going to come through our usual strategy of just utilizing price to offset the impact of inflation and getting margins higher through incremental transactions. Andrew North: That's helpful. And hoping you could elaborate a bit more on what you're seeing from the high-efficiency equipment package in early days. Scott, I know you mentioned the hundreds of basis points of comps outperformance again. But wondering if that gap has widened versus control for some of the early restaurants with the equipment? And maybe just how to think about the pace of rollout through the year to get to 2,000 at year-end? Scott Boatwright: Yes. So -- and what we're seeing right now is outperformance on throughput, taste of food, [ OSAT ] and then again, hundreds of basis points of comp lift in those restaurants, and that ranges from [ 200 ] to [ 400 ], depending on the restaurant, I will tell you. We are at 600 restaurants today. We'll be at 2,000 by year-end. This quarter, I think we're at 35 -- 30 installs per week. We're going to move to 45 installs per week here in the next month or so. We are going as absolutely quickly as we possibly can, but doing it in a responsible way where we don't have to close restaurants to get the new equipment in. We're doing it overnight on these installs to ensure we don't affect the business and then make sure we do it the right way where [ the ] teams are trained correctly to use the equipment. Although the equipment is plug-and-play, it does require some level of training. And it takes the team about a month, if you will, to really get up to speed on how to use the equipment most efficiently. So we're being responsible. I think we can get the full portfolio done at some point late 27, early '28. Operator: The next question comes from Chris O'Cull with Stifel. Christopher O'Cull: Scott, just a follow-up to that last question regarding the heat package. How long does it take to see the same-store sales improvement that you're experiencing in these test stores once you deploy the package? Scott Boatwright: About 2 months, Chris. So it happens pretty quick. It takes about a month to really get proficient and then a month to kind of hit your stride. So after about 2 months, we're starting to see some pretty material uplift in the business. Christopher O'Cull: Okay. And then the marketing spend grew I think 22% in the first quarter and following a very heavy push in the fourth quarter. While you're seeing positive inflection in comps, the marginal lift relative to that level of investment appears obviously a little modest. So how is the team measuring the incremental return on the spend and are you seeing a strong enough conversion trend to justify maintaining this level of marketing? Adam Rymer: Yes. I mean I'll start and then Scott definitely add in. So yes, what you're seeing right now with the level that we're spending, especially around supporting four LTOs is we're getting some really good returns on that incremental spend as well as some of the additional things that we're doing around some of the more Chipotle's as we call them around the [ tattoo Bogo ] and some of the other things. And so we measure them individually and really ensure that we're getting the best return on each of them. I think what you're seeing, too, though, with that incremental spend, is there still some noise especially when it comes to consumers and kind of what we're up against. And so we're expecting this to continue to improve. But the team does a phenomenal job of really looking at each individual investment, assessing and determining where we go from there. Scott Boatwright: Yes, I think it's important to note that some of that has a tail, right? So as you think about marketing spend, your goal is sales overnight and brand over time. So there's a component of it that is really driving sales and transactions there's another component that is brand building, which will serve you well for many years to come. And so as long as we look at the return on ad spend as being responsible and margin accretive, which I think is the right way to view it, we'll continue to incrementally spend there. Operator: The last question today comes from Andrew Charles with TD Cowen. Andrew Charles: Great. Adam, I wanted to ask you the guidance for 2Q same-store sales up 1% relative to 1Q, 50 basis points increase is commensurate with the [ 5 ]0 basis point step-up in price quarter-over-quarter -- you also caught up you expect mix to be flat in 2Q versus down 1% in 1Q. So I'm curious like 2Q's embedding a 50 basis points traffic decline that versus what you saw with 1Q 60 basis points gain unless you categorize 2Q guidance is similarly conservative to the full year '26 guide? Adam Rymer: Yes. So I mean I think what you're picking up there is right. Really, what it comes down to is we're being modest, like I said earlier, on the increase that we expect to get, not only from [ Chipotlane ] chicken with a yesterday, but some of the other initiatives that we have planned, just given the consumer environment, especially with the conflict in Iran and gas prices. And so we're going to remain cautious on that outlook, but we believe that there's upside from there. Andrew Charles: That's helpful. Just kind of want to follow up the sustainability report published this week it indicated a large pickup in hourly turnover in 2025, following 3 years declines. What drove this? And can you talk a little bit more about the plans in place to improve throughput in 26 outside of heat, leading to a faster experience. Scott Boatwright: Yes. So the first part of the question, 2025, I believe, was just an anomaly as sales decelerated, which I hate to talk about, as you can imagine, there were fewer hours, which drove some attrition. And then this new focus on hospitality caused us to give a hard look at the employees we have in our restaurants and which ones were naturally friendly and have a natural inclination to smile and take care of our guests. And so we had to make some hard decisions there. I'm happy to report Q1, we're back to our historical low levels of turnover. So I know we're on the right track, and we're back where we need to be as it relates to turnover. And what was the second part of your question? Andrew North: No, you hit it. That was it. I was just wondering what drove and what you're doing to fix it. That's it. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Boatwright for any closing remarks. Scott Boatwright: Well, thank you, everyone. We're pleased with the results in the quarter, as you can imagine, showing progress in reinforcing that our Recipe for Growth strategy is working and driving traffic across all income cohorts. I want to leave you with the idea is that we're building on a strong team with the addition of a new Chief Brand Officer and Chief Digital Officer. And we expect our initiatives to continue building throughout the year and have transactions improve as innovation on ideas like heat, group occasions, rewards and restaurant execution scale over time. And we'll continue to lean into what makes Chipotle great hospitality, generous portions, great culinary and great throughput. And with that, I just want to say thank you to our teams out in the field that really do the hard work for us and the heavy lifting in this brand for all that they do to make our brand great. and I wish everyone a good day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to Everspin Technologies First Quarter 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Amy Grant, Investor Relations for Everspin. You may begin. Amy Grant: Thank you, operator, and good afternoon, everyone. Everspin released results for the first quarter 2026 ended March 31, 2026, this afternoon after market close. I'm Amy Grant, Investor Relations for Everspin. And with me on today's call are Sanjeev Aggarwal, President and Chief Executive Officer; and Bill Cooper, Chief Financial Officer. Before we begin the call, I would like to remind you that today's discussion may contain forward-looking statements regarding future events, including, but not limited to, the company's expectations for Everspin's future business, financial performance and goals, customer and industry adoption of MRAM technology, successfully bringing to market and manufacturing products in Everspin's design pipeline and executing on its business plan. These forward-looking statements are based on estimates, judgments, current trends and market conditions and involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. We would encourage you to review the company's SEC filings, including the annual report on Form 10-K and other SEC filings made from time to time in which the company may discuss risk factors associated with investing in Everspin. All forward-looking statements are made as of the date of this call, and except as required by law, the company undertakes no obligation to update or alter any forward-looking statement made on this call, whether as a result of new information, future events or otherwise. The financial results discussed today reflect the company's preliminary estimates are based on the information available as of the date hereof and are subject to further review by Everspin and its external auditors. The company's actual results may differ materially from these estimates as a result of the completion of financial closing procedures, final adjustments and other developments arising between now and the time that the financial results for the period are finalized. Additionally, the company's press release and statements made during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP net income to non-GAAP net income, which provide additional details. A copy of the press release is posted on the Investor Relations section of Everspin's website at www.everspin.com. And now I'd like to turn the call over to Everspin's President and CEO, Sanjeev Aggarwal. Sanjeev, please go ahead. Sanjeev Aggarwal: Thank you, Amy, and thanks, everyone, for joining us on the call today. Before I discuss our first quarter results, I would like to share some exciting news. Today, after market close, we announced a new 2.5-year $40 million agreement with the U.S. prime contractor. Under the agreement, Everspin will be a subcontractor on an existing prime contract and will provide Toggle MRAM process technology capabilities and engineering services for U.S. defense industrial-based customers. In addition, Everspin will provide engineering and foundry services for U.S. Department of War or DoW products through its recently announced Foundry Services Agreement with Microchip. This agreement builds on our long history of supporting military and aerospace applications where performance, reliability, longevity and domestic production are critical. Now turning to our first quarter results. We are pleased to report results at the high end of our guidance range with revenue of $14.9 million and non-GAAP EPS of $0.11 per diluted share. Our performance this quarter was driven by strength in Industrial Automation, Transportation and Data Center applications. Industrial Automation growth was driven by a recovery in customer demand, including Japan, as inventory levels have been worked down. In the Transportation segment, growth was driven by the transition of design wins to production at several customers, including 2 rail applications. One such customer is a railroad operator in Asia, who is utilizing our MRAM technology for critical railway signal applications such as train axle counters. Axle counters and by extension, their components must operate in harsh, vibratory conditions, which MRAM can withstand better than other memory technologies. Modern axle counters use MRAM for storing large amounts of diagnostic and maintenance data, allowing for real-time monitoring such as wheel detection and predictive maintenance. Additionally, MRAM enables more robust data storage, contributing to the high safety integrity levels, SIL4, required for axle counter systems, ensuring accurate detection and reducing false alarms. Another customer is a leading embedded computing company in Asia who chose Everspin's MRAM solutions for rail transit systems because they reliably preserve critical data during power loss and support unlimited erase and write cycles. In Data Center, growth continues to be driven by our ongoing work with IBM on the FCM4 and FCM5 modules and the Redundant Array of Independent Disks or RAID, reference design at the top 5 hyperscale operators. With respect to below-the-line items, we recognized $2.1 million in other income in the first quarter and $12.8 million to date from the $14.6 million contract we have with the DoD contractor to develop a sustainment plan for our MRAM manufacturing facilities to provide continuous onshore MRAM capabilities to their aerospace and defense customers. We expect this business to begin to wind down over the coming quarters with estimated completion in the first half of 2027. Turning to some of our product development efforts. During the quarter, we formally introduced our UNISYST MRAM family at Embedded World in early March. This product family represents a new generation of unified memory solutions designed to fundamentally change how embedded systems store and access code and data. UNISYST delivers high-bandwidth read and write speeds in a nonvolatile memory device, enabling fast boot, rapid updates and predictable performance without the trade-offs of traditional flash-based designs. UNISYST will extend our MRAM road map to higher densities while giving customers a practical way to start with PERSYST today and migrate to a code and data MRAM architecture as soon as it is available. Everspin will initially offer the UNISYST family in densities ranging from 128 megabits to 2 gigabits using a standard xSPI interface operating up to Octal SPI at 200 megahertz. Target use cases include AI at the edge, military and aerospace, automotive, industrial and casino gaming. Engineering samples of UNISYST are expected to be available in the fourth quarter of 2026. As a reminder, the UNISYST family of products will serve the high-density stand-alone NOR Flash market, which will expand our addressable market by approximately $3 billion. Our goal is to capture 5% to 10% of this market in the early years and then grow further. With respect to the high reliability parts that we announced last quarter, customers have our PERSYST 64-megabit xSPI STT-MRAM devices in hand and are engaged in design activity. Additionally, we remain on track to qualify our 128-megabit and 256-megabit high reliability parts and continue to expect them to be available in high volume in the second half of this year. Customers have engineering samples of these parts on hand as they evaluate them in their designs. Building on our existing relationship with Microchip, we recently announced a strategic manufacturing agreement with the company to expand our onshore production capacity and strengthen our long-term supply chain resiliency by creating a second domestic source of supply for our customers. Under the 10-year agreement, we will establish an MRAM line at Microchip's fab in Oregon to manufacture MRAM and TMR sensor products currently produced at our line in Chandler. We expect to ship the first products from the new line in the second half of 2027. I will now turn it over to our CFO, Bill Cooper, who will walk you through our first quarter financials and second quarter 2026 guidance. Bill? William Cooper: Thank you, Sanjeev. Our results reflect the consistency of our execution. During the first quarter, we delivered revenue of $14.9 million, up 14% year-over-year and toward the high end of our guidance range of $14 million to $15 million, driven by higher product sales. MRAM product sales, which include both Toggle and STT-MRAM revenue, were $14.1 million, an increase of 28% over the first quarter of the prior year and up 5% sequentially. Licensing, royalty, patent and other revenue decreased to $0.8 million from $2.1 million in Q1 '25 due to fewer currently active projects. Our GAAP gross margin increased to 52.7% from 51.4% in the first quarter of 2025 due to higher capacity utilization. GAAP operating expenses were $10.6 million, up from $8.7 million in the first quarter of 2025 due primarily to litigation costs as well as higher compensation costs for new and existing employees and professional fees. Other income of $2.1 million was related to the strategic award we won in mid-2024 to upgrade manufacturing equipment in our existing manufacturing facility located in Chandler, Arizona. We recorded fourth (sic) [ first ] quarter non-GAAP net income of $2.6 million or $0.11 per diluted share based on 23.1 million weighted average diluted shares outstanding. This was at the high end of our guidance range of non-GAAP net income of $0.07 to $0.12 per share and compares to non-GAAP net income of $0.4 million or $0.02 per share in the first quarter of 2025. Our reported non-GAAP results exclude the impact of stock-based compensation as well as litigation expenses. Our balance sheet remains strong and debt-free. We ended the quarter with cash and cash equivalents of $40.5 million, down $4 million from the $44.5 million at the end of the prior quarter. Cash flow generated from operations decreased to $0.5 million for the first quarter from $2.6 million in the fourth quarter due to the litigation costs I mentioned earlier as well as increased working capital needs. We believe our cash and cash equivalents are sufficient to meet our anticipated capital requirements to execute upon our Foundry Services Agreement with Microchip and continue to invest in product development to support our future road map and enable the company to drive growth. Turning to guidance. Excluding any impact from the new subcontractor agreement that Sanjeev mentioned, we expect Q2 total revenue to be in the range of $15.5 million to $16.5 million and GAAP results per fully diluted share to be between a net loss of $0.12 to a loss of $0.07. On a non-GAAP basis, we anticipate results to be between breakeven and net income of $0.03 per fully diluted share. These non-GAAP figures exclude the impact of patent litigation costs in addition to stock-based compensation expense. In summary, we are pleased with our solid performance this quarter and remain committed to maintaining financial discipline while focusing on scaling our business and converting additional design wins to revenue. Operator, you may now open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Neil Young with Needham & Company. Neil Young: So the $40 million contract that you just announced, could you give us like a shape on how you're thinking that revenue layers in? Or anything you can share on the milestone payments such as how achievable you think the milestones are? What are the biggest risks to the milestones? And then lastly, will that revenue live in the licensing royalty patent bucket? And then I have a follow-up. William Cooper: Yes, Neil, this is Bill. Thanks for the question. Yes, so we really aren't giving any guidance related to that particular subcontract agreement just yet. But of course, we do expect to have a significant positive impact over the next 2.5 years to the financials. In terms of meeting and achieving the milestones, yes, that was negotiated with the group involved, and we're very confident in our ability to deliver on the milestones. Neil Young: Okay. And then could you maybe speak to what drove the gross margin strength in the quarter? As the STT portfolio continues to evolve, are you maybe starting to see higher ASPs come through here? And then also, should we sort of expect to see this gross margin -- the gross margin hold in this range or revert back to similar levels of 4Q '25? William Cooper: Yes, good question. I think a couple of things, right? So the first is strong quarter on the margins. Again, as we've sort of always noted, we do target 50% plus in terms of gross margin. I think as we sort of see that lift in the top line and that volume increase, right, you kind of get into that beneficial arena of higher capacity utilization and obviously, right, the guys are always looking at ways to reduce costs and improve our yields. So all those things factor in. Operator: Our next question comes from the line of Richard Shannon with Craig-Hallum Capital Group. Richard Shannon: I'm going to follow up on this $40 million contract here. I guess a few questions here for me. I want to follow up from your response, Bill here about why you don't have any revenue thoughts here you can give today, is that because you're not allowed to or because you don't know what the shape and structure and timing looks like? And then also, I want to get a sense of what kind of margin profile we should expect over the life of the contract with this. William Cooper: Thanks. Yes, good questions. So I'll try and elaborate a little bit further. The contract itself, right, the ink on that is just drying. And obviously, it's going to have a significant impact on the financials. And so we're looking at all of the various impacts of that. And as we run through Q2 and get the results and get the kickoff of the contract and all the various pieces, right, we'll give you guys better guidance as we go into the end of this Q2 results. And then in terms of margin, yes, I would expect that, that is also going to have a bit of a beneficial impact to margin as well. And -- but again, that's sort of -- I have to be a little careful there. We're going to, again, reiterate, we do target the 50% plus margin for gross margins. And again, we have to sort through all the pillars of that significant contract. Richard Shannon: Okay. I want to ask a follow-up about this contract in the context of other activities you have or may have going on in the future here. So you've referenced today and in the past here this -- I think it's a $14.6 million contract for -- I forget the word you used here, continuity plan or something. And I think there's an RFQ out there from the U.S. government about maybe establishing 300-millimeter capacity here. And then you've obviously recently, as you announced, I can't remember last month or whatever, adding some more capacity at Microchip. To what degree do all of these things interrelate here? Can you kind of tie these things together or if they're not tied together, tell us? I'd just love to get kind of some context here, please. Sanjeev Aggarwal: Richard, this is Sanjeev. Good question. And I think maybe I can help and then maybe there's a follow-on to further clarify. But the bottom line is the RFI for the 300-millimeter MRAM line is independent of the 3 other items you mentioned, namely the $14.6 million contract that we got in 2024, the Microchip Foundry Services Agreement and the new contract that we just talked about today. So as far as the $14.6 million contract that we got in 2024, that is the one where we basically got some support from the U.S. government to improve the supply chain for MRAM or Toggle MRAM for the U.S. government. And that revenue, as you know, is actually being recognized below the line. So that was not above the line. There's a lot of CapEx and supply chain robustness involved in that discussion. The Microchip Foundry Services Agreement was simply between Everspin and Microchip, where we basically went out to increase our capacity. So that was independent of these 2 contracts in that sense. So we went out to increase our capacity given the high demand that we've been seeing over the last couple of quarters. Now this new agreement that we just signed is basically we are going to provide a technology information, a recipe, a compendium, if you will, for mil and aerospace Toggle MRAM to this contractor, to this U.S. prime contractor, okay? And in addition, they would have a right to second source the Everspin Toggle MRAM for mil/aero applications again in case Everspin decides to exit the business. Obviously, we have no intention of doing that, but we do give them the rights and all the technology and all the recipes, et cetera, associated with it in case we do exit, right? And then also under this agreement, they actually get access to this Microchip fab that we are bringing up to qualify their existing products on that line. So there's NRE associated with getting that activity done. And then finally, there is a new product that the U.S. government is actually planning to tape out. So the R&D for that product and the production support for that product would also be part of this contract that we just talked about. Hopefully, that helps. Richard Shannon: That does help a lot. I appreciate that. If you don't mind, I'm going to throw one more question before jumping back into the queue, and that's really about the guidance here. So I mean, it sounds like we should expect most of the sequential growth in dollar terms here to come from products here. How do we think about it between the kind of the STT that's mostly going to IBM versus other products here within that? And then any idea -- or can you just give us a sense of what kind of litigation spend you're expecting in the second quarter? William Cooper: Yes. So on the first point, what I would say is definitely seeing very strong product sales. We're up year-on-year 28%. I think most of that growth from Q1 to Q2 is going to be in that product sales category. Again, we are seeing, I would say, just good solid product sales across all the various categories. And then on your second question, we do show the $1.6 million that we had to expend in Q1 on litigation costs. And what I would say is, unfortunately, litigation is expensive, and I think we're kind of expecting it to continue in that range for at least the next couple of quarters. But again, we'll see how that ultimately pans out. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. We did have a question -- a follow-up question that come through. One moment. William Cooper: Okay. Operator: We have a follow-up question from the line of Richard Shannon with Craig-Hallum. Richard Shannon: Well, I guess I didn't have to jump out of line. But let's hear, maybe a couple more from me guys here. I noticed you've had a couple of quarters of some above-trend CapEx numbers in the fourth quarter and now the first here. And while I could certainly expect some of that coming from maybe your Microchip agreement or not, I'm not sure. But how do we look at that going forward here? William Cooper: Yes, we did. We had a, I'll call it, a unique period of capital spend. And that, again, was related to some of the improvements that we saw in the Chandler facility primarily across a couple of different contracts. So that flurry of activity, I think, will start to settle down until we get into the real heart of this Foundry Services Agreement. Richard Shannon: This Foundry Services Agreement, is that referring to Microchip specifically? William Cooper: That's right. That's right. That's right. Richard Shannon: When do we start to see that pick up? And any idea how to think about that sum total over -- I don't even know what period of time to expect to be there. I assume it's at least a couple of years, but what do we think about there? William Cooper: Yes. So there will be some significant capital spend over the next 2 years. Again, it's going to be spread out over time a little bit, probably some later this year as well as early next year. And then in terms of the overall CapEx, not so significant that we can't manage it. I think, again, it's going to be in the range of kind of what our historical spend has been annually. Yes. Richard Shannon: Okay. Fair enough. My last question, I will jump out of line. If I took the notes here, and I seem to recall them being consistent with what I've heard in the past regarding the UNISYST product line here, you talked about this being a $3 billion TAM. And Sanjeev, if I caught your comments right, you're expecting kind of a 5% to 10% share early on here. 5% share, that number is $150 million in a year, and you're talking about -- last quarter, you talked about getting to a goal of $100 million within 3 to 5 years. So I look at that 5% to 10% share early on, "early on" seems to be a little bit longer time frame than what would fit in here. So are we either thinking it's going to take a while to get that kind of share? Or is there some meaningful upside in terms of timing to hit that $100 million total corporate level goal? Sanjeev Aggarwal: Yes, that's a good question for clarification, Richard. So I think we have talked about this in the past. I don't think that UNISYST is going to strongly contribute to the $100 million target that we have in the next 3 to 5 years. And the reason being that it takes about 18 to 24 months for the qualification of these products at our customers. So let's say, we have the product available samples in Q4 of '26, production, let's say, Q1 or Q2 of '27, and you basically have another 18 months before it's going to ramp to production. So I don't think it's going to contribute significantly, but it will contribute some. Richard Shannon: Okay. So early on would be after that qualification period that you said takes up to 2 years then, so -- okay. Sanjeev Aggarwal: That is correct. Yes, that's right. Richard Shannon: That makes sense. Sanjeev Aggarwal: Yes. Operator: I will now turn the call back over to Sanjeev for closing remarks. Sanjeev Aggarwal: I just want to say thank you, everyone, for joining the call today, and we look forward to talking to you at the end of Q2. Thanks a lot for your time. Bye now. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome, and thank you for joining the SBA First Quarter 2026 Results. [Operator Instructions] With that, I'll turn the call over to Louis Friend, Vice President of Finance and Capital Markets. Please go ahead. Louis Friend: Good evening and thank you for joining us for SBA's First Quarter 2026 Earnings Conference Call. Here with me today are Brendan Cavanagh, our President and Chief Executive Officer; and Marc Montagner, our Chief Financial Officer. Some of the information we will discuss on this call is forward-looking, including, but not limited to, any guidance for 2026 and beyond. In today's press release and in our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, April 29, and we have no obligation to update any forward-looking statements we may make. In addition, our comments will include non-GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our supplemental financial data package, which is located on the landing page of our Investor Relations website. With that, I will now turn it over to Marc to comment on the first quarter results and 2026 outlook. Marc Montagner: Thank you, Louis. Given the solid start of the year, we are increasing our full year outlook for all key metrics, including site leasing revenue, our cash flow, adjusted EBITDA, AFFO and AFFO per share as compared to our initial 2026 guidance. The primary drivers of these increases include outperformance during our first quarter, high straight-line revenue and favorable foreign currency rates. In the first quarter, we continue to operate efficiently, controlling direct costs and achieving company-wide tower cash flow margins of approximately 80%. In the U.S. we added approximately $10 million of quarterly new lease and amendment billings year-over-year. The bulk of the activity continues to come from new colocations as carrier both densify and expanded network footprint. With respect to churn, our prior outlook for both Sprint and EchoStar-related churn for the year remains unchanged. With regard to EchoStar, we continue to litigate the matter in federal court and believe strongly in our contractual rights. Internationally, we continue to see healthy demand for our infrastructure and we added approximately $4 million of quarterly new lease and amendment billings year-over-year. International churn continues to be elevated due to carrier consolidation, bankruptcy, restructurings and wireless operator's network rationalizations. We believe 2026 will be the peak year for international churn and expect improvement in our churn rate over the next several years. Moving to our balance sheet. In January, we paid off $750 million of ABS debt with our revolving credit facility, and our outlook assumes that we will use our free cash flow to pay down the current outstanding amount on our credit facility over time. Consistent with our prior outlook, we continue to assume that a $1.2 billion November ABS maturity will be refinanced in November at 5.25%. We also continue to be committed to becoming an investment-grade issuer and anticipate making our inaugural investment-grade bond issuance at some point in 2026, dependent market conditions. We ended the quarter with approximately $13 billion of total debt. Our current leverage of 6.6x net debt to adjusted EBITDA remains near historical lows and within our target range of 6 to 7x. During the first quarter, we declared and paid cash dividend of $135.2 million or $1.25 per share. And today, we announced that our Board of Directors declared our first quarter dividend of $1.25 per share, payable on June 17, 2026, to shareholders of record as of the close of business on May 22, 2026. This dividend represents an increase of approximately 13% over the dividend paid in the first quarter of 2025 and an annualized rate of approximately 41% of the midpoint of our full year AFFO guidance. I will now turn the call over to Brendan. Brendan Cavanagh: Thanks, Marc. The first quarter was another quarter of solid financial and operational results, leading both in industry AFFO per share and year-over-year growth in our dividend. Our customers around the globe remained busy deploying cutting-edge technology, expanding the footprint and deepening existing capacity to meet strong customer demand. In the U.S., our customers continue to invest in their networks, expanding 5G coverage with new spectrum, including C-band, technology upgrades such as massive MIMO antennas and growth in fixed wireless access, which continues to add strain to carrier networks. The majority of leasing activity in the quarter came from new leases as carriers focus on coverage gaps and capacity needs. Our backlogs also continued to steadily increase during the quarter, and we expect to see steady activity levels throughout the remainder of 2026. Looking farther out, we expect the drivers of organic growth to include the upper C-band auction expected in mid-2027. 6G network architecture moving towards a more balanced uplink, downlink mix and new spectrum bands currently being studied for future auction. All of these items will require new hardware at the tower sites. Today, we are starting to see the early signs of 6G with higher capacity radios and denser and more intelligent antenna configurations to send and receive growing volumes of data. Beyond towers, we continue to make progress and are very excited about the opportunities to leverage our existing portfolio to play a more meaningful role in mobile edge computing as edge workloads move closer to the end user. Macro tower compounds offer a cost-effective solution for edge compute needs, benefiting from strategically located sites with existing power, backhaul infrastructure and zoning protections. We are excited about the potential of this incremental revenue driver. Internationally, we had a solid quarter as well. We've made tremendous progress integrating the Millicom assets and are seeing healthy colocation demand for these sites, exceeding our initial lease-up projections. We are also just starting to ramp up the number of new tower builds, building just over 60 towers in Central America in the first quarter, with expectations to do much more over the coming quarters and years. Between building towers and buying the land underneath, we intend to put capital to work in Central America at risk-adjusted returns that are expected to be well above our cost of capital. We expect that our leading position in Central America will enhance our overall international portfolio, reducing relative FX exposure, diversifying our customer base and extending lease terms, all with the overarching goal of improving the durability of cash flow over the long term. Turning to capital allocation. Our dividend as a percentage of AFFO remains relatively low. This means the continuation of our shareholder-friendly remuneration policy while also preserving the flexibility to opportunistically invest in new assets in our existing markets. While we did not repurchase meaningful shares in the first quarter as we prioritize paying down our revolving credit facility with excess free cash flow, we expect share buybacks to remain an important part of our capital allocation strategy in 2026. In the first quarter, leverage remained within our recently revised target levels even with the removal of all EchoStar revenue as of January 1, and we are well positioned to be an investment-grade issuer during this year. We expect that this shift to IG will reduce our relative overall cost of debt over time while providing access to the deepest and most liquid market in the world, improving our already solid balance sheet. SBA is a truly remarkable company. We have solid financials, high-quality assets, an established track record, the best people in the industry and perhaps most importantly, a drive and culture that continually pushes us forward to maximize outcomes for all of our stakeholders. The future potential for this company remains very exciting. Before opening it up for questions, I'd like to thank our team members and customers for their trust in SBA. The company's ability to achieve our vision to be our customers' first choice provider and the industry leader in quality infrastructure solutions is only possible because of the incredible team members we have with SBA. With that, operator, we are now ready for questions. Operator: [Operator Instructions] Let's go to our first caller. Ric Prentiss: It's Ric Prentiss, Raymond James. Can you hear me? Operator: Yes, we can. Ric Prentiss: I want to ask a couple of philosophical questions. When you -- can you help us understand what are the advantages and disadvantages of being a public company versus a private company as you look at competing for assets and tenants and capital? Just kind of help us lay it out long-term view, short-term view leverage levels. Help us understand kind of how you think about public versus private. Brendan Cavanagh: Well, I mean, Ric, I think for us, it's not really about public versus private. We focus on quality of assets that we have and providing the best service possible to our customers and the best -- meet their needs where they have them. And I think whether we're a public company or a private company, that will continue to be the case. There's, of course, differences in public and private companies in the way that they're capitalized and things that they have to talk about publicly, but otherwise, the business is the same. Ric Prentiss: Okay. The other philosophical question is you guys sold the Canadian tower portfolio. As you review that Canadian sale, how do you stack up the priorities or criteria or the factors of price versus ability to close versus financing? When we look at Canada, how do you kind of think of going through the potential list of buyers and what's important? Brendan Cavanagh: Well, Ric, I mean the approach with Canada was specific to Canada. We had come to the conclusion after being there for many, many years that our ability to get to a scale that would position us in the best place possible to continue to grow that business and meet customer needs there was not going to be achievable. And so we decided to explore monetizing those assets as a better -- potential outcome for our shareholders. And based on that process that we ran, we were able to achieve a price that we felt was attractive and appropriate and so we sold the assets. And that's really no different than the way we've approached all of our markets. We've talked for the last couple of years about portfolio review that we're doing, trying to make sure that we're positioned in the best place possible in each of the markets where we operate in terms of our relative scale as well as our relative positioning to the leading carriers in those markets. And the Canada situation was no different than any other. Ric Prentiss: Okay. And then one operational question. Obviously, not meaningful stock buyback this quarter, but you said you want -- still plans to do some in '26. How should we think about leverage level, buyback, M&A opportunities and how you're kind of balancing those use of your flexibility? Brendan Cavanagh: Yes. So our leverage target, we revised late last year to 6 to 7 turns of net debt to adjusted EBITDA, and we're obviously operating right in the middle of that range. And so we start with the leverage first. We make sure that we kind of maintain leverage in that target range and then prioritize what we think provides us the best opportunity at a given point in time among buybacks. Obviously, dividends are paid out and growing on a pretty steady basis and then new asset investments, mostly new tower builds and acquisitions. And that's not really that different than the way we've approached things historically. I think from quarter-to-quarter, different opportunities come up and we spend time on those opportunities. And depending on what we're looking at, that may cause us to slow down on buybacks or possibly increase them because we don't have enough other options to invest that capital, but it's our goal to stay levered at the same level that we've targeted. And as a result, that provides us a lot of excess cash flow to invest every year. And we look at all the options available and compare them to each other at a given time. But ultimately, I expect we're going to spend money on all of those categories over time just as we've done in the past. Operator: Let's move on to our next caller. Please go ahead. State your name, organization, then question. Michael Rollins: Mike Rollins from Citi. Two topics, if I could, please. The first on the leasing environment. The release referred to, I believe it was a larger backlog in domestic leasing. Just curious if you could talk about the significance of that change in backlog versus maybe other historical first quarters and put that into perspective in terms of the type of leasing growth that you're expecting to deliver this year or in future years? And the second question, maybe just taking a step back, as you talked at some conferences, the subject of your value versus private markets has come up. I'm curious, as you talk with investors about it, what you learned about how investors are valuing you in the public market? And what are the ways that SBA is trying to respond to questions about whether it's the business or the financial outlook in a way to improve that visibility and transparency for your future financial opportunities? Brendan Cavanagh: Yes. So first, the leasing environment. Our backlog did increase from December 31 levels to March 31 levels. So that was a good sign. And I'm talking about U.S. backlog specifically. I think that's what you're questioning. And that increase, I would categorize as moderate. It wasn't extreme necessarily, but it definitely was an increase where we have more applications coming in than new business that we are executing. So it's actually replenishing faster and at a higher rate than it's being used. So that's a good sign in terms of the rest of the year and how the year should shape up in terms of leasing activity. I think from a historical standpoint, it's not necessarily an extreme outlier. And I would expect that this year's leasing activity in the U.S. will be relatively steady based on where we sit today. Obviously, things can change throughout the course of the year. But at this moment in time, based on our interactions with our customers and the way that the backlogs have grown, I would expect to see fairly steady activity levels. In terms of how we position SBA, it's a little bit of a cryptic question, Mike. But I think our focus is on trying to be as clear as we can with our public investors about all of the tremendous attributes of our business and sharing that information clearly in terms of the quality of our assets, the quality of our growth prospects and the quality of the cash flow that we produce on a very steady, consistent basis than we have, frankly, for decades. And so the more that I think we can share that message and evangelize it and then ultimately demonstrate our ability to execute, I think we'll be just fine. I can't speak to how every individual party might look at valuing this company if they're outside of the public shareholder base at this point. Operator: All right. Let's move on to our next caller, Batya Levi UBS. Batya Levi: Great. Just a follow-up on the domestic activity. With the backlog -- the moderate increase in the backlog that you're seeing, is that across the board or specific to a company? I think one of your tenants had been slowing down significantly. Do you see some uptick in their activity to maybe offset some of the slowdown you were expecting in the second half? And a question on the mobile edge compute that you think could provide a new incremental revenue opportunity. What kind of investment do you think it would require to refit your sites? And when do you think that will start to flow into the P&L both from an expense and a revenue perspective? Brendan Cavanagh: Okay. So on the domestic activity, and I don't like to necessarily share specifically what each customer of ours is doing, I will say that it was not necessarily completely even among our biggest customers in terms of backlog increases. We obviously have 1 customer where we've signed a recent agreement. And so we're starting to see an increase in activity associated with that. So that definitely has influenced it. But overall, that ebbs and flows generally over time anyway. That's what we've always seen historically. So in a given quarter, 1 quarter does not necessarily tell the story. So I would expect that we'll see all 3 of the primary customers we have in the U.S. be active at various points during the year. On the edge compute side, we are kind of excited about the potential opportunity there. It's definitely emerged as something that I think there's going to be a lot of interest in specifically for AI inference and low-latency environments that are going to be critical as AI just continues to infiltrate all of the applications that end users will eventually be using over these wireless networks. We are, ourselves, engaged actively with multiple companies exploring how we might deploy some of these edge data centers at our tower sites. And we're in the early stages of that, Batya. I would say we have some that we've already done, a very small number. And so some of that is almost trial in nature. We expect some of those to come online shortly. So we've incurred some dollars as it relates to that. I think I need to just punt a little bit on the timing for impact to the financials in any material way, but that's something that I'm sure we will be coming back to you with in future quarters because it's definitely starting to gain traction, and I think it will be a contributor down the road. Operator: [Operator Instructions] Let's move on to our next caller from Brendan Lynch from Barclays. Brendan Lynch: Just a follow-up on the edge sites. Brendan, can you hear me? Brendan Cavanagh: Yes. Brendan Lynch: Just to follow up on the edge sites. Brendan, can you give any concrete examples of how AI being deployed at a tower site is advantageous relative to in a traditional data center? Just -- I asked this because it's largely been theoretical over the past several years. So maybe it sounds like there's some momentum and things are changing there. So any additional color you can give would be helpful. Brendan Cavanagh: Yes. I mean it's hard to give you exact. I mean, really, what we're talking about and what we're seeing is some of these applications that have a much greater amount of uplink versus downlink, which affects, by the way, the general architecture of the wireless network itself is requiring in order to be effective an even lower level of latency to make those solutions as effective as possible. And as a result, the closer that you can move the compute power to the edge of the network and closer, frankly, to the user, we're finding that folks think that that's going to make a real difference to the success of some of these applications. And as a result, there's a push to move that out. I also think there's a practical issue in that, in some ways, it may be easier to have this more distributed compute sort of network through these micro data centers versus just having the bigger facilities that are more centralized in terms of just power usage and other resources that are necessary to make these things effective that to some degree, when you distribute it out on a further basis, that's actually easier to achieve in some cases. So we'll see, Brendan, but I think as long as latency is a real issue, then edge compute is going to become more and more important. Brendan Lynch: Okay. Great. That's helpful. And then maybe just another question on the land purchase in Guatemala. Can you just kind of walk through some of those details and what the cap rate was that you paid? Brendan Cavanagh: Yes. So that -- we actually talked about that, I think, on the last call because we closed on that early in the year. We were able to buy out land under most of the towers in Guatemala that we acquired as part of the Millicom acquisition. I believe the multiple we paid was in the 7-ish range. I'm looking for confirmation. I think it was about 7 turns was about what we paid for that. So pretty attractive and accretive in terms of valuation, but also helpful to us in terms of our relative positioning from a risk standpoint on all those properties and that we can control that land a lot better than, obviously, we could have before. Operator: Our next caller is Nick Del Deo from MoffettNathanson. Nicholas Del Deo: So Brendan, you noted in your prepared remarks that the demand you're seeing for the Millicom towers has exceeded your expectations. I guess based on your conversation with those customers, is it your sense that this is like an initial burst that's happening, the sites have become available that may subside? Or does it strike you something that's more sustainable? Brendan Cavanagh: Yes. I think there's definitely an initial interest because these sites were obviously in carrier-controlled hands before. And so now that they're kind of opened up more directly for colocation business than they probably were before, that's caused some inbound interest that I think is what you would normally expect when assets like this become available. But I do think that there is an opportunity to sustain the growth for an extended period of time because for one thing, there's a lot of sites. Two, we're just at the very beginning stages of having conversations with those other customers, and it's primarily 1 customer in many of these markets about the site. So based on the pent-up demand that we see and what they've expressed to us, I think we're going to see very attractive lease-up for an extended period of time. Nicholas Del Deo: Okay. Okay. Great. And then maybe one about the U.S. market. One of your peers has commented that the big carriers might be more interested in working with the larger public tower companies to undertake more new construction opportunities. I was wondering if you've observed anything similar. Brendan Cavanagh: Yes. I think there is some of that. I mean, definitely, the dialogue that we've had with the MNOs as of late has been much more constructive towards new build opportunities here in the U.S. than it has been in the past. I mean, really, if you kind of go back in history, and this isn't just SBA, but the other big tower companies as well, were primary suppliers of new builds for many, many years. And then that obviously changed dramatically. You had a lot of smaller new companies coming up and the financial terms that were being offered were not really something we found attractive, and I imagine most of our peers -- our bigger peers did not as well. And so that's why you saw the level of what we're doing dry up. But in this current environment, as we sign some of these master agreements, and we have broader reaching relationships that get established as well as the cost of capital increasing and the stability of the end provider that the carriers are dealing with, it's becoming more and more important to them that they're with somebody that they know that they can rely on to be there for the long term. And I think as a result, you're going to see more opportunity for companies like us to do more new tower builds here in the U.S. Operator: Moving on to our next caller, David Barden from New Street Research. David Barden: So I guess, Brendan, I just have to ask, like, do you -- the story that -- there were a couple of questions already about this, which is that there are multiple PE firms circling, wanting to buy SBA, take it private. TMT Finance reported that they would do with a $250 a share. And I'd question whether you and Jeff, who is still the Chairman would really want to sell. So could you kind of walk us through what would it take for this to actually happen? That would be kind of question number one. And then -- well, that's it. That's my question. Brendan Cavanagh: All right. Yes. I mean, listen, of course, I've seen, of course, these articles that have been out there for the last few weeks, and you won't be surprised to hear me say that as a matter of policy, which is our policy, we don't comment on speculation or rumors that get put out there in the press. I mean what I can say just more generally is that I've been with SBA for over 28 years. And during that entire time, we have always focused on evaluating all options and all possible routes we can take around various different things in order to act in the best interest of our shareholders. And we do that still today, and I expect we will do that in the future. And so of course, we will always evaluate any opportunity that presents itself to us. But beyond that, I mean, I can't really comment on what somebody decides to put in an article without any real basis. David Barden: Would it be fair, Brendan, to say that if there was ever a moment in the last, say, 3, 4, 5 years while this constant evaluation has been happening, where you bought back stock, that you would never sell the company for a number that's less than the number that you bought that stock at? Brendan Cavanagh: Well, I mean, I can't -- David, I can't really tell you what we would do or what we would not do in some hypothetical case. What we would do is always make a decision that we thought was best for the shareholders, whatever that was at that moment in time, and that's the decision we would make. Operator: [Operator Instructions] All right. And that looks like that's all the questions we have for today. Brendan Cavanagh: Okay. All right. Well, thank you, Marilyn, and thank you, everybody, for dialing in, and we look forward to reporting our second quarter results to you next quarter. Thanks. Operator: Thank you to our speakers and to everyone in the audience for joining us today. The call has concluded. You may now disconnect.
Delaney Gembis: Good afternoon, and welcome to Aware's First Quarter FY '26 Conference Call. Joining us today are the company's CEO and President, A.J. Amlani; and CFO, David Traverse. [Operator Instructions] Before we begin today's call, I would like to remind everyone that the presentation today contains forward-looking statements that are based on current expectations of Aware's management and involve inherent risks and uncertainties that could cause actual results to differ materially from those described. Listeners should please take note of the safe harbor paragraph that is included at the end of today's press release. This paragraph emphasizes the major uncertainties and risks inherent in forward-looking statements that management will be making today. Aware wishes to caution you that there are factors that could cause actual results to differ materially from the results indicated by such statements. These risks and uncertainties are also outlined in the company's SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements should be considered in light of these factors. You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Although it may voluntarily do so from time to time, Aware undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. Additionally, this call contains certain non-GAAP financial measures as that term is defined by the SEC and Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, Aware has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company's earnings release issued today. I would like to remind everyone that this presentation will be recorded and made available for replay via a link available in the Investor Relations section of the company's website. Now I would like to turn the call over to Aware's CEO and President, A.J. Amlani. A.J.? Ajay Amlani: Thank you, Delaney, and good afternoon, everyone. First, let me start with our performance this quarter. Revenue for the first quarter was $3.4 million, which was below our expectations. Transparently, we underestimated the pace at which the market was shifting and the degree to which our existing product infrastructure and architecture needed to evolve to meet it. The rapid advancement of AI has simultaneously raised the stakes and expanded the threat surface for biometric systems, making liveness detection and identity assurance more critical than ever, while making the job of protecting against spoofing and deep fakes more demanding. We did not move fast enough to get ahead of that reality, and this quarter's results reflect that. As part of our ongoing transformation, we took deliberate steps during the quarter to further align the business with our platform-first strategy. This included removing approximately $4 million in expenses and simplifying our go-to-market operating model. These actions represent a meaningful reset of our cost structure and are designed to support a more focused, efficient organization aligned with our highest return opportunities. Stepping back, this quarter marks the next phase of our transformation. 2025 was about building the foundation, strengthening our technology, expanding certifications and deepening our understanding of customer requirements. We are now in step 2, focusing the company around a single scalable platform strategy. At the center of that strategy is the awareness platform. We are moving away from a fragmented portfolio of components and SDKs and toward a unified biometric orchestration platform designed to serve both federal government and enterprise customers at scale. We believe biometric orchestration represents a critical layer in modern identity infrastructure, enabling organizations to integrate, manage and scale biometric systems and workflows across their environments with increased efficiency and simplicity. More importantly, this is not just a product decision and is grounded in market demand and data. In our recently published market research, the state of biometric security in the age of AI fraud and a founding 98% of organizations already using biometrics said they're interested in investing in orchestration capabilities. Additionally, nearly 90% report concern over AI attacks targeting biometric systems, further illustrating why they need visibility into orchestrating biometric workflows. The report is available on our website, and I'd encourage you to read it. Taken together, this feedback reinforces that we are aligned with where the market is headed, allowing us to build with a clear understanding of the opportunity in front of us. We also believe Aware is uniquely positioned to lead in this category. Our decades of experience, our deep scientific foundation and our strong intellectual property portfolio, particularly in liveness detection, represent a durable competitive advantage. It is the critical capability that will determine winners and losers in this space, and it is where we have historically been strong and intend to lead. As part of this shift, we are prioritizing investment in the awareness platform and aligning our resources accordingly. This includes downshifting investment in certain legacy product areas, including portions of our law enforcement-focused offerings while continuing to fully support our existing customers and deliver on our commitments. At the same time, we are increasing our focus on the federal government, where our foundational capabilities have long proven and where we continue to see demand for modernization and biometric interoperability. In parallel, we have gained important insight from enterprise customers whose requirements are increasingly centered around cloud-based multi-tenant architectures. This feedback has directly shaped the design of the awareness platform, which is built to support scalable enterprise-grade deployments. The platform continues to evolve, and we are actively engaging with customers to refine capabilities and ensure a strong product market fit. We are encouraged by the feedback we are seeing and believe this positions us as we plan for a broader platform rollout later this year. Step 3, which we expect to begin in the coming quarters and accelerate into the fall is about scaling, bringing expanded platform capabilities to market, including continued advancements in liveness and providing single integration access to top-performing systems so that customers can test and evaluate performance as well as quickly deploy biometrics anywhere across their business. As we move through this transition, we expect near-term variability to continue. Our focus is not on optimizing for quarter-to-quarter results, but on building a more durable, modern and scalable business that can deliver steady, long-term growth and broader adoption of the platform. While this business did not meet our expectations this quarter, we are confident that the actions that we have taken position us more effectively for the future. A key example of continued progress is our performance in independent real-world government evaluations. During the quarter, we delivered strong results in the DHS remote identity validation rally Track 3, where our Intelligent Liveness solution demonstrated the ability to stop sophisticated attack ors while maintaining a high-quality user experience. We view results like these as more than technical milestones. They are a direct reflection of our commitment to building high assurance, production-ready technology that can operate at scale with speed and accuracy in the most demanding environments. These validations are critical prerequisites for winning large government and enterprise deployments, and they reinforce our confidence in the platform as we are continuing to build. With that, I will turn the call over to David to review our financial results in more detail. Over to you, David. David Traverse: Thank you, A.J. Let's review our financial results for the first quarter of 2026, which ended on March 31, 2026. Revenue for the quarter was $3.4 million compared to $3.6 million in the prior year period. This decrease reflects lower perpetual software license revenue and was partially offset by higher maintenance and services and other revenue. Operating expenses for the quarter increased to $7 million compared to $5.5 million in the prior year quarter. The higher expenses included onetime severance costs of $700,000 as well as higher compensation costs related to hires we made in 2025. As A.J. noted earlier, we have reduced operating expenses by $4 million on an annualized basis starting in the second quarter of 2026. And we continue to make adjustments to our operating expenses as we continue to focus on our strategic objectives. Net loss for the quarter was $3.5 million or $0.16 per diluted share compared to $1.6 million or $0.08 per diluted share in the prior year period. Adjusted EBITDA loss was $3.2 million compared to $1.5 million in the prior year period. We ended the quarter with approximately $19.6 million in cash, cash equivalents and marketable securities, and we have no debt. Our balance sheet remains strong and provides flexibility as we execute on our strategic plan. We expect the savings of the actions taken this quarter to be more visible as we align our expenses with our strategic priorities. Given the nature of our business and the transition underway, we expect quarterly variability to continue. And as a result, we continue to believe performance is best evaluated over multiple quarters. With that, I'll hand it back to A.J. for closing remarks. A.J? Ajay Amlani: Thanks, David. We have been transparent with you today about where we fell short. We underestimated both the fit and capability demands of the current market and the speed at which AI is reshaping what customers need for biometric infrastructure. That is on us, and the restructuring actions we have taken this quarter reflect genuine accountability, not a reaction to 1 quarter, but a deliberate reset towards our opportunity to lead us as a biometric orchestration platform player. We are intentionally moving away from products that will not be relevant in our new paradigm and concentrating our resources on the areas where we have a proven durable advantage. Chief among those is our liveness capability to help combat AI-powered spoofing and deep fake threats and our proven track record serving the federal government. The awareness platform is how we bring this to market at scale, giving customers a single integration point to access, evaluate and deploy best-in-class biometric capabilities across their environments. The early feedback reinforces that this is the right direction, and we remain focused on executing the rollout with discipline. We are building toward consistent long-term growth from a sharper, more defensible position. We believe the path forward is clear, and we are committed to it. That concludes our prepared remarks. We will now open the call for questions. Delaney, please provide the instructions. Delaney Gembis: Thank you, A.J. At this time, there are no questions. That completes our Q1 FY '26 broadcast. As a reminder, this presentation is recorded and made available for replay via a link available in the Investor Relations section of the company's website. Thank you, and you may now disconnect.
Operator: Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to the O-I Glass First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Chris Manuel. Please go ahead. Christopher Manuel: Thank you, Kate, and welcome, everyone, to the O-I Glass First Quarter 2026 Earnings Conference Call. With me today are Gordon Hardie, our CEO; and John Haudrich, our CFO. After prepared remarks, we will open the line for Q&A. Our presentation materials are available on the company's website. Please review the safe harbor statements and the disclosures regarding our use of non-GAAP financial measures included in those materials. With that, I'll turn the call over to Gordon, who will begin on Slide 3. Gordon Hardie: Good morning, everyone, and thank you for joining us. Today, we will review our first quarter results, what we are seeing across the business and our outlook for the year. Before I begin, I want to thank all our O-I colleagues across the world for their focus, execution and commitment to supporting our customers in a tough environment. The year got off to a challenging start. While the top line held steady, demand was sluggish early in the quarter before improving through March. We also experienced elevated commercial pressures in Europe and several onetime external events that increased our costs. As a result, first quarter adjusted earnings of $0.05 per share came in below our original expectations. Fit to Win continues to deliver and the disciplines are now embedded across the organization. We are seeing the benefits of a stronger cost position reflected in new business wins across key categories that should support higher volumes starting in the second half of the year. Operationally, it was a story of two hemispheres. In the Americas, earnings were stable despite several external disruptions. In Europe, results fell short of expectations amid elevated competitive pressure. Europe is also earlier in the Fit to Win journey than the Americas, and we expect performance to improve in the coming quarters as we execute the restructuring actions we have announced. Looking to the full year, we expect strong year-over-year improvement in the Americas. Yet we have an updated -- we have updated our 2026 guidance to reflect a more challenging European market, compounded by elevated energy inflation and broader macro dynamics. John will walk you through the updated outlook in more detail in a few moments. Even with the near-term uncertainty, our strategy and priorities are unchanged. With continued Fit to Win execution and new business wins, we are confident we can strengthen results as the year progresses and expect to build momentum into '27 and beyond. We remain laser-focused on our investments -- Investor Day objectives, and we believe many of today's headwinds are temporary. Let's now turn to Slide 4 to discuss our top line performance and volume trends. As you can see, net sales have remained steady over the past several quarters, even amid ongoing volatility and uncertainty. That said, we got off to a slow start this year with first quarter shipments down about 8% versus the prior year. This comparison was also tougher as last year likely benefited from customer prebuys ahead of a new U.S. tariff regime. By category, alcoholic end users were the softest, while NAB and food performed better. In fact, food is now emerging as our second largest category behind beer. Regionally, shipments declined in North America and Mexico amid ongoing customer inventory adjustments in spirits, while South America delivered mid- to high single-digit growth. In Europe, demand was softest in wine, particularly in the South and an extended negotiation period, while other markets were more balanced. Importantly, volume trends improved sequentially through the quarter, with March volumes down only 2%. Given that trend, we continue to expect full year sales volumes to be about flat with the prior year. After a slow first quarter, we anticipate shipments to be stable in the second quarter and to deliver low to mid-single-digit growth in the second half, supported by easier comparisons and new business wins. As we implement our new go-to-market approach, we are encouraged by the early progress. We've landed new business across about 15 accounts spanning all categories that should contribute 1.5% of new sales volume starting in the second half of the year. Together, these wins should help set us up for a profitable, sustainable growth in the 1% to 2% range beginning in 2027. While the quarter was challenging, the trend improved as we exited Q1. The team executed well in difficult circumstances. With steadier demand and new business wins, we believe the fundamentals position us well for a stronger second half. Turning now to Slide 5. Fit to Win remains a core value driver for O-I. The program continues to take cost out and optimize our footprint and value chain. Strengthening our cost position improves competitiveness and enables long-term profitable growth as demonstrated by new business wins. We are now at the halfway point towards delivering $750 million of cumulative benefits through 2027, and we remain ahead of schedule. In the first quarter, the team delivered gross Fit to Win benefits of about $50 million, in line with our expectations. Net benefits were $35 million after headwinds from external disruptions in the Americas and temporary transition costs as we complete the closure of three plants in Europe. Let me highlight our progress across the phases of the initiatives. Phase A, focused on SG&A streamlining and initial network optimization, generated $32 million of net benefits in the quarter despite transition costs in Europe. We expect the organizational actions and planned capacity closures to be largely completed by mid-2026. Phase B focused on end-to-end value chain transformation, was slightly up after absorbing costs associated with disruption in the Americas. Core work streams continue as planned. We launched the third wave of total organization effectiveness, and we are accelerating procurement and energy initiatives to drive incremental savings. We are also pursuing incremental opportunities to offset cost headwinds we observed in the first quarter. Fit to Win is working. We continue to target at least $275 million of benefits in 2026. With that, I'll turn it over to John to walk you through the financials, starting on Slide 6. John Haudrich: Thanks, Gordon, and good morning, everyone. First quarter net sales were $1.54 billion, essentially flat with the prior year. Favorable FX largely offset slightly lower average selling prices and a high single-digit decline in volumes, while shipments improved meaningfully as the quarter progressed. Adjusted earnings were $0.05 per share, down from $0.40 per share in the prior year, primarily due to commercial headwinds, including unfavorable net price and lower volumes. Operating costs were comparable to the prior year as Fit to Win compensated for unanticipated disruptions. Earnings also reflected an unusually high effective tax rate on low pretax earnings. As earnings improve, we expect a full year tax rate of approximately 35% to 40% with the potential to move lower in 2027 and beyond. Looking ahead, the full O-I team is focused on strengthening performance as the year progresses. Let's turn to Slide 7 to discuss operating results. Segment operating profit was $142 million, down from $209 million last year, primarily due to the commercial pressures we discussed. As noted, the Americas was stable, while Europe was down considerably. In the Americas, we performed well despite several external disruptions. The segment's top line was stable as favorable FX and mix, largely offset slightly lower selling prices and a 9% decline in shipments. Demand trends also improved as the quarter progressed with March shipments down only modestly versus the prior year. Americas segment operating profit was $142 million, essentially flat year-over-year, benefiting from higher net price, while lower sales volume and higher operating costs were headwinds. Costs included $10 million of disruption-related expense driven by extreme weather, civil unrest in Mexico and a natural gas pipeline failure in Peru, partially offset by Fit to Win. In Europe, the results were well below our expectations, and they are the primary driver of the year-over-year decline in segment earnings. Europe segment operating profit shortfall was driven by a combination of softer demand and an increasingly competitive market backdrop, which pressured price amid low capacity utilization, most notably in wine in Southern Europe. As a result, net sales declined slightly with favorable FX partially offsetting lower price and volumes. Shipments were down 7% year-over-year, although trends improved as we moved through the quarter and March shipments were up slightly versus the prior year. As you'd expect in that environment, profitability compressed meaningfully. Europe segment operating profit was breakeven in the first quarter, down roughly $68 million from a year ago. The biggest factor was a $76 million reduction in net price, reflecting both elevated price competition and the reset of favorable energy contracts that expired last year. Lower shipments were an additional headwind. These pressures were partially offset by Fit to Win benefit costs even after absorbing $5 million of higher-than-expected temporary plant closure expenses. Looking ahead, we anticipate performance to increasingly converge across the regions as Europe builds the same resiliency and execution capability demonstrated in the Americas while continuing our transformation journey. Turning to Slide 8. I'll close with an update on our outlook for the remainder of 2026. As discussed, it has been a challenging start to the year, and we have updated our full year guidance to adjusted earnings of $1 to $1.50 per share. The chart also reflects our revised EBITDA and free cash flow expectations. To frame the outlook, it's important to separate what we are seeing in our core glass markets and what we are absorbing from broader macro environment, especially energy. Starting with the core glass business, demand trends are stabilizing as the year progresses and Fit to Win is continuing to deliver meaningful results. In the Americas, our outlook remains positive, and we expect results to be up year-over-year. In Europe, we have risk-adjusted our outlook by up to $25 million given elevated competitive pressures, net of additional cost actions and restructuring should support improved performance in the second half. The biggest swing factor in our updated guidance is macro-driven energy inflation stemming from conflicts in the Middle East, which could total $75 million to $100 million. Higher energy prices flow through natural gas, electricity, logistics and certain raw materials. Importantly, our proactive energy management practice significantly limit further exposure, particularly in Europe, where approximately 75% to 80% of gas requirements are protected at prices favorable to current market levels and higher protection in the colder winter months. We will continue to monitor macro developments, including customer demand and whether broader inflation could further influence commercial dynamics. As we have essentially risk-adjusted our outlook for energy inflation, the appendix includes additional earnings sensitivities to changes in European natural gas market prices. While our 2026 outlook is conservatively set given macro uncertainty, our strategy and priorities remain unchanged, and we continue to drive towards the 2027 objectives we outlined at last year's Investor Day. We expect Fit to Win to deliver significant value next year, and we believe many of the pressures we are seeing in 2026 are temporary. More than half of our business operates under contractual price adjustment formulas that reflect changes in inflation on a lagging basis, providing an important structural mechanism as cost conditions evolve over time. Likewise, as capacity utilization increases, particularly in Europe, we believe our competitive position should continue to strengthen. Overall, we remain focused on the levers within our control, anchored by Fit to Win, and we are determined to deliver the best possible performance this year while building momentum into 2027. With that, I'll turn it back to Gordon for closing remarks on Slide 9. Gordon Hardie: Thanks, John. Let me close with a few key takeaways. We are not satisfied with our first quarter results, and we are moving quickly to improve performance. At the same time, our strategy is unchanged, and our long-term value creation plan remains firmly on track. While near-term noise may continue to drive volatility, we see several clear indicators that O-I's underlying fundamentals are moving decisively in the right direction. Here are six reasons we believe O-I is a compelling long-term investment. Fit to Win is delivering and continues to enable future profitable growth by improving operational discipline and cost competitiveness across the business. Core glass demand is stabilizing and recent trends are increasingly encouraging. March volumes point to a clear turning point in demand, providing early evidence that our actions are beginning to translate into profitable growth in the second half and beyond. Improving competitiveness across the footprint is already converting commercial opportunities. We have 15 confirmed incremental volume wins in hand, yielding approximately 1.5% annualized growth. These ramp up over '26 and into '27, giving us a clear line of sight to profitable, sustainable growth. The Americas, where we are furthest along in executing our transformation, are performing very well. Our capacity and demand are tightly aligned and across much of the region, we are effectively sold out. As such, we are actively evaluating opportunities to bring dormant capacity back online. Further, cost parity between aluminum and glass is spurring increased customer interest. In Europe, Fit to Win execution is accelerating. While the region trails the Americas by roughly 6 to 9 months, our capacity rationalization and restructuring actions are underway. Our competitive position continues to strengthen, especially as capacity utilization improves. While we conservatively risk-adjusted our 2026 outlook to reflect Europe's operating environment and the energy backdrop, we remain committed to our 2027 Investor Day targets. We believe these headwinds are temporary and manageable. Taken together, O-I today is a more disciplined, better balanced and better positioned for durable growth than at any point in recent years. Thank you for your time today and your continued support. With that, we'd be happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of George Staphos with Bank of America Securities. George Staphos: Gordon and John, what has your line management relayed to you about 2Q volumes and Fit to Win performance so far? And what have you relayed in turn to the Board? And why are you and the Board both confident that the turn is happening in 2Q, both in terms of volumes and accelerating in Fit to Win? Relatedly, the phase B on Fit to Win seems to be really not having much contribution so far this year versus target. The second question, I know you gave us some sensitivity, but if you could help us out, if energy rises from here and the consideration of your hedges, is there a way you could give us some back-of-the-envelope EBITDA effects? And do we need to start worrying about any of your secured debt covenants at this juncture or not? And where would we need to? John Haudrich: George, this is John. I'll take the second part of that point first. So as far as the sensitivity to the earnings situation, we assumed in these numbers given that we're 75% to 80% covered this year, we're assuming a range of EUR 45 to EUR 55 per megawatt hour being the relevant range. And so to the degree that energy is below that, for every EUR 5 drop on average, we get back about $0.05 per share. So that's about $12 million or so of EBITDA. To the degree that it goes above $0.55, we're protected, that's more like $0.02 to $0.03, so maybe $5 million or so of risk. We use a combination of different tools and factors and things to manage our energy positions. So we're pretty confident that, that number that we have between $40 million and $60 million of pure energy exposure to the elevated environment and the conflict is about right. And ideally, we can perform better on the downside. And then on the secured question, we got -- we're very, very low on our secured ratio right now, very favorable net position. We're not anywhere near at risk. And I'll tell you, we've got significant liquidity, $1.5 billion of liquidity. We manage our cash very conservatively in the organization. So from a balance sheet standpoint and managing the liquidity, we're in great shape. Gordon Hardie: George, Gordon here. So with regard to Fit to Win, I think we're very well placed to deliver the $275 million and maybe beyond this year. The way we set up the timing of it, we're in line. Quarter 1 delivered to expectation. We did have a number of external events through the tough winter, particularly in North America and some extra costs in Europe on the closure and reconfiguration of the network that were once-off in nature. And so you will see the Fit to Win momentum build. Behind those numbers is very detailed plans, very detailed accountability, weekly tracking. So we feel we're in good shape on Fit to Win. And as ever, we're always looking at new opportunities that are identified and ways to strip waste and inefficiencies out. So we'll be obviously pushing for a higher number, but we're confident in that $275 million number. George Staphos: And what are you seeing so far in 2Q on volume? What have you committed to the Board? Gordon Hardie: Q1 volumes of about 8% in the Americas, and let me break that down and about 7% in Europe. It's clear -- let me start with the Americas because it is a kind of a story of two hemispheres. Let me start in Brazil, where the business is performing very strongly for us with beer volumes up mid-single digits, NAB up mid-single digits and food and spirits up low teens. So we're outperforming the market in all categories in Brazil. And the team there has done an excellent job in executing Fit to Win to become much more competitive and has already entered what I would consider the profitable growth horizon of our strategy. And an interesting fact, Brazil is now more profitable in 2026 than when it had too fewer major competitors a number of years ago. And we expect Brazil to have another very strong volume and financial year. If I move Northwest to Andean, again, performing very strongly for us, outperforming the market in all categories, delivering mid-single-digit growth. And we're expecting a very strong second half and full year in that business. We're also executing incredibly well our Fit to Win program in Andean, and I would consider that market well advanced in the profitable growth horizon. In Americas North, our teams are executing well and addressing very effectively kind of long-run structural issues in that business and getting good results thereof. And so while volumes were down 8%, let me break that down. About 3% of that 8% was wine volume we -- that was not viable and was a barrier to us getting a much leaner network in place. And along the lines of our EP EBIT, we've taken that out of the business. There was about 3% of spirits customers destocking in the face of high distributor volumes. We know that is a temporary piece. And there was about 2% in what I would call missed beer volume due to those external disruptions and we had a furnace repair. We expect another very strong financial year in North America. And indeed, the first quarter EBIT in North America was the strongest in over 8 years. If I look at America Central, we're on track for another strong year despite the macro challenges of tariff impact on beer and spirits exports. We're executing very effectively there, and we're driving cost and waste out and becoming much more competitive on the domestic market in beer, in food and in spirits to offset in part volumes lost in exports. But we expect a strong run home. So in essence, the Americas are performing strongly. We see the volumes coming through. We see the wins coming through with customers. And I'd reinforce that the Americas is about 6 to 9 months ahead of Europe in terms of executing on Fit to Win. In Europe, overall demand was sluggish in the first quarter, particularly across spirits, wine and beer. However, food and NAB held up really well. That said, there are pockets of growth for us. So we had a strong volume rebound in spirits in the U.K., up mid-single digits and wine up about 11% delivering a strong overall year-on-year volume growth in the first quarter in the U.K. North Central Europe, which encompasses the Nordics, Germany and Poland for us, performed strongly with very good growth in food, up above mid-single digits and NAB the same. And we've picked up significant new pieces of business in North Central Europe, where I would say our Fit to Win program is most advanced in Europe, and we can see that competitiveness turning into profitable volume growth opportunities. So they're the two kind of best-performing regions for us, where the issues in volume were in Southwest Europe and Southeast Europe. And that is largely driven by wine, where demand continues to be soft, down in the region overall of about 5%, where there's significant overcapacity and quite significant kind of price pressure in the first quarter. So the bright spot for us in Southeast Europe is food, up about 10% and spirits up about 2% and RTD is actually growing quite nicely for us. But the main issue in Southwest Europe and Southeast Europe is wine and some spirits in France as cognac continues to be impacted by lower export volumes. So Europe, we believe the tide is turning. And when we look at our forecast for quarter 2, we expect to be up low single digits and then low to mid-single digits for the back half of the year. And overall, in Europe, I think we're having the highest rate of new business wins since pre-COVID. And so that's very encouraging. One other marker that we keep an eye on is how many of our customers are returning. And we're having customers come back to us that we haven't done business with in a number of years. So when you put that all together and we look now at our new go-to-market approach and how effectively that's being implemented, we're confident we'll finish the year close to flat with sequential kind of volume growth now in each quarter. So I hope that gives you a flavor, George. Operator: Your next question comes from the line of Mike Roxland with Truist Securities. Michael Roxland: Gordon, I just wanted to follow up with you on the new business wins across 15 accounts, and you said spanning all categories. Is that mostly Europe? Because you just said a lot of the commentary in terms of your response to George's question, it sounded like there's a lot of new business wins in Europe. So can you just comment about those new accounts, the breakdown between, let's say, Europe versus the Americas and what end markets you're really seeing that growth come from? Gordon Hardie: Yes. So overall, that growth, if you were to annualize it, would make up about 1.5%, so overall. And right now, that's split about 70%, 75% Americas, 25%, 30% Europe, with Europe kind of building momentum. We're seeing that in beer. We're seeing it in spirits. We're seeing it particularly in food and NAB. And in North America, for the first time, we're starting to make inroads into RTDs. And as you know, due to a regulation change last year, it's given us the opportunity to enter the RTD market, which is a market that certainly in Anglo-Saxon markets is growing in double digits. So we -- the way we've set up our business is -- and our sales forces and go-to-market is a category and sales combo. And so we see opportunities in each of the categories, and we're executing those, I think, quite effectively. We expect that momentum of new business wins to continue as we translate cost reduction into competitiveness. And if I take people back to I Day, the overall strategy is for us to get our cost base way down, and we're doing that. We still have quite a way to go to be the lowest cost producer, but we're making tremendous progress and then sharing some of that productivity with key strategic customers in exchange for profitable growth. And you're seeing that come clearly through in Brazil, a business that was really in a tough place 2 years ago and is now outperforming in all categories and a tremendous uplift in profitability over the last 2 years. We're seeing the same in the Andean, we're seeing despite a tough macro environment in Mexico, seeing the same dynamic, winning more business, getting costs down, winning more business, improving the financial results. And particularly pleasing to us is North America, which for years, for O-I has been a tough market. We're addressing finally some structural issues in that business in that market and turning that into profitable growth with a number of really strong wins for us in North America. So we believe we're executing this strategy. What happened in Europe in the first quarter, we're mid- to end of the network restructure. And I think the overcapacity in the Southwest and Southeast was an issue. And then the energy cost is a bit of a hit, but it's not a knockout for us. And we see a clear path to getting back to the kind of margins that, that business can deliver. Michael Roxland: That's great color, Gordon. And then just one quick follow-up. Just you mentioned remain focused on 2027 targets, including EBITDA of $1.5 billion plus. Your 2026 guide is down about $100 million at the midpoint. So obviously, that's a setback. Can you help us bridge how -- roughly how you intend to get to the 2027 guide right now? And what levers do you have at your disposal to make up the shortfall? I know maybe not specifically going to provide guidance on 2027, but just maybe walk us through some of the larger buckets that will help you get there given the fact that 2026 is down $100 million. Gordon Hardie: Yes. So here's how we look at that. we are absolutely laser-focused on our 2027 Investor Day targets, of which one is $1.45 billion, okay? There's no question that this is a setback this year, but we're absolutely clear that we have a viable path to that $1.45 billion. And let me give you probably two, three -- three points. We've already laid out that we have $150 million of Fit to Win to come in 2027. And a significant part of our business is in -- has what we call PAFs, price adjustment formulas that are lagged formulas that will allow us to catch up on some of the inflation this year in next year. And we're also, as I said, starting to deliver and move in, in more and more of the markets into the profitable growth phase of our strategy, which also should help us bridge that gap. We've tended to outperform on Fit to Win. So there's also the opportunity to do better than that $150 million, and we're ruthlessly focused on stripping waste and inefficiency out of the business and out of the chain. So when we put all that together, yes, is it a bit of a steeper climb, but absolutely achievable. And in every difficulty, there's an opportunity. And I think the opportunity for us here is to even get more focus and to move even at a faster pace to get to where we need to go. Operator: Your next question comes from the line of Anthony Pettinari with Citi Investment Research. Anthony Pettinari: Gordon, John, it seems like you have these -- you've seen these periods in the past where you have oversupply in Southern Europe with maybe smaller producers in Italy and France. And I'm just wondering if you could talk a little bit more about the competitive dynamics that you're seeing today and maybe how those situations have sort of resolved themselves in the past. Are people -- I guess the basis of the question is you were breakeven in Europe in 1Q. I assume smaller producers are doing much worse. And I'm just curious how sustainable that's been historically? And then I guess, related question, is it fair to say you're giving up a little bit of share in Southern Europe and maintaining or maybe even growing in Northern Europe? John Haudrich: I'll touch base on that one, Anthony, just to talk about the competitive situation and kind of maybe do a compare and contrast. So for example, if you go over to the Americas, where that's a lot of the restructuring has occurred already. We've taken out significant capacity. We went from the low 90s to the upper 90s as far as capacity utilization in that set of markets. And now you can see that on the bottom line. I mean, the performance of the Americas through Fit to Win and a good capacity balance in the marketplace. Our results are over the last 1.5 years, 2 years are up about 60% there. So you can see when there is the balance of these activities, it drives performance. If you compare that to Europe, that probably going into the year -- and I think we brought this up during the last call is that we were -- the market was probably more in the low 90s, right? But there is significant amount of announced capacity closures underway. We're -- as we said, we're going to complete the work that we're doing by midyear. We believe from what we can see is even net of new capacity additions, you're getting into a very similar spot that you see in the Americas. So a much more supply-demand balance. And as a result, it gives us confidence that as we go forward, what we saw in the Americas, we could replicate over in Europe. And truth, yes, it's a more fragmented base in Europe than it is in the Americas. But if you look at the whole, the capacity utilization road map seems to be improving. Gordon Hardie: Yes. Just in addition to that, Anthony, as we laid out at I Day, our cost base was too high. We've made significant progress on that further along in the Americas, as I said. But we also see tremendous further opportunity to get our cost base way down, and that is a key focus for us so that we can compete and deliver our commitments in any environment. So a bit to go there, but that is fundamental to our strategy. And then we're -- it's not really up to us to comment how anybody else is doing. But we're crystal clear on what we need to do. We're crystal clear on the point on the cost curve where we need to be at to grow profitably, and we are absolutely determined to get there and have a clear line of sight on how to do it. Operator: Your next question comes from the line of Joshua Spector with UBS. Gaurav Sharma: This is Gaurav Sharma sitting in for Josh today. I'm just wondering what the optimal utilization target for the European network is in a normal demand environment? And then if there's any additional facilities where you're considering idling versus permanent closures if the market just generally remain soft this year? John Haudrich: Yes. So clearly, from an overall market utilization standpoint, as I mentioned just before, you see the Americas in the kind of an upper 90 utilization across the whole marketplace would be our estimate. But when we talk about our own plants, when we're running them, something in the 90s, low 90s is a great place to be for a glass plant. And so if you're running maybe in the 80s or mid-80s or so, being able to get your utilization up into the 90s is a really good performance trend. That's part of what we -- when we get to win with the total organizational effectiveness program is really about driving the productivity up and utilization levels within our own network. So that's where we're trying to drive that. And ultimately, that gives you scale and allows you to continue to network optimize within your system. When it comes to the overall -- how do you manage kind of a softer environment, it is obviously -- you got to make a read on what you think that you need over the long term, right? And that has driven our own decisions around capacity rationalization over the last year or more. But you also have to say that you have to have some spare capabilities to be able to meet market growth and things like that. So if we go back 1.5 years ago, we were probably -- we had about 13%, 14% excess capacity in our overall network. And that's why we announced the larger restructuring, long-term restructuring activities. In the first quarter, that was down to low single digits or so. So -- and then we're going to continue, obviously, to complete where we are over in Europe over the next few months or so here. So the idea is that we want -- we always want to have a couple of percent of spare capacity to be able to take advantage of what Gordon was saying, which is as we grow our business, we want to be able to do that. But one of the things we did comment is we -- over in the Americas, for example, we are bringing back a previously shutdown furnace to be able to meet the needs. So you've got the ability to flex a little bit on both sides. Gaurav Sharma: Got it. That was very helpful. And then just a quick follow-up to that. You mentioned an extended price negotiation window in the release. I think you spoke about that at conference already. I was just wondering if this is done now or if there are negotiations still ongoing on that end. Gordon Hardie: Yes. For us, it's done usually, the season kicks off kind of late October, early November and a big chunk of it is usually completed before year-end. Some of it kind of runs on into the end of January. And I think the dynamic this year in Europe or last season in Europe was that there were deals done or agreements kind of brought to near conclusion that opened up again in January and February because of -- particularly in Southern Europe and Southwestern Europe, because of the spare capacity and a number of players feeling they needed to keep their capacity full. And so there was a bit of toing and froing. And that extended down to sort of, I would say, mid-February last week in February, which was an unusually long window. But that is done for sure, yes. Now there's always volume that's not contracted in the open market and -- but we're largely done in our business. John Haudrich: One thing I would add to that, and you saw that the volumes in Europe were down 7% in the first quarter. And as we indicated that was concentrated in when those negotiation windows extend like that, people tend to sit on the sideline on their orders, right, because they're waiting for the final deal. So one of the reasons we had a softer first quarter is because of this extended window and a lull in order activity. And so that's starting to normalize after that window was completed at the end of February. Gordon Hardie: Yes. And also, Easter was later this year, which had an impact in Europe. Operator: Your next question comes from the line of Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess I just want to go back to the volume side. So I would agree that you do have a steep climb for next year given the $100 million shortfall this year. And when we started this journey, a lot of the comments was nonmarket dependent and volumes, I guess, you could still achieve your guidance with weak volumes. But it seems like volumes have been a bigger headwind than initially thought. So when you think about the 1% to 2% that you could be adding through new business wins, do you expect that to offset continued volume declines? And should we just kind of assume maybe low single-digit volume declines from here for the market? Is there a path to actually reporting absolute 1% to 2% volume growth on a consistent basis? Or maybe you can just comment on some of those ideas. Gordon Hardie: Yes. Thanks, Arun. So yes, I think it's fair to say over the last 15 months, probably volumes have been below what we thought they might have been. We were expecting them to come to flat a bit sooner. I think what's got in the way of that is the level of inventory in the total system in spirits, for example, and markets like the U.S. and China continuing to be soft. And then you have the continued decline in wine across both the Americas and Europe. And that probably has continued longer than we initially thought. So where we are is we really feel we've bottomed out. And so when we're talking about being close to flat year-end and then kicking into 1%, 1.5% next year, that is net, right? That's a net position. So -- and these new business wins, they're not small fragmented customers. They're largely of sizable customers with sizable volumes. John Haudrich: I would just add, Arun, two points. One is if you look at some of our volume numbers, as Gordon had mentioned earlier, we intentionally did walk away from some low profit business. So you have to kind of consider that in there. And if you go back to our original strategy, we said, hey, we intended to be focusing on the cost and maintaining a stable top line while we're really focusing on cost. But now we're pivoting to that point where we believe, especially like we see in the Americas here and ultimately in Europe, that the competitiveness is improving, which allows us the baseline to create the profitable growth. And so we're at that inflection point where it wasn't necessarily the primary focus of our strategy over the last 18 months. It's increasingly going forward because of the cost positions that we're establishing. Gordon Hardie: Yes. And Arun, I refer back to my earlier comments. We're in markets like Brazil, where we really nail the Fit to Win and translating that into being much more competitive. Our volumes are up mid-single digits in beer, NAB and food and spirits, and we're outperforming the market in all those categories. Likewise, in the Andean and increasingly in North America right now, we can sell all the beer that we can produce. And we have pockets in, as I said, in North Central Europe, where we've -- in that particular region, we've had a 7% uplift year-to-date. So the whole -- the entire strategy of getting more competitive and then translating that working with key customers into more profitable growth. There's numerous clear examples of that across the business. And we're absolutely focused on executing that strategy with more rigor. Arun, one other point I'd make, we continue to see the cost gap between cans and glass narrowing. And we've absolutely seen an upturn in interest from beer customers to accessing more glass. And again, that was one of the premises we had that as you close that gap, you would curtail the shift from glass to cans and actually reverse it. And we're seeing that happen. And certainly, the interest in beer for glass, even in mainstream glass is a much different dynamic to last year. Arun Viswanathan: Okay. Great. I appreciate that. I guess what I'm observing is that the market appears to be declining a little bit faster than maybe what the capacity rationalization is. And maybe that -- and so you have to take downtime and you have to make these decisions to exit businesses that maybe were unforeseen a year or 2 ago when you initially put together Fit to Win and that's maybe causing the shortfall. Do you envision a time period in the future where we won't have these supply-demand imbalances and oversupply situations? Because I think just even 2 years ago, Europe was considered balanced and North America was a little oversupplied and then you have to kind of shut some capacity in North America and now because of the volume declines in Europe, wine and spirits and so on, that new capacity additions in that region is oversupplied. So is there ever a period where you envision again the capacity rationalization kind of being in line with demand growth or maybe demand growth kind of reaccelerating so we wouldn't have these issues of oversupply? I know it's kind of a longer-term question, but it seems to be the main issue here. Gordon Hardie: Yes. Look, I think we all live in a very dynamic world now with a lot of volatility. And I think over a cycle of a decade, there's also -- there'll be periods of where it's perfectly matched up and there will be periods where it's not. And then you've got to make a decision, is that a short-term mismatch? Or is it a fundamental match that's out of position where you can't make an economic return on that asset? And that's always a dynamic question in any business, I would say. We feel good about where we are in terms of our capacity, particularly in the Americas. And as John said, there's even opportunities to bring some capacity back up to fill demand for profitable volume. And where we are in Europe, we should have all of the announced capacity curtailments completed and clear of that by the half year. And I think that puts us in good stead. I can't speak for the rest of the market, but our S&Ds or supply and demand should be well in balance. And then it's about executing productivity, quality and service levels to the customer. So as you said, it's a longer-term question, but it really depends on volatility and dynamics over an extended period, yes. John Haudrich: The one thing I would add, Arun, specifically to our own plan, as you know, we did increase our Fit to Win target in the face of some additional commercial pressures, and we believe that protects our position to our targets. But that also did include a little bit of scaling up of some of the restructuring from what we originally had to be able to be nimble to that. So as we stand here right now, we believe that the Fit to Win actions are sufficient to be able to address through our horizon here, our next year's target, understanding the other extra $100 million we're dealing with this year, it is more of a temporary phenomenon with a good ability for recovery through PAFs and things like that in the future. Gordon Hardie: I think one additional kind of thought on that, Arun, is portfolio momentum is also a part of how you maximize the value of your capacity. And as opportunities arise in the market to shed unprofitable volume like we did in wine in North America in the first quarter and bring in more profitable volume -- higher margin volume, more premium volume, that's also a way of sweating your capacity much, much harder. And I think we're getting much better at that and making those calls and starting that sort of mix shift that we outlined in Investor Day as well as part of our strategy. Operator: I'll now turn the call back over to Chris Manuel for closing remarks. Christopher Manuel: Thanks, Kate. That concludes our earnings call. Please note, our second quarter call is currently scheduled for Wednesday, July 29. And remember, make it a memorable moment by choosing safe, sustainable glass. Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, and welcome to Dana Incorporated's First Quarter 2026 Financial Webcast and Conference Call. My name is Regina, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session will be recorded for replay purposes. [Operator Instructions]. At this time, I would like to begin the presentation by turning the call over to Dana's Senior Director of Investor Relations and Corporate Communications, Craig Barber. Please go ahead, Mr. Barber. Craig Barber: Thank you, and good morning. Welcome to Dana Incorporated's earnings call for the first quarter of 2026. Today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from what we discuss here today. For more details about the factors that may affect future results, please refer to our safe harbor statement found in our public filings and our reports with the SEC. I encourage you to visit our investor website where you'll find this morning's press release and presentation. As stated, today's call is being recorded, and the supporting materials are the property of Dana Incorporated. They may not be recorded, copied or rebroadcast without our written consent. With us this morning is Bruce McDonald, Dana's Chairman and Chief Executive Officer; Byron Foster, Senior Vice President and President of our Light Vehicle Systems Group and our incoming CEO; and Timothy Kraus, Senior Vice President and Chief Financial Officer. Bruce, I'll now turn the call over to you to you. R. McDonald: Okay. Thank you, Craig, and good morning, everyone, and thanks for your interest in Dana. Just maybe before we get into the slide deck, I'd just like to kind of reflect on the fact it's my last call as CEO, and I'm transitioning into the Chairman's role here now. If you look at the first quarter results, Tim, Byron and the entire Dana team, I think, have delivered another terrific quarter with the first time since I've been back, we're showing revenue growth and extremely strong year-over-year improvement in our margins. I'd also reflect on the fact that these are the first of our 30 conference calls we're going to have when we talk about our Dana 2030 plan. And I think we're off to a terrific start. And with the -- that's the $10 billion revenue bogey that we put out there and with our margins getting into the 14% to 15% range. You'll see in our deck, we've talked about winning the RAM Dakota Program. And with that award, we now have just over 60% of our growth through 2030 secured. So I think that's a great start. Anyway, I'll turn it over to Byron, and he'll take you through the highlights of the quarter. Byron Foster: Okay. Thanks, Bruce, and thanks, everyone, for joining the call this morning. As Bruce said, the team is off to a strong start to the year, and I'm excited to share a few highlights that I'll take you through on Page 4. Starting with the financial results. EBITDA margin came in at 9.2% which, as Bruce alluded to, is a great year-over-year improvement of 400 basis points. So really seeing the margin expansion come through on a year-over-year basis. In terms of share repurchases, we repurchased 4.4 million shares in the quarter, returning $125 million to our shareholders, and that keeps us on track to our target of $300 million for the year here. If you look at the program to date since we launched back in Q2 of last year, that takes us up to $775 million of value return to our shareholders and keeps us on track to our target of $2 billion through 2030. In terms of cost reductions, you'll see, as Tim takes us through the walk that the team delivered $35 million of cost reductions in the quarter, which is right on track to our target of $65 million for 2026 and a program total of $325 million. So the team remains highly focused on making sure that we remain a lean and efficient operation here. If you look at new business growth, and Bruce mentioned it in his opening comments, we were able to deliver a significant new business award in the quarter, which I'll take you through here in a couple of pages. So delivering against our commitment of profitable growth for the company. And this is right in line with what we laid out relative to our Dana 2030 strategy around profitable growth and margin expansion for the company. If you go to Page 5 in the deck, I want to take the opportunity again to thank all those that were able to spend time with us at our Capital Markets Day about a month ago. And as a quick reminder, our plan is about profitable growth in our Traditional business, our Aftermarket business as well as Applied Technologies, and it's about margin expansion through manufacturing excellence and structural cost reductions. You can see the financial targets that we've laid out and we remain committed to top line of $10 billion, which is 33% above our guide here -- the midpoint of our '26 guide, margins in the mid-double-digit 14% to 15% range, which is a 400 basis point improvement over the midpoint of this year's guide and then 6% free cash flow margins. So as we go through our journey of the Dana 2030 strategy, you will continue to hear various proof points from us as we're in front of you, giving you updates on the progress of the business. And this quarter, we'd like to give you an update on the first pillar around Traditional growth -- growth of our Traditional product lines, if you will. So if you go to Page 6, you can see the new award that -- we're proud to announce that we'll be participating on the RAM Dakota program with Stellantis, where our content will be front and rear axles. And it's really a testament to the continued performance of the team relative to world-class quality and delivery performance as well as competitiveness. It's also a great story because it leverages installed capacity that we have in place supporting the Toledo assembly complex and really leverages our core products on the ICE front. You can see that it's $250 million of annual sales, and that it will launch in early 2028. So if you flip to Page 7, just to give you a visual now of where the backlog stands. When we were last in front of you, our 3-year net new sales backlog was $750 million, which takes it up to $950 million. And that's because as the program ramps, some of that $250 million that I referenced on the previous page will fall in the 2029 time horizon. So really proud that the team continues to deliver on incremental growth in our backlog and has secured a significant new award with one of our key customers. So on Page 8, just in summary, again, what new Dana is all about. It's really about focusing on our core Light Vehicle and Commercial Vehicle markets, remaining a lean, efficient organization and ensuring that the work we've done to take cost out that, that cost remains out and that we remain efficient. It's about double-digit margin performance, and you're going to see that starting here in 2026, and you'll see that those margins increase over our 5-year planning horizon. And it's about delivering strong shareholder returns through profitable growth, margin expansion and maintaining a best-in-sector balance sheet. So great start to the year, great quarter. And with that, I'll turn it over to Tim to take us through the numbers in more detail. Timothy Kraus: Thank you, Byron. As we begin the discussion of the first quarter with the change in sales and adjusted EBITDA, you can join me on Page 10 of the deck. Starting with sales. First quarter 2026 sales were $1.868 billion, up from $1.781 billion last year. As expected, lower end market demand drove a $33 million headwind from volume and mix. Despite that backdrop, we continue to execute well across the organization, as Byron mentioned. Performance actions added $2 million due to pricing and recoveries. Tariffs contributed $48 million, primarily due to the recovery timing. Currency added $64 million, largely driven by the euro strength, while commodities provided an additional $6 million top line benefit in the quarter. Altogether, those items brought us to the $1.86 billion of sales for the first quarter of 2026. Turning to adjusted EBITDA. We started at $93 million in the first quarter of last year, a 5.2% margin and delivered a significant step-up despite slightly softer demand. Volume and mix contributed $27 million in incremental profit, reflecting favorable mix and improved profitability on new programs. Performance actions added $15 million driven by stronger operating efficiency and continued tight cost controls across all aspects of the business. Cost savings were a major driver, contributing $35 million as our cost actions continue to deliver exactly as planned and remain on pace for our full year and full program target of $325 million. Tariffs were a modest $2 million headwind to EBITDA this quarter, while currency contributed $5 million. Lastly, commodities were a $2 million headwind on a year-over-year basis. Bringing it all together, adjusted EBITDA was $171 million, representing a 9.2% margin, a 400 basis point improvement over 2025's first quarter. This was a very strong quarter from a margin and execution standpoint, demonstrating the durability of our business post divestiture and our ability to drive meaningful profitable improvement even in a softer demand environment. Next, I will turn to Slide 11 for a look at adjusted free cash flow for the quarter. First, you will note that 2025 comparisons include both continuing and discontinuing operations to be consistent with the structure of our Off-Highway transaction. In 2026, it will just be continuing operations contributing to adjusted free cash flow. On that note, adjusted free cash flow from continuing operations improved by $78 million, driven by strong operations following the completion of the sale of our Off-Highway business. Onetime costs declined by $20 million on a year-over-year basis, reflecting completion of several of our cost reduction programs and lower restructuring spend as we move past the intensive phase of our transformational initiatives. Net interest expense increased by $6 million, driven primarily by the timing of interest payments related to the debt repayment activity after the closing of the Off-Highway sale. Taxes were $6 million year-over-year headwind, reflecting timing of tax payments. Working capital was a use of $224 million, largely due to higher accounts receivable and the timing impact related to certain VAT recoveries and customer paid tooling. Finally, net capital spending was modestly lower by $3 million. Putting all these items together, adjusted free cash flow for the first quarter was a use of $195 million with higher operating profitability and lower onetime costs, partially offset by the loss of EBITDA from discontinued operations and normal first quarter working capital dynamics. Please turn with me now to Slide 12 for an update on our full year guidance for continuing operations. Our guidance ranges remain unchanged from our February call, but we now expect to be at the upper end of our ranges for sales and see a commensurate adjusted EBITDA increase. Our 2026 outlook reflects continued operational execution, accretive new business and the ongoing benefit of our cost reduction initiatives. Starting with sales, we expect 2026 revenue to be approximately $7.5 billion at the midpoint of our range. Increased backlog and the benefit of higher-margin new business are expected to largely offset a modestly softer market environment and changes in product mix. Beneficial sales mix, potential second half commercial vehicle improvement, higher tariff recoveries and currency translation will likely push us higher in our range for sales. Adjusted EBITDA is expected to be around $800 million, an increase of roughly $200 million compared with 2025. This improvement is driven by the full year run rate of our cost-saving programs, continued operating efficiency improvements and the incremental margin from new business that carries higher profitability. At the midpoint of the range, this represents an adjusted EBITDA margin of roughly 10% to 11%, an expansion of approximately 250 basis points on a year-over-year basis. Diluted adjusted EPS guidance for 2026 is expected to be about $2.50 at the midpoint. For this calculation, we're using a share count of 109 million and are not including future share repurchases in this calculation. Adjustments for EPS are similar to those in nature that we make for adjusted EBITDA. Adjusted free cash flow is expected to be around $300 million, in line with our 2025 performance. Free cash flow stability reflects disciplined working capital management, improved earnings and a normalization of capital spending as major investments over the past several years begin to taper. Our 2026 outlook demonstrates continued profit improvement driven by new business, operational efficiencies and the structural benefits of our cost actions over the past year or so. Please turn with me now to Slide 13 for the drivers of the sales and profit change for our full year guidance. Beginning with sales, volume mix remains unchanged, and we expect to reduce revenue by approximately $95 million as lower demand in Traditional markets as well as ongoing softness in Electrical Light Vehicle program's impacts our battery cooling business. We are seeing the beginnings of higher demand for North American Class 8 trucks that may benefit sales later in the year. Performance is expected to be modestly lower, reducing sales by about $30 million, reflecting more normalized pricing environment as we lap last year's commercial actions. Tariffs are expected to improve sales by roughly $50 million, largely due to the timing of recoveries. Foreign currency translation adds approximately $60 million, driven primarily by the strengthening of the euro compared to the U.S. dollar. Commodities are projected to add about $15 million in sales due to continued effectiveness of our recovery mechanisms with our customers, which recover about 75% of the average commodity pricing changes. As we experienced in the first quarter, foreign currencies have remained strong against the dollar so far this year. If that trend continues, we will likely see a benefit to sales from currency translation above what is shown here. Altogether, these drivers result in 2026 sales of approximately $7.5 billion, in line with prior year levels. Turning to adjusted EBITDA, starting from the $610 million in 2025, representing an 8.1% margin. Volume and mix is expected to add approximately $20 million in EBITDA. Favorable mix within our businesses will drive higher profit on slightly lower sales. Performance is expected to increase EBITDA by roughly $100 million, largely from pricing improvements and continued operating efficiency. And please note, we still expect to eliminate about $40 million of post-divestiture stranded costs, which is included within this $100 million number. Cost savings in addition to the stranded cost reduction remain a meaningful contributor, adding $65 million in profit in the year. Tariffs are expected to be a $10 million tailwind due to timing on recoveries. Commodity costs is expected to represent a $15 million headwind driven by timing differences in recoveries and expected material cost changes. All combined, adjusted EBITDA for 2026 is expected to be approximately $800 million at the midpoint of our range or approximately 10.6% margin, representing an improvement of roughly 250 basis points over 2025. Next, I will turn to Slide 14 for details of adjusted free cash flow outlook for 2026. Our adjusted free cash flow also remains unchanged. As I discussed during the first quarter review, full year 2025 included cash flow from discontinued operations that will not continue in 2026. Even without the contribution from discontinued operations, we expect full year 2026 adjusted free cash flow to be about $300 million at the midpoint of the guidance range. Onetime costs will be about $30 million lower than last year or about $40 million due to fewer strategic actions. Net interest will be about $70 million in 2026, about $95 million lower than last year due to our aggressive debt reduction actions completed in January. Taxes will be about $100 million, about $75 million lower than 2025 due to lower taxable income and the jurisdictional distribution of profits. Working capital will be a source of $25 million in 2026, a $40 million improvement over last year. And net capital spending is expected to be about $325 million this year, which is about $70 million higher than last year as we invest in efficiency improvements in our operations and support our new business backlog. Please note that we expect to utilize a portion of the proceeds of our Off-Highway transaction to buy out some facility leases. A portion of that buyout will flow through capital spending, but we are excluding it here as we have excluded the proceeds from our Off-Highway sale as well. These transactions will likely occur in the second quarter. Please turn with me now to Slide 15 for an updated look at our sales growth and 2030 targets. As both Byron and Bruce mentioned, we look -- this slide will likely look familiar. We really walked through this framework at our Capital Markets Day back in March. What you're seeing here is the same underlying road map to the $10 billion in sales by 2030, but we've updated today to reflect the recently secured new business win Byron mentioned. As a result, we've improved both the timing and quality of our backlog. Approximately $200 million that we had previously shown as future sales growth has moved from the additional backlog column into the 2028 backlog category, increasing our near-term visibility of our sales growth. In addition, $50 million has moved from nonsecured backlog into the secured backlog, further strengthening the outlook for our business. Importantly, this does not change the overall road map we laid out in March. We still see $2.5 billion of organic sales growth through 2030, supporting a roughly 6% compounded annual growth rate, driven by now larger secured backlog, commercial vehicle market recovery, share gains and continued growth in Aftermarket and our pursuit of Applied Technologies. The update here reinforces execution, converting opportunities into profitable sales and gives us even greater confidence in delivering the growth trajectory we outlined in March. Please turn to Slide 16 for a brief reminder of our Dana 2030 strategy. I will end my remarks by reminding everyone of the key elements of our Dana 2030 strategy, which we laid out at our Capital Markets Day last month. The strategy is centered around above-market growth supported by new business wins, delivering 6% growth -- compounded annual growth in sales, 17% compounded annual growth in adjusted EBITDA and 11% compounded annual growth in free cash flow through 2030. Underpinning that growth is a fundamental improvement in our operations, driven by structural cost reductions, manufacturing excellence and a disciplined focus on the right mix of Traditional products, Aftermarket and Applied Technologies, all aimed at achieving top quartile margins. At the same time, we're focused on accelerating free cash flow generation with free cash flow expected to grow from roughly $300 million today to $600 million by 2030 and deploying that cash in ways that consistently increase shareholder value. Importantly, the targets remain unchanged, approximately $10 billion of revenue by 2030, 14% to 15% adjusted EBITDA margins and around 6% free cash flow margin, which we believe position Dana for sustained value creation and multiple expansion over the long term. We are off to a great start to achieve them and intend to continue to execute strongly throughout this year and the years to come. Thank you, and I will now turn the call back over to Regina for any questions. Operator: [Operator Instructions] Our first question comes from the line of Tom Narayan with RBC Capital Markets. Gautam Narayan: Tim, I wanted to get back to that Slide 15 that you were talking about, the one that we saw at the Capital Markets Day. Just trying to understand like how do we think about those green buckets, the $1 billion worth, Traditional, Aftermarket, Applied Technology. I know Aftermarket, you said there's market share gains in there. I mean, what -- like is the Traditional product, is that kind of the easier to get and then it kind of gets harder to get as we go down that chain Aftermarket and then Applied Technology is the hardest to get? Like just trying to -- and also the cadence of what you could get sooner rather than later as we get to 2030. Just trying to understand as we get trying to get proof points and converting those greens to blues? Timothy Kraus: Yes. Tom, thanks for the question. It's a good one. So yes, I think the way to think about this, the $400 million in Traditional products, that's probably -- think about it as, hey, it's our current products. We're gaining share. We're able to sell those. I mean, to some respect, when you think about the Dakota program, we're using an existing plant. It's our core technology that's able to be applied at a very good incremental margin. That's obviously sitting in backlog. But you can think about that with our Traditional products. That also does include Traditional products that is some EV as well because we have obviously a very good portfolio of EV products that we can sell that need minimal amounts of application engineering, off-the-shelf products that we can continue to sell to the OEMs. If you think through Aftermarket, we continue to work on growing our Aftermarket share. As we mentioned at the -- or as Brian mentioned at the Capital Markets Day, we have 30% or 35% market share when you think about our gasket business in Europe, and we have less than 5% in North America. We do believe and are making really good strides to deliver increases in our Aftermarket business, especially around sealing. And I think as we move through the next couple of quarters, we'll be able to share some more there, which will probably give you some more comfort around how we're going to fill that up. But we have very, very strong conviction in our ability to deliver that $200 million over the next 3 or 4 years. The last is Applied Technologies. So that's clearly the one where we're taking current -- our current technologies and developing products for new markets. Now if you think about that, some of those are in defense, where we're taking largely off-the-shelf commercial vehicle, even some light vehicle products and adapting them for use from a defense. Same would be true in powersports. So I think while that one probably has maybe a little bit longer tail, we are making, again, very strong inroads. We're receiving a lot of really inbound interest in a lot of these products from various customers, and we'll be able to share that too. And Byron, you've got a comment there? Byron Foster: I was just going to add on the powersports side, as an example, we've gotten over $200 million of RFQ opportunities in front of us. We're having workshops with the key players in that space. And they're really looking for kind of the automotive quality off-the-shelf product that we can bring to improve the performance of their vehicles. And so to Tim's point, we're expecting that those opportunities will begin to convert for us and launch kind of in the '28 time frame. And we look forward to kind of giving you some more proof points as those become reality for us. But we feel really good about the progress so far. Timothy Kraus: Yes. And look, we're going to -- what we just laid out here with the Dakota pickup truck win, we'll keep updating the schedule and moving those buckets from green to blue and showing you as we fill it up. Gautam Narayan: Got it. If I could just do a quick follow-up on the '26 guidance. I guess IHS numbers came down after you guys gave this guidance at the end of Q4. And now you're raising your guidance effectively. So just curious like -- so I mean, obviously, your revised guidance incorporates the weaker Light Vehicle production. Is that right? Timothy Kraus: Yes. I mean, obviously, we have to look at our specific programs when we think through that. But we have -- we're confident in where we're at today, and we do think there's opportunity, especially in the commercial vehicle side in the back half of the year. I mean we did see some softness in Commercial Vehicle in the first quarter, especially in Brazil, but we do -- we are watching that closely as we move through the year. But largely, we do see upside on the top line from CV. And as I mentioned, also from currency when you look at our first quarter, I think we printed $65 million in currency up. And so there's probably upside in currency as well from a top line perspective. Operator: Our next question will come from the line of Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: Curious if you could give us some sense of cadence for the earnings improvement throughout the year going from the 9.2% margin this quarter to like the 10.6% at midpoint for the full year. I think the biggest driver seems to be continued cost performance and cost savings, but just curious if there's any specific cadence or seasonality to that? Timothy Kraus: Yes. As usual, Emmanuel, typically second and third are our stronger quarters and then tails off a little bit in the fourth quarter, just given the production schedule. I would think that's probably how we can see it here. We're probably a little more weighted to third quarter just given the timing on some of the performance improvements. But generally, you can think about it the way we generally do, but probably more weighted in the third than the second. But we should see an improvement in margin as we march through the 2 middle quarters of the year. Emmanuel Rosner: Okay. And then on the Light Vehicle sales, so I guess, another -- or I guess, performance yet, another quarter of sort of like negative volume mix at the top line, but obviously, pretty solid sort of like at the bottom line. I think you flagged against sort of product mix. Can you just remind us what exactly is going on in there as well as for the full year? Timothy Kraus: Yes. So there's a couple of things in there. We've -- some of it is pricing around EV. So we've been very successful in getting pricing on EV products despite -- because of the lower volumes. So you're seeing lower volumes, but better pricing and better profitability coming through that. And then as we start to turn over some of these programs, we tend to have better profitability on them. So we're seeing refreshed and new programs coming through on that, which is essentially giving us despite a little bit softer on the volume, a much better conversion on the profitability. Brian, I don't know if you have anything else to add? Brian Pour: Yes, no. You hit it. Operator: Our next question will come from the line of James Picariello with BNP Paribas. James Picariello: Just a clarification question first, and I don't know if I only get one question or a follow-on. But operating cash flow is cited in the press release at $156 million use of cash for the quarter. And then if we just bridge that against the adjusted free cash flow, right, that would imply $39 million in CapEx, but the slide deck refers to $61 million in CapEx. So apologies if I missed the clarification on that, but... Timothy Kraus: Yes, it's just some of the adjustments. And we'll -- when we file the Q, we'll give you the full breakdown, but some of it has to do with how we're classifying some of the -- we still have some onetime costs coming through from the transaction. But we can help you clean that up when we give you the [ walks ]. James Picariello: Okay. And then just any order of magnitude on the operating lease buyouts that I think you said have a second quarter time frame? Timothy Kraus: Yes. There'll certainly be -- I mean, we're still in negotiations on some of these, but it certainly is -- it's tens and tens of millions of dollars as we go through. But I don't want to get too far ahead given we're in the midst of negotiating some of this stuff. But it's a sizable number. And it's some of the plants that we've -- when we were a bit constrained around capital that we ended up leasing. But from our view, it's -- these are facilities we should own because they're core facilities. And again, we're using the proceeds from the off-highway sale, which was our intention to pay for this. R. McDonald: Yes. It's probably also just worth noting, this is like a onetime catch-up. We've gone through and said, "Hey, our core manufacturing facilities, we should own, not lease," and there's a handful that we lease, and this is a onetime adjustment using our cash to clean it up. Operator: Our next question will come from the line of Joe Spak with UBS. Joseph Spak: I wanted to talk a little bit about how you're thinking about the incremental margins on the backlog because you've mentioned in the past, you're getting some higher-margin categories here. And then even on this Dakota win, you clearly called out utilizing existing capacity, minimal capital investment. So it seems like could come on pretty strongly. And I just wondered if you could elaborate on that? Byron Foster: Yes, for sure. I mean I think the Dakota win is a great example where we've got a pretty substantial footprint today supplying the Wrangler and Gladiator. And so this program will drop basically right into that footprint for both the final assembly as well as our component plant. So our ability to leverage all the fixed cost that's in place for those plants should deliver very strong contribution margin on the incremental sales here. Timothy Kraus: Yes. But Joe, don't forget our customer also knows that as well. So keep that in mind. The customer knows where we're going to assemble and what we have. So -- but we would agree the new programs -- and don't forget, as we move through the product life cycle, they tend to get less profitable over time given some of the givebacks and whatnot. So that's part of it as well. But I agree, they should come on at good margins for us. Joseph Spak: Okay. And then just one quick one on the guidance. I know -- I'm just curious about the Commercial Vehicle market view actually, which is still flat even though I think there's views out there that, that could be up now this year. So I just want to be sure, you're saying you're trending to the high end even with a flattish commercial vehicle environment and then a decent growth there... Timothy Kraus: No, Joe, that includes some thought around the Commercial Vehicle market. Don't forget, it's North American Class 8. And -- but at the same time, we have a pretty sizable medium-duty business and medium-duty business is still flat, it's soft, it's actually a little down. So our mix is a little bit different. And then it's mostly line haul, which we have -- again, we don't have as large a representation as the overall market. So those are why we're still seeing -- we're being a little bit more cautious. But certainly, we're starting to see those back half. So -- and then, of course, our South American business was weak in the first quarter, and we got to keep an eye on that as well. Operator: Our next question will come from the line of Colin Langan with Wells Fargo. Colin Langan: Just unusual question, I guess, but why not delay the earnings call until you have sort of more full financials? Usually, it's sort of unusual that we don't have like it's actually less information than the Q4 release. What is the thought process there? It just seems unusual to me, I guess, maybe as a former accounts... Timothy Kraus: Colin, I think we would agree. We would like to be here with our usual cadence of filing the Q this afternoon. We just continue to work through all the aspects of the transaction and tariffs and the like. And so we already had this scheduled, and so we wanted to make sure we got the information out on sales and EBITDA on our normal schedule. So agree. I think you see us in the second quarter, we'll be back to our normal cadence. Colin Langan: Got it. Okay. And then if I look at Slide 13 with the full year guidance, everything is identical to Q4, yet we've had S&Ps lowered, raw material has been all over the place, FX moved all over the place. Is really everything not changed? Or is just you're trying to signal that nothing has materially changed from what you had last? Timothy Kraus: Yes. I think what we're saying is, hey, we're still inside of our range. We're probably trending to the upper end of the range, driven by potentially some upside in CV and then a bit higher tariff and currency will -- if you just look, we're at $60 million. I think we [ printed $65 million ] in the quarter. So you just trend that, we would -- currency alone would drive us to the upper end. We did -- like when you think about the business itself, those are the drivers taking us to the higher end of the range. So we're still in the range of what we gave. And so we didn't go and kind of mix through the buckets. But we feel like there -- we'll likely be at the upper end of the range. Colin Langan: Okay. You mentioned tariffs in there. So Commercial Vehicle is better, currency is better. And then what is the tariff change? Timothy Kraus: Maybe tariff wise, just some of the timing and the recoveries around tariff, maybe a little bit higher than what we have here. Operator: Our next question will come from the line of James Mulholland with Deutsche Bank. James Mulholland: Just as a quick follow-up on the Commercial Vehicle market. You've talked about some recovery in North America and South America. But conversely, has there been any discussion or concerns about the higher energy prices could impact any recovery we might be seeing in Europe's production? Have orders seen any improvement? It sounds like the truckers earlier today and last week came out, they sounded pretty positive. But any color that you could give there would be great. And then I have a follow-up. Timothy Kraus: Yes. No, I mean our European CV business is relatively modest. So we don't see it being overly impacted or any softness there overly impacting our overall results or our view of the way the year will come. James Mulholland: Okay. And then I guess just looking at your walk for the rest of the year, as you think about, I guess, call it, $125 million of performance and cost savings, excluding the stranded cost, do either segments have more room to run there? Or are the savings going to be generally proportional. And then from a cadence standpoint, should we think about it as relatively steady or really back half weighted? Timothy Kraus: So on the performance, it generally sized to the size of the business. So you can -- it will follow generally that split. And I'm sorry, your second piece of that question? James Mulholland: It was just on the cadence. I know I think you mentioned what Emmanuel asked earlier that there could be some -- a little bit more in the third quarter. So should we think of it as more back half weighted just in general? Timothy Kraus: Yes. I mean, yes, but I think in general, we're in the middle 2 quarters will be better. I mean our fourth quarter, just given production schedules and the holidays, it generally is a softer quarter. But I think if you think about our middle 2 quarters being generally our best 2 performing quarters, that's probably more weighted to the third than the second given what our historical performance has been in those. But I don't know that I'd say it's absolutely back half, but because of the way fourth quarter generally runs. Operator: Our final question comes from the line of Dan Levy with Barclays. Dan Levy: Maybe we could just double-click on the commodity exposure, which you maintained a headwind of $15 million on the EBITDA line. And so I know that you have indexing in place and you're more exposed on steel, which hasn't moved as much. But maybe you could just talk about broadly what you've been seeing on the inflationary side, your exposure to things like aluminum or freight or other oil-based exposures that -- is there any risk that on the inflationary or raw mat side that, that could be something that deteriorates? Timothy Kraus: I mean I think we're obviously watching it closely. We're continuing to see what happens. Obviously, oil impacts a lot because it goes into -- even if it's only transportation, everything that we buy. I think from us, if anything, it's a timing issue based on when the costs come through and when we get the recoveries because we're on a lag for most of these indexed programs. But we're watching it. I don't -- right now, we don't see it as a big potential issue for us. We'll continue to work through it. I think if you look through over the last few years, the recovery mechanisms we have in our contracts with our customers have worked very, very well. And we continue to have those dialogues with our customers to make sure we're in front of it. Dan Levy: And for some of the inputs like the oil or transport or freight where you're probably not indexed, I assume the mechanism is such that this would just be part of normal course commercial discussions with your customers and you have confidence that you would get fully reimbursed on the inflation over time? Byron Foster: Yes, that's right. That's exactly how it will work. And we've been through this cycle before. So we'd be in front of our customers working through recovery mechanisms for those items. Dan Levy: Okay. Just as a follow-up, you talked about earlier the volume mix benefit really reflect some of the EV pricing. We're seeing a number of the automakers put out in these large impairment numbers, which reflect payments to suppliers. Maybe you could just unpack, are the benefits you're seeing within volume mix on EV pricing, are these onetime benefits? Or is this a structural repricing of the contract such that you don't see any reversal in subsequent years beyond this year? Timothy Kraus: It's generally the latter. For ongoing programs, we're getting pricing that comes through over the course of the program. Byron Foster: Okay. With that, we're going to close the call. I want to thank you again for attending our call. Thanks for the questions and continued interest in Dana and the Dana 2030 plan. I do want to take the opportunity to thank Bruce for his leadership as our CEO -- Chairman and CEO, and we look forward to continuing to partner and work closely together with Bruce in his role as Chairman going forward. And I also want to take the opportunity to thank our customers and the Dana team for delivering a great quarter and a great start to the year. Have a great rest of the day, and we'll talk to you soon. Operator: This concludes today's call. Thank you all for joining. You may now disconnect.
Operator: I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Commercial Real Estate Finance, Inc. and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections. In addition, we will be discussing certain non-GAAP measures on this call, which management believes are relevant to assessing the company's financial performance. These measures are reconciled to the GAAP figures in our earnings presentation, which is available in the Stockholders section of our website. We do not undertake any obligation to update our forward-looking statements or projections unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apollocref.com or call us at (212) 515-3200. At this time, I'd like to turn the call over to the company's Chief Executive Officer, Stuart Rothstein. Stuart Rothstein: Thank you, operator. Good morning, and thank you for joining us on the Apollo Commercial Real Estate Finance, Inc. First Quarter 2026 Earnings Call. I am joined today by Anastasia Mironova, our Chief Financial Officer; and Scott Weiner, Chief Investment Officer. This call comes at a pivotal moment for ARI. As previously announced, we completed the sale of the company's $9 billion loan portfolio to Athene on April 24. Following repayment of ARI's financing facilities, other indebtedness and transaction expenses, ARI's total assets now consist of approximately $1.3 billion of cash, along with 4 REO assets representing approximately $900 million in gross value. The sale delivered ARI stockholders a compelling premium to where the stock has traded in recent years, and we believe this outcome demonstrates our unwavering commitment to maximizing stockholder value. As previously indicated, ARI's management team, Board of Directors and other senior investment professionals at Apollo are in process of evaluating a range of commercial real estate-related strategies for ARI with the goal to deliver attractive, go-forward returns for stockholders. We have spent a significant amount of time since the announcement at the end of January, exploring different strategies and speaking with bankers and other industry experts. We anticipate having an update on the strategy exploration in the coming months. Shifting now to a brief update on the 4 remaining REO assets. As a reminder, 2 assets, the Brook, a multifamily asset in Brooklyn and the Mayflower Hotel in Washington, D.C. represent approximately 80% of the REO net equity value. At the Brook, the market rate residential component is approximately 80% leased and affordable units are approximately 70% leased, with 95% of units selected. Both components are expected to reach stabilization by this summer. We continue to monitor the market and think through the appropriate exit strategy, either pre- or post-stabilization while continuing efforts to add value to the Western parcel. With respect to the 2 hotels, the Mayflower had a strong first quarter, with net cash flow well ahead of budget, driven by margin improvements and higher occupancy. We see opportunity for continued improvement in year-over-year performance and subject to market conditions, we expect more clarity on exit strategy in the second half of the year. Turning to the Courtland Grand. First quarter performance was below budget due to broader market softness, though we expect business interruption insurance from the offline units and the benefit from the upcoming soccer World Cup over the summer to bring full year performance in line with our expectations. We are in active dialogue with several potential buyers regarding alternative uses as we think through potential exit strategies. Lastly, for the 2 remaining former hospital assets, which combined represent approximately $24 million of book value, we are actively engaged in rezoning efforts and in dialogue with local operating partners to determine optimal exit scenarios. Before I turn the call over to Anastasia, in anticipation of a question, I just want to provide an update on dividend policy going forward. Consistent with past practice, declaration of any dividends will remain subject to the approval of the Board of Directors, and we will announce the second quarter dividend a few weeks prior to the end of the quarter as per the customary schedule. As we disclosed at the time of the original announcement of the loan sale, ARI intends to continue paying a quarterly dividend as we assess strategic opportunities. We also previously indicated a target dividend resulting in approximately an 8% annualized dividend yield on book value per share of common stock. The goal and target remain intact. It is worth noting that given the cash balance held at ARI and the desire to invest that cash conservatively while evaluating strategic options, any dividends declared for future quarters likely will contain a significant return of capital component. With that, I will turn the call over to Anastasia to work through our first -- to walk through our first quarter financial results. Anastasia Mironova: Thank you, Stuart. Good morning, everyone. For the first quarter of 2026, ARI reported net income available to common stockholders of $23 million or $0.16 per diluted share of common stock. Distributable earnings for the quarter were $31 million or $0.22 per diluted share. Net interest income for Q1 2026 was $36 million compared to $39 million in Q1 2025. Interest income from commercial mortgage loans increased modestly to $150 million from $144 million due primarily to loan portfolio growth of about $1.2 billion on amortized cost basis compared to March 31, 2025, outweighing the impact of lower average index rates. Interest expense increased to $114 million from $105 million, reflecting higher average secured debt balances associated with portfolio fundings compared to last year. Throughout the quarter, we opportunistically repurchased approximately 2.9 million shares of common stock at a weighted average purchase price of $10.52 per share. Following the quarter end, we repurchased an additional 3.9 million shares at a weighted average price of $10.72, bringing total repurchases year-to-date to approximately 6.8 million shares. This activity resulted in $0.07 of book value per share accretion year-to-date with $0.03 in Q1 and $0.04 in Q2 to date. In April, our Board of Directors has authorized a new share repurchase program, and we now have up to a total of $150 million available for the repurchase of common stock. Common equity book value per share was $12.01 at March 31 compared to $12.14 at the end of Q4 2025, with $0.10 of the decrease attributable to the impact of vesting and delivery of restricted stock units, the trend typically observed during the first quarter of the year. Pro forma book value per share at the closing of the portfolio sale without giving effect to real estate owned quarter-to-date activity and certain quarterly accruals is $12.15, reflecting reversal of general CECL allowance in excess of discounts and closing costs for the portfolio sale as well as accretion from the share repurchases, as referenced earlier. Turning now to the portfolio sales. I want to highlight a few key points from the transaction. In addition to repaying our secured borrowing facilities, we have fully repaid the outstanding balance of our Term Loan B and deposited funds to satisfy and discharge our senior secured notes, which will be redeemed at par on or about June 15. As Stuart indicated, our balance sheet is now predominantly represented with cash and net equity in our real estate owned assets. The only commercial mortgage loan currently remaining on our balance sheet is the loan secured by a hotel property in Chicago, which remains on nonaccrual status. The loan has an amortized cost basis of $42 million and an upcoming maturity in May, at which point we expect it to be repaid through the sale of the underlying property, the purchase agreement for which was executed during Q1 with hard money deposits received by the sponsor. With that, I will open the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from Jade Rahmani with KBW. Jade Rahmani: Could you comment on the rationale to be buying back stock at this point in advance of the strategic review? It's reasonable to expect that capital could be needed to consummate an acquisition or some transaction. And so I'm just curious about your thoughts on that. Stuart Rothstein: Yes. I think from our perspective, Jade, look, we obviously, in light of the sale and what's left in the portfolio, have significant confidence in where the book value per share is today. And as we think about using some amount of capital to buy back stock, I would say the amount that we're using to buy back stock is not material as we think about having any impact on our options to do something strategically with the remaining capital in the vehicle. Jade Rahmani: And then regarding the strategic review, just wondering if you could comment on asset classes or give any broad commentary as to how your thinking is evolving. I noticed that Blackstone is planning to IPO a data center REIT and wondering if that type of construction could be similar to something you might explore. Stuart Rothstein: I'm not going to give any specific comments on asset types. I guess what I would say is a few clarifying comments. While the agreement we announced several months ago indicated we had until the end of this year to decide the strategic path we were headed in, I think it's safe to say I don't envision a scenario where we are sitting here until the end of the year and making a grand announcement. I think there will be meaningful progress made in the next few months and significant clarity provided the next time we are speaking to all of you, if not sooner. The other thing I would say is, as we think about strategic alternatives, our view fundamentally is we have created $12 a share of value in the ARI box. And anything we would think about doing strategically needs to be done with us having full confidence that what we are considering/pursuing will create more than the current book value per share for shareholders. Operator: Our next question comes from Rick Shane with JPMorgan. Richard Shane: Look, it sounds like we'll have additional clarity within the next 3 months. And for now, you guys are sitting on a lot of cash. You talked about sort of doing something in the near term to invest that cash. How should we think about that? Is this -- are you -- how much flexibility do you have? Does it have to be, for example, CMBS given the mandate of the company? Can you invest in agency mortgage-backed securities and mitigate credit risk, but take on some duration risk? Is this just going to be a treasury portfolio? How do we think about the asset class and potentially the leverage that you would take given some of the facets of those different asset classes or loan types? Anastasia Mironova: Rick, this is Anastasia. So maybe to start with the first part of your question, CMBS, agency securities, all of these are typically good REIT assets, CRE CLOs, maybe not good REIT assets, but there are structures which could allow us to invest in those if we wanted to. And other than that, we have a number -- more than a handful at this point of high-yielding deposit accounts, which are providing us a pretty attractive yield. So that's an option as well. Richard Shane: And is the REIT test based upon the average over the quarter? Or is it actually based simply on 6/30. So can you -- do you have flexibility intra-quarter and then can be in compliance at the very end of the quarter to meet your obligations? Anastasia Mironova: Technically, the asset test is as of the quarter end. There is also an income test, which is on an annual basis. Richard Shane: Got it. Okay. And what about leverage on any of those different classes? Anastasia Mironova: No leverage as we envision to date. Stuart Rothstein: I mean, to be simple, like it's not about return, Rick. It's about making sure the cash is there if we go down any of the strategic paths we're considering. We don't want to put any of the capital at risk today for market movements that sometimes occur. Operator: [Operator Instructions] Our next question comes from Jade Rahmani with KBW. Jade Rahmani: Just wanted to ask about the REO resolution paths and how that interacts with the strategic review because let's just say the strategic review did not come up with a definitive strategy in which you were confident that new company would trade above $12 a share and you decide to return the money. Would you look to bulk sale the REO portfolio or put that in a liquidating trust? Just wanted to get some color you might provide on that. Stuart Rothstein: Yes, nothing set in stone today, Jade, but I think more likely the latter, which would be we'd want to give ourselves the time to make sure we maximize the value of each of the four REO assets, and that is probably more likely some form of liquidating trust as opposed to just a bulk sale, which might have some sort of discount attached to it. Jade Rahmani: And then if I could ask a follow-up just broadly about the macro picture with the 10-year today now at 4.4% and the mortgage REITs down 3% to 5% today, including ARI, which had an unsurprising quarter, in fact, a positive quarter. So what are your thoughts about the interest rate outlook and how that might complicate either the strategic review or equity return calculations in real estate? Stuart Rothstein: Well, first of all, I think you just validated your own initial question on share repurchase for ARI, given what's going on in the market today. Look, I think it's something -- historically, we've not been -- spent a ton of time trying to predict interest rate markets and try to think about value through cycles vis-a-vis interest rates. But I do think, given the uncertainty in the market today, when we've created effectively a capital box that is mostly cash right now, I would say it just has implications as higher rates, inflation, potential impacts on employment, all factor into thinking about future strategies versus the value of what we've created for people and at some point, deciding we're better served to let others decide what they want to do with their capital in the future. Operator: Thank you. I would now like to turn the call back over to Stuart Rothstein for any closing remarks. Stuart Rothstein: Thank you, operator. And as always, myself, Anastasia, Hilary are around if people have follow-up questions after the call. Thank you. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to the Navient First Quarter 2026 Earnings Conference Call. This call is being recorded. [Operator Instructions]. At this time, I will turn the call over to Jen Earyes, Head of Investor Relations. Jen Earyes: Hello, good morning, and welcome to Navient's earnings call for the first quarter of 2026. With me today are David Yowan, Navient's CEO; and Steve Hauber, Navient's CFO. After the prepared remarks, we will open up the call for questions. Today's discussion is accompanied by a presentation, which you can find on navient.com/investors. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results, description of our non-GAAP financial measures and a reconciliation of core earnings to GAAP results can be found in Navient's first quarter 2026 earnings release, which is posted on our website. Thank you. And now I will turn the call over to Dave. David L. Yowan: Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. This morning, we reported Q1 results that demonstrate continued momentum in our ability to deliver high-quality loan growth while maintaining expense discipline. Our reported results are in line with the full year outlook we provided in January, and that's a strong start towards achieving those targets. Overall, this quarter reinforces the strength of our platform, driving consistent growth, improving efficiency and delivering strong credit performance. Total originations grew over 60% year-over-year. Refinance loan originations grew 65% year-over-year, marking our 10th consecutive quarter of growth, driven by continued strength in demand generation and our ability to capture that demand. At the same time, we're seeing that volume growth come through more efficiently as we scale our loan production. Marketing and other operating costs continue to improve as a percentage of originations. Thirdly, credit quality strengthened with Q1 refi originations having an average FICO of 775. We're seeing continued strength in demand from borrowers with established credit and employment histories. Together, these outcomes demonstrate the effectiveness and scalability of our platform, enabling us to grow efficiently while delivering stronger credit performance. In-school lending had a solid quarter, originating $40 million of new loans with strong credit quality and margins. This performance and the peak season preparation we are doing increases our confidence in capturing the on-strategy opportunities in graduate lending contained in our outlook. Operating expense levels compared to the year ago period reflect the actions we've taken to eliminate costs and significantly reduce our expense base. With the Phase 1 strategic actions in our rearview mirror, the final expenses associated with our wind-down activities were incurred this quarter. We saw sequential improvement in credit performance across all of our private portfolios. Delinquency rates in private legacy improved from year-end, but continue to run above long-term historical trends. Steve will take you through these and other parts of our results in greater detail in a few minutes. We repurchased $23 million of shares during the quarter as we view the share price that prevailed for the quarter as an opportunity to repurchase shares at a greater discount to book value. We are mindful of a more volatile macro and geopolitical environment and are monitoring it closely. We have the flexibility to adjust quickly as and if conditions evolve. The successful completion of the strategic initiatives and the accompanying expense reduction targets that were announced in January 2024 are a natural time for me to step out of the CEO role. Ed Bramson will step into the CEO role in a few weeks' time. I'm proud of what's been achieved and grateful for the commitment of the many colleagues who accomplished it. The actions we have completed create the foundation for a more strategically focused, flexible and efficient organization to support future growth. Ed has been heavily involved in the development of our strategies and initiatives. I look forward to continuing to guide and support management as I remain on the Board. With that, I will turn it over to Steve, who will provide more detail on Q1 results. Stephen Hauber: Thank you, Dave, and thanks to everyone for joining today's call. As Dave highlighted, our results for the quarter were in line with our 2026 outlook and included strong contributions across the business. I'll provide additional detail on first quarter results, beginning on Slide 3. In the first quarter, we recognized core earnings per share of $0.20. We delivered these results while driving strong originations growth and maintaining strict expense discipline. Credit trends also improved with lower delinquency rates across our private and FFELP portfolios. Turning to Slide 4. Earnest continued its robust refinance loan origination growth in the first quarter. Refinance originations were $778 million, up 65% year-over-year and on pace with our 2026 target. We drove this growth through strong demand generation and engagement with rate check volume up 62% year-over-year. We are also seeing continued strength in credit with new loan average FICO increasing to 775, underscoring the quality of borrowers we are attracting. Slide 5 highlights our in-school lending growth. In-school originations were $40 million in the first quarter, consistent with our plan. We are well positioned for the upcoming peak season and the expected expansion of the in-school graduate addressable market, a customer segment that we know well. Slide 6 provides our Consumer Lending segment results. First quarter net income was $35 million, reflecting the mix shift toward more refi loans in the portfolio and the impact of rate changes from different index resets across the segment's assets and debt. That same mix shift also drove net growth in our private portfolio with outstanding balances increasing approximately $200 million quarter-over-quarter as refi and in-school originations outpaced portfolio paydowns. Consumer lending expenses in the first quarter were $39 million. This represents a $4 million increase compared to the prior year quarter, primarily reflecting marketing and other expenses associated with the growth of our lending businesses. Credit trends were favorable in the quarter with private charge-off rates declining from 2.26% in the fourth quarter to 1.91% in the first quarter. Delinquency rates also improved quarter-over-quarter with 31-plus day delinquency rates decreasing from 6.3% to 5.5% and 91-plus day delinquencies decreasing from 2.9% to 2.5%. We recorded a provision of $18 million in the first quarter, $11 million of which was related to new originations. While the improvement in year-to-date credit performance is encouraging, private legacy delinquency and charge-off rates continue to run above our longer-term historical levels. Federal Education Loan segment results are on Slide 7. First quarter net income was $22 million, slightly down from $24 million a year ago. Portfolio paydown reduced net interest income by $3 million, which is offset by a $3 million reduction in expenses. This offset highlights the impact of our cost reduction efforts, including the variable cost benefits from outsourcing servicing. Provision in the Federal segment in the first quarter was $9 million, and the net charge-off rate increased to 29 basis points. These largely reflect loans to borrowers affected by 2024 natural disasters that were written off in the first quarter. The bulk of the impact from this cohort is now behind us and delinquency rates improved significantly during the quarter. The 31-day plus delinquency rate improved from 17.5% to 15.2%, while the 91-day plus delinquency rate improved from 10.0% to 8.5%. The allowance for loan loss, excluding expected future recoveries on previously charged-off loans for our entire loan portfolio is $645 million, which is highlighted on Slide 8. Operating expense results are on Slide 9. First quarter total core operating expenses were $89 million, a 30% improvement compared to the first quarter of 2025. First quarter expenses were consistent with our plan for the quarter and the $350 million expense outlook for the year. Capital allocation and financing activity is highlighted on Slide 10. In the first quarter, we completed our first securitization of the year, $683 million in bonds backed by high-quality recently originated refinanced loans. We continue to see strong investor demand for our refi-backed notes, and we are achieving attractive pricing and a high effective cash advance rate. Additionally, last week, we priced our first in-school securitization of the year. The $550 million transaction was significantly oversubscribed, executed at favorable pricing and will release warehouse capacity in advance of our peak in-school lending season. The strong investor reception on both our refinance and in-school deals demonstrates investor confidence in the quality of the assets we are generating. The in-school transaction underscores the resilience of our funding programs to provide cost-effective financings in uncertain market conditions. Turning to our cash and capital positions. We have ample capacity to invest in attractive loan originations and distribute capital. In the first quarter, we repurchased 2.3 million shares at an average price of $9.91 as our shares remain significantly below tangible book value. In total, we returned $38 million to shareholders through share repurchases and dividends. Our adjusted tangible equity ratio remained above our long-term target at 8.9% and demonstrates our commitment to a strong and resilient balance sheet. In summary, our first quarter performance was a solid start to 2026 and keeps us on track with our outlook for the year. While we remain mindful of macro and geopolitical volatility, we are encouraged by the progress we're making and the momentum we are building as we execute on the opportunities ahead. As I wrap up, I want to thank the Navient team for their contributions this quarter and their continued dedication throughout our strategic transformation. Thank you for your time, and I'll now open the call for questions. Operator: [Operator Instructions]. We'll take our first question from Bill Ryan with Seaport Research Partners. William Ryan: First question just related to the credit numbers that you highlighted in the prepared remarks. You had very nice improvement in the private portfolio. I think it was down 80 basis points in delinquencies quarter-over-quarter, 90 basis points year-over-year. Yet you also kind of talked about it still kind of underperforming relative to past patterns. So are we now at a new base level at which we could expect to see normal seasonal credit trends develop? Or do you think there's additional room for at least some improvement from this point forward? And the second part of that related to it is, does the provision or the allowance level today capture sort of the underperformance that you're currently seeing? And I have one follow-up. Stephen Hauber: On the first question, right, we did see significant improvement in delinquencies across our portfolios. We are still above our historical levels as well as we do believe there -- we will see future improvement, so continued improvement along the lines of what we saw in the first quarter. So we are not at kind of the level that we expect to be -- we expect further improvement from this point forward. In terms of the reserve levels, reserve levels do reflect our -- that expectation that we have going forward. William Ryan: And just one follow-up on the loan originations. The origination mix right now is about 50-50 grad, undergrad. And just kind of thinking about it on the in-school side. And looking forward, obviously, July 1 opens up some new opportunities. Is that mix going to be doing kind of back of the envelope math, it seems like it might move to like 70-30 grad, undergrad starting in the third quarter. Is that the right way to think about it? And has there been any additional thoughts on the change in the funding for the incremental grad loans that are going to be put on the balance sheet? David L. Yowan: We're maintaining our outlook for the year in terms of total originations for in-school. We talk about peak season being in the third quarter. We're really in peak season, particularly with the changes to Grad PLUS -- we're in active discussions with financial aid offices who are trying to figure out, particularly at the graduate level, how they're going to fill the gap for their students between lending that used to come from the federal government and now will be supplied by private lenders. We're encouraged by those conversations. We continue to be confident in the products that we have that are well established with us and our ability to provide a customer experience that's tailored to graduate needs. The first quarter originations is really -- not a part of peak season, but I would point out in the first quarter that we originated or we disbursed almost 4x the amount of volume that we certified, which is $40 million. So we have a substantial footprint in that marketplace. I would expect that, in fact, the graduate percentage of our volume probably would be higher than it has been in prior years. But I think everybody, including competitors who we are actively running into in this space, as you might imagine, are all in a little bit of a learning and wait-and-see mode on what that -- what the actual volume and what that mix is going to look like. Operator: And we'll go next to Jeff Adelson with Morgan Stanley. Jeffrey Adelson: Maybe just to follow up on the last question. I guess just as we all sort of try to grapple with what the opportunity is here in the graduate market and who has the right to win here. Is there any sort of like early learnings or early market research you've done in terms of what you think your share of this new market could look like? I know I think you pointed in prior quarters to having 20% of the graduate market. Just kind of curious based on the work you've done and some of the efforts around marketing and product development that gives you some more confidence around what you'd be able to get there? David L. Yowan: Jeff, let me just give you a couple of examples of the experience we've had and not that it's unique to us. But one example I would give is there are more than a handful of graduate schools that provide degrees that we've traditionally funded. So professional degrees, for example, that have not relied on -- have only relied on Grad PLUS for funding. So there's a number of schools that don't even have preferred lending list coming into this. And so that allows somebody like us to get in on the ground floor with those kind of institutions, explain our product offering, explain the customer service that we have, show them the -- our ability to surprise and delight students with the ease of applying and the flexibility of our products. It's one example of a lot of work that we're doing to try to educate people about what we have to offer them. And I would say that early signs are there's certainly a keen interest coming in that's created because of the elimination of Grad PLUS, which we all knew. We're seeing that. We're seeing others compete alongside us, and we continue to be confident about what we bring to the table and look forward to reporting our results in the third quarter. Operator: And we'll take our next question from Caroline Latta with Bank of America. Caroline Latta: How should we think about the cadence of OpEx through the year? Should we expect it to be more front half loaded as you guys prep for Grad PLUS? Stephen Hauber: On OpEx throughout the quarters, I think the way to think about that during -- first of all, the first quarter, we -- as Dave mentioned, we incurred the final remaining expenses that we had as part of our transformation and completion of Phase 1. So first quarter does have about $5 million of wind-down costs that we would not expect to recur going forward. In terms of the rest of the quarters, third quarter would have some -- probably the highest operating expense quarter compared to the others given the origination activity that we expect for in-school that quarter. So feeling good about how that all fits together and our ability to hit the $350 million target that we set for the year. Caroline Latta: And then maybe just a similar question on originations. Should we expect Q2 originations to be similar to Q1 and then we'll see the bump in the back half? Stephen Hauber: I think that's a fair way to approach Q2 and Q1 being very similar. We would expect to see in-school tick up some in Q2 compared to Q1. But really, I think the meaningful difference gets to the Q3 where you see the majority of our in-school originations in that quarter. Operator: And we'll take our next question from Ryan Shelley with Bank of America. Ryan Shelley: First one here, I know it's still very early days, but can you give us any update or any learnings you've had on some of the trials you've had on the personal loan front? And I have one more, I'll follow up back with. David L. Yowan: So as we indicated, this year and certainly the beginning of the year is a testing and learning phase for us on personal lending. We did go live in the fourth quarter in our existing base in some tests that we're conducting. We went live in the first quarter with a sample of prospects. We're testing different product offerings, different ways to create demand, different ways to pull that demand through the conversion. We're testing our credit and fraud capabilities in this process as well. And I'd say at this point, we're pleased with the learnings that we have. It's too soon to give an update on any of the results, which are very immaterial at this point in time. But we're very pleased with the learnings that we're making in that product and following along the path that we laid out last November. Ryan Shelley: And then just one more quick one on funding throughout the year. So you have an unsecured maturity coming up here in June. Originations are projected to be up 50% year-over-year. So my question is just any color you can give us around funding where you think the most attractive cost of capital is at the moment would be much appreciated. Stephen Hauber: I had a little trouble hearing the question, but I think the question there related to how we're feeling about kind of both the unsecured -- we have an unsecured maturity coming up in June, which we certainly have the right liquidity and plan to address. And then for upcoming peak season and our lending, I'm feeling really good about our ability to fund those. We've had a lot of success in terms of our funding through our ABS securitizations and just have a clean path ahead here in terms of how we're feeling about funding for this year. Operator: [Operator Instructions]. We'll take a follow-up question from Bill Ryan with Seaport Research Partners. William Ryan: Thanks for taking my follow-up. I didn't think I'd cycle through this quickly, but I know there's quite a few competing calls this morning. I take a step back at a higher level, just kind of ask this question. So stock price is kind of around $9 a share. And if you start to look at it and you kind of value the FFELP portfolio, it looks like basically, you're paying the price today of what the FFELP portfolio value is worth on a present value basis in runoff. And the optionality is on the lending business where some people might say the optionality is actually on the FFELP portfolio, more value in the lending business. But either way, it looks like on an intrinsic value basis, the stock price is well below probably what the end of the day price should be. And just kind of throwing it out there, it seems like there's an opportunity or could be at some point for more of a strategic type maneuver. And I'm just kind of curious how you're thinking about that in terms of the stock price in relation to what the intrinsic value of the company might really be worth. David L. Yowan: We certainly agree that we don't think the stock price does reflect the intrinsic value of the company. Our share repurchases in the quarter and our share repurchases in the past year have been designed to help the rest of our shareholders capture that by buying back stock that we think is cheaper than that. Look, we're -- I'd say 2 things. One is we're very focused on the strategy and the plan that we have and executing against that. I'd also say that we're always interested in and looking at any ways that we can enhance the value of the firm. And so you can be assured that we're trying to think of all the things that we could do to get the share price a better reflection of the intrinsic value and the growth prospects of the company. Jen Earyes: Operator, are you on? Operator: Yes. At this time, there are no further questions in queue. I'd like to turn the call back over to Jen Earyes for closing remarks. Jen Earyes: Thanks, Erica. Before we conclude, I want to note that beginning next quarter, our earnings calls will take place after market close. And for the second quarter of 2026 earnings call, the date will be adjusted from our historical cadence. We'll share the specific date and time for the next call when we announce our earnings release schedule in July. Thank you for joining today's call. Please contact me as you have follow-up questions. This concludes today's call. Thank you. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, and welcome to the Daqo New Energy First Quarter 2026 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jessie Zhao, Director of Investor Relations. Please go ahead. Jessie Zhao: Hello, everyone. I'm Jessie Zhao, the Investor Relations Director of Daqo New Energy. Thank you for joining our conference call today. Daqo New Energy just issued its financial results for the first quarter of 2026, which can be found on our website at www.dqsolar.com. Today, attending the conference call, we have our Deputy CEO, Ms. Anita Zhu; our CFO, Mr. Ming Yang; and myself. Our Chairman and CEO, Mr. Xiang Xu, is on the business stream now. So Ms. Anita Zhu will deliver our management remarks on behalf of Mr. Xiang Xu. Today's call will begin with an update from Ms. Zhu on market conditions and company operations, and then Mr. Yang will discuss the company's financial performance for the quarter. After that, we will open the floor to Q&A from the audience. Before we begin the formal remarks, I would like to remind you that certain statements on today's call, including expected future operational and financial performance and industry growth are forward-looking statements that are made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement. Further information regarding this and other risks is included in the reports or documents we have filed with or furnished to the Securities and Exchange Commission. These statements only reflect our current and preliminary view as of today and may be subject to change. Our ability to achieve these projections is subject to risks and uncertainties. All information provided in today's call is as of today, and we undertake no duty to update such information, except as required under applicable law. Also during the call, we will occasionally reference monetary amounts in U.S. dollar terms. Please keep in mind that our functional currency is the Chinese RMB. We offer these translations into U.S. dollars solely for the convenience of the audience. Now I will turn the call to our Deputy CEO, Mr. Anita Zhu. Ms. Zhu, please go ahead. Anita Zhu: Thank you, Jessie. Hello, everyone. This is Anita. I'll now deliver our management remarks on behalf of our CEO, Mr. Xu. In the first quarter of 2026, market sentiment across the solar PV industry remained cautious amid seasonal softness and elevated inventory levels. It was further exacerbated by rising module prices driven by higher silver, aluminum, and glass costs, which led to a market slowdown in China. Geopolitical tensions in the Middle East also weighed on end market demand in the region. Against this backdrop, persistent industry overcapacity continued to exert downward pressure on polysilicon prices, resulting in quarterly operating and net losses. Notwithstanding these headwinds, we continue to maintain a robust and healthy balance sheet with 0 debt. As of March 31, 2026, we held a cash balance of USD 559.4 million, short-term investments of USD 288.3 million, bank notes receivable of $20.8 million, held-to-maturity investment of $50.3 million, and a fixed-term bank deposit balance of USD 1.1 billion. In total, these assets that can be converted into cash stood at USD 2 billion, providing us with ample liquidity. This solid financial position gives us the confidence and strategic flexibility to navigate the current market downturn. On the operational front, we continue to take proactive measures to navigate challenging market conditions and weak selling prices with nameplate capacity utilization rate operating at approximately 57%. Total production volume at our 2 polysilicon facilities was 43,402 metric tons for the quarter, exceeding our guidance range of 35,000 metric tons to 40,000 metric tons. With market prices for polysilicon experiencing a notable decline to be below production cost during the quarter, we adhered to the Chinese authorities' self-regulation guidelines by declining to engage in below-cost sales. We adopted a disciplined wait-and-see approach, pending further implementation of the national anti-involution policies we highlighted last quarter. As a result, our sales volume dropped to 4,482 metric tons, while average selling price increased 2.3% sequentially to USD 5.96 per kilogram. On the cost side, total production and cash costs increased marginally by 2% and 3% respectively on a sequential basis, primarily driven by exchange rate movements. However, despite higher silicon metal costs, manufacturing costs in RMB terms actually declined slightly on a sequential basis, reflecting our continued improvements in manufacturing efficiency. In light of the current market dynamics, we expect total polysilicon production volume in the second quarter of 2026 to be approximately 35,000 metric tons to 40,000 metric tons. For the full year of 2026, we expect production volume to remain in the range of 140,000 to 170,000 metric tons. With the solar market impacted by seasonality surrounding the Chinese New Year holidays and the absence of concrete updates on capacity rationalization policies, polysilicon transactions and shipment volumes remained low during the quarter. N-type polysilicon prices dropped from RMB 48 to RMB 55 per kilogram at the end of 2025 to RMB 35 to RMB 37 per kilogram by the end of the first quarter. However, polysilicon prices heading into the second quarter are showing signs of bottoming out with weekly declines gradually easing. While producers await clear guidelines from authorities to tack overcapacity, a weak demand outlook, industry inventory buildup and financial pressure forced several peers to adjust their production pricing strategies toward a more market-oriented approach. As a result, industry-level polysilicon monthly supply fell to approximately 93,000 metric tons during the quarter, representing an industry average utilization rate of just 39%. Looking ahead, we expect government authorities to strengthen the anti-involution policies necessary to address these industry-wide overcapacity issues. As an encouraging move on April 17, the Ministry of Industry and Information Technology, the National Development and Reform Commission, the State Administration for Market Regulation, the National Energy Administration and other key national departments jointly had a symposium on regulating market competition within the solar PV sector, reinforcing the urgent need to address irrational competition and curb destructive revolution. Additionally, all relevant authorities are now required to deploy concerted measures to strengthen industry governance and promote the high-quality development of the solar PV industry, including in respect of capacity regulation, standards guidelines [Technical Difficulty] Operator: Pardon me ladies and gentlemen, it appears we've lost connection to our speakers. Anita Zhu: Sorry. Apologies, my line got disconnected. So continuing with the April 17 symposium. All relevant authorities are now required to deploy concerted measures to strengthen industry governance and promote the high-quality development of the solar PV industry, including in respect of capacity regulations, standards guidance, innovation-driven development, price law enforcement, quality supervision, mergers and acquisitions, and intellectual property rights protection. More broadly, the solar PV industry continues to exhibit compelling long-term growth prospects. Growing vulnerabilities in global energy markets have sparked widespread concerns about national energy security, in which the solar PV and renewable energy sectors can play a crucial role. As one of the world's lowest cost producers of the highest quality N-type polysilicon backed by a robust balance sheet and 0 debt, we remain optimistic about the sector and are well positioned to capitalize on anticipated market recovery and long-term growth opportunities. We'll continue to strengthen our competitive edge through advancements in high-efficiency N-type technology and cost optimization via digital transformation and AI adoption. As the world accelerates the transition to clean energy, we are confident in our ability to play a leading role in shaping that future. So now I'll turn the call to our CFO, Mr. Ming Yang, who will discuss the company's financial performance for the quarter. Ming, please go ahead. Ming Yang: Thank you, Anita, and hello, everyone. This is Ming Yang, CFO of Daqo New Energy. We appreciate you joining our earnings conference call today. I will now go over the company's first quarter 2026 financial performance. Revenues were $26.7 million compared to $221.7 million in the fourth quarter of 2025 and $124 million in the first quarter of 2025. The decrease in revenue compared to the fourth quarter of 2025 was primarily due to a decrease in sales volume as the company reduced sales in light of the relatively low selling prices. Gross loss was $139.4 million compared to a gross profit of $15.4 million in the fourth quarter of 2025 and gross loss of $81.5 million in the first quarter of 2025. Gross margin was negative 521% compared to 7% in the fourth quarter of 2025 and negative 65.8% in the first quarter of 2025. The decrease in gross margin compared to the fourth quarter of 2025 was primarily due to an increase in provision for inventory impairment. Cost of revenue for the first quarter of 2026 includes $98.4 million of provisions for inventory impairment due to end of quarter market polysilicon pricing that is below production cost. Selling, general and administrative expenses were $12.2 million compared to $18.7 million in the fourth quarter of 2025 and $35 million in the first quarter of 2025. The sequential decrease of SG&A expenses was primarily due to lower sales volume in the first quarter of 2026. The year-over-year decrease was also due to the company recognizing $18.6 million in non-cash share-based compensation costs related to the company's share incentive plan in the first quarter of 2025. R&D expenses were $0.8 million compared to $0.7 million in the fourth quarter of 2025 and $0.5 million in the first quarter of 2025. R&D expenses can vary from period to period and reflect R&D activities that take place during the quarter. Loss from operations was $150.8 million compared to $20.9 million in the fourth quarter of 2025 and $114 million in the first quarter of 2025. Operating margin was negative 564% compared to negative 9.4% in the fourth quarter of 2025 and negative 92% in the first quarter of 2025. Net loss attributable to Daqo New Energy shareholders was $88.4 million compared to $7.3 million in the fourth quarter of 2025 and $71.8 million in the first quarter of 2025. Loss per basic ADS was $1.31 compared to $0.11 in the fourth quarter of 2025 and $1.07 in the first quarter of 2025. Adjusted net loss attributable to Daqo New Energy shareholders, excluding noncash share-based compensation costs, was $88.4 million compared to $7.3 million in the fourth quarter of 2025 and $53.2 million in the first quarter of 2025. Adjusted loss per basic ADS was $1.31 compared to $0.11 in the fourth quarter of 2025 and $0.80 in the first quarter of 2025. EBITDA was a negative $83 million compared to $52.5 million in the fourth quarter of 2025 and negative $48 million in the first quarter of 2025. EBITDA margin was negative 311% compared to 23.7% in the fourth quarter of 2025 and negative 39% in the first quarter of 2025. Now on the company's financial condition. As of March 31, 2026, the company had $559.4 million in cash, cash equivalents and restricted cash compared to $980 million as of December 31, 2025, and $792 million as of March 31, 2025. And as of March 31, 2026, short-term investments was $288 million compared to $114 million as of December 31, 2025, and $168 million as of March 31, 2025. As of March 31, 2026, the notes receivable balance was $20.8 million compared to $135.5 million as of December 31, 2025, and $62.7 million as of March 31, 2025. Note receivables represent bank notes with maturity within 6 months. And as of March 31, 2026, held-to-maturity investment was $50.3 million compared to 0 as of December 31, 2025, and 0 as of March 31, 2025. As of March 31, 2026, the balance of fixed term deposit within 1 year was $1 billion compared to $972 million as of December 31, 2025, and $1.1 billion as of March 31, 2025. Now the company's cash flow. For the 3 months ended March 31, 2026, net cash used in operating activities was $147.5 million compared to $38.9 million in the same period of 2025. And for 3 months ended March 31, 2026, net cash used in investing activities was $275.8 million compared to $211 million in the same period of 2025. Net cash used in investing activities in 2026 was primarily due to the purchase of short-term investments and fixed term deposits. And for the 3 months ended March 31, 2026, net cash used in financing activities was $7.8 million compared to 0 in the same period of 2025. Net cash used in financing activities in 2026 was primarily related to $7.8 million of share repurchases made by the company's subsidiary, Xinjiang Daqo, from its minority shareholders. That concludes our prepared remarks. We will now open the call to Q&A from the audience. Operator, please begin. Operator: Our first question comes from Philip Shen with ROTH Capital Partners. Philip Shen: First one is on the state administration for market regulation. Tier 1 manufacturers submitted formal correction proposals. Can you walk us through how these specific proposals are practically shifting or may practically shift competitive dynamics on the ground today? Ultimately, do these commitments accelerate or delay the necessary industry consolidation needed to stabilize ASPs? Anita Zhu: So you're kind of breaking up on our end. Can you repeat your question? Philip Shen: Yes, sure. So just wanted to understand what the submissions to the state administration for market regulation, those proposals, how could they practically improve the competitive dynamics to accelerate or delay the necessary industry consolidation needed to stabilize ASPs? Ming Yang: Anita, do you want to start first, and I can add to that? Or let me just start by -- our understanding is, I think that the government, especially at the most recent industry meeting with the Ministry of Industry Information Technology and NDRC and NEA and the Market Regulation Agency -- so basically, there is a consensus from the government that at the minimum, while maintaining some market competition, there's a need to enforce the price law. And now there is some details to be determined in terms of, for example, how to measure cost for all the different manufacturers. And our understanding is they're doing a new round of price determination. So this should come out, say, in the next 2 months or so. Our understanding is around midyear. So once that new cost determination is being done and then there will be a renewed guidance on where the minimum price would be. And then at the same time, we're still monitoring in terms of how the enforcement can be done. There may be some enforcement actions that's being discussed, but that hasn't taken place yet. So at least for us, right, so we're in observation mode in terms of whether enforcement happens. I mean, if there's no enforcement, then we maybe need to sell wherever the market is, right? I mean, at least right now, we're enforcing the price only in our sales efforts, right? But obviously, that's having a negative impact on our sales volume, right? So we're waiting for that to happen. But our expectation is that once the new cost determination comes out and manufacturers are now required to sell above production costs and then the market price should recover. So that's at least our -- yes. Philip Shen: In terms of enforcement actions, what could that look like and what kind of timing could that be? Do you think the probability of enforcement action is higher or lower or like greater than 50% or less than 50%? Ming Yang: Okay. Our understanding is rather than depending on the company's own reported cost, right, so the government is trying to have a cost model that is consistent across all the manufacturers in terms of like material cost, depreciation, labor and things like that, right? So once that is done, then we don't know if it's going to be one general price or there could be a different price for manufacturers. So that's to be determined. And then once that is done, then I think there will be enforcement or at least they will communicate how enforcement will be done. Previously, right, this would be in the form of a fairly significant penalty or in a worst-case scenario, you could revoke your manufacturing license or shut down your electricity. So there are many ways that the government could enforce, but we're yet to see that right now. Philip Shen: Got it. And then final question for me. So given all that and with -- the reality is you guys still need to operate and participate in the market. And so what do you think is a practical outlook for ASPs for Q2, Q3? And what do you think your utilization rate might be in those quarters? Ming Yang: Okay. I mean, for Q2, then it will be optimistic, right? I mean, cash price is kind of in the RMB 35 to RMB 37 range. I think some producers, if they have cash issues, they might sell a little bit discount to that. And then there are opportunities in the futures market, for example, where you might be able to sell a little bit higher, maybe in the RMB 38 to RMB 41 per range depending on the contract period. So we're looking at that as well. So let's say, if there is no price guidance and enforcement action, I think then the price range is maybe RMB 35 to RMB 40. Honestly, if price guidance does come out, it should be in the range of RMB 40 to RMB 45 or maybe even higher. And these are inclusive of VATs. Philip Shen: The utilization rate, do you have a sense for Q2 and Q3 yet? Ming Yang: For us or for the industry? Philip Shen: For you. Ming Yang: For us, it will be at roughly 50% to 55%. We're maintaining utilization for now because we're kind of at a fairly optimal operating condition in terms of both quality and cost, and production volume. And adjustments will generally -- our experience is will bring short-term volatility to both quality and cost. So at least in the short term we're maintaining the current production level. And obviously, either the new price guidance -- or enforcement, if it says below expectation, below what we would expect and price remain low, then we would make further adjustments in the second half. And this is subject to demand environment as well. Q1 was a really fairly negative demand environment overall, I would say. Operator: Our next question comes from Alan Lau with Jefferies. Alan Lau: In terms of the sales volume and the revenue in first quarter is a bit of a surprise. I would like to know if I do the math and back the ASP in the first quarter, it seems to be at around RMB 41 or RMB 42, ex VAT. So does it mean that the company didn't sell anything maybe after February? Ming Yang: I think that is the right way to look at this in terms of -- yes, we did sell volume in January at the high 40s, inclusive of VAT, right? I think actually our Q1 recognized ASP is higher than Q4, while if you look at market ASP is actually, on average, is much lower than Q4. And I think the big change is really around Chinese New Year, especially after Chinese New Year, where with the new policy from the state administration of market regulators was that the anti-evolution policy that was counted on previously to reduce capacity and enforce price was kind of disrupted, right? So that's when we start to see price to come down fairly quickly and significantly, right? So once price fell below production cost, and then we stopped selling to the market. The market generally in the first quarter was really -- I can characterize it by fairly high uncertainty, right? You have a number of things happening, the war in the Middle East, the high silver prices, right, that led to a lot of uncertainty for the downstream. Actually they were seeing fairly significant increase in their production costs, at the same time it was difficult for them to pass through all that increase while that's having a fairly negative impact to the Chinese end market as well. So these combined really led to a fairly low industry transaction volume for polysilicon in the first quarter. Alan Lau: I recall... Anita Zhu: Let me add... Ming Yang: Anita go ahead. Anita Zhu: No, I was just going to say, let me add a little bit more to that. So in terms of the industry-level inventory, it has accumulated to a relatively high level. So I would say in the first quarter has been above 500,000 metric tons, and it's now nearly 600,000 metric tons. So I would say Tier 1 manufacturers held roughly at least 3 months of stock. So that's why that led to a wait-and-see attitude from the downstream buyers. And for us, especially, we wanted to adhere to the Chinese authority self-regulation guidelines. So we were relatively reluctant to engage in below-cost sales. So we took this wait-and-see approach to see further implementation from the national policies level. Alan Lau: Understood. Sorry, how much did the Tier 1 producers are holding in terms of inventory? Is it 500,000? Anita Zhu: Like in total? Alan Lau: That total is 500,000. Anita Zhu: Yes, around that. Alan Lau: So how much is in Tier 1? Anita Zhu: Including the downstream as well. Alan Lau: Including wafer players, okay. Ming Yang: [Indiscernible] Alan Lau: So I recall actually in January and February, actually demand was quite good because downstream players are having a rush export to catch the VAT deadline. So I wonder why the company didn't sell more in January or February maybe, like because 4,000 tons seems to be just 10% of the production? Ming Yang: Okay. Let me add more color and then maybe Anita can feel free to add more. So I think what happened was there's fairly strong demand for the modules, especially for the European market. But what happened was these integrated manufacturers, especially we were selling mostly their existing inventory of modules. And then they were also producing, but primarily, I would call it, using their own inventory, right? They had some inventory of poly and materials. And I think the uncertainty in cost especially after Chinese New Year led them to really hold off or delay their procurement of polysilicon, I think especially uncertainty related to demand after April 1, right? And then with the war that made even a little bit worse. Yes. So I would say the market probably had reasonable amount of transactions in January, but really February and March was lower. Then you have this expectation of falling prices, especially for polysilicon because of the inventory issues. So that made it probably even worse or a little bit worse in terms of -- the customers, they buy when prices are rising, but they delay purchase when prices are falling. Alan Lau: Understood. So in terms of the price outlook, I think I just want to have a follow-up on Phil's question. So approximately, when you think there will be a guideline coming from the authority, like when do you think -- or like is it within a month or a quarter that price will start to rebound? Or like what is the time line there? And is there regular meetings with the authority to discuss the details on the enforcement? Or like what is the status now? Ming Yang: Our understanding should be around June. And then right now, they're redoing the cost model for all the different producers and then trying to make an alignment. So once that cost is done and then the next step would be an updated price guidance. Alan Lau: So to my understanding, that will be more like an enforcement of the price law, which means everyone should sell above their cost. But the previous acquisition incentives are -- is it basically rejected or it's still -- yes, or it's still aligned for, like what's the -- any updates on that? Ming Yang: There's no update to that as of now. There's no new guidance or development. They don't... Anita Zhu: I would say we're open to different kinds of proposals, but we're not 100% sure how that might unfold. But we're engaging in conversations now to discover or to test different sorts of solutions. So anything that would benefit the industry as a whole and for manufacturers as well, we're willing to try out or at least try to come to a solution with concerted efforts towards that. Ming Yang: I would say that the general policy of the government is positive and promoting mergers and acquisition to, call it, for more consolidation, right? But in terms of how that might lead to actual policies or action, that's still yet to be seen. Alan Lau: So I wonder if you are seeing any uptick of demand recently because demand, I think, was quite poor in the past couple of months. But wondering if you are seeing any recovery in demand. Xiang Xu: I would say on the module side and end market, certainly right now, Q2 is actually trending to look better than Q1. So we shall see. And then definitely, I think downstream inventory is coming down. So that's also a good sign. Alan Lau: Poly prices are also bottoming. So I would like to know if the company -- like because the sales was very low at first quarter, not sure if the strategy is the same in second quarter. If that's the case, then I would like to know if -- has the company considered maintaining an even lower utilization rate, like because the company was also running at like more than 50%. But I recall the company used to be running at 30%. So any consideration behind that, like running the utilization rate at a relatively high level? Xiang Xu: I would say that the general framework for the company is we're monitoring the developments of the price law, especially. So if the companies do prefer the price law or not are required to sell above production cost, and we're fairly confident on where we are in terms of industry positioning, right, and then we should regain market share. And it will be a function of demand as well. So if that's the case, then we might maintain the current utilization level. But let's say, if it turns out to be more negative in terms of -- especially if prices remain where it is right now, then we would consider a lower utilization rate. Operator: Our next question comes from Mengwen Wang with Goldman Sachs. Mengwen Wang: My question is about utilization as well. So my understanding now is that our current strategy is to maintain over 50% utilization and stop selling to external customers at below cost pricing. So this is based on the assumption of potential further regulation to drive poly price higher to RMB 40 per kilo and above. Is that correct? Ming Yang: That's generally the right thinking. So it's kind of a scenario, right? So the 2 major scenarios where if the government does what it says, right, enforce price law, right, penalties and all that and then have the manufacturer sell above cost, then we would maintain at the current utilization. On the other hand, if unfortunately, price laws have been forced for whatever reason, right, and the manufacturers continue to sell below cost, then we will lower our utilization. Mengwen Wang: So if we assume a scenario like no policy kicking and the pricing is likely to stay at the current level, then what's our sales strategy and production strategy in 2Q and in second half? Say -- is there any guidance on the utilization rate in this scenario? And on top of the utilization guidance, will we follow the rest of the industry to sell product at below cost pricing or we will continue to stop selling at the lower pricing level and continue to tie up the inventory and then wait for the sector turnaround? Ming Yang: Okay. So if we assume, right, the government, despite all the rhetoric, nothing happens, right? I think that's unlikely because -- I mean, there's a lot of pressure on my team right now as well. So by the way, let's assume that happens. And then obviously, we would lower our utilization and then start to sell at close to market pricing, right, whatever it takes to move volume. So I mean, then we would compete with our peers, right? And then obviously, we have a strong balance sheet. So I mean, we expect we would be one of the last provider if not the last provider, right. Then we would actually in say, 2 or 3 years, we will see fairly significant exit of the industry where then we have a market-based, call it, capacity consolidation, right? And then the company will do fairly well after that. So it's a trade-off. Mengwen Wang: Yes. That's clear. So I recall you just mentioned like you expect the policy will kick in, in June, and that's the month where we would expect a potential price hike. So if to reconcile your expectations, can we assume like we will keep utilization at 50% above to June and then start selling at close to market pricing if no policy kick in? Ming Yang: I think that's the right assumption, yes. So there is no policy, right? If price remain low, then we would be at a reduced utilization. And if the government does enforce price law, then we would maintain at least the current utilization. Mengwen Wang: So June is the month we are waiting for any policy to kick in, right? And if not, they will switch our strategy. Ming Yang: In terms of communication with government -- go ahead Mengwen. Mengwen Wang: No worries, it's fine. Ming Yang: Yes. I understand June is the time line of the new government policy. Mengwen Wang: My final question is about cash cost. Is there any guidance about our cash cost in second quarter and in the second half of 2026? Ming Yang: I think based on our current utilization production level and the current silicon metal costs and material costs, for example, we're expecting our cash cost to be in line with Q2 in terms of RMB terms and trending slightly lower over the next quarters. So a fairly steady cost structure. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jessie Zhao for any closing remarks. Jessie Zhao: Thank you, everyone, again for participating in today's conference call. Should you have any further questions, please don't hesitate to contact us. Thank you, and have an awesome day. Goodbye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Extreme Networks Q3 Fiscal Year '26 Financial Results. [Operator Instructions] I will now hand the call over to Stan Kovler, Senior Vice President, Finance and Corporate Development. Please go ahead. Stan Kovler: Thank you. Good morning, everyone, and welcome to Extreme Networks's Third Quarter Fiscal Year 2026 Earnings Conference Call. I'm Stan Kovler, Senior Vice President of Finance and Corporate Development. And with me today are Extreme Networks President and CEO, Ed Meyercord; and Executive Vice President and CFO, Kevin Rhodes. We just distributed a press release and filed an 8-K detailing Extreme Networks' financial results for the third quarter of 2026 and a copy of our press release, which includes our GAAP to non-GAAP reconciliations, and our earnings presentation is available in the IR section at extremenetworks.com. Today's call and Q&A may include certain forward-looking statements based on current expectations about Extreme's future financial and operational results, growth expectations, new product introductions, supply chain dynamics and management strategies. All financial disclosures made on this call will be on a non-GAAP basis, unless stated otherwise. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that can cause actual results to differ from those anticipated by these statements. These risks are described in our risk factors in our 10-K and 10-Q filings. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans to update them, except as required by law. Following our prepared remarks, we will take questions. And now I will turn the call over to Extreme's President and CEO, Ed Meyercord. Kevin Rhodes: Ed, you may be on mute. Operator: [Operator Instructions] Please stand by. Ladies and gentlemen, we are currently experiencing technical difficulties. Please stand by as we resolve the issue. Edward Meyercord: Am I unmuted? Kevin Rhodes: There you go, you're good, Ed. Edward Meyercord: Okay. Sorry about that. Thank you all for joining us this morning, and thank you, Stan. The third quarter marks our fifth consecutive quarter of double-digit revenue growth. Our results reinforce our momentum as the fastest-growing enterprise networking player, outpacing market leaders. Our performance reflects strong sales execution and differentiated technology, including our enterprise fabric and AI-powered platform, which are driving share gains across key markets. We've also resolved memory supply needs for both the near and long term, which will allow us to meet customer demand and stabilize gross margins. And in the quarter, we returned $50 million to shareholders through share repurchases. Revenue in the quarter beat the high end of our guidance at $317 million, an improvement of 11% year-over-year. Product revenue increased 12% year-over-year, representing 8 quarters of growth. Cloud subscription momentum lifted SaaS ARR to $236 million, an increase of 29% year-over-year. This performance underscores the strength of our Platform ONE strategy and the durability of our recurring revenue model. Extreme has secured our forward-looking supply to support demand through fiscal '27 and beyond through a combination of multi-sourcing, alternative component qualification, engineering redesign, component inventory investments and strategic supplier partnerships. Moving forward, this gives us greater fulfillment certainty and margin visibility. Enterprise networking demand remains strong as high-quality secure networks are mission-critical to scaling operations and achieving business objectives. This demand supports targeted price increases to offset supply costs while maintaining a price advantage relative to Cisco. The combination of disciplined pricing actions and cost management allowed us to improve gross margins to 62.3%, up quarter-over-quarter, exceeding guidance. A recent independent study found that enterprise customers can experience more than 30% total cost of ownership savings with Extreme compared to leading competitors. Additionally, our new partner program delivers 20% higher profitability versus our largest competitor. This, combined with Cisco's end-of-life refresh cycle and HPE Juniper integration complexity is creating a significant opportunity for Extreme to take share. This is reflected in double-digit growth, where 44 customers spent over $1 million with Extreme this quarter. Our products and solutions stand out in the market. Our fabric continues to be a significant differentiator. Customers highlight its simplicity and automation, which translate into reduced deployment time, improved reliability and lower operational complexity. It also strengthens security by shrinking the attack surface and containing threats with built-in segmentation that limits lateral movement. The feedback we hear most often is, "It's so easy," and our favorite customer quote is, "What took us 6 hours with Cisco, took only 6 minutes with Extreme." We're the only vendor that offers this fabric. We're gaining traction and adoption across verticals with Extreme Platform ONE. Its agentic core and ability to provide customers with full network visibility is a significant competitive advantage. Customers are using Platform ONE to streamline operations, accelerate root cause analysis and automate routine tasks, resulting in faster issue resolution, reduced downtime and more efficient use of IT resources across increasingly complex environments. Wi-Fi 7 continues to be a key driver of wireless network refresh opportunities. This is driven by the advanced design of our access points, which maximizes throughput, minimizes latency and efficiently utilizes spectrum in dense environments. Our APs are built to handle the increasing demand of complex enterprise applications, AI-driven workloads and real-time traffic, delivering consistent high-performance connectivity even in the most challenging conditions. And finally, no one matches Extreme's cloud choice, public, private or on-prem with no trade-offs in performance or control. Our platform's built-in compliance and flexibility let customers meet strict data security and regulatory requirements without compromise, driving strong public sector interest. The strength of our portfolio is showing up clearly in our results and customer wins. For example, Extreme played a role in 2 marquee events this quarter. During the recent Artemis II lunar spaceflight launch from Kennedy Space Center, our networking solutions supported mission-critical systems at the launch control operations. We're very proud to be a part of this historic and critical mission. We also supported Lucas Oil Stadium during the NCAA Men's Final Four, where our team rapidly modernized connectivity, removing legacy access points and deploying temporary infrastructure to make the stadium game ready. Now we're upgrading and modernizing the stadium to Wi-Fi 7 for the upcoming Indianapolis Colts season. In addition, we had several new Extreme platform ONE wins in the quarter with customers, including Asiana Airlines, which is merging with Korean Air; Atlantic Food Distributors; Bridgeport Public Schools; City of Prescott, Arizona; Johnstone Supply; Nissha Medical Technologies; and the University of Buckingham. These customers are turning our AI-powered automation to reduce manual tasks, streamline operations and minimize network complexity, ultimately enabling faster execution and lower costs. We're seeing strong momentum with our MSP program, with more than 70 active partners. MSP billings grew 26% quarter-over-quarter and continued a solid upward trajectory. MSPs value Platform ONE for its ability to manage multiple customer networks, licenses and incidents and our unique consumption billing and portable licensing model make it easy for them to scale their businesses. We exited the quarter with over $200 million in annualized EBITDA, healthy net cash and a full year guidance that reflects continued growth. And we have resolved supply chain concerns, which could translate into increased market opportunity. The setup for Q4 means we're set to grow double digits for fiscal '26, and we're confident in our ability to outpace the market and continue to gain share in fiscal '27. Now let me turn the call over to Kevin to discuss financial results and guidance. Kevin Rhodes: Thanks, Ed. We're really pleased with the third quarter performance. It was another strong quarter across several key areas: revenue growth, SaaS ARR growth, deal volume, gross margin improvement, earnings per share and solidifying our supply chain for at least the next fiscal year. Let me walk you through what drove the strong results this quarter. Total revenue of $317 million, grew 11% year-over-year and exceeded the high end of our guidance range. We achieved 5 sequential quarters of growth, a double-digit growth year-over-year and 8 quarters of sequential product revenue growth. The growth in revenue is being driven by larger deals over $1 million, higher overall volumes of deals and improved average selling prices due in part to selective price increases. We achieved strong bookings across all regions, which reflects strong execution as well. On the bottom line, we continue to achieve strong operating leverage. Earnings per share of $0.26 exceeded the high end of our guidance range and grew 24% year-over-year, up from $0.21 in the prior year quarter. A few highlights to consider. We saw a meaningful acceleration in our SaaS ARR to $236 million, which was up 29% year-over-year due to strong Platform ONE attach to new product sales and upsells within our existing customer base. We have several new AI and product features that are being announced at our upcoming Connect conference next week, which we expect to continue to drive Platform ONE adoption. Subscription and support recurring revenue of $114 million in the quarter grew 13% year-over-year and remained consistent at 36% of revenue. SaaS deferred revenue climbed to $342 million, a 19% year-over-year increase. This strong and growing base of deferred revenue signifies the shift to a more favorable mix of predictable, high-margin recurring revenue. Wi-Fi 7 grew meaningfully in its contribution to wireless product revenue, representing 37% of total wireless unit shipments in the quarter, up from 27% last quarter. In terms of bookings dollars, nearly half of wireless bookings came from Wi-Fi 7 this quarter. This favorable mix shift continues to drive higher selling prices and gross margin. Geographically, we had very strong performance in EMEA and APAC, and we're confident in building on our success in those regions due to our favorable competitive positioning and differentiated solutions. Performance in Americas was also solid, especially considering the elevated revenue benchmark set in the prior year, and our bookings growth during the third quarter provides confidence in our outlook. Across verticals, we saw particular strength -- booking strength that is in education, health care, manufacturing and sports and entertainment during the quarter. Several other factors drove revenue growth during the third quarter. The first factor was our momentum in winning larger and more strategic customer engagements, demonstrated by 44 customers spending over $1 million with Extreme, higher than any point in the last 2 years. Second, we had recent competitive wins and strong funnel conversion. We're seeing improved win rates with our differentiated campus fabric, Platform ONE's ability to offer full network visibility and AI-powered automation and network refresh opportunities with Wi-Fi 7. And finally, we successfully implemented another round of price increases in March, following our mid-single-digit November price increases. The rising cost of memory and other components caused us to selectively raise price. This as well as disciplined discounting helped improve gross margins during the quarter. Overall, gross margins of 62.3% was up 30 basis points from the last quarter. Product gross margin grew 70 basis points from the second quarter as well. We've secured our supply chain, including our memory supply through fiscal 2027 and beyond, putting us in a strong position to meet our longer-term demand due to a combination of multi-sourcing, alternative component qualification, engineering redesign, component inventory investments and strategic supplier partnerships. Turning to operating profit. Our operating margin in the third quarter was 15.2%, up from 14.1% in the prior quarter and 15% last year. This was driven by improved gross margins and disciplined cost management. In fact, we achieved our highest EBITDA on a dollar and margin basis in the last 10 quarters at $53.4 million of EBITDA and a 16.9% EBITDA margin. Our strong operating results reaffirm our confidence in driving operating leverage to reach our long-term profit target of 22% to 24%. On the capital allocation side, we executed a $50 million accelerated share repurchase during the quarter, retiring over 3 million shares post settlement at an average price of $14.58 per share. We plan to return cash to shareholders through continued buybacks with $137.5 million of our current $200 million authorization still remaining. Now let me turn to our fourth quarter guidance. We expect our revenue to be in the range of $330 million to $335 million. We expect gross margins to be in a range of 61.8% to 62.2%. Operating margin is expected to be in a range of 15.2% to 16.1% and earnings per share is expected to be in the range of $0.28 to $0.30. Our fully diluted share count is expected to be around 132 million shares. For the full fiscal year 2026, we expect guidance as follows: revenue to be in the range of $1.275 billion to $1.280 billion. The midpoint of this range suggests 12% year-over-year growth. Given our results and visibility we have for gross margins, we now expect gross margins for the full fiscal year to be in the range of 61.8% to 61.9% and operating margin to be in a range of 14.7% to 14.9%. Earnings per share for fiscal 2026 is expected to be in a range of $1.02 to $1.04 per share. And with that, I'll now turn the call over to the operator to begin the question-and-answer session. Operator: [Operator Instructions] Your first question comes from the line of Ryan Koontz with Needham & Co. Ryan Koontz: Terrific results to see here this morning. If I could start with SaaS there. Nice to see that inflect higher and start to accelerate. What's your visibility look like for that continuing that momentum? And do we expect some solid seasonality in your Q4? Maybe you can unpack that for us a bit. Edward Meyercord: Kevin, do you want to take that one? Kevin Rhodes: Sure. I'm happy to, Ryan. So I mean, we actually were pretty pleased with what we saw both from a bookings perspective on Platform ONE. We do have a little bit of a tougher comp in Q4, like you mentioned. We still believe that we can range, I'd say, our growth in SaaS ARR to be in that kind of 20% to 30% range. Naturally, this quarter, it's higher on that range, but that's roughly the range that we're expecting on the long term. Edward Meyercord: And I'll just add to that. Yes, I'll add to that, Kevin, that we have -- in terms of growth, we've been exceeding our internal expectations for Platform ONE. We have a very steep ramp in our plan. And so, it's doubling from Q2 to Q3 and then further into doubling again in Q4, and we're on track. And so I would say it's really that momentum of Platform ONE adoption that has been the driver. Ryan Koontz: That's terrific. It sounds right in line with your plan. So maybe on the competitive front, you mentioned some wins and some strong bookings internationally. Who are you seeing the most success with against in these competitive bids? And what gives you confidence here going forward on your continued share gains here because you guys are clearly taking share. Edward Meyercord: Yes, it's interesting, Ryan, in all of the examples that we put in our press releases, it really reflects wins against virtually all of our competitors. And when we say that, obviously, #1 is Cisco, #2 -- and it really just goes by market share, #2 being HPE Juniper and then we actually included a win from Huawei, which is interesting because we don't see them in the U.S. in many markets. So I would say that it's -- our competition is primarily versus Cisco and HPE. And we're winning with our fabric. We're winning with Platform ONE. We're winning with our success and making it very easy for customers to deliver a high-quality experience in complicated networking environments. We talk about complex wireless. And we also talk about cloud choice and flexibility. And then there's also commercial terms. There's -- today, the competitive environment is such that Cisco continues to grow and expand outside the networking market. And I would say, simply focus on other things. That opens the door for us. The new comp plan for partners require them to jump through hoops and sell things that they normally don't sell. That opens the door for us. And then HPE Juniper, the complexity of that deal and the challenges that they'll have with integration filters out into the field and into the channel. And so here, again, with Extreme, with a very clean vision, a clean portfolio and hardware and solutions that are very easy for customers to use and simplify operations in something that's inherently complex is getting us more at bats and our conversion rates are going up and our win rates are going up. Operator: Our next question comes from the line of Dave Kang with B. Riley. Dave Kang: Question on the gross margin came in better than expected. Were there several large professional installation projects in fiscal third quarter? And what should we expect for fiscal fourth quarter as far as the installation projects are concerned? Because I think that was the reason that kind of pressured gross margin last quarter, right? Kevin Rhodes: Yes. Dave, we... Edward Meyercord: Yes. I'll take it, Kevin, and then you can jump in. We had a couple of professional projects pushed to Q4 and Q1. And so the level of professional services in the quarter was a little higher than normal, but not as significant as we had expected. But obviously, there's a lot of variables impacting gross margin. And we saw some benefit from the pricing moves we took earlier in Q2. And then we're very aggressively managing the cost on the cost of goods side. I think our teams are doing a great job there of being very disciplined and aggressive and attacking the cost structure. Kevin, do you want to add anything? Kevin Rhodes: I think that's right, Ed. I think across the board, we just saw a little bit more improvement than we had expected. But overall, part of it is execution, part of it is the price increases and part of it is just a slight delay in some of the professional services, mix of all 3. Dave Kang: And then more importantly, on product margins, are they still trending up and -- going forward? Kevin Rhodes: Product margins, I mean, yes, I would say from -- first of all, we had 70 basis points increase quarter-over-quarter from a product margin perspective, Dave. I would say from a product margin perspective going forward, we're still absorbing some of the costs that we had, higher memory costs, and we're trying to balance that with the price increases that we had, including those in March. We're still trying to see if we can get those price increases in March through. But I would say, generally speaking, we feel confident in our ability to stabilize product margins around that 57% plus range. Dave Kang: Got it. And then on the memory situation, I think the last time we talked, I thought you were targeting close to 3 years. Are we there yet? Or where are we in that regard? Kevin Rhodes: Go ahead, Ed. Edward Meyercord: Yes, I was going to say I don't -- we would not target to have on hand 3 years of supply of memory. But at this stage, what we're messaging is that we no longer believe we have an issue with supply of memory. And that's near term with committed supply through fiscal '27 and into '28. And then there are new sources of supply coming into the market when -- we believe in the first quarter of calendar '28. So from our perspective, we mentioned the fact that we have -- we've established direct connections with suppliers of memory and taken a multi-sourcing approach. We've been able to qualify alternative components that were designed for other industrial sectors, which has given us another source of supply. We've been able to redesign our products to reduce the number of chips required, which is another factor. And then we've been able to make investments with our strategic partners and our ecosystem of partners, they have helped us find and locate supply, which has been very important. And so it's through a combination of a variety of initiatives that we've been able to solve for this, and we're confident in saying that we have no near-term nor do we believe a long-term issue with memory and currently any of our components going forward. Operator: Our next question comes from the line of David Vogt with UBS. David Vogt: So maybe, Kevin, I might have missed it and maybe if you can touch on this again regarding kind of the supply chain dynamics and all the initiatives that you undertook in the quarter, can you remind us again sort of how we should think about the implementation of price increases in the supply chain and how it flows through? Historically, you've had, what, like 90-day quoting windows. Like what do those quoting windows look like today for customers? And when do you start to think you're going to start to see the benefits of -- obviously, I'm sure you saw some of the price increase benefits from December, but you mentioned March as well. So how do we think about that flowing through into the upcoming quarters from a gross margin perspective? Kevin Rhodes: Sure, Dave. And first of all, I would describe the price increases, even if you do like a 10% price increase, the industry standard is discounting at 75%. So really, you're looking at somewhere between 2% to 3% net price increase, right, as you can imagine. And so with these price increases kind of coming through on a net basis at 2% to 3%, both between November and March, some of that is to obviously offset the cost themselves and some of it is to maintain the margins that we've had in the past going forward. It's a little early to tell what's going to happen with the March increases. And quite frankly, a lot of competitors also put price increases in March. So the fact that typical quotes are open for 30, 60 days makes it a little difficult to know what's going to happen with March over the time frame. We feel good about stabilizing our gross margins and being able to start to grow gross margins I would say, into the '27 period. And so I think from our perspective, we are feeling confident about the 62% number and then growing from there throughout the next year. David Vogt: Perfect. And maybe one follow-up too. I know, obviously, you talked about big wins in EMEA and other markets. Can you maybe just touch on the U.S. market? I would have imagined -- I know there was a little bit of a tough comp in the Americas, but I would have imagined given the share gains that you probably are taking from some of the integration challenged companies that we would have seen stronger growth in the Americas. Anything to call out there in the Americas vis-a-vis what's going on in APAC and EMEA? Edward Meyercord: Yes, David, I think it's a little misleading because the -- what we're showing as revenue is based on shipments and the timing of shipments doesn't always line up with -- I think what you're getting at is the demand and our success in the marketplace. If we were to flip the page and actually look at bookings, and I know we don't report bookings data, but bookings growth in the Americas was up significantly, and I would say significantly higher than total revenue growth for the company. So I think the revenue stats here are going to be a little misleading because we had an excellent quarter in the Americas as far as bookings. But in terms of the shipments and the timing of shipments channel, that's what's going on. So I would say that geographically, the strongest geo was the Americas this quarter, even though it wouldn't appear so if you're looking at that revenue number. Operator: Our next question comes from the line of Tomer Zilberman with Bank of America. Tomer Zilberman: Maybe following along the gross margin question line here. Outside of the price increases, you also mentioned some other things like requalifying alternative parts. I think previously, historically, you mentioned qualifying in automotive-grade DDR4, if I recall, and I think also qualifying in some Chinese vendors. One, is this more about just securing supply versus improving the gross margin level? And two, these other alternative things you're doing, I think you also talked about redesigning some of your products. When is that flowing through? Did that already impact results this quarter? Or is that something that we should expect to benefit in 2027? Edward Meyercord: Thanks for the question, Tomer. I think it's a combination of both. It's both demand as well as gross margin. I would say we're securing memory at prices that are below market with the initiatives that we have underway. As I mentioned on the last call, our size is an advantage in terms of what we're chasing. I want to shout out to our teams because we have very creative teams that have excellent relationships with our vendors. I also want to shout out Broadcom. We have a strategic relationship with Broadcom. They have gone out of their way to support us in making important introductions out into the industry for us to solve this problem. And so they have been a key partner for us in solving for this. And it is a combination of a variety of things. Historically, we would -- Extreme would not buy memory direct. We would -- our ODMs, our manufacturers would acquire memory from distribution in Asia, and then they would, in turn, buy from suppliers. And what's changed is, we've established direct connections now with multiple vendors of memory. And as you mentioned, we've been very creative working with Broadcom to qualify memory chips that were designed for other industrial sectors that we could use and Broadcom has qualified those. So now those are going into production, and we've been able to pick them up for a very good price. And so I would say that the efforts that have been undertaken at the company, and it's been multifaceted has opened the door for us for new supply from different vendors, from different markets. And we've been able to secure not only the supply for the long term -- near term and long term, but we've also been able to get them at very attractive prices. And I would say that we were -- I'm pleasantly surprised with the success that we've had given where we were 2 quarters ago and kind of what the outlook was at that time. At this point in time, as I said, we put this behind us, and we believe it could turn into a competitive advantage. What we hear from manufacturers is that we are in a very strong position relative to competitors. Tomer Zilberman: So maybe a follow-up question just to the end of what you were saying there. Are you hearing from your customers that any of your wins are coming specifically from that? One, from -- you have a level of supply that maybe some of your peers don't and customers are going to you because you can ship faster? And could it also be that you just have less cost pass-throughs versus your peers, and that's also a differentiator for your customers? Edward Meyercord: Tomer, I think that as far as the demand side of the ledger, we haven't really seen a competitive win based on supply yet. But given what's going on in the market and given the persistent shortage out in the industry, we think it could come into play. I think that's the way to think about it. We do know that there is some activity that -- of customers wanting to make sure that they can secure supply for important projects, some of that going on. Kevin mentioned the price increase. intra-quarter, we saw some people moving orders earlier in the quarter to take advantage of the price increases. But generally, it's been business as usual. And as we look into Q4, we have a really healthy funnel, and we're off to a really good start. So we feel really confident about how we're guiding. Operator: Our next question comes from the line of Mike Genovese with Rosenblatt Securities. Michael Genovese: I guess the upside in Extreme ONE orders and the RPOs kind of answered this question in a way. But is there any more detail you can give us, Kevin, on cloud and services attach rates and how those have changed since you've launched Extreme ONE? Kevin Rhodes: Well, yes, Mike, I mean, I would say -- I mean, Ed nailed it earlier where we said our plan this year, we're running ahead of our plan. So we launched in July, obviously, Q2 being the first full quarter. And now in Q3, we've doubled what we expected from Q2, and we're expecting to double again from a bookings perspective in Q4. That's going to start to play out and continue to accelerate subscription and support revenue over time. This is what we've talked about, right, for about a year now with launching Platform ONE as a platform that gives a higher attach rate, a higher ASP and obviously better renewals in the future. From an attach rate perspective, I would just tell you, the agentic AI is the interesting part where we're getting higher attach rates, both on the wireless as well as the wired side. And that's where you're continuing to see strong bookings there. And like I said, we saw really strong bookings in the third quarter related to Platform ONE. Michael Genovese: Great. And then my second question, it just seems looking at the data that you've been gaining share from Cisco for a while. But I'm wondering, has there been any inflection that you can point to on the HPE Juniper side where kind of have the share gains there started? What's the confidence that they're going to accelerate? Kind of what's going on, on that side? Edward Meyercord: Yes. Mike, the answer is we're seeing opportunities both with end-user customers. And then we're seeing a lot of opportunities in the channel. A lot of channel partners, maybe they were Juniper partners, and now it's the HPE show and they're disillusioned and they're looking for alternatives. There's a lot of activity in the channel right now where we're engaged with new partners that are larger partners as we move upmarket and a lot of those partner opportunities are coming from the disruption of Juniper and HPE. Those opportunities as it translates into end-user business, I don't think we've seen that materialize yet. We have examples, but in a meaningful way, but we're expecting that to gain momentum as we go forward. Michael Genovese: Congratulations on the bullish quarter and outlook. Operator: Our next question comes from the line of Christian Schwab with Craig-Hallum. Our next question comes from the line of Eric Martinuzzi with Lake Street Capital Markets. Eric Martinuzzi: I wanted to revisit the Investor Day comments you had regarding long-term growth rates. At that time, this was -- you guys were talking about a 10% plus growth rate between FY '25 and FY '29. Given the good numbers that you've seen here, certainly top line, both since the December quarter and the March quarter, is there any change to that outlook as far as a double-digit growth rate? Edward Meyercord: Eric, there's not. When you look at our guide into Q4, that implied growth in Q4 is, call it, a 7% to 9% range. But keep in mind, last year in Q4, we grew 20%. If you average that out, you've got a mid-teens growth rate that we're running at. And so I think that assumption holds and it has not changed. Eric Martinuzzi: Okay. And then from a macro perspective and probably more for your EMEA market, but the war with Iran has been going on for a couple of months now. You obviously put up good numbers here in the March quarter. But anything on the margin, good or bad, tied to pipeline in EMEA with the war? Edward Meyercord: Yes. I think during the quarter, there were a couple of shipments that were impacted where we couldn't ship into the region. And -- but at this point, a lot of those projects have resumed. We talked about our massive project in Ras Al Khaimah, which is just north of Dubai, right near the Strait of Hormuz is. It's a Wynn Casino and Resort. It's the first casino in the Middle East. It's the first phase is a $10 billion project, and it's a massive project for us. They're back and working. And it's hard to believe it's business as usual there. The shipping lanes and our ability to transport product into the region is open. So at this point, I'd say we're -- it's somewhat business as usual. We have seen -- because of the incident, and we have seen some delays in some of the projects, but it feels like projects are getting back and that they will recover from prior delays. The other comment on that, Eric, is that for us, it's a smaller -- a much smaller piece of our business. The Middle East is tied to EMEA for us, and we had a strong quarter in EMEA. And we've been taking share in the Meta market, and that continues. We have excellent customer references there. So we expect that market to continue to grow at a healthy growth. Operator: [Operator Instructions] Our next question comes from the line of Christian Schwab with Craig-Hallum. There are no further questions at this time. I will now turn the call back to Ed Meyercord, President and CEO, for closing remarks. Edward Meyercord: Okay. Thank you, Melissa, and thank you, everybody, for joining us. I also want to shout out, we have employees, customers and partners that tune into these calls, and thank you for the hard work and support on delivering an excellent quarter. Also mentioning to stay tuned, we have some big announcements coming out next week. We have our user conference, Extreme Connect, which is going to be in Orlando. We will be talking about some new technology solutions and the evolution of our portfolio and some exciting new developments on that front. So we appreciate your support, and I hope you have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Amarin Corporation's First Quarter 2026 Results Conference Call. [Operator Instructions] And please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Devin Sullivan. Sir, you may begin. Devin Sullivan: Thank you for your time and attention this morning as we discuss Amarin's 2026 first quarter financial results. On the call today are Aaron Berg, President and Chief Executive Officer; and Pete Fishman, Chief Financial Officer. Other members of the senior management team will be available as needed during the Q&A session that will follow these prepared comments. Turning to today's agenda. Aaron will provide a state of the company, and Pete will walk through the numbers. Before we begin, I'd like to remind everyone that today's press release and related quarterly report on Form 10-Q are available on the Investor Relations section of the company's website, www.amarincorp.com, as will a replay of this call shortly after its completion. Please be aware that during this call, we may make certain statements related to our business that are deemed forward-looking statements under federal securities laws. These statements are not guarantees of future performance, but rather are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements. Additionally, we assume no obligation to update these statements as circumstances change. For a discussion of the material risks and important factors that could affect our actual results, please refer to our SEC filings, which are available either on our company website or the Securities and Exchange Commission's EDGAR system. With that said, I'd now like to turn the call over to Amarin's President and CEO, Aaron Berg. Aaron, please go ahead. Aaron Berg: Thanks, Devin, and thank you all for joining us today. The momentum that started to build in late 2025 continued in the first quarter of 2026. Our results and cash generation in the quarter demonstrate our progress in advancing our new business model and expanding the global market for VASCEPA through our new and more efficient operating platform. We've substantially completed our previously announced global restructuring, and we remain on track to achieve the estimated $70 million in total operating expense savings by June 30, 2026. Our financial position continued to improve. Our cash balance of $308 million rose from year-end 2025. We reported a second consecutive quarter of positive cash flow and ended the quarter with no debt. 2026 will be the first full year in which we've employed our new and more efficient operating model comprised of 2 distinct but complementary businesses, a well-established and durable commercial business in the U.S. that continues to generate meaningful revenue and cash flow and a fully partnered commercial strategy for all other markets. I'll now provide some high-level commentary on each business. Our growth engine is comprised of a fully partnered international commercial strategy that's anchored by our exclusive license and supply agreement with Recordati. This relationship is focused in Europe, where we have IP protection through 2039 and covers 59 countries. European revenue in Q1 2026 rose significantly from Q4 2025, reflecting the promise of this partnership. As of March 31, 2026, Recordati had commenced sales of VAZKEPA in 10 countries, including a Q4 2025 launch in Italy. Overall, commercial momentum in Europe continues to build, driven by growth in in-market demand in key launch markets. We remain encouraged by these early performance trends. Lipid management in Europe is an increasingly important area of focus given the combination of aging populations, significant unmet need, evolving treatment standards and attractive long-term market potential. The potential for VAZKEPA to address the significant unmet need in cardiovascular disease beyond LDL lowering is similar to what we saw in the U.S. when we launched VASCEPA for cardiovascular risk reduction based on the strength of the REDUCE-IT trial. Recordati recognizes this as well and has prioritized the rollout of VAZKEPA in its active markets and those targeted for commercialization. We're also seeing continued growth in the rest of the world outside of Europe with our additional international partners, in China, Australia, Canada and the Middle East. Also, as we discussed on our fourth quarter call, we're preparing for early 2027 launches in South Korea and Singapore, are monitoring regulatory reviews of previously submitted applications in Thailand and the Philippines. And following the submission of Vietnam in Q1 2026, we're on track to submit a new filing in Malaysia in Q2 2026. Our U.S. team continues to operate the core business, which serves as a cash-generating base. As we've stated, while our U.S. franchise continues to see revenue declines due to the pressures of generic competition, VASCEPA remains the clear U.S. market leader across all available icosapent ethyl products more than 5 years after the introduction of a generic product. The overall IPE market based on third-party data rose by 3% in Q1 2026 compared to Q1 2025. Our share of the market rose to 48% at March 31, 2026, up from 42% in the same period last year. Most impressive is that VASCEPA branded prescriptions rose by 17% in Q1 2026 versus Q1 2025. The steps we've taken to rightsize our U.S. operations continue to allow our U.S. franchise to deliver efficient and profitable revenue. To that end, we expect to maintain our exclusives with key payers through the end of 2026, while also retaining coverage in our nonexclusive accounts. This remarkable achievement is a testament to the hard work of our team members, the reputation of our brand and the growing library of supporting scientific evidence that validates VASCEPA's ability to reduce cardiovascular events by 25% when added to a stat. In summary, both of our businesses are performing well. I ended last quarter's call by emphasizing the progress we've achieved to date and the important work that remains ahead. That message has not changed. What has changed is the building momentum behind our execution and the tangible progress we've delivered. We intend to continue to advance our organic growth initiatives and execute with a high level of financial and operational discipline. Additionally, we continue to collaborate closely with our exclusive adviser, Barclays, and exploring additional potential pathways to further enhance shareholder value. Now let me talk about some additional VASCEPA developments. In late 2025 and early 2026, we highlighted new post-hoc analysis from the REDUCE-IT study of statin-treated patients with elevated triglycerides and known cardiovascular disease or with diabetes and other risk factors. In these analyses, treatment with VASCEPA on top of statin therapy significantly lowered cardiovascular risk across a diverse range of patient subgroups in the REDUCE-IT study, including in patients with cardiovascular kidney metabolic or CKM syndrome, in patients with common risk factors like hypertension, diabetes, smoking and hypercholesterolemia as well as in patients at extreme or very high risk for cardiovascular events. Another analysis of REDUCE-IT showed that patients treated with VASCEPA on top of statin therapy experienced fewer total hospitalizations and fewer days lost due to hospitalizations and death during the study, providing additional insights on the effects of VASCEPA on patient-centered measures of total disease burden. Everything we do as a company is guided by our commitment to reduce cardiovascular disease as the leading cause of death. We're encouraged to see increasing momentum around the importance of addressing the numerous risks associated with elevated triglycerides, driven by the growing body of clinical evidence linking elevated levels to cardiovascular risk, independent of LDL and by evolving guidelines that formally integrate triglyceride treatments into cardiovascular risk assessment and treatment pathways. In March of this year, the American College of Cardiology, the American Heart Association and 9 other leading U.S. medical associations jointly issued an updated 2026 guideline for the management of lipids, including cholesterol and triglycerides. This updated guideline includes new recommendations based on high-quality evidence from major randomized controlled clinical trials that have been completed and published since the prior 2018 guideline, including our REDUCE-IT cardiovascular outcome study in VASCEPA. Within this updated ACC/AHA clinical treatment guideline, icosapent ethyl is positioned as the only primary triglyceride-lowering medication that reduces cardiovascular event risk in combination with statin therapy in individuals at high risk of cardiovascular disease with moderate triglyceride elevations after achieving sufficient LDL lowering. This reinforces that patients on statin therapy can continue to experience residual cardiovascular risk driven by elevated triglyceride levels and underscores the need for complementary therapeutic approaches beyond LDL-lowering therapy alone in these patients. Importantly, the guideline distinguishes therapies intended for pancreatitis prevention from those proven to reduce atherosclerotic cardiovascular disease events, reinforcing that cardiovascular outcomes, not biomarker changes alone must be the focus of and guide treatment decisions. For patients who remain at elevated cardiovascular risk despite optimized LDL therapy, the guideline supports the addition of evidence-based therapies specifically proven to reduce cardiovascular events such as icosapent ethyl. This position is consistent with guidance from other cardiovascular societies, including the 2025 ESC EAS dyslipidemias guideline focused update, which states that high-dose icosapent ethyl as in the REDUCE-IT trial should be considered for high-risk or very high-risk patients with elevated triglyceride levels despite statin therapy to lower cardiovascular events. Together, these guideline updates reflect growing global consensus around the importance of addressing residual cardiovascular risk beyond LDL lowering alone. Against this backdrop, and as we've highlighted previously, the introduction of promising new therapies is also elevating awareness of triglyceride-associated risk, catalyzing doctor-patient conversations, changes in behavior and in some cases, prescribed therapies. As a result, we believe VASCEPA is well positioned to benefit from the continued evolution of the lipid management landscape, specifically as it relates to the increasing attention on risks and unmet needs in patients with elevated triglycerides. I want to take a moment to explain why these developments may very well benefit sales of VASCEPA by strengthening its inclusion in the treatment flow from physician to formulary to patient. More than 500 peer-reviewed publications validate the science behind VASCEPA, including its ability to reduce major adverse cardiovascular events across diverse patient populations, and this groundbreaking therapy has been prescribed more than 30 million times by over 250,000 health care professionals. For new patients, treatment often begins with an established lower-cost therapy that has proven effectiveness with newly approved premium-priced, sometimes injectable therapies typically reserved for patients who need additional options or fail initial treatment. Coverage approval can reinforce this sequence through step edits requiring documentation that the preferred therapy was tried first before a costly alternative is authorized. VASCEPA taken orally is widely available, well established and supported by a clinically proven efficacy and safety profile. While the treatment landscape continues to evolve, our view remains straightforward. Therapies that are accessible today and backed by strong evidence should not be overlooked simply because newer options are gaining attention. Again, we applaud these new discoveries that may over time add to the array of options available to address this widespread health concern in patients at risk. I ended last quarter's call by emphasizing the progress we've achieved to date and the important work that remains ahead. That message has not changed. What has changed is the building momentum behind our execution and the tangible progress we've delivered. We intend to continue to advance our growth initiatives and execute with a high level of financial and operational discipline. With that, I'll now turn the call over to Pete to take us through the numbers. Peter Fishman: Thanks, Aaron. Our results for the first quarter of 2026 reflected the continuing traction of our new business model and our global restructuring plan. Given the adoption of our new agreement with Recordati, I will, in some cases, also compare consecutive quarterly results, Q4 2025 to Q1 2026 to highlight recent progress. Total net revenue in Q1 2026 rose to $45.1 million from $42 million in last year's first quarter. By geography, U.S. was consistent with Q1 2025. While volume was higher due to regaining exclusive status with a PBM beginning in Q3 2025, this was offset by pricing based on annual changes for payers. First quarter product revenue in Europe was $4.9 million under our new partnered model as compared to $5.4 million in the first quarter of 2025 under our previous sales model. Notably, Q1 2026 revenue was generated at a significantly lower cost with improved operating margins when compared to first quarter of 2025. On a consecutive quarterly basis, Q1 2026 European revenue more than doubled, up 113% from Q4 2025 revenue of $2.3 million. European product revenue in the first quarter included $3 million of supply shipments to Recordati compared to $900,000 of such shipments in Q4 2025, reflecting initial stocking from the transition of our international commercial activities. With the transition now complete, going forward, Europe product revenue will come entirely from supply shipments to Recordati. Rest of World revenue in Q1 2026 was $2.8 million, whereas there were no supply shipments to our other partners in Q1 2025. As a reminder, our partnered model will result in revenue variability quarter-to-quarter, driven by the current scale of operations as well as the impact of launch timing, end market demand and the structure of individual partnership agreements. Cost of goods sold rose by $10.5 million or 62%, reflecting increased product volumes associated with regaining an exclusive PBM relationship in the U.S. and the effect of shipments to our rest of world commercial partners, both of which did not exist in last year's first quarter. Looking ahead, on a comparative quarterly basis, we expect our cost of goods sold to continue to be higher until Q3 2026, the anniversary of regaining this exclusive relationship. Our expense profile continues to reflect the success of global restructuring we commenced in mid-2025. In the first quarter, total operating expenses declined by 31% or $12.8 million to $29.1 million. Excluding the restructuring charge of $3.3 million, total operating expenses of $25.8 million declined by 38% from last year's first quarter. Q1 2026 operating expenses were relatively stable compared to Q4 2025 of $25.4 million. SG&A declined by 42% and represented 47% of total net sales compared to 87% of total net sales in last year's first quarter. R&D expenses were in line with our ongoing commitment to global regulatory support and to the science underlying our global branded product. As noted above, restructuring expenses were $3.3 million, down from $4.1 million in Q4 2025, bringing our total restructuring expense to $39.6 million. We incurred the majority of these restructuring expenses through March 31, 2026, with the remaining nominal expense to be recognized in Q2 2026. Our operating loss in the first quarter narrowed to $11.3 million from an operating loss of $16.8 million in last year's first quarter. Excluding restructuring charges, operating loss in Q1 2026 was $8 million. I also want to point out that despite the increase in cost of goods for the quarter, we were still able to drive down our total OpEx by 31% and excluding restructuring costs, cut our operating loss by more than 32%. I'll emphasize that it is early, but the Europe partnership model we adopted in 2025 is working. Turning to the balance sheet. We ended the quarter with cash and investments of $308 million, up from $303 million at year-end 2025, no debt and working capital of $450 million. We generated positive cash flow from operations of $6.4 million in the first quarter, the second consecutive quarter of positive cash flow. I would like to reiterate that we expect to generate positive cash flow for 2026. The business continues to evolve and improve, driven by key achievements realized over the past year. Under our new operating model, we rightsized the company to support both our U.S. business and our global partners in generating long-term international sales growth with an expense profile that is significantly lower than in prior years, reflecting the approximately $70 million in annualized savings to be achieved by the end of Q2 2026. Thank you again, and I now ask the operator to open the call to questions. Operator: [Operator Instructions] Our first question is coming from Jessica Fye with JPMorgan. Jessica Fye: I was hoping you could talk about the right way to think about the trend in U.S. net price over the remainder of the year. And then also related to the expectation for positive cash flow in 2026, can you talk about the degree to which you see that as sustainable beyond '26? Aaron Berg: Sure. Good morning, and thanks for joining us this morning. Pete, why don't you cover both the questions, the net price and cash flow beyond '26. I know we have confidence going forward and touch on those. Peter Fishman: Right. Thanks, Aaron, and thanks for the question. For the U.S. NSP, as you've seen in past years, the bulk of our year-over-year change occurs in Q1. And as we look forward to the rest of the year, we'd expect the NSP volumes to be relatively consistent. As we've said in the past, this is driven by our exclusive contracts. We expect to keep them through the rest of 2026. However, if there are changes, that would have an impact there. For the cash flow expectations beyond 2026, we are confident that as we've turned into a cash flow positive position that, that will continue into the future. But that -- again, that is driven by how we retain those exclusive contracts. But we feel confident that we will continue this trend going forward. Jessica Fye: Great. And can I ask just a couple of follow-ups on the expense side, and I appreciate the commentary you gave on the COGS trend. So I guess maybe the other side of that is just like the gross margin percentage over the remainder of the year that be kind of stable? Is that going to be a little lumpy depending on supply shipments, is that a good way to think about that? And then on SG&A, sort of if we exclude the restructuring charges, is that a good run rate from here? And I know you mentioned restructuring expense would be kind of nominal in 2Q. Does nominal mean a similar size to 1Q or is that something different? Aaron Berg: Yes. So starting on the COGS, as mentioned, a piece of that is the -- regaining that exclusive. So as you look into Q2, that will have an impact on the comparative for our COGS amount. And you're right on overall COGS and gross margin. It will be in part dependent on the supply shipments to our partners. As you know, in that partnership model, it does have a different margin point than the U.S. business and will have an impact in that. And you saw that again in this quarter as we had greater supply shipments compared to Q1 of 2025 and saw that lower margin percentage compared to that comparative year. On the SG&A side, excluding the restructuring, yes, this is a good way to look at that ongoing run rate. We'll continue to have the remainder savings as we've talked about in the past, but this is a good way to look at that run rate going forward. And finally, as far as the restructuring, you should look at that as a pretty nominal amount compared to past quarters and would not be at the same levels that you saw in the Q1 of the $3 million. It will be lower than that. Operator: Our next question is coming from Paul Choi with Goldman Sachs. Kyuwon Choi: I know it's early days since the most recent guidelines were issued. But Aaron, can you maybe just comment on physician feedback and any change in thought processes with regard to utilizing VASCEPA in light of the guideline changes? And then I have a follow-up as well. Aaron Berg: Sure. So the guidelines, and it's also combined with news we've had over the last -- really over the last year, which saw -- the fibrate change. As you'll recall, we've spoken about, Paul, previously, where the label change and the emphasis on the fact that fibrates do not provide cardiovascular risk reduction yet. They're widely used in combination with statin for cardiovascular risk reduction. So that's one thing. That was also noted in the guidelines. And then this increasing focus around triglycerides, patients with elevated triglycerides and the risks of those patients. And as you know, there's a significantly increasing focus, and that also is noted in the guidelines. So qualitatively, what we're seeing from all of this and what we're hearing is very positive. Right now, it's qualitative. It will take time as these guidelines do and as news does for it to actually impact growth. And there are a number of dynamics that are related to all of these that are impacting growth, in particular, also, as we've noted previously, now with some of these newer triglyceride-lowering agents, these very good agents for FCS and severely high triglycerides, a lot of the payers are stepping them through existing triglyceride-lowering drugs, proven effective approved drugs like VASCEPA. So that will also wind at our back a little bit. So it will take time for all these to play out. Hard to quantify exactly what it will be, but it's all very timely. It's all happening at once, and it's very positive. I've got Steve Ketchum here with me as well. And Steve can speak to the guidelines and what the scientific community is saying about the impact as well. Steven Ketchum: Yes. Thanks, Aaron. Yes, we do see, Paul, these updated guidelines, both in the U.S. from the American College of Cardiology, American Heart Association, that were issued in March 2026. And of course, they're also consistent with the European equivalents that were issued last August. And although our REDUCE-IT results have been published back in 2018, 2019 time frame, that's when the prior version of this guideline, this dyslipidemia guideline was released, and it had not yet incorporated the REDUCE-IT results in other landmark cardiovascular outcomes trials such as those that showed that fibrates did not add any benefit on top of statin therapy. So we see these, as Aaron mentioned, as important, timely and major updates that position icosapent ethyl as an important consideration for patients with elevated triglycerides and that cardiovascular risk. So we see it as an exciting development. Aaron Berg: [indiscernible] Kyuwon Choi: Yes. My follow-up is, as you transition to consistent cash flow profitability over the coming quarters, just with the stock price where it is, can you maybe just provide your -- maybe your high-level thoughts or maybe the Board's thoughts on -- in the future, returning some of this cash to shareholders as it starts to accumulate either in one form or another possibly? Aaron Berg: Sure. That's a topic we talk about on a regular basis. As we've mentioned previously, we have -- we've been working with Barclays as our exclusive adviser and looking at strategic opportunities to capitalize on the value of the company. We feel like we've put the company on very sure footing, cash flow positive moving forward and sitting on that cash. But clearly, there are some things we can do to extract value. What shape or form that is yet to be determined because we're not in any type of desperate situation. We are being opportunistic, and we're focused on value for shareholders. In that context, cash -- buyback, cash back to shareholders, of some sort is a concept that is being discussed and could possibly happen at the right time. But we're thinking more holistically, strategically about the total value of the company. And when we have something tangible to report, we'll certainly do so. Operator: Our next question is coming from Michael Ahn with Leerink Partners. Byunghyun Ahn: This is Michael on for Roanna Ruiz at Leerink Partners. I have two questions today. The first one is, do you have any update on your strategy around launching an authorized generic and what would trigger that decision? And the second question is, what's the underlying growth demand in the rest of the world market? And are there any milestone payments from rest of the world market that you're expecting in 2026? Aaron Berg: Michael, so regarding the authorized generic, we've been -- we've done very well maintaining our branded business profitably in the U.S. We're incredibly efficient, maintaining the lion's share of the IPE category, and we're doing so with the strategy that we implemented a number of years ago, which is focusing on payers and the exclusives. That's proven to be very beneficial. And given that we've been able to maintain the exclusives and we believe we're maintaining those exclusives at least through 2026, then we don't believe that it's in our best interest to launch an authorized generic at this time, even though we're ready to do so when the opportunity arises. Once we find we can't compete any longer with this strategy, then that would be the opportunity to launch an authorized generic. But we've said this over the last couple of years, and being prepared to do so, but the strategy has paid off. We've been very patient. We haven't overreacted to the market, and that's turned out to be a very wise approach given how our financial results are and the revenue we're generating in the U.S. by investing very little in the U.S. So that's where we are with the AG. Once we feel the market dynamics turn, then we'll certainly do so. We see that as an opportunity to generate revenue, generate cash into perpetuity, frankly, as long as there's an IPE category and we have an authorized generic that can be distributed. Regarding growth in rest of the world and milestone payments, I'll let Pete address what's going on there and tied to into those partnership agreements. Peter Fishman: Thanks, Aaron. We have been pleased with the end market demand growth within each of the regions and our partners. We have seen that consistent growth throughout. It is early stages in most of these markets. So we'll continue to monitor that, and we have been working very closely with each of our partners to support them in that growth. As far as the milestone payments go, we haven't been providing specific guidance around those growth. And there are milestones, as we've talked about with Recordati, for example, based off of in-market sales for them that will trigger milestones. But at this time, haven't been providing specific guidance on that outside of just that we've been pleased with what -- with each of our partners and what they've been able to accomplish to date. Aaron Berg: And we're at the early stages, too, right? I mean it's -- again, as you said, it's kind of the tale of two companies. The U.S. is at one end of the life cycle. But in so many of these other regions, we're just getting going. And we've got very good partners. They've made VASCEPA/VAZKEPA a priority. We're really fortunate to have these partners, and our job is simply to execute and support them, but we look forward to what they can do, and they're certainly committed. Operator: As we have no further questions in the queue at this time, this will conclude our question-and-answer session. And I would like to turn the call back over to Mr. Berg for any closing remarks. Aaron Berg: I'd just like to thank everyone for participating today. I hope that we've been able to communicate the progress that we've made and our confidence about Amarin moving forward. We look forward to keeping you updated about our progress. And again, thank you for the continued interest in Amarin. Have a good day. Operator: Thank you. Ladies and gentlemen, this concludes today's call, and you may disconnect your lines at this time. And we thank you for your participation.
Operator: Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Central Pacific Financial Corp. First Quarter 2026 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This call is being recorded and will be available for replay shortly after its completion on the company's website at cpb.bank. I would now like to turn the call over to Jayrald Rabago, Senior Strategic Financial Officer. Please go ahead. Jayrald Rabago: Thank you, and thank you all for joining us today as we review Central Pacific Financial Corp.'s financial results for the first quarter of 2026. Joining me this morning are Arnold D. Martines, Chairman, President, and Chief Executive Officer; David S. Morimoto, Vice Chairman and Chief Operating Officer; Ralph M. Mesick, Senior Executive Vice President and Chief Risk Officer; and Dayna Matsumoto, Executive Vice President and Chief Financial Officer. We have prepared a supplemental slide presentation with additional details on our earnings release. The presentation is available in our Investor Relations section of our website at ir.cpb.bank. During today's call, management may make forward-looking statements. These statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. For a complete discussion of these risks related to our forward-looking statements, please refer to slide two of our presentation. With that, I will now turn the call over to our Chairman, President, and CEO, Arnold D. Martines. Arnold D. Martines: Thank you, and aloha to everyone joining us today. The first quarter represented a strong start to 2026 with solid earnings performance and continued execution across our franchise. We delivered growth in both loans and core deposits, maintained strong credit quality, and continued to operate from a position of capital strength. This momentum reflects the strength of our relationship-focused banking model and our continued commitment to serving the people, businesses, and communities of Hawaii. Our results also demonstrate the durability and organic earnings power of the franchise. With return on equity above 13% and robust capital levels, we remain focused on disciplined, sustainable growth and thoughtful capital allocation. From a shareholder perspective, we remain committed to deploying capital in ways that enhance long-term value. This includes supporting organic growth, maintaining a strong balance sheet, returning capital through dividends and share repurchases, and preserving flexibility to respond to market opportunities. We were also pleased that CPB was named the Hawaii U.S. Small Business Administration Lender of the Year for 2025. This marks the seventeenth time CPB has received this recognition and reflects our long-standing commitment to Hawaii's small business community. Turning to the broader environment, Hawaii's economy remained resilient during the first quarter. Visitor arrivals and spending increased, and the state's unemployment rate remained exceptionally low at 2.3%. While oil prices have decreased due to the conflict in the Middle East, the direct impact on Hawaii's economy has been limited to date, and we continue to monitor conditions closely. At the same time, Hawaii continues to benefit from ongoing construction activity, military spending, and a resilient local economy. Recent storm activity and flooding, including impacts from the Kona Low, caused isolated but significant damage in parts of the state. We remain committed to supporting affected customers and communities as they recover and rebuild. Against this backdrop, our strategy remains consistent: support local businesses through prudent lending, grow and deepen core deposit relationships, invest thoughtfully in our franchise, and manage risk with discipline through the cycle. With that, I will turn the call over to Dayna. Dayna Matsumoto: Thanks, Arnold. For the first quarter, net income was $20.7 million and earnings per diluted share was $0.78. Return on average assets was 1.12%, and return on average equity was 13.9%. Compared to the year-ago quarter, our EPS increased by 20%, reflecting revenue growth and expense discipline as we continue to successfully execute on our strategy. Net interest income totaled $61.4 million and net interest margin remained healthy at 3.53%. Compared to the prior quarter, results reflected typical seasonal factors and balance sheet timing, including lower day count and lower average loan balances. The decline in our loan yields was partially offset by the improvement in our deposit costs. For the second quarter, we are projecting NIM of 3.50% to 3.55%. Our guidance for full-year net interest income remains at a 4% to 6% increase over the prior year. Across a range of potential rate environments, our balance sheet positioning and funding mix continue to provide meaningful resilience. Total other operating income was $11.6 million and declined from the prior quarter by $2.6 million. In the prior quarter, we had one-time BOLI death benefit income of $1.4 million. Current quarter BOLI income was further impacted by equity market volatility. Additionally, Q1 seasonality typically results in lower levels of fee income in the mortgage banking and wealth areas. We continue to expect our full-year other operating income to increase modestly over normalized prior year. Total other operating expense was $43.7 million and declined by $2 million from the prior quarter. The decline was primarily driven by higher incentive accruals in the prior quarter and lower deferred compensation expense this quarter. We expect our expenses to increase over the year, but our full-year expense growth is still expected to be modest at 2.5% to 3.5% from 2025 normalized. In the first quarter, we paid a cash dividend of 29¢ per share and repurchased approximately 321 thousand shares for a total of $10.5 million. With our strong earnings and capital position, our board declared a second quarter cash dividend of 29¢ per share. We had $44.5 million remaining available under our share repurchase program as of March 31, and we plan to continue to utilize it as part of our capital allocation strategy. I will now turn the call over to David. David S. Morimoto: Thank you, Dayna. During the first quarter, our total loan portfolio grew by $31 million, bringing total loans to $5.3 billion at quarter end. The majority of the loan growth came near the end of the first quarter; therefore, we will see the benefit in our net interest income in subsequent quarters. Loan growth this quarter was driven by commercial real estate, where we continue to see good risk-reward opportunities both in Hawaii and the Mainland. We had a roughly equal amount of loan production volume in Hawaii and the Mainland this quarter, while loan runoff was greater in the Hawaii portfolio, as it represents over 80% of overall balances. Average loan portfolio yield in the first quarter was 4.93%, compared to 4.99% in the prior quarter. The yield decline was primarily due to the impact of the fourth quarter Fed rate cut on repricing and new loan yield. Total deposits increased $90 million during the quarter, ending at $6.7 billion. Core deposits represent over 90% of total deposits, with continued growth in noninterest-bearing and relationship-based accounts. At the same time, total deposit costs decreased by 4 basis points quarter over quarter to 0.90%. Looking ahead, our loan pipeline remains solid across Hawaii and select Mainland CRE markets, and currently we see stronger opportunities in commercial loans relative to retail lending. We will continue to execute our deposit strategy, focusing on new customer acquisition and deepening existing relationships. As a result, we are maintaining our full-year 2026 guidance of loan and deposit growth in the low single-digit percentage range. With that, I will turn the call over to Ralph. Ralph M. Mesick: Thank you, David. We continue to operate within risk appetite, and the credit profile of the bank is unchanged at quarter end. We maintain an approach of seeking to achieve optimal returns, balance, and diversification, emphasizing underwriting discipline, relationship lending, and risk-based pricing. Our credit metrics stayed near cycle lows during the first quarter. Nonperforming assets totaled $14.5 million, or 19 basis points of total assets. Net charge-offs were 18 basis points. Past due trends were stable. Criticized loans were less than 200 basis points of total loans and within an expected range. Changes in criticized loans reflect relationship-specific dynamics rather than any broad-based credit trend. Provision expense for the quarter was $2.4 million. We added $2.7 million to the allowance, while the reserve for unfunded commitments declined by $300 thousand. We identified no material matters impacting our customers from the recent Kona Low flooding. At quarter end, our total risk-based capital ratio was 14.7%. At this level, we retain ample flexibility to manage through adverse conditions. With that, let me turn the call back over to Arnold. Arnold D. Martines: Thank you, Ralph. To summarize, the first quarter was a strong start to the year. We delivered solid earnings, maintained strong credit quality, grew both loans and core deposits, and continued to operate from a position of capital strength. I want to thank our employees for their continued commitment, care, and dedication to our customers and communities. We will now open the call for questions. Operator: Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star then one on your telephone keypad. If you would like to withdraw your question, simply press star then one again. Your first question comes from the line of Evan Krotowski from Raymond James. Your line is open. Analyst: Good morning. I am on for David Pipkin Feaster. I just wanted to start on loans. What have you been hearing from borrowers in your market, and how has demand been holding up given the uncertainty we are seeing in the market today? And then going forward, I think you mentioned seeing more opportunity or maybe focusing more on the commercial side. What kinds of credits are you targeting there as well? David S. Morimoto: Hey, Evan. It is David Morimoto. What we are seeing and hearing from our customers has not changed much from prior quarters. We continue to see opportunities, but as we mentioned, they are currently more focused in the commercial area than in the retail area, and that is industry-wide. A lot of the retail loan categories are subdued right now as a result of the interest rate environment, but hopefully that will change going forward. Right now, we are seeing good risk-reward loan opportunities. They tend to be primarily focused in commercial mortgage and, to a lesser extent, in commercial and industrial. Analyst: Is that more on the Mainland or in Hawaii, or is it balanced wherever you see the opportunity? David S. Morimoto: Currently, it is relatively balanced. I will say that quarter to quarter, there is always a lot of variability in deals—when things ultimately end up closing. You might think it is going to close in the second quarter and it slips to the subsequent quarter. But currently, what we are seeing in the pipeline is relatively balanced. We are always targeting to grow both Hawaii and the Mainland every quarter, but as we saw this quarter, it varies based on a lot of different factors. Analyst: That is helpful. Pivoting to the margin, you were able to achieve further funding cost leverage during the quarter, which is no easy feat seeing as deposit costs are at 90 bps. Do you think you have hit a floor on funding costs from here? If so, what are the main drivers for the margin going forward with the Fed seemingly on hold? Dayna Matsumoto: Hi, Evan. With the Fed on hold, we expect our deposit cost will level out somewhat. We do have some downward repricing opportunity on our CD portfolio. We have about $480 million, or slightly less than 50% of our CD portfolio, maturing in the second quarter with a weighted average rate of 2.8% coming off, while our new CD rates on a blended basis are approximately 2.5%. Thinking about the NIM going forward, we will improve our earning asset mix as we plan to optimize our excess liquidity by growing loans and some securities. We also expect to continue to get a positive lift from back book repricing, although that lift has moderated somewhat. On the funding side, we do expect some modest continued decline in our CD cost. All in all, our NIM is expected to remain relatively close to where it is today. With the Fed on hold and our position being fairly neutral to slightly asset sensitive, we think it could be modestly positive to us, but not a big overall impact. Bottom line, we feel really good about our strong NIM being in the mid-3% range, and that gives us some flexibility to be more competitive in the market to drive growth and revenue. Analyst: If I can ask one more: you were active on the buyback this quarter and still maintain a good amount of excess capital. How are you thinking about capital priorities today, and do you see any opportunities for balance sheet optimization with that excess capital? Dayna Matsumoto: Our capital priorities remain the same. We continue to deploy our capital in a very thoughtful and deliberate manner. As we have said before, our top priority is to use capital for loan growth and to support our clients. We plan to continue our quarterly cash dividend, and any excess capital beyond what we can use to organically grow the business we will consider for share repurchases. You will likely see that we return a similar amount of capital as we did this past quarter through both dividends and share repurchases. Operator: Your next question comes from the line of Matthew Clark from Piper Sandler. Your line is open. Matthew Clark: Good morning, everyone. A couple more questions around the margin. Dayna, do you have the spot rate on deposit costs for March? Dayna Matsumoto: For March month-to-date, deposit cost was 90 basis points, and the spot rate at the end of March was about the same. Matthew Clark: And on the asset side, on average how much do you have in fixed loan repricing or runoff per quarter, and the same on the securities side in terms of cash flows? Dayna Matsumoto: We typically have around $200 million to $250 million of loan runoff each quarter. Our weighted average new loan yield in the first quarter was 6%, compared to our average loan portfolio yield in the quarter of 4.9%, so we continue to see positive repricing there. On the securities portfolio, cash flows are about $30 million per quarter at a weighted average rate of about 2.8%, and our new security purchase yields have been around 5%, so we continue to get a very nice lift there. Matthew Clark: Given those dynamics—some basis points on CD repricing and a few basis points on loans and securities—why guide the margin to 3.50% to 3.55% instead of closer to, say, 3.60%? Dayna Matsumoto: There are a lot of factors and variables that go into the NIM. In addition to the moderation of the back book repricing I mentioned, on the competitive front we do see some pressure on spreads and new loan yields due to the competitive nature of the market. Those are some of the factors we are considering. Our NIM path will largely depend on loan growth, market dynamics, and the shape of the yield curve going forward. Arnold D. Martines: I will add that we have a healthy NIM level, and we want to be thoughtful about balancing further improvement with being selective and competitive in the local market. We remain very committed to maintaining a very healthy NIM overall. Matthew Clark: Do you still anticipate a few construction projects funding this quarter, and how should we think about the related reserves you put against them? David S. Morimoto: There is one large residential condominium project that is expected to close in the second quarter. That will be a paydown on the construction side, but it will largely be offset by takeout mortgages on the residential mortgage side for the homeowners. Matthew Clark: On the uptick in criticized loans in the slide deck, what drove that and what is the plan for resolution? Ralph M. Mesick: The increase in criticized loans was related primarily to one commercial relationship. There is no systemic deterioration. This is a longtime customer with a viable business and a fairly strong balance sheet. They experienced some operating losses that resulted in a drawdown in liquidity. The plan is to retain and support this customer. We do not see any loss content in that credit. Operator: Your next question comes from the line of Kelly Motta from KBW. Your line is open. Kelly Motta: Good morning, and thanks for taking my questions. Circling back to the margin, you mentioned greater competition on loan pricing. Where is the blended rate of new originations now relative to a quarter ago? Dayna Matsumoto: In the first quarter, our weighted average new loan yield was 6%. In the fourth quarter, it was 6.8%, so we do see a little bit of moderation there. Kelly Motta: Appreciate the color on capital return. I know it is early, but given residential mortgage is a decent part of the portfolio, is it fair to say the proposed capital rules would be beneficial to you, and have you done any preliminary sensitivity around the impact to your regulatory capital ratios? Dayna Matsumoto: That is correct. It will be beneficial to us. We are still evaluating the proposal, but it is positive and will have a favorable impact on our capital ratios, particularly from the residential mortgage risk-weighting changes. Our early estimate is an improvement of around 50 to 100 basis points in our CET1 ratio. We will continue to monitor developments on the proposal, and we do not expect it to change our capital strategy. Kelly Motta: Two modeling items: on the tax rate, it jumped from Q4, but you had the BOLI death benefit then. Is 22% to 23% a good go-forward effective tax rate? Dayna Matsumoto: The increase in our effective tax rate this quarter was due to less tax-exempt BOLI income, and in Q4 we had some tax credit benefits. On a normalized basis, we expect the ETR to be in the range of about 22% to 23%. It could trend lower to the extent that we bring on additional tax credits or have more tax-exempt income. Kelly Motta: Lastly, you noted liquidity was higher in Q1. How do you manage liquidity levels, and should we expect some of that to be redeployed into the growth you are seeing? Dayna Matsumoto: At 03/31, our cash and liquidity position was very healthy. We had some inflows of deposits and have some excess cash, maybe in the range of about $100 million to $150 million, that could be deployed as opportunities present themselves. Our average earning asset growth may not be too significant as we shift some of that excess cash to loans or securities. Going forward, it will be a function of good loan risk-reward opportunities and our continued focus on growing core deposits. Arnold D. Martines: Thanks for your questions, Kelly. Operator: Again, if you would like to ask a question or have additional follow-up questions, press star then the number one on your telephone keypad now. We will pause for just a few seconds. As there are no further questions, I will now turn the call back over to Jayrald Rabago for closing remarks. Jayrald Rabago: Thank you, everyone, for joining us today and for your continued interest in Central Pacific Financial Corp. We look forward to updating you again next quarter. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good afternoon. Welcome to the Penske Automotive Group First Quarter 2026 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through May 6, 2026 on the company's website under the Investors tab at www.penskeautomotive.com. I will now introduce Anthony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead. Anthony Pordon: Thank you, Krista. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's first quarter 2026 financial results was issued this morning and is posted on our website along with the presentation designed to assist you in understanding the company's results. As always, I'm available by e-mail or phone for any follow-up questions you may have. Joining me for today's call is Roger Penske, our Chair and CEO; Shelley Hulgrave, our EVP and Chief Financial Officer; Rich Shearing from North American operations; Randall Seymore, of International Operations, and Tony Facione, our Vice President and Corporate Controller. We may make forward-looking statements on today's call about our earnings potential, outlook and other future events, and we also may discuss certain non-GAAP financial measures such as EBITDA and adjusted EBITDA. We've also prominently presented and reconciled any non-GAAP measures to the most directly comparable GAAP measures in this morning's press release and investor presentation, again, both of which are available on our website. Our future results may vary from our expectations because of risks and uncertainties outlined in today's press release under forward-looking statements. I direct you to our SEC filings, including our Form 10-K and previously filed Form 10-Qs for additional discussion and factors that could cause future results to differ materially from expectations. At this time, I'll turn the call over to Roger Penske. Roger Penske: Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. We're pleased to report a solid and productive first quarter. During the first quarter, PAG delivered over 123,000 new and used vehicles and nearly 3,600 new and used commercial trucks and that generated approximately $7.9 billion in revenue. We earned $324 million in earnings before taxes and $235 million in net income and generated earnings per share of $3.56. The first quarter results include a $60 million gain on the sale of a dealership partially offset by $13 million in certain disposals and other charges as we continue to optimize our dealership portfolio. Excluding these items, adjusted earnings before taxes, was $276 million. Net income was $201 million and earnings per share was $3.05. This was a difficult comparison for the prior year period and challenging market conditions impacted year-over-year performance. We also continue to grow our footprint. In February, we acquired 2 high-performing and strategic Lexus dealerships in Orlando metropolitan area of Central Florida, one of the fastest-growing regions in the U.S. These acquisitions complement the 2 Lexus and 2 Toyota dealerships we acquired in November 2025. Combined, these 6 dealerships are expected to generate $2 billion in estimated annualized revenue. We also repurchased 170,000 shares of common stock for $26 million. We increased the dividend to $1.40, which yields approximately 3.4%, the highest yield in our peer group. Looking at the details for the quarter. Same-store retail automotive new units declined 5% and used increased 1%. Units retail were impacted by weather-related challenges and a difficult comparison to March 2025 when tariffs caused pull-ahead sales and lower BEV sales in the U.S. associated with the elimination of the BEV tax credit. Gross profit per unit, new unit retail was $4,783, up $94 sequentially. Gross profit per used unit was $2,076, up $306 sequentially. Our service and parts revenue and gross profit was a Q1 record. Same-store revenue increased 4.6 and related gross profit increased 5.7%. Service and parts gross margin was up 60 basis points. In the Retail Commercial Truck segment, Q1 unit sales declined 953 units driven by reduced order intake during Q3 and Q4 2025, following the implementation of tariffs and weakness in the freight market. However, we are encouraged today with the trends we are seeing across the commercial truck market. In recent months, we've seen an increase in new truck orders and expect the timing of these deliveries to take place in the second half of 2026. PTS equity income increased 24%. Growth in the full-service leasing revenue, improved fleet utilization lower operating and interest expenses resulting from continued fleet reductions, including maintenance and our depreciation were partially offset by continued challenges in the rental and lower gain on sale of trucks. At this time, I'll turn the call over to Rich Shearing. Richard Shearing: Thank you, Roger, and good afternoon, everyone. In U.S. Retail automotive same-store new and used unit sales were affected by 2 major winter storms, liberation day tariff announcement and pull forward of retail sales in March of last year and lower BEV sales from easing emissions regulations and the elimination of the BEV tax credit at the end of September 2025. During the quarter, 25% of new units sold were at MSRP compared to 29% in Q1 last year. Same-store service and parts revenue increased 3.2% and gross profit increased 3.4%. Customer pay was up 4%, warranty was up 5% and collision repair declined 4%. Our U.S. automotive technician count is up 3% when compared to the end of March of last year, and our Bay utilization is 84%. Turning to Premier Truck Group. During Q1, Premier Truck Retail 3,583 new and used trucks, generated $695 million in revenue and $128 million in gross profit. On a sequential basis compared to Q4 2025, new unit gross increased $111 and used unit gross increased $4,624. New unit sales were down 26% and were in line with the overall North American Class 8 market. The recessionary freight environment and market uncertainty associated with tariffs and the status of emissions regulations impacted new truck orders during the last half of 2025. However, as Roger mentioned, in recent months, we have seen an increase in new truck orders. In fact, Class 8 orders increased 91% and the industry backlog grew 33% to 175,000 units in the first quarter when compared to March of last year. We expect this increase in order activity to result in higher new unit sales in the second half of this year. Service and parts revenue increased 5% as average daily activity continues to grow and service backlog is beginning to increase. Service and parts gross profit represented 73% of segment gross profit during Q1. Turning to Penske Transportation Solutions. We are also encouraged by the stronger financial performance of Penske Transportation Solutions. During Q1, operating revenue declined 4% to $2.5 billion. Lease revenue increased 2%, rental revenue declined 17% and logistics revenue declined 3%. PTS sold 9,319 units in Q1, ending the quarter with a fleet size of 387,500 units compared to 435,000 at the end of December 2024. Gain on sale declined by $26 million in Q1 '26 compared to Q1 2025. As PTS continues to rightsize its fleet, higher fleet utilization, lower operating costs for maintenance, depreciation and interest expense contributed to an increase in earnings. Overall, our equity income from PTS increased 24% to $41 million. I would now like to turn the call over to Randall Seymore to discuss our international operations. Randall Seymore: Thanks, Rich. Good afternoon, everyone. During Q1, international revenue was $3.3 billion, which is up 6%. International new units were up 2% and used increased 3%. Same-store service and parts revenue increased 7% as our strategies to increase customer pay drove a 10% increase, which was more than offset the 3% decline in warranty. In the U.K. market, Q1 automotive registrations increased 6% to 615,000 driven by private and retail demand and an increase in Chinese OEM sales. While we were encouraged by Q1, the U.K. automotive environment remains challenging as inflation, higher taxes, consumer affordability and the government mandate towards electrification impacts the overall market. During Q1, our U.K. same-store new units delivered were flat from lower sales of several German luxury brands and the elimination of the [indiscernible] programs for these luxury brands. Same-store used units increased 3% and gross profit per unit increased $500 sequentially when compared to Q4 2025. Turning to Australia. Our EBT increased 15% compared to Q1 last year. In automotive, our 3 Porsche dealerships in Melbourne continue to gain market traction through implementing our Porsche 1 ecosystem process. This process has driven higher customer satisfaction with all 3 dealerships in the top 5, including the top position nationally. Although we had a decline in new unit sales associated with the transition of the McCann to an all-electric vehicle, we had a strong mix of higher-end vehicles and our focus on pre-owned and after sales continues to drive the business. In the Australian Commercial Vehicle and Power Systems business, we are diversified with revenue and gross profit split approximately 2/3 off-highway and 1/3 on-highway. The off-highway business continues to grow. The current order book has exceeded our full year business plan with strength in in Energy Solutions, mining and defense sectors. We have over AUD 600 million in secured orders so far for 2026. The engines and support we provide will be critical as this segment evolves. We continue to see the potential for our Energy Solutions business to generate at least AUD 1 billion in revenue by 2030. Over the last several years, our focus has been to increase units in operation to grow the recurring service, parts and remanufacturing aspects of our business, and this focus is starting to pay off. One of the major mining customers operates 125-megawatt power station with 20 Bergen engines that we installed 4 years ago. As part of the major maintenance interval, we have begun to remanufacture 300 cylinder heads which will generate approximately 15,000 hours of work for our business. I would now like to turn the call over to Shelley Hulgrave to review our cash flow, balance sheet and capital allocation. Michelle Hulgrave: Thank you, Randall. Good afternoon, everyone. We remain committed to a strong balance sheet and a flexible and disciplined approach to capital allocation while driving our diversification strategy, implementing efficiencies and striving to lower costs. SG&A expenses increased by 1.5%, which is lower than the rate of inflation, while gross profit declined 1.7%. SG&A as a percentage of gross profit for Q1 2026 was 74.3%. Adjusted SG&A to gross profit was 73.3%. Q1 SG&A to growth was impacted by employee benefit costs up $4 million, payroll taxes and other U.K. social programs of $3.5 million, rent and real estate taxes up $7 million and lower automotive units and the impact from lower sales of new and used commercial vehicles at Premier Truck Group. During Q1, we generated $215 million in cash flow from operations and EBITDA of $397 million. During Q1 2026, we invested $63 million in capital expenditures. This is down from $85 million in Q1 2025. We completed acquisitions of 2 Lexus dealerships representing $450 million in estimated annualized revenue. We increased the cash dividend to $1.40 per share, representing the 21st consecutive quarterly increase. On a forward basis, our current dividend yield is approximately 3.4% with a payout ratio of 39% over the last 12 months and we repurchased 170,000 shares of common stock for $26 million. As of March 31, 2026, [ $221 million ] remained available for repurchases under our securities repurchase program. Since the beginning of 2023, we have returned approximately $1.6 billion to shareholders through dividends and share repurchases. At the end of March, non-vehicle long-term debt was $2.6 billion and leverage was only 1.8x, despite completing several large acquisitions over the last 6 months. Floor plan was $4.1 billion, and we have $425 million in vehicle equity. For the quarter, total interest expense increased $2 million. Floor plan interest decreased $4 million due to our cash management and lower interest rates, while other interest expense increased $6 million, primarily from higher borrowings for acquisitions. We estimate a 25 basis point change in interest rates would impact interest expense by approximately $15 million. Our effective tax rate was 27.4% in Q1 2026. The prior year results have been recast for the acquisition of Penske Motor Group using common control as disclosed last quarter. As a reminder, PMG was a partnership prior to our acquisition and was not subject to income tax. Q1 2025 does not reflect federal or state income taxes had PMG been included in our taxable group. Therefore, period-over-period comparisons of net income and earnings per share may not be directly comparable due to the change in tax status of PMG. The impact to the effective tax rate would have been approximately 100 basis points and the impact to earnings per share would have been $0.05. Total inventory was $4.9 billion, up $77 million from December 2025. New vehicle inventory is at a 44-day supply, including 46 days for premium and 29 days for volume foreign. Used vehicle inventories at a 39-day supply with the U.S. at 33 days and the U.K. at 42 days. At the end of March, we had $84 million in cash and liquidity of $1.2 billion. At this time, I will turn the call back to Roger for some final remarks. Roger Penske: Thank you, Shelley. As mentioned, we added 2 Lexus dealerships to PAG during the first quarter. And today, I'd like to welcome our new teams at Lexus Orlando and Lexus Winter Park to our organization. As I said earlier, we had a solid first quarter, and I continue to remain optimistic about our business. New and used retail on motive process remained strong and service and parts continue to grow. Our diversification remains our key strength of our business model, the recovery commercial truck market is underway. We expect to increase new truck orders to benefit the second half of the year and our retail truck dealerships and PTS investment should benefit. Again, today, thanks for joining our call. We'll take questions. Operator: [Operator Instructions] Your first question comes from Michael Ward with Citigroup. Michael Ward: I hope you all are doing well. Weather had a -- had a significant impact on the industry in January and February in the U.S. Can you quantify at all how much you were affected? And were you able to get any of that back? Richard Shearing: Mike, this is Rich here. Good question. I mean as I mentioned in my prepared remarks, 2 significant storms, both -- one in January, one in February, impacted -- the first storm in January, I think, was almost 2,400 miles in its length. So it impacted our businesses from Texas all the way to the Northeast. And so we had either delayed openings, multiple day closures as we had to deal with the cleanup. So February wasn't as bad, but did impact pretty significantly the Northeast. Now the good news is, obviously, the competitors around us in those markets also suffered the same same challenges. So we don't think consumers were running to their dealerships to buy cars while were struggling. But certainly, from a fixed growth standpoint, there was lost business there because that's time you just can't get back. So we had the added expense of the snow removal and then we attribute the fixed gross loss to about $4 million to $5 million. And then in total, overall, about a $6 million impact to our earnings in Q1 related to the weather. Michael Ward: Okay. So you called out -- I don't know if you were calling out or just the cost on the SG&A side of about $15 million. It sounds like some of those will be recurring, I guess, the rent and the health in the U.K. Are those onetime in nature? Are they not recurring? What were you kind of alluding to with that? Michelle Hulgrave: Mike. Yes, a little bit of both. Certainly, rent increases we see year-over-year health benefit plans. We certainly hope those costs go down, but that doesn't seem to be the trend. I wanted to highlight the fact that the U.K. social programs, this is the last quarter before we anniversary those. So it's a bit uncomparable compared to Q1 of 2025. But like I said, we'll see that anniversary here in Q2. Michael Ward: Okay. And that's about 30 to 40 bps, sorry? Michelle Hulgrave: Yes. We estimate without those that our SG&A to growth would be in that 71% to 72% range that we had talked about. So still comfortable in that low 70s range. Michael Ward: Okay. And just lastly, it looks like you've been doing some portfolio rebalancing. Usually, you don't see much movement in the retail automotive revenue mix, but you see a couple of good changes year-over-year. And I'm just wondering if that's a trend we can look to more. Are those going to our focused brands continue to focus on the luxury, the volume form, that's the strategy, correct? Roger Penske: Well, let me say this, that we actually sat with our Board probably 18 months ago to determine what was going to be our strategy on brands, locations not only domestically but internationally. And we felt that we would look at our low performers, and then we looked at what were the expectations of the manufacturers from a CapEx perspective. And then what could we grow that business? And we determined there were probably a number of locations that we would need to sell in order to get a return that we would want on top of that, because of our commitment to go forward with Penske Motor Group, and we had to commit to sell 2 Lexus stores, one in Norwich and one in Madison, Wisconsin, which we completed. Obviously, that gave us the opportunity to buy the Orlando stores and the PMG stores. Along with that, we took out a number of other smaller locations, some larger, some in the U.K. and that generate about 300 -- I'd say, [ $25 million to $350 million ] worth of free cash flow back on these stores, which we sold, which obviously, we used some of that money to pay to buy these other key stores that we're going forward with. So we'll continue to prune the portfolio. We're still in the acquisition business. I think we made the decision in the U.K. to reduce our number of [indiscernible] select stores from 14 to 6, which is paying off. We are taking those locations and adding the Chinese brands in the same showroom. So overall, I think the strategy has worked and we've kept our leverage, as Shelley said, from around 1.5 to 1.8, am I right? Michelle Hulgrave: That's right. Roger Penske: So I think it's been a good movement and will continue. And I think I see our peers doing the same thing because today, the cost of doing business is so high and some of the smaller locations with all the controls you need and the high cost of the best people we just can't see the numbers, give us the returns we want. So all of us are obviously looking for locations, at least where we can add on in key markets. Anthony Pordon: So Mike, this is Tony. Just Page 9 of our earnings presentation is a key chart in the deck that lays out what total revenue is, right? And you can see there, in particular premium, 72% volume, volume non-U.S. is 22%. And then when you look at the Toyota Lexus number, it has jumped up to 18% of our overall business from an automotive standpoint. So very, very key with the acquisitions and the OEM presence that we have. Michael Ward: Proactive plan looks like you're just pulling it off. Operator: Your next question comes from the line of Rajat Gupta with JPMorgan. Rajat Gupta: I just wanted to follow up on PTL. Pretty nice earnings growth in the quarter, obviously despite the lower gain on sale. Obviously, a lot of those improvements are coming from just lower maintenance, debt, fleet costs, et cetera. I'm curious how we should think about the trajectory of PTL earnings for the remainder of the year? Any kind of guardrails you can give us for the full year? Roger Penske: I think number one, we've come from roughly 430,000 units defleeted to 387,000 at the end of the quarter. So that's obviously reduced a significant interest cost in our depreciation has been impacted positively with that. But the good news is that our fleet utilization on the rental side which were before we were down to 71%. It's now moved up to 76%. And I think we've seen that the operating side of our business has been excellent during the quarter and really in Q4 also because our gain on sale obviously has been down $26 million in the quarter. So we were able to pick that back up through utilization through lease revenue and some of our logistics businesses, which provided an overall pickup in our profit -- their profit from $120 million to $142 million. We've got lower operating expenses, obviously, as I mentioned, maintenance, depreciation, et cetera. So it's operations. I think you think about interest, depreciation and gain on sale is down but still higher than it was a year ago, but we're seeing rental utilization up about 500 basis points. Rajat Gupta: Got it. Got it. So I mean, just like a lot of these trends are sustainable like from -- or at least from like a cost and earnings perspective through the remainder of the year on a year-over-year basis? Anthony Pordon: Rajat, could you repeat that, please? Rajat Gupta: I was trying to say that a lot of these trends seem sustainable for the remainder of the year directly from the cost side when you look at the year-over-year trend? Roger Penske: You're talking about PTS? Rajat Gupta: Yes. Roger Penske: Okay. Look, certainly, we are continuing. We probably have another 3,000 or 4,000 units that we'll take out easily during this year from a fleet perspective, we will continue to grow. And also, we're seeing the revenue coming back on rental, we can take some of our off-lease equipment and replace at that point. So I think the older trucks are out now, which we're providing much higher maintenance. So we're seeing that maintenance and entire maintenance much, much better. And I think that the customer acceptance -- this is a key one for you. We're starting to see people signing up for long-term leases. We say there was a pause over the last 90 to 120 days with emissions, with costs, et cetera. and we weren't getting the traction in the month or the quarter, Q1, we saw our lease signings going up, which bodes well for us for the future because these leases are 3, 4, 5 years of economic escalators. Rajat Gupta: Got it. Got it. And just a follow-up on the parts and service business, more on the international side, pretty strong numbers overall. But it looks like if you look at it excluding the FX benefit, growth was probably flat to slightly up. I'm curious if sort of -- if that's correct? And what kind of initiatives are in place to maybe accelerate that growth going forward? Randall Seymore: Rajat, it's Randall. We could take the FX out, that's correct. In the U.K., we were slightly up. But as an example, Italy, we were up 11%; Germany, up 20%, and it's really on the back of customer pay focus because warranty is actually down. And remember, internationally, we don't get the markup on parts like we do here in the U.S. So you only get 10% margin, we're on warranty on the parts, whereas customer pay it's the same. So it's the mix and the focus on customer pay that's driving it with the higher margin business. Rajat Gupta: Got it. What portion of international in the U.K. versus non-U.K. in your numbers there? Roger Penske: Italy was up 11%. Germany was up 20%. Rajat Gupta: I mean like just mix of services, just mix of your business in terms of contribution in U.K. and non-U.K? Anthony Pordon: Rajat, I'll get that back to you off-line after the call. Operator: Your next question comes from the line of Jeff Lick with Stephens. Jeffrey Lick: Question for Rich. Rich, we get into this part of the year kind of April through the rest of the year, lapping against last year. Last year at this time, luxury started to lag the broader auto sector with the exception of April and -- I mean, of August and September with the EVs. Just kind of curious how you're seeing things now as the year plays out because you guys are a bit unique and that you have easier compares. Just kind of curious how you're thinking about the rest of the year on the new luxury and then maybe also talk about as we lap the EV compare with anything to think about there? Richard Shearing: Yes. So I'll touch on the last comment you made relative to EVs. So if you look Q1 this year versus Q1 of 2025, our EV sales were down 61% this year compared to last year. And certainly, in our West Coast in California, there's still a certain level of demand for the BEV. And so the consumer out there. We haven't completely replaced that with hybrids or ICE. So that was a tough compare year-over-year. We thought that the Iran conflict would drive some near-term or short-term demand in BEVs that we just haven't seen materialize. So that escalation in fuel prices hasn't overcome the consumers' concerns about battery electric vehicles, either from a range or infrastructure charging perspective. And so I don't see really a material change occurring in the balance of this year. I think it's kind of stabilized post the tax credit going away in that 4% to 5% of the overall retail sales market. So then coming back to the luxury, you mentioned or someone did earlier that the tough compare, certainly in March, we were at $17.6 million [indiscernible]. April, is it at $17 million. And so we've got some tough comps year-over-year. You look at the premium luxury market, certainly, the sales are a little bit down in those brands. If I look at Audi in Q1 was down about 30% overall as they're launching some new models that need to come into the marketplace. BMW about 15%. And Porsche with the Macan going away, we knew that this year, next year until they relaunch that model will be a little more challenging. So we're down about 18% with them and Mercedes, about the same as BMW down about 15% overall. The good news, I would say, is that the OEMs have now adjusted to the -- what the tariff impact is going to be on their business. Certainly, I think they were holding back money on incentives and programs certainly in the latter half of last year. I'd say they're back in the market. I wouldn't say the incentives are great, but they're good. And the products they're producing are still very desirable. We tend these annual dealer meetings and every single one of them has a bevy of new products that are going to be launching in the market this year that I think are going to be highly desirable. So I think from a model mix and brand mix with our 72% premium luxury, we're still in a good position there. Jeffrey Lick: And anything to call out with service and parts with respect to warranty that you're lapping stop sales, especially on the luxury side? Randall Seymore: So our fixed gross overall was up about 3.5%. We talked about the impact from the storms. An encouraging nugget in there is our customer pay ROs. We talked about that in the last couple of calls, we've been really focused on that segment, too. The recalls, they continue to happen. So if you look at Toyota, they increased the Tundra recall on engines to the 23 and 24 model year units. BMW has got a starter recall that was recently announced, and then Audi on their 3-liter engine has piston replacements, which is about a 30-hour job, and then we're doing a proactive software campaign, too, on the Q5 product. So look, I know the OEMs would prefer not to have these recalls, but they continue to have quality leakage into the marketplace. Operator: Your next question comes from the line of John Babcock with Barclays. John Babcock: Just a quick one on the truck market. I know you're expecting an increase in truck orders, particularly in the second half. Just curious on the sustainability [indiscernible]. I mean I'm sure there's probably a portion of the truck demand is probably driven by expectations for higher prices with some of the regulatory changes. So I'm just kind of curious if you think this is something that you think is long-term sustainable truck demand? Or is this something that you temporarily driven by some of the short-term factors like regulations. Randall Seymore: I certainly think there is some short-term influence on the truck orders similar to what we saw with lack of truck orders in Q3, Q4 last year, John. I think once there was some finality on what the EPA 27 guidelines were going to look like and customers could understand what the rule set was going to be that's what drove the order intake here in the first part of this year, as Roger quoted, up 91% on Class 8. I also think we had a near-term bump in particular for Premier Truck Group with tariff announcements in February. And so there was a grace period that was granted to customers that if they placed orders by the end of -- or sorry, by the beginning of March, they could avoid that tariff price increase, which was between $1,000 and $1,500 depending on heavy-duty or medium-duty and then there's some things structurally that I think have been going on that we've talked about for the last 18 months with the administration, right? The Department of Transportation and FMCSA have really been cracking down on illegal carriers and non-domiciled CDL holders, and that has had an effect of tightening capacity. You see that in the spot rates up 30% to 40%. And year-over-year, and that's driving higher utilization of, say, the legal operators on the road, and we're seeing that manifest itself in our parts and service revenue up just over 4% in that business. And that's the first first time in 6 quarters that we've seen a growth in our fixed gross profit there. And then when you look at the freight rates increasing, we're seeing that drive near-term used truck demand as well. So our volume sales are trending upward there, and our gross profit, as you saw in the quarter, was up almost $4,000. So -- and I think if you look -- if you follow any of the public, J.B. Hunt, Covenant Transport, that they've reported, they would reiterate that they feel that the changes are structural and not temporary in nature. John Babcock: Thanks for all that color. Now just on the M&A side of things, you've increased exposure to Texas -- Toyota and Lexus recently. But on a go-forward basis, should we think about expanding brands? Are there certain geographies you want to tack on to? Also, how are you balancing that with leverage? And what's your comfort level of leverage right now? Roger Penske: Well, I think our leverage gives us all sorts of opportunity, point number one. Point number two, we're sitting with 70-plus percent premium luxury and 21% or 22% volume foreign. And we're focusing obviously on the mix of our business in those particular areas probably more critically and looking for opportunities. I think our goal obviously is to maintain, as Shelley said, our dividend, our buyback and our CapEx. We think by eliminating some of the stores that we have, have allowed us to reduce our CapEx whole fleet by $100 million this year, and that's going to give us the opportunity to continue to focus. I would say, internationally, we've also done some pruning of our businesses there. I think at the end of the day, we're focusing on investments in Australia, in the defense area and the power system and power generation. So a good thing is we have such a diversification. And then obviously, the returns that we're getting from Premier Truck Group, their Freightliner business, they are market share leaders and we'd be looking for other locations in the U.S. and Canada to represent them because those have been turned out to be quite good. And I think what's key is we'll look right now, like the stores we did in Orlando, the right brand, certainly the right location and profitability. So I think we have the luxury of not being in a hurry when you put $2 billion of revenue on, now we've got to continue to integrate those into our company, which I think we're doing well. And we'll again look for ones with a brand, look at Titan and Lexus right now. the lowest day of supply of the industry. We're talking 120 days when you think about it, some of the Lexus stores under 10, and they could continue to keep the product tight and that, to me, is going to be critical, and they're saying, that's where they're going to operate in the future. And we're getting some of that already also. When you look at Land Rover, you look at Porsche and our business is down, not because we're down it's because of supply of the vehicles we want, and that's being impacted by tariffs, et cetera. So we're going to be cautious and there will be people that are confused down because on these businesses, some of the smaller operators if they're contiguous to our circles, we're going to pounce all over those if we can. That's a long answer, I'm sorry. John Babcock: Yes. no thanks. That's perfect. Appreciate it. Operator: Your next question comes from the line of Mike Albanese with StoneX. Unknown Analyst: Could you guys just comment on what you saw in Q1 regarding Chinese models and taking share in international markets? And then a house view on how you think about the implications to premium luxury? And I mean, do you think about leaning into building exposure with these models or just kind of continue to take it slow and monitor. Roger Penske: Let's let -- Randall is the expert on -- in fact just came back from the auto show in China. So he's most current that we have on the phone. But that's again what we're doing, what we're seeing in the U.K. and Europe. Randall Seymore: Yes, Mike. So obviously, the Chinese brands are gaining share in Europe. In fact, the markets that were in the U.K., Italy and Germany, they've more than double. In fact, if you look at Australia last year, the Chinese brands were 15% and year-to-date this year, through the first quarter, they're up to 23%. So we are -- we've put our toe in the water in the U.K. and in Germany starting really effectively at the beginning of the year, we started late last year, but this is our first full quarter. We've got 11 locations between the U.K. and Germany right now, 4 different brands. And I would say, first of all, our strategy has been to put these brands into existing facilities. So in the U.K., we have our Sytner Select, which is our big box used car retail. So we're able to put the brand there with a, call it, a minimal CI spend and we're in business. So we don't have additional fixed expense, we can sweat the asset a little bit more. But frankly, first blush so far has been positive. We're going to take a walk before run approach in the big box used car retail, we get about 400 guests per week. So these Chinese OEMs are eager to partner with us more. So that's one of the reasons I went to the auto show is really to understand the difference between these brands. You can't just throw an umbrella, say, Chinese brands, just like any Western brands that each of them have their pros and cons. So look, we're going to expand where it makes sense, but we're going to be, let's say, eyes wide open, cautious as we do it. Unknown Analyst: Great. And then probably just follow up to that, it probably matters brand by brand as you alluded to. But could you just comment on what you're seeing in terms of unit profitability on these vehicles? Randall Seymore: Yes. It's -- look, it differs slightly, I would say, in the U.K., Geely and Cherry have both been good to deal with. One concern like with any brand, got to make sure they don't have over inventory that they're not going to over dealer the market because then it's just a race to the bottom. And the other channels as you think about you open a brand-new store stand-alone, you don't have any fixed operations. So instead of running at 75% fixed absorption at 0, right, at the beginning. Now over time, that will increase. But that's to get a return on that investment. So -- and then in Germany, we have BYD and MG, and we just started those. So I would say it's too early to tell. Roger Penske: I'd say when you look at the margins in the big boxes, we're probably getting a couple of thousand pounds more on the Chinese brands that are with our used vehicles we're selling in the same store. So right now, it could be Christmas. We don't know what's going to happen as we go forward. Richard Shearing: But look at the product's good -- we're not seeing any consumer pushback. The mix has been about 50% retail, 50% fleet. Obviously, they're going to put some in fleet to seed the market and get some volume up and awareness in the marketplace. But I think their approach has been sensible overall. Again, as a dealer, you just caution not to -- that they don't saturate the market. Unknown Analyst: Okay. And then just my last question on this front. Is there anything we should be thinking about in terms of implications on after sales with these brands? I mean, is it the same process, getting them in the service lines and the same general RO that you would get on premium luxury. Yes, go ahead. Randall Seymore: Look, it's a good question, more from the standpoint of, hey, are they prepared and hence, are we prepared that we've got all the right safety stock from a parts standpoint that when the customer does come in, that we can handle them officially. So that's 1 big message I had with these OEMs as I met with them, and they seem to understand that we haven't had any challenges yet. But it's been so minimal, Mike, relative to the number of customers we've had come in. I can't say dollar period. But one thing is these cars have a 7-year warranty on it. So we think the customer is going to be stickier rather than having a 3- or 4-year warranty, they'll keep coming back. Roger Penske: We don't know what the used car bias going to be. That's -- and then also is the captive finance companies, which lead the brands around the world that has the best captive finance the ones that we see are best for us. So right now, they're using banks and other things in order to support it, then they will buy down the rate to be competitive in the market. So those are all things. And we don't have units in operation. That's why Randall decide if we're going to do it, we're going to put it in places where we already have revenue and we have a parts and service just in different cargoes on the left on the more ... Randall Seymore: Those select locations where we have full fixed operations in each of them. So it's -- again, we're just -- we're utilizing our assets better. Roger Penske: We're trying in a different market to what's going on in Germany versus what's happened in the U.K., you might talk a little bit about Australia. Richard Shearing: Yes, from a Chinese standpoint? Roger Penske: Yes. Richard Shearing: Yes. Well, look, we don't have any Chinese brands there now. But like I said, it's up to 23% and that's 1 market where the Australia is pinched a little bit more with lack of fuel. They've only got 2 refineries there, so they're dependent on imports. So their fuel price went up more than most countries. And they've seen significant increase in BEV sales along with the Chinese sales. So think about it, they went from 15% to 23% in just 1 quarter. And those customers now are getting the taste of the quality of those brands. So it's it's a disruptor for sure. Operator: Your next question comes from the line of Daniela Haigian with Morgan Stanley. Daniela Haigian: So switching gears a little bit to a more thematic question. The trend of energy and auto is converging on a global scale is getting a lot of interest from investors. Could you speak a little bit about your Australian, New Zealand segment? And any opportunity there? Randall Seymore: Well, thanks, Danielle. It's Randall again. So first of all, let's say, the energy business is vital across the world, but particularly in Australia, the data center business is exploding. And we have a 75% market share in data center backup power for the power range of 1,250 kilowatt and higher, which the majority of them are. So that's just our business pipeline there is extremely strong. We're very tight with numerous customers and that's good news. The bad news with that is you sell the engine and it sits there, right? You go, you do maintenance on it once a month, but it doesn't run. So you don't have that after sales annuity. So where we're focused is to continue to grow our prime power strategy and units in operation. So as an example, 4 years ago, we built a power station with our Bergen engines in the Northwest of Australia, which for our biggest mining customer, 175-megawatt stations, 15 engines, 20 cylinders per engine. These are massive engines, 18 liters per cylinder. These are and these run 7,000 to 8,000 hours a year. And so we're in the cycle right now after they got this commissioned, where the 16,000-hour maintenance interval, you have to take the heads off and remanufacture them. We have all that capability and expertise to remanufacture these heads in country as part of Penske Australia. So after those 15 engines or 300 cylinder heads, that's about 15,000 hours worth of work. So our strategy is to do more -- get more units in operation than our prime power, and we've got that whole vertical strategy and approach and solution for those customers in the market. So it's a key strategy without a doubt for us. Operator: Your next question comes from the line of Alex Perry with Bank of America. Alexander Perry: Congrats on the strong quarter. I wanted to ask about the outlook in the U.K. sort of ex the Chinese brand sort of the core outlook in the U.K. And then just 1 piece on the Chinese brands. Are you expecting -- I know you said earlier you're going to take a measured approach there, but will you continue to add doors there. So just wanted to get your thoughts on the U.K. sort of outside of what's going on with the Chinese brands. Roger Penske: Yes. I think we're going to be measured is the right word, but it was interesting, again, meeting with all these OEMs and understanding the strengths and what some of their strategies are, how that aligns with our strategies. I think we'll continue to evaluate 2 things. Number one, which brands make sense, most sense to continue to partner with. And number two, where we have available facility infrastructure, again, with the strategy of saying we already have it, let's put it there. And because, again, with the lack of units in operation, you don't have that after sales. So the cost to get in is minimal. And then look, we're going to, as usual, be good partners with these brands and want to grow and help them understand the market better. But they're going to limit us based on [indiscernible]. Randall Seymore: Yes. Roger Penske: Now we start to see what the discounting is because we don't want to handle [indiscernible]. Randall Seymore: Correct. Correct. Alexander Perry: Yes, that makes a lot of sense. And then just on inventory levels across the network more broadly. Can you just talk about how you feel about inventory levels? It sounds like there are certain brands [indiscernible] Lexus where you're light any where you think you're over in inventory? And then -- and the brands that you're like, how much do you think that, that sort of restricting the sales velocity and any line of sight into those improving? Richard Shearing: Yes, Alex, Rich here. So I'll speak to the U.S. and then Randall can cover internationally. Just as a top side from an overall perspective, new, we ended the quarter 43 days and unused 33 days and the new compared to 52 days a year ago. So we're down from a day to supply standpoint, 9 days. You've got to look at both the day supply and the model mix within the inventory that you have by brand. And so even though we would say that Toyota Lexus is great from a days supply standpoint, we would prefer to have maybe more wrap forwards in that inventory and less [indiscernible] as an example. So you've got to look at it from both perspectives. But certainly, they are the healthiest in maintaining that supply versus demand balance. We talked last year, we saw Honda maybe overproduced a little bit and our days supply crept up there. They had a plant closure earlier this year that has got them back more in line. And then we still got to balance the BEV mix in there. We've seen that come back up after the the tax credit went away at the end of September, and we had that sell-through. We were down 12 days supply on bev. We're up to 78 days supply now. And so that's higher than certainly our overall new car averages and certainly higher than we would want it to be. And then I think from a use perspective, we would prefer to have more used right now. There is demand in the used car market. but we've been disciplined again on our sourcing of used cars. We could go out and buy more used cars, but it would have the counter effect of lowering our grosses on the other side of the ledger. So we've stayed within our wheelhouse of 0- to 4-year-old used cars, not going upmarket in the 8-plus year range for used cars. So that's -- that's a little bit of color on the U.S. So Randall? Randall Seymore: Yes. Look, it's very similar in the U.K., our new car supply is 40 days and giving you an idea the lowest day supplies land over at 35 days and the highest is Audi at 45 days. So the band is pretty small with all the brands in between. And then our used car supply is 42 days, similar to the U.S. is difficult now, but I would say -- our team in the U.K. has done a fantastic job with acquisition of used in proper appraisal. The available growth we have in our used cars right now is as best it's been in months. So anyway, we feel we're in very good shape. Operator: Your next question comes from the line of David Whiston with Morningstar. David Whiston: On service [indiscernible] utilization, you talked about it being, I think, 84%. So I was just curious what prevents that from being -- not being 100%? Is it purely labor shortages or other variables? Richard Shearing: Yes. There's -- it's a combination of tax because that is a measure of tech ratio to base. And so our tech count is up 3%. Our guys would tell you, you don't want and we're probably never going to have 100% [indiscernible] utilization because in order to achieve that, you need that, to Randall's comments earlier, have every part you need at the time you need it and invariably, that's never the case. And so you -- you're in a process of having a car torn down, waiting on a part that's tying up a bay or you -- in the case of battery electric vehicles, you've got a flat Bay and you've you need a bay next to it to reinstall the battery. So we feel pretty good at 84%. We probably can tick that up a few percentage points more. But with the flexibility we need for the type of work we do, growing north of 90% would be a challenge. Roger Penske: Yes, I think, Rich, also these bigger jobs or we're taking engines out of [indiscernible] and things like that, you will see the second [indiscernible] year [indiscernible] in order to be able to do the work. It's flexible. But we are -- to put it in perspective, we're adding -- we're going to 100 bays at Longo Toyota, in California. We're building a full dealership with 100 bays and Hutto Texas outside of Austin, and we're adding another 30 bays to Central Florida Chadwell get us to almost 100%. So our commitment because the units in operation for this brand, make this a real opportunity, talk about where growth will be. And depending on its warranty, look, we like to warranty work, but the customer comes back because you've got a car that's not in for warranty every day. So I think that's key and as for Toyota, in many cases, leads the market. And there's no question that our biggest push when we talk about investment is some of the showroom CapEx that's required because in many cases, that means we got to tariff our billing. We just did this in San Diego at Lexus, we spent by almost a year, new furniture, et cetera, et cetera. I think it's done great, but we have to go further than that. This is some of the questions that we have today. what is the store making, what's the expectation of the OEM. And we're pushing back to them in a good way, trying to explain to them, we needed to spend more in parts of service let's make the showroom smaller, let's put more cars outside and work on more inside. I know it's opposite of what the thinking is. But we have Bill Brown Ford, #1 Ford dealer in the country, we could put 3 cars in the showroom and they sold 600 cars this month. And what are we doing, we're expanding the service. So there is no question in the back end. And that's why we like Rich's business in premium truck, what are you 120%, 130% fixed coverage? Richard Shearing: That's Premier Truck, yes, we're 127%. Roger Penske: 127%. So how many trucks you have in the showroom? Richard Shearing: Zero, [indiscernible]. Roger Penske: [indiscernible] based, David. Operator: That does conclude our question-and-answer session. And I would now like to turn the conference back over to Mr. Penske for closing comments. Roger Penske: Thanks for joining us. We'll see you next quarter. Thank you. Operator: Ladies and gentlemen, that does conclude today's call. Thank you all for joining, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Silicon Motion Technology Corporation's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. This conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 as amended. Such forward-looking statements include, without limitation, statements regarding trends in the semiconductor industry and our future results of operations, financial condition and business prospects. Although such statements are based on our own information and information from other sources we believe to be reliable, you should not place undue reliance on them. These statements involve risks and uncertainties, and actual market trends and our results may differ materially from those expressed or implied in these forward-looking statements for a variety of reasons. Potential risks and uncertainties include, but are not limited to, continued competitive pressure in the semiconductor industry and the effect of such pressure on prices, unpredictable changes in technology and consumer demand for multimedia consumer electronics, the state of and any change in our relationship with our major customers and changes in political, economic, legal and social conditions in Taiwan. For additional discussion of these risks and uncertainties and other factors, please see the documents we file from time to time with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements, which apply only as of the date of this conference call. And with that, I'll now hand you over to Mr. Tom Sepenzis, Senior Director of IR and Strategy. Please go ahead. Thomas Andrew Sepenzis: Good morning, everyone, and welcome to Silicon Motion's First Quarter 2026 Financial Results Conference Call and Webcast. Joining me today is Wallace Kou, our President and CEO; and Jason Tsai, our CFO. Wallace will first provide a review of our key business developments, and then Jason will discuss our first quarter results and outlook. Following our prepared remarks, we will conclude with a Q&A session. Before we begin, I would like to remind you of our safe harbor policy, which was read at the start of this call. For a comprehensive overview of the risks involved in investing in our securities, please refer to our filings with the U.S. Securities and Exchange Commission. For more details on our financial results, please refer to our press release, which was filed on Form 6-K after the close of the market yesterday. This webcast will be available for replay in the Investor Relations section of our website for a limited time. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore, chosen to provide this information to enable you to perform comparisons of our operating results in a manner consistent with how we analyze our own operating results. The reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued yesterday. We ask that you review it in conjunction with this call. With that, I will turn the call over to Wallace. Chia-Chang Kou: Thank you, Tom. Hello, and thank you for joining our call today. I'm pleased to report another quarter of better-than-expected results, highlighted by record revenue of $342.1 million. Growth and operating margin both exceeded our guidance as stronger-than-anticipated revenue drove improved overall profitability. We saw strong performance across embedded eMMC and UFS as well as our Ferri and boot drive solutions, driving solid growth this quarter, following an exceptional start and given our current pipeline of win across all our markets, I'm confident that we will deliver meaningful growth throughout what should be a record revenue year for Silicon Motion. Now let me first address the current market environment. The memory and storage market continue to create significant challenges across the market in which we operate. NAND prices continue to rise sharply with a sequential increase of about 55% to 60% in the first quarter of 2026. AI adoption has driven significant demand across all memory and storage technologies, including HBM, DRAM, NAND and HDD. Growing demand from hyperscalers and cloud service providers for AI infrastructure deployment, combined with the low NAND bit growth and insufficient DRAM capacity have led to significant scarcity, negatively impacting many markets include smartphone and PC, particularly in the low end. Despite these challenges, we executed well in the first quarter with our backlog design win and new opportunity ramping throughout the year, we are confident in our ability to deliver solid growth. We have spent many years developing deep relationship with the NAND flash makers, which have allowed us to gain share as NAND makers outsource more of their controller requirement. These strong relationships have also allowed us to secure NAND in the difficult environment as we ramp our Ferri and enterprise boot drive business and help our module maker and AI smart storage system customers secure NAND, making us an even more valuable and strategic partner. While we expect the NAND shortage will remain challenging throughout 2026 and '27, we have never been better positioned. We have and will continue to benefit from the fundamental shift by the NAND maker towards higher-end and high-capacity enterprise and data center solutions, driving a greater reliance on Silicon Motion to serve the consumer market and opening a new opportunity in automotive and lower density storage solution. As a company, we are at the start of the wholesale transformation as we scale our new cloud AI opportunity with our enterprise MonTitan controller and boot drive storage products, which will drive meaningful growth to both our top and bottom line going forward. We are also benefiting from our edge AI opportunity, including smartphones, PC, automotive, IoT and other applications where we are seeing a rapid shift toward next-generation storage capabilities. Silicon Motion is playing a pivotal role with an expanding pipeline of products spanning edge AI and cloud AI platform in 2026 and beyond. Given our current backlog and design win pipeline, we expect sequential growth across our product portfolio in 2026 as we capitalize on our investment, gain share in existing markets and benefit from our diversification strategy, starting with another strong sequential quarter of growth of 15% to 20% in June. I will now discuss our embedded eMMC and UFS business, which include controllers for smartphone and other IoT and connected devices. AI is fundamentally reshaping how memory and storage makers are allocating capital. Memory and storage makers are increasingly redirecting internal resources towards DRAM, HBM and other high-performance memory technologies for AI workload and stepping back from edge market, including phone and other smart devices. For the first quarter, our mobile business was up between 30% to 35% sequentially and over 140% year-over-year, significantly outperforming the industry as share gain further fuel strong growth for our business. The mobile market is undergoing a rapid shift as NAND manufacturers accelerate the outsourcing of controller to third party, especially Silicon Motion. Some NAND makers are also finding increasingly attractive to monetize wafer rather than investing in development of complete eMMC and UFS solutions for smartphone. Module makers have stepped in to fill this gap, and they rely heavily on Silicon Motion controller and firmware. Our relationship with the NAND supplier and our ability to assist our module maker customers in securing NAND put us in the best position to benefit from the rapidly shifting landscape in the mobile market. Looking ahead, the smartphone market is likely to stay pressured due to ongoing NAND and DRAM supply constraints. Chinese handset OEMs are expected to face greater headwind than Apple, given Apple's purchasing scale and Samsung given its captive memory supply. At the start of the year, we projected global smartphone unit volume will decline by 5% to 10% in 2026. However, recent estimates suggest the decline could be more than 10% year-over-year with a greater weakness concentrated in China. Importantly, much of this unit pressure is occurring at the low end of the smartphone market, where we have limited exposure. Elevated memory and storage costs make it increasingly difficult to produce low-cost smartphone, a dynamic we expect to persist through at least the end of '26 to '27. Our eMMC business remains stronger than expected, driven by multiple markets, including automotive, smart TV, AI glasses, smart watches, next-generation set-top box that demand higher capacity storage and many others. The market for eMMC are large and growing at over 900 million units sold every year. With major flash makers essentially gone from this segment, competition is decreasing and our revenue contribution from this market is growing. Based on our current backlog, customer forecast and continuing share gains, we expect another very strong year of growth in our embedded eMMC and UFS business with share gains dramatically outpacing the macro pressure on smartphone unit sales. Moving on to our SSD business, which includes edge SSD and enterprise controllers. In the first quarter, our overall SSD controller business revenue declined approximately 10% sequentially, in line with the seasonal trend, but was up approximately 45% year-over-year as we benefited from the early impact of PCIe 5 on our mix and the early ramp of our MonTitan controllers. For our edge SSD business, our client SSD controllers are utilized in a variety of products, including PC, gaming console and PC workstation. The PC market has been a challenging area so far this year given supply constraints and high prices associated with both NAND and DRAM. PC manufacturers are lowering specification for new computers and passing on higher NAND cost to consumers, which we expect will contribute to overall unit decline in the PC market in 2026, especially at the low end. Fortunately, for Silicon Motion, our products span the market from value line to the high end, and we continue to gain share across the range of devices as the NAND market makers exit the consumer segment. 2026 will be a defining year for our client SSD business. PCIe 5 began to displace older technologies. Our 8-channel PCIe 5 controller leads the market in performance and ramp steadily throughout 2025. While we expect a DRAM supply constraint could limit growth of this high-end controller in 2026, it is still highly sought for this unmatched power and performance. In December, we launched our 4-channel DRAMless PCIe 5 controller and at a mass market, and we expect this to become the volume leading PCIe 5 chip in our portfolio this year. This controller bring PCIe 5 performance to a broader audience at a more accessible price point and remove a significant component hurdle for our customers at the time when DRAM availability is constrained and the costs are elevated. We have our NAND flash maker customer for each of our PCIe 5 controller well as nearly all the module makers and expected to drive higher ASP and improve margin in our client SSD business throughout 2026 as PCIe 5 grow as a percentage of our sales mix. Entering this year, we estimate that the PC market will experience unit decline of 5% to 10% in 2026, given the tightening NAND and DRAM supply and increased prices. Current expectations are a bit lower with anticipate unit decline now in the 10% plus range. Despite this, we expect to grow our edge SSD business through a combination of increased market share and higher ASP as our PCIe 5 controller continue to ramp and as NAND flash maker retrieve from edge market in favor enterprise and cloud AI. For our MonTitan enterprise controller business, our cloud AI opportunity in the data center and AI infrastructure are growing rapidly, and we are in the early innings. NAND is a central part of enterprise and AI infrastructure deployment spanning warm storage, compute storage and increasingly near CPU and near GPU storage applications. The need for speed, lower latency, greater power efficiency is driving a technological shift in the data center, and MonTitan is squarely in the middle of the transition. MonTitan when paired with the TLC NAND power high-performance CMX, KVCache and compute SSD using near CPU and near GPU environment. When paired with the QLC NAND, MonTitan enable high-capacity, high-performance enterprise and AI data storage. During the December quarter, end user qualification of TLC-based and high-performance compute SSD powered by MonTitan began with multiple customers. This qualification have been progressing well, and the end customers are now expected to begin volume commercial ramp in the current quarter, one quarter earlier than expected. Currently, we see greater demand for TLC-based CMX compute and KVCache SSD controller than for QLC given a slower rollout of 2 terabit NAND than initially expected. While we anticipate more initial revenue contribution to come from TLC configurate MonTitan solution, we believe QLC configure solution will begin contributing more meaningful later this year and long term. High capacity storage SSD leveraging QLC NAND will represent the largest addressable market for MonTitan, and we expect to begin ramping multiple customers as broader availability of the next-generation 2-terabit QLC NAND die become available from nearly all NAND makers and as supply returned to more normal levels. Our QLC solution offer meaningful advantage over HDD for AI inference workload, faster assets, higher speed, lower power consumption and improving cost to jatterory. I'm excited to announce that our MonTitan customer plan to begin ramping of 3 Tier 1 Asian CSP and 2 U.S. Tier 1 CSP later this year with both TLC compute and QLC1ory SSD solutions. In the third quarter, we expect to tape-out our first 4-nanometer controller, a PCIe 6 MonTitan controller targeting hyperscaler and CSPs. It has been developed in close collaboration with multiple partners and customers, and we expect it to drive the next phase of MonTitan growth beginning in the 2027, '28 time frame. Importantly, we have already secured design wins with multiple Tier 1 customers with volume expected to ramp meaningfully in 2028. Given the traction we are seeing and the progression of end user qualification for both TLC and QLC implementation of MonTitan, we are increasingly confident that the business will grow rapidly throughout this year and at our target run rate of 5% to 10% of our now expanded 2026 revenue expectation with further growth anticipated in 2027 and beyond as our entry into the enterprise market scales meaningfully over time. And finally, I would like to provide an update on our Ferri and the boot drive storage business. Our Ferri and boot drive storage business delivered exceptional performance in the March quarter as we began scaling several new projects in Ferri for automotive as well as in our emerging enterprise boot drive business. So this business are growing rapidly this year. Sourcing NAND is becoming more critical to our long-term success. Our unparalleled relationship with the NAND maker has become a key differentiation and has enabled us to secure NAND from 3 different makers, which will ensure we will remain a resilient supplier of Ferri solution and boot drive for our customers despite the increasing supply constraints. NAND supply allocation for 2026 were largely finalized by all flash makers by mid last year. Our ability to secure NAND has given us a meaningful competitive advantage as we are one of few suppliers globally able to consistently source NAND to support our customers' accelerating requirements. Ultra storage is rapidly becoming one of our most exciting growth opportunity as we are actively engaged with multiple customers to build solutions that operate across a variety of platforms. This includes leading DPU, Ethernet and NVLink switches and other opportunity across different AI infrastructure architecture. In the fourth quarter of 2025, we began volume boot drive shipment to a leading AI GPU manufacturer for their current DPU product. In the first quarter, we worked with that customer to qualify next-generation DPU design as well as Ethernet and NVLink switches of their new GPU CPU platform to be launched in the second half of this year. As our customers transition to the next-generation GPU CPU platform, our opportunity is increasing rapidly with a much broader footprint beyond the DPU boot drive and with the density that increased 2 to 4x from the previous generation. We anticipate strong revenue contribution and growth with this customer this year and throughout 2027. In addition to this customer, we have recently won a design with a leading telecommunication infrastructure provider and will be ramping initial scale with them later this year. We are also sampling with a leading search engine company for its TPU architecture as well. And we will continue to develop a new boot storage device built around our leading controller to drive future growth. Our Ferri business is experiencing strong demand from automotive and industrial customers as the NAND maker continue to shift away from lower density solution to focus on higher ASP, higher-density enterprise solution. Our more than 10 years of developing automotive-grade a solution provides significant differentiation by offering reliable supply, proven technology, dedicated technical support and qualification expertise tailored to the automotive market. As a result of this investment, demand from global automotive OEMs and their subsystem supplier continue to accelerate across the U.S., Europe, China and Japan. We are gaining meaningful share, creating a strong pipeline of near-term revenue and long-term sustainable growth opportunities. In conclusion, the first quarter was exceptional, delivering our highest quarterly revenue at Silicon Motion as we continue to drive meaningful share growth across our markets. Despite ongoing supply constraints and price increases associated with the NAND and DRAM, we continue to expect that we will deliver sequential growth throughout 2026 as we reap the benefit from the investments we have made over the past few years. This growth was across all our major business propelled by our growing cloud AI opportunity with our enterprise AI product, including MonTitan and our emerging boot drive storage business that are just beginning to ramp. We are in the strongest position in our company history with a deeper product portfolio, growing foothold in edge and cloud AI with multiple opportunity growing in tandem in the legacy and new markets. The successes we have made through the partnership with all the NAND makers over the past many years have given us an unparalleled advantage as we leverage these relationships to gain access to NAND supply. This relationship as a strategic differentiation for our company, and I am extremely confident in our ability to deliver broad-based sustainable growth as we scale both established and emerging opportunities across the business in 2026 and beyond. Now let me turn the call to Jason to go over our financial performance and outlook. Jason Tsai: Thank you, Wallace, and good morning, everyone, for joining us today. I will discuss additional details of our first quarter results and then provide our outlook. Please note that my comments today will focus primarily on our non-GAAP results unless otherwise specifically noted. The reconciliation of our GAAP to non-GAAP data is included in the earnings release issued yesterday. This was an outstanding start to the year for Silicon Motion as our investments over the past several years are bearing fruit. We're gaining share across our entire portfolio in a difficult macro environment and rapidly expanding into new opportunities in edge and cloud AI applications, which should drive -- which should continue to drive significant top and bottom line outperformance. In the March quarter, sales increased 23% sequentially and 105% year-on-year to $342.1 million, coming in well above the high end of our guided range, delivering our second consecutive quarter of record revenue. Outperformance in the quarter came primarily from our embedded eMMC and UFS controllers and strong growth in our Ferri and boot drive storage business. Gross margin was 47.2%, above our guided range of 46% to 47% as we capitalized on new product introductions. Operating expenses increased sequentially to $99.2 million, given increased investments in our emerging MonTitan AI and enterprise SSD controller and boot drive storage solutions. Operating margin was 18.2%, above our guided range, driven by higher-than-expected revenue and gross margin during the March quarter. Earnings per ADS was $1.58. Total stock compensation, which we exclude from non-GAAP results, was $8.4 million in 1Q '26. We had $210.9 million cash, cash equivalents and restricted cash at the end of the first quarter compared to $277.1 million at the end of the fourth quarter of 2025. Cash decreased in the first quarter due to a combination of dividend payment of $16.9 million and an increase in inventory to support our expected strong business ramp. Our team is executing exceptionally well in this challenging NAND and DRAM pricing and supply environment. We continue to invest in advanced geometry products for both our established markets and our emerging enterprise markets, including MonTitan SSD and enterprise boot drive storage solutions. These investments will continue throughout 2026 as we support the growing demand for our enterprise portfolio. For the second quarter of '26, we now expect revenue to grow 15% to 20% sequentially to $393 million to $411 million. We see strength across nearly all our product segments with an emphasis on continuing market share gains and new cloud AI opportunities with our MonTitan and boot drive business as they ramp. Gross margins are expected to increase sequentially to 48.5% to 49.5% in the June quarter, given the product mix assisted by greater contribution from MonTitan and our PCIe 5 controllers. Operating margin is expected to be in the range of 21% to 22%, and our effective tax rate is expected to be 19%. Stock-based compensation and dispute-related expenses is expected to be in the range of $3.6 million to $4.6 million. 2026 is on track to deliver record revenue for Silicon Motion with strength across all of our major product lines. We expect sequential top line growth for the remainder of the year with further improvements in profitability. We still anticipate additional development costs, which will drive higher operating expenses in the second and third quarters of this year, which will be more than offset by higher revenue and gross margin performance. We anticipate our full year 2026 operating margin to improve as compared to '25 despite our higher investments this year. We are navigating the current memory and storage supply constraints and high pricing environment with remarkable success, driven by our relentless strategy of relationship building with NAND flash makers over the past 20-plus years. We are also beginning to reap the benefits of our multiyear investments in eSSDs for enterprise and AI with MonTitan and our growing boot drive storage business beginning to ramp in volume. Our leading position in merchant controller, combined with unmatched NAND maker partnerships will drive higher share across eMMC and UFS, client SSDs, enterprise, automotive, boot drives and the high-performance, high-capacity enterprise and data center storage markets. We expect this will lead to significant revenue growth for Silicon Motion in 2026 and the years to come. I look forward to sharing more detail on our progress when we report next quarter. This concludes our prepared remarks. I'd like to open up for questions now. Operator? Operator: [Operator Instructions] We will now take our first question from the line of Neil Young of Needham & Company. Neil Young: So it obviously sounds like everything is supposed to grow quarter-on-quarter throughout the year. But maybe specifically looking to 2Q, could you sort of rank the segments on what you think should grow the most and what you think should grow the least? Jason Tsai: We anticipate growth, as I said, across all of our business segments. I think, obviously, we've had some very strong growth in eMMC and UFS early on in the year. If you take a look at our automotive, Ferri and our boot drives, we're just in the early stages of that ramping. So we do anticipate stronger growth from those products. And then certainly, the rest of the other products continue to grow as well throughout the -- for the quarter. Neil Young: Okay. And then I have a follow-up. So within the eMMC and UFS business, it sounds like it's diversifying a little bit away from handsets. Could you maybe update us on the mix of handset revenue in the business versus sort of the broad markets that you talk about? Chia-Chang Kou: So for our eMMC and UFS controller business, UFS majority is in handset. I think eMMC majority is in the smart devices such as smart glasses -- and IoT device, smart TV, new set-top box and smart door lock and many others is going to the automotive. So I think the -- although the smartphone unit shipment will decline, but our overall eMMC UFS controller shipment will continue to grow throughout the year. Jason Tsai: Neil, we also anticipate MonTitan to begin to ramp more meaningfully in the second quarter -- starting in the second quarter as well. So that will be another growth vector for our second quarter. Operator: We will now take our next question from the line of Mehdi Hosseini of Susquehanna Financial Group. Unknown Analyst: So this is Amy filling in for Mehdi. The first one is with the new SM8008 product launch in March, can you give a bit more color on the boot drive revenue trajectory? I know the contribution of revenue is small this year. So how should we frame the ramp from here? And what does a more meaningful contribution year look like? And I have a follow-up. Jason Tsai: So we don't break out those segments specifically. But as I said before, we do anticipate boot drives and Ferri to be more meaningful contributors of revenue in the second quarter as well as throughout 2026. SM8008 is a boot drive controller that was introduced, and that will be part of the portfolio of solutions that we have in this category of products, but we have other solutions here as well that have been ramping. Chia-Chang Kou: So I mean, let me add some comments. For SM8000A, our PCIe Gen5 high-end boot drive controller, primarily selling the controller and the firmware to the customer who make a boot drive solution. So for this year, most of our boot drive solution were not based on 8000A controller. This is only ship specific to certain customer, major customer, that will start to ship by late this year. Unknown Analyst: Got it. Really helpful. And my next question is regarding the revenue diversification. Do you remain on target to have 20% of your total revenue from a mix of MonTitan boot drive and auto? Chia-Chang Kou: Yes. We definitely will reach the goal. I think we quarter-by-quarter figure. We didn't give a full year guidance, but wait for our next quarter results and the guidance for Q3. Operator: We will now take our next question from Suji Desilva of ROTH Capital. Sujeeva De Silva: Wallace, Jason, Tom, congratulations on the progress here. Perhaps you can give us some fundamental color here. Maybe understanding how the second half versus first half half-over-half revenue would be this year perhaps versus typical years? And is 50% gross margin potentially in the near future? Or any puts and takes there would be helpful. Chia-Chang Kou: I think, first of all, 50% gross margin is definitely achievable. We're confident for this year. The second is we cannot give you the -- we just say quarter-by-quarter sequentially. So we'll continue to grow quarter-by-quarter, but we cannot give you a percentage regarding first half, second half. Sujeeva De Silva: Okay. Jason, can you remind us what the typical year is? Or do you have that data? Jason Tsai: Yes. I mean, typically, we're about 45, 55, somewhere in that ballpark. Sujeeva De Silva: Great. And then my other question is around MonTitan. Can you give us an update on how many customers are ramping today that are going to ramp start near term and how many you have or pipeline? Any update on MonTitan number of customers would be helpful. Chia-Chang Kou: So MonTitan, we are ramping today in production with 2 customers, but we are going to have 5 additional major customers from CSP by late this year, 3 from Asia, 2 from U.S. Operator: We will now take our next question from Gokul Hariharan of JPMorgan. Gokul Hariharan: Great results. So Wallace, I just wanted to dig in a little bit on your comment about having more interest on the MonTitan solution from TLC NAND and KVCache, especially for the CMX piece of the equation. Could you talk a little bit about what has changed there, given I think previously, I think you were a lot more optimistic about the QLC NAND solution, and that was kind of like the key selling point for MonTitan given Silicon Motion's experience in managing QLC NAND. And in addition to that, can you also talk a little bit about how is the adoption that you're seeing from a lot of these customers on the CMX solution or the previously called ICMS solution -- is that largely the 5 customers or at least the 2 non-Asia customers that you're seeing ramping up along the CSPs? Is that related to the CMX solution? Chia-Chang Kou: Okay. You have a very long and good questions. Let me try to answer one by one. First of all, because the NAND price increased dramatically and because the NAND supply shortage and the most of the majority output and taken away by the CSP customer. Now because the NAND price increased dramatically, so the customer who originally designed with the QLC with 128 terabyte, even higher capacity, they have certain drawback because the price increased almost 5 to 10x compared with a year ago. It is very, very unlikely. So we see more demand, either the QLC capacity reduced or they're shifting more for compute storage. As everybody know, compute storage, we say is the compute SSD, which is next to CPU and the new compute SSD, which is called by NVIDIA CMX content memory storage is for KVCache for AI inference is also use TLC because latency is very, very important. So we see more and more customers moving to TLC with a smaller capacity like 4 and 16 terabyte. And this is really a benefit for Silicon Motion because we ship more controller. But for QLC, we also still have 2 customers continue and ramping later this year, and they are able -- we can help -- we help them to secure NAND supply because the QLC 2 terabit today only have 3 NAND maker can provide the production. I think wait for 1 more year, we see all the NAND maker can produce QLC availability will be better. We will see more demand for high-capacity QLC and supply will become more normal. So that situation we see. Regarding the CSP customer, because MonTitan are one of the unique technology called performance shaping, which is very, very good for AI inference because when AI inference go to KVCache, you need to have managed multiple token and our MonTitan have the architecture can handle 4 tokens simultaneously. That's why the many, many leading customers and CSP like the great architecture. That's why we see demand is very, very high from U.S. to Asia. Gokul Hariharan: Got it. That's very clear. Just on the client SSD controller side, I do notice that the strength is still very robust even in a reasonably challenging PC market. Do you sense any pull-forward demand from some of these customers? Because this is something that we hear from some of the other vendors that even though end demand has been not that great, there's been some pull forward demand, customers trying to stock up inventory ahead of cost hikes and price increases. Is that something that you're seeing among your customers? And secondly, when you talk about NAND makers exiting this market, does it change the threshold in terms of what kind of market share you could eventually have of client SSD? I think previously, you've talked about maybe 50% or 40%, 50%. Is that threshold increasing given the industry trends we are seeing? Chia-Chang Kou: Okay. I think you asked a very good question. As everybody knows, the NAND supply is shortage and the NAND maker allocate less SSD to PC OEM customers. But this trend benefit for Silicon Motion because, first of all, we get a more outsourcing project from NAND maker for PC OEM. Second, and because the module maker, they step up to fill the gap because we own almost majority module maker to design our controller for PC OEM. And that's why although we see the PC unit shipment might decline 10% or more, but we will continue to gain market share, and we see the client SSD business continue to grow. When the PCIe 5 moving from high end to mainstream and PC OEM and shipping more PCIe 5, we benefit much more because ASP is higher and also we dominate for PCIe 5 more than 50%. So we see a market share gain continually when PC OEMs start to ramp the 4-channel DRAMless PCIe 5 controller. Operator: We will now take our next question from the line of Sebastien Naji of William Blair. Sebastien Cyrus Naji: On the strong results and guidance. My first question is on the share gain momentum that you're seeing, particularly in the mobile and PC markets. How do you think about the trajectory of those share gains? In other words, have you seen maybe more meaningful share gains been front-loaded here Q4, Q1, Q2 of this year? Or is there significantly more runway for you to keep taking share as we move into the second half and even into 2027? Chia-Chang Kou: Our goal is to continue gaining market share. When NAND maker, now they have limited R&D resources, and they probably will outsource more projects to Silicon Motion. So we try to reserve all the R&D, and we're very busy to catch all this outsourcing opportunity. And we see we continue to gain the embedded eMMC and UFS controller business as well as client SSD for PC OEM because retail for client SSD almost gone. It's very, very low. We see the PC OEM, but we have a much broader customer to provide the SSD solution to PC OEM, not just NAND maker. There'll be more module maker coming too. Sebastien Cyrus Naji: Great. Great. Okay. That's nice to hear. And then my follow-up is just on the boot drive opportunity. Can you just remind us what the competitive landscape looks like? Who else might be in a position to provide these types of boot drive controllers? And then relatedly, how should we think about your share in that market? Should it be higher than in some of your other subsegments? Or should it be pretty similar? Any pointers there? Chia-Chang Kou: So for our first engagement for the DPU BlueField 3, there will be 3 makers provide the solution. Two other NAND makers also use the Silicon Motion controller, but different controller, different NAND. And we also -- with our additional different controller to support. But I think through the engagement, I believe the customer will like to focus on the new generation DPU and also provide much more deeper NVLink and Ethernet, the C69 switches project to us because for the new generation boot drive, security becomes very critical. I believe today, we are probably only one to have a specific security in our firmware and hardware in our controller. And we have a unique firmware with -- to manage the NAND into a pseudo LC mode, provide specific function for the end customer. So that's why we believe we probably have a majority of the new generation boot drive in this particular customer. Operator: We will now take our next question from Tiffany Yeh of Morgan Stanley. Hsin Yeh: On the great results. And my first question would be, could you share with us your latest view on the TAM for the MonTitan or the overall eSSD market and also your targeted market share in the overall market? And I have a follow-up. Chia-Chang Kou: We see MonTitan now get tremendous attention and a very, very broad design win. We're very happy in our progress. We see we'll continue to gain market share. We see MonTitan, even for PCIe Gen 5 and associate product, we will grow to at least 5% to 10%, aligned with our expanded 2026 revenue and '27. Our PCIe Gen 6 MonTitan even stronger even before we tape-out, we have multiple design wins from Tier 1 customers, including 2 NAND maker and several CSP customers. So this is bringing a very, very broad and long-term commitment and for development. We see the -- our PCIe Gen 6 MonTitan also have a very, very unique technology with 160x LDPC and support both TLC and QLC for next-generation QLC. So we have a very, very broad customer waiting for the product, and we'll continue ramping PCIe Gen 5 and waiting for PCIe Gen 6 for design win pipeline. Hsin Yeh: All right. Very clear. And my second question would be, as we see elevated material costs and also the OSAT costs, would you consider conduct price hike on your product to pass through all these costs to your customers? Jason Tsai: I think we've developed a very good relationship with our back-end packaging and testing as well as our suppliers. Look, I think our goal here is to maintain our gross margins in this 40% to 50% range, and we're comfortable through our existing relationships with our suppliers as well as our relationships with our customers that we can maintain that pricing. We're not going to go into specifics about pricing changes with customers, but we're confident that we can maintain our margin... Chia-Chang Kou: Let me add a comment. At the moment, our concern is not in the price increase regarding manufacturing side. Our main concern is the Ton material for the BGA substrate because it's very, very tight and supply is very limited. We have to fight with all the U.S. Tier 1 customer. But our operation worked very hard with both the Japan customer directly and work with all the Taiwan manufacturers. And so we try to overcome the challenging and manage supply to make sure we can meet the customer demand. Operator: Do you have any follow-up question, Tiffany? We will proceed with our next question from the line of Craig Ellis of B. Riley Securities. Craig Ellis: Congratulations on the great performance, guys. I wanted to ask an intermediate to longer-term question. Wallace, congratulations on what appears to be really significant MonTitan customer diversification through this year, and you've got a boot drive position that seems to be broadening out significantly in next-generation drives through the year and auto with Ferri is expanding nicely as well. So the question is this, as we look at reports seeing that that memory-related order pipeline is happening deep into 2027. And as you exit this year with a much broader customer and program footprint, how do you feel about supply availability next year? And are you seeing from your customers extended order visibility? And if so, where is that happening? Chia-Chang Kou: I think for this year, NAND supply is a little challenging to us. It's not because the NAND maker won't provide NAND supply to Silicon Motion because we provide the PO were late last year because the NAND maker and DRAM maker, they almost finished allocation before August time frame. And this is why we -- but through our strategic relationship and deep partnership and presentation with the NAND maker, we're able to secure the full supply for 2026. Now for next year, we will start to provide our demand to our NAND partner in advance. So we are pretty sure and we are able to secure all the NAND we need for '27 growth. And I believe 2027 DRAM and NAND supply will be more severe than 2026. But the DRAM will get easier from late 2027 to '28 because all the new mega fab start to ramp from second half 2027. And I think Micron, the second fab in Boise will ramp from second half 2028. But I think the NAND will start to see release probably from early '28 or second half '28, but still in shortage. But we will try to maintain the position, make sure we secure all the NAND in advance, meet our customer demand and meet the growth demand. Jason Tsai: And also keep in mind, Craig, we have -- we're sourcing from 3 different flash makers. So we've got a really good range of suppliers to work with. Craig Ellis: That's really helpful color, guys. And then for the second question, I think just thinking near term about how some of the hydraulics play out in the second half of the year with product-related investments. It sounds like there'll be some asset costs for PCIe Gen 6, but you're also looking for much higher revenue and higher gross margins. So can you talk a little bit more the gives and takes that we should be thinking about in the middle of the back half of the year? Jason Tsai: Yes. I think from an OpEx standpoint, we will have our OpEx obviously higher this quarter, and then that will probably tick up a little bit in the third quarter as well as some of these tape-out costs come in. And then our expectation for timing is that fourth quarter, those we should have a lot less development costs, so that will come down. Overall, we expect to see margins continue to improve, operating margins continue to improve throughout this year. Chia-Chang Kou: Let me add some comment. Silicon Motion procure NAND is not like a normal customer. We are a strategic partner for NAND maker because we are a mutual business, and we engage their project to many, many large-scale customers, too. So they treat us as a partner, not just a normal buyer for NAND. Operator: We have reached the end of the question-and-answer session. Thank you all very much for your questions. I'll now turn back to Mr. Wallace Kou for his closing comments. Chia-Chang Kou: Thank you, everyone, for joining us today and for your continuing interest in Silicon Motion. We will be attending several investor conferences over the next few months. The schedule of this event will be posted on our Investor Relationship section of our corporate website, and we look forward to speaking with you at this event. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
Operator: Greetings, and welcome to Pebblebrook Hotel Trust First Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Raymond Martz, Co-President and Chief Financial Officer. Thank you. Please go ahead. Raymond Martz: Thank you, Donna, and good morning, everyone. Welcome to our first quarter 2026 earnings call. Joining me today is Jon Bortz, our Chairman and Chief Executive Officer; and Tom Fisher, our Co-President and Chief Investment Officer. But before we begin, I'd like to remind everyone that our remarks are as of today, April 29, 2026. Today's comments may include forward-looking statements that are subject to various risks and uncertainties. Please review our SEC filings for a detailed discussion of these risk factors and visit our website for reconciliations of any non-GAAP financial measures mentioned today. Now let's jump into the first quarter financial results. We had an exceptional first quarter with results well above the high end of our outlook across key earnings metrics. Same property hotel EBITDA increased 27.6% to $82.2 million, coming in $8.2 million above the high end of our outlook. Adjusted EBITDA was $73.3 million, up 29.5% from last year and $9.3 million above the high end. Adjusted FFO per diluted share doubled year-over-year to $0.32 and which was $0.09 above the high end of our outlook. So this is a very strong quarter by any measure. Even more important, performance is not narrowly driven. While we had a great setup, the strength was broad across the portfolio and their performance came from both stronger revenues and superb expense control. At the property level, same property occupancy increased 550 basis points, ADR increased 2.8% and RevPAR increased 11.8% and total revenue increased 10.1%. Same-property total expenses increased just 5.6% and driving 327 basis points of hotel EBITDA margin expansion. More than half of the incremental same-property revenue flow through to hotel EBITDA. That reflects the strategic operating initiatives we've been implementing across the portfolio that benefits from our investments in revenue generating in many avenues and strong execution by our property teams and asset managers. The strength extended across the portfolio with 32 exceeding revenue forecast and 34 exceeding GLP forecast in the quarter. In [indiscernible] was exceptional. While benefited from the Super Bowl and a large citywide convention that shifted into the first quarter, all segments, including business and leisure transient were incredibly strong and continue to recover. RevPAR increased a robust 44.5% and hotel EBITDA more than tripled from a year ago, climbing by $11.6 million. Losango also recovered sharply from last year's fire-related disruptions. With RevPAR climbing 31.5% and occupancy growing more than 16 points to 74.6%. Their improvement across LA properties is broad helped by a stronger lease demand and improving entertainment-related group and leisure activity and the ramp-up of our recently renovated and rebranded Hyatt Centric, Delfino in Santa Monica. LA's Q1 same property EBITDA increase, we captured all of the EBITDA loss in the first quarter from last year's files. While San Francisco and L.A. were standout in markets, they were far from the whole story. Our urban portfolio posted RevPAR growth of 14.3%, total RevPAR growth of 12.9% and EBITDA growth of 55.1%. City over Urban Hotels delivered RevPAR growth of 8.7%, driven by a 900 basis point jump in occupancy supported by healthy weekend leisure demand. Chicago also turned in a good quarter with RevPAR increasing 5.6%. Washington, D.C. was our most challenged market in Q1, with RevPAR declining 24.1% and reflecting a very difficult inauguration comparison and continued weakness in government-related travel, though we have seen some recent improvements. Boston was another softer market, with RevPAR down 3% and reflecting lighter citywide calendar, two major winter storms and the rooms renovation of Revere Hotel Boston Common. We expect both markets to improve in the second quarter given the better event calendars. Our resorts also had a very strong quarter, with RevPAR rising 7.5%, total RevPAR increasing 6.7% and EBITDA declining 13.9% and Reserve performance was driven by resilient user demand, healthy on-property spending, favorable holiday timing and the continued ramp-up of our redeveloped assets. We also benefited from an earlier-than-normal spring break, which pulled more spring break travel into March from April. Several resorts delivered double-digit RevPAR gains, including Newport Harbor idle Resort apply Beach Resort and Club, Skamania Lodge, Paradise Point Resort & Spa, [indiscernible] Day Resort and Asana Joya Hotel and Spa. Overall, first quarter demand was encouraging despite heightened geopolitical tensions and increased uncertainty around travel. User demand remained strong, business trends to continue to grow and recover and group was stable. Consistent with broader travel and spending commentary, visibility has shortened somewhat in late March, but we have not seen any material change in booking trends to date. Premium leisure and business travel have remained healthy to date. Weekday RevPAR increased 9.7% overall and 12% in our urban markets, while weekend RevPAR increased 15% overall. Weekend leisure demand remains healthy but the improvements in weekday demand is equally important as it reflects the continued recovery in business transient and group travel and creates more meaningful earnings power as Orbis occupancies rebuild. What losses put out this quarter was the quality of the revenue growth. [indiscernible] revenues again grew up nicely 7.6% overall. Food and beverage revenues increased 7.4% and outlet revenues were up 10.2% and bandwidths and cater revenues increased 4.8%. Guests were not only staying with us in greater numbers. but they are also spending more on property, and that is exactly the kind of revenue mix that supports increased profitability. On the expense side, our strategic operating initiatives again delivered this quarter. Total expenses rose by only 5.6%, while total revenues increased 10.2%. Freediverage revenues rose 7.4%, while food and beverage expenses increased just 3.7%. Sales and marketing expenses, excluding franchise fees, grew only 3.9%, while energy costs actually declined 2.8%. And on a per occupied room basis, total expenses declined 2.8% and total expenses or fixed costs declined 3.2%, demonstrating the favorable benefits of the operating leverage in our portfolio. We are generating more efficiencies from improved labor productivity and technologies, tighter cost controls and continued benefits on property level efforts to reduce energy and water consumption. Some more simply, as revenues improve, our portfolio is flowing more of that upside to the bottom line than it did a year or 2 ago. At a quick point on onetime items because it is important to put this quarter is in a proper context. The Super Bowl contributed about 215 basis points to same-property RevPAR and the recovery loss angles contributed another 285 basis points. Offsetting those benefits, the 2 winter storms reduced RevPAR and by about 115 basis points and the difficult inauguration comparison in Washington, D.C., we reduced it by another 105 basis points. Even after adjusting for those items, same-property RevPAR still grew by roughly 9%, underscoring the overall strength of the quarter. This strong underlying performance translated into higher free cash flow and greater financial flexibility. On the capital side, we invested $11.9 million to our properties during the quarter, including guest room renovations at [indiscernible] and Reversal Boston Common, both of which are now substantially complete. For the full year, we still expect capital investments of $65 in $75 million, which represents a much more normalized run rate and an important tailwind for higher discretionary free cash flow and greater flexibility for debt reduction and share repurchases. We also completed the able first rebranding of Mondrian Los Angeles into the Valor Los Angeles, Perception by Hilton. We believe that strategic change has and will create value for the property, rebranding as an independent franchise hotel with Inturio leverages Hilton's distribution platform pairs it with a strong hospital style operator in Pivot and preserved the distinctive character of psychotic hotel, and we made this change in no cost as franchise-related key money funded the changeover. We appreciate the partnership with both helping and pivot during this strategic transition, and we are excited to work together to drive improved performance at this important property in L.A. Moving to our balance sheet. Our net debt-to-EBITDA ratio declined to 5.5x from 5.9x at the end of last year. We ended the quarter with $24.6 million of cash and restricted cash along with roughly $641 million of capacity on our revolving credit city. Our weighted average interest rate remained a very attractive 4.1% with approximately 98% of our debt effectively fixed and 98% unsecured. As of the start of the year, we've repurchased over 400,000 common shares at an average price of $12.11 per share. higher EBITDA, improved debt metrics and strong liquidity all moved in the right direction. Stepping back to the first quarter takeaway is clear. Despite heightened macro uncertainty and risks, the quarter demonstrated stronger demand across both urban and resort markets, healthy revenue quality and dispense control. At the same time, we're not assuming the balance of the year will be as visible as the first quarter. Recent events in the Middle East higher fuel prices, more fall off more and broader economic uncertainty, cook pressure, travel demand and booking patterns. However, based on our current booking trends and broader travel and spending commentary, the demand environment remains constructive, particularly for premium leisure and business travel. So while we feel really good about the first quarter and the underlying trend line, we remain appropriately cautious on the balance of the year. And with that, I'd like to turn the call over to Jon for more color on the quarter, the financings that we're seeing across the portfolio, the broader industry backdrop and our outlook for the balance of 2026. Jon? Jon Bortz: Thanks, Ray. In our last earnings call, just 60 days ago, we laid out the extremely favorable setup we were looking at for 2026. We also provided a robust outlook for our portfolio for Q1, but a cautious outlook for the rest of the year, given our experience in 2025 with major policy actions, geopolitical events and weather events that negatively impacted us in a material way. Our concern about major geopolitical risks prove warranty. As the conflict in the Middle East began just 48 hours after our earnings call. To summarize the setup for 2026 that we discussed, we have easy comparisons to a year that was negatively impacted by a number of policy and geopolitical events. We have a favorable macroeconomic environment and a uniquely strong events calendar particularly in our markets. We have the best holiday calendar we could ever remember. There is very limited supply growth for 2026 and beyond. And we maintained our view that hotel demand would re-correlate to GDP, absent major policy or geopolitical surprises. In our markets, we highlighted that San Francisco's recovery will continue to build Los Angeles would benefit from Espie related comparisons. Washington D.C. would benefit from easier government-related comparisons passed the tough inauguration comp and our recently redeveloped and repositioned properties were likely to continue to rain. We also believe our upper upscale and laundry positioning would remain outperformers given the continued strength of the marlin consumer. When we look at how the first quarter played out, that favorable backdrop translated into even better results than we were expecting. I think it's fair to call the first quarter low out quarter on both the top line and the bottom line. This setup was accurate and we delivered with a favorable setting. We haven't seen RevPAR and total RevPAR growth at these levels since the third quarter of 2014. The excluding one unusually strong pandemic recovery quarter in 2023 and our same-property hotel EBITDA growth of 27.6% was even stronger than Q3 '14. At the industry level, Q1 demand growth of 2% clearly began to demonstrate its reconnection with GDP growth and industry demand would have been even better but for 2 of the largest winter storms in history to hit in late January and late February. Occupancies increased as demand follow GDP growth While supply grew just 0.6%. In March, we began to see more compression days and ADR growth improved through an impressive 3.8% and with a solid 2.4% increase for the quarter. Industry RevPAR in Q1 increased by a much improved 3.8%. Leisure demand was very strong throughout the quarter, aided by the favorable holiday timing around New Year's and the combined Valentine's Day and Presidents Day weekend. Importantly, that leisure strength didn't just benefit our resorts. Our urban markets, especially San Francisco, Los Angeles and San Diego, all continued to benefit from the post-pandemic return of leisure demand to the cities. The early Easter and school spring breaks also helped March, so partly at the expense of April performance. We likely also saw some benefit in Southern California and South Florida, from traveler ships away from Mexico and from poor snow conditions out West. For Pebblebrook, we saw the same industry benefits in Q1 and more. The event calendar delivered as we captured increased demand from events throughout our portfolio. Our Hollywood Florida resort benefited from demand from the college football national championship game in Miami as our properties just 11 miles from the stadium, far closer than most hotels in Miami and Miami Beach. All of our San Francisco hotels achieved very robust results from the Super Bowl and its week of activities and events in February, and our L.A. hotels saw a lift from the NBA All-Star game and related activities, which were also in February. Our hotels in San Diego, Chicago and Washington, D.C. saw increased demand due to the NCAA men's basketball tournament games in March. Events in Q1 definitely pushed our results higher, maybe even more than we were expected. As Ray indicated, our redeveloped and repositioned properties all continue to ramp up led by Hyatt Centric Delfina Santa Monica, Skamania Lodge, Newport Harbor Island Resort, the Playa Beach Resort and Club, Estancia La Joya Hotel and Spa and Hilton San Diego Gas Line quarter. They all gained significant share in the quarter with more to go for them and many others in the portfolio where we invested so heavily in prior years and we continue to reap the benefits. Business transient continued to recover across the industry and our portfolio during the quarter. We saw even stronger growth in corporate travel in San Francisco and Los Angeles, where both cities are seeing the benefits from return to office policies. Group also grew industry-wide and for Pebblebrook in Q1. We delivered strong group revenue growth primarily driven by a 7.4% increase in group ADR, that was aided by the Super Bowl. We had a fantastic quarter all around, but it's highly likely to be our strongest quarter of the year by far. Looking ahead, we remain appropriately cautious given policy and geopolitical risks, particularly the potential impact of the ongoing conflict in the Middle East. Right now, we're mostly concerned with the potential economic slowdown, driving airline ticket prices, cutbacks in airline capacity in routes and potential jet fuel shortages elsewhere in the world, it could weigh on inbound international travel. As Ray indicated, we're not seeing any negative impact on PACE or bookings at this time, but we're closely monitoring all our data as well as travel data and commentary from others in the travel industry, particularly the airlines. Since our last call, our 2026 room revenue pace advantage versus last year has continued to increase. In the year, for the year pickup in room revenue improved by $12.5 million over the 2 months ended March 31 at an improved for every quarter of the year, which is very encouraging. As of the end of March, full year room revenue pace of $33.5 million ahead of last year, with $21.8 million from Q1 performance and the remaining $11.7 million in quarter 2 for 4. Over 90% of the room revenue pace advantage is in transient revenue with roughly 20% of from higher rates. The $33.5 million advantage is stable, would put us at a 3.8% increase in room revenue for the year. right in the middle of our increased range of 2.75% to 4.25% for the year. If we pick up more in the year for the year, it will go hacker. And if pickup is lower than last year, it will go lower. Recall that last year, with everything that happened, we lost pace advantage as the year progressed. And finished down for the year in room revenue. For Q2, total room revenue pace as of the end of March was ahead of last year by $7.5 million. April pickup for April looks like it will be down year-over-year, but much of that likely reflects pace being so far ahead when we entered the month. We expect April RevPAR and total RevPAR to grow in the 3% to 5% range versus last year. May appears to be our weakest month in the quarter weighed down by the year's most difficult monthly convention comparison in San Diego, along with softer convention calendars in both Boston and San Francisco compared to last year. Finally, I thought I'd provide a few thoughts about this year's World Cup. We've always thought of it as a large collection of college football bowl games. Like the college bowl games, we believe demand for World Cup games will vary dramatically depending on the teams involved and the impact from each game will vary, not only by the Albertan attendance of the games, but also by everything else that is already going on in the specific market. Most of the 48 teams have based themselves in locations across the U.S., including many markets without games. For example, we have a team at benign in Portland, even though there are no games important. I'm sure you've seen the media reports about a propping large blocks of rooms in many markets. Our understanding is that these blocks are intended mostly for fans who can choose to purchase hotel rooms through FFO. Obviously, bands are not choosing to purchase or tells for FIFA in a major way and will likely book the rooms individually through normal hotel booking channels. When teams and ticket holders moving around the country many on extended trips that include non-World Cup destinations and Visa -- and Visa waiver documents required. We expected and continue to expect. Most of the demand to book very short term, certainly within the 60-day window, which we're in now. And consistent with that, we are seeing some of that demand book on and around game days in our markets. We also booked some group demand from teams, sponsors and FIFA. We're currently contracted for about $1.9 million of room revenue. Over half of this group business is booked in our Boston hotels. We don't have an estimate for the total impact of the World Cup on our overall performance, but we do think it will be positive with most of the benefit coming in terms of higher average rates and increased non-room revenues. Occupancy will be aided by the World Cup. However, it comes at what is already a very busy time of year with high occupancies in June and July the norm in our World Cup markets. We also remain concerned about the impact of the conflict in the Middle East on airline ticket pricing, airline capacity jet fuel availability and especially inbound international travel. As a result, our forecast for the World Cup and Q2 remain conservative. For the full year, similar to the second quarter, we remain appropriately more cautious for all the same reasons. We have reflected a significant Q1 in our hotel performance assumptions. But we've left Q2 and the rest of the year unchanged from our prior outlook. As we said last quarter, we're going to take it 1 month at a time, given the volatile and uncertain environment. But we've got a very strong first quarter done and in the books. So we've increased our current outlook for RevPAR and total RevPAR growth for the year by 75 basis points for each, with our RevPAR growth outlook range now at 2.75% to 2% to 4.75% and our total RevPAR growth outlook range now at 3% to 5%. For 2026, we expect to continue delivering operating efficiencies and keeping property expense growth well controlled as our outlook indicates. The Q1 $10 million hotel EBITDA beat has been fully passed along into our hotel EBITDA outlook at the year's midpoint. As a result, we're now forecasting same-property EBITDA growth of 5.2% to 8.6% at the midpoint of almost 7%, a healthy increase for the year and a material step-up from our prior outlook. To wrap up with a terrific first quarter behind us, we remain very excited about the 2026 setup for Pebblebrook. Now we just need the rest of the year to cooperate and provide a more stable environment. And with that, we'd now be happy to take your questions. So Donna, could you please proceed with the Q&A. Operator: [Operator Instructions]. Today's first question is coming from Cooper Clark of Wolf Fargo. Cooper Clark: Appreciate some of the conservatism baked into the 2Q reports you guide as you bounce the calendar event with an uncertain macro. I was just hoping you could remind us about the historical impact of higher oil prices on travel demand for your portfolio and maybe certain assets either on the drive two or flat to markets where you see a greater impact? And then curious when you may expect to see some of the negative impact from higher oil prices as it relates to room night demand if we do see higher oil prices for longer. Jon Bortz: Sure. Thanks, Cooper. So historically, for our portfolio, out prices -- significant increases in gas prices cannot have an impact. And that's A big part of that it has to do with the fact that our resorts in particular, are all in dry markets. And of course, many of our markets also have other forms of transportation access like trains on the East Coast, in particular, in the trains on the West Coast. But it's really airline ticket prices where there's a clear connection between demand ultimately and people's ability to fly. Now, again, it has more of an impact on middle income and lower and less of an impact on the upper end. So it's hard to forecast exactly what the impact is going to be. They're certainly according to the airline, he's been a lot of business booked and have ticket prices going up. We've seen -- so far, we've seen increases anywhere from 0% to 2% to -- we've seen much bigger increases for international travel, particularly international travel originating from Europe and Asia. So start to tell how much of an impact that will have on international inbound. That is what we not worry about. But the resorts are also drive to and -- so if people do trade down from flying to driving, which is something we've seen to some extent in the past that domestically located resorts tend to benefit a little bit more and the ones available by airline flights tend to be impacted a little bit more. Cooper Clark: Great. And then just switching over to the expense side. Curious if you could take us through some of the building blocks on the expense guidance for the full year and where you're expecting to see growth come in for wages and benefits, insurance and utilities. Raymond Martz: Sure, Cooper. Yes. So our full year outlook implies on expense growth at 2.4% to 3.8% range. And so on the labor side, which is the largest cost that's low single digits. We're in the 3% to 5% range depending on the market. But because of -- in terms of wage increases, but in many cases, we're having FTEs actually in line or decline year-over-year despite the increase in occupancy. So we're finding a lot of efficiencies there, which we continue to pursue. We talked about this quarter. in areas like insurance as well as, for example, property insurance. It's a very favorable property insurance market for owners this year given a lack of storms last year. that impacted the U.S. as well as a lot of capacity on that side from insurance. So it's likely to be in pushing down premiums pretty significantly this year. So our renewal isn't until June 1. So at our July call, we'll have an update there, but we would expect property insurance costs to be declining on a year-over-year basis. relative to last year. And outside of that, we're doing what we can on energy initiatives [indiscernible] given what's going on right now with Middle East, we expect a little more pressure there. But overall, we feel really good about our expense growth that we provided. And the fact that we've been able to find new ways to do things accretively and limit this expense growth versus what others are experiencing in the industry. Operator: Our next question is coming from Smedes Rose of Citi. Bennett Rose: I was just interested to hear a little bit more about your decision to rebrand what was, I think, the Mondrian to Veloria and join the Hilton system. Could you just maybe talk about how you weighed what I assume would be maybe higher costs to be in the Health system versus the system you were in and sort of how you -- some of the things that help you make that decision? Jon Bortz: Sure. So [indiscernible] jump in. But I think strategically, as we've seen sort of the L.A. market and the West L.A. market and the sunset trip submarket sort of evolved over time, there's been a lot of luxury product that's been added into that market. And what we found over time is Mondrian well and Icon, particularly when it was created and really over up to maybe 5 years ago. I think was sort of the dominant player in the market. And as other luxury products come in, I think what we found is the system, the core [indiscernible] system was just not delivering to the property at the level that one of the domestic major brands could deliver it. And so given the positioning of Curio, we felt like tucking under the luxury in terms of their brands with sort of the right positioning for the property -- it is a luxury product. I'd say the service levels are more lifestyle than maybe you would consider being luxury. And so we really thought it was a much better positioning with a much more value brand and a more entrepreneurial and life spot-oriented operator who is really comfortable with the major collection brands like Curio. And then as it relates to cost that the cost of the Interia program are actually less expensive in the cost of the Kerio arrangement or maybe better said, the combined cost between the operator and the franchise in total is lower than the cost of where we were with port anime as both the brand and the operator. So a little different than some of our other properties is the way the cost play down. Raymond Martz: And [indiscernible] gone through a number of transitions in the past with switching brands going from one brand to another or going to independent every vice versa. And [indiscernible] in a fantastic to work with. The transition has been very smooth so far. I hope has been really additive in the process. And look, with Davidson, we have demote properties advance for us. So we have a very differ with their team. So they've done a very good job for us and look forward to in July when we have a full quarter under our belt here to report on the results that we're producing. I realize, of course, of course, quarter they're usually bumpy when you are up 1 system to another, but we like the direction we've had so far since April 1. Jon Bortz: And maybe one other thing to add is the Hilton distribution in that market is little to none. So we felt like it was really good positioning with Hilton. Bennett Rose: Okay. That's interesting. And then I wanted to ask you, just coming into the year, you had provided some guidance around what you thought LaPlaya could you just -- how did the first quarter ago? And is that property still kind of on track as what you had initially expected? Jon Bortz: Yes. The first quarter for LaPlaya went well. we're on track to be in that $28 million to $30 million range compared to $24 million last year. And I'd say also as well as the first quarter when it's not stabilized yet as we went into the quarter with softer group than we would normally have given all the disruption we have in construction last year these group into that environment. So, so far, so good. We've also sold I think we've already sold 45 or so additional memberships there at the low that well over $100,000 a piece. Those are bound refundable and that continues to grow the revenue at the property as well. Operator: Our next question is coming from Gregory Miller of Truth Securities. Gregory Miller: I'd like to start off with a question on 2027, and I promise to not ask you too much on a guidance perspective. But hopefully, 1 of the more straightforward questions on relates to the Super Bowl change moving from the San Francisco be area down to Los Angeles. And I'm curious, just your general perspective so far, do you consider an LA Super Bowl exposure, superior or inferior to your San Francisco exposure as we think about the implications to 1Q next year? Jon Bortz: Sure. Good question, Greg. I think the Super Bowl and L.A. will be obviously an extremely major benefit to the market, particularly in February. And -- but L.A. is a much larger market in San Francisco or even the combined nature of San Francisco and San Jose. And so -- when we look at where the pricing is already is and where it's likely to be for Super Bowl, likely to be at the same levels as San Francisco. It will still be super as the name implies, but it won't quite have the same benefit that we had discoveries come. Greg it's breaking up a little bit. Greg. Okay. Greg, you're breaking up. So it's -- sorry, Greg. I can't make how your question. I apologize. Operator: Certainly. Our next question is coming from Aryeh Klein of BMO Capital Markets. Aryeh Klein: I was hoping maybe you can unpack a little bit more about the World Cup and how it's setting up for you. I understand that you're not incorporating [indiscernible], but is there any risk that if the world set at sizzle, it ultimately -- it could ultimately emerged as a headwind if it's also disrupted to other travel into those markets. Jon Bortz: It's possible it could be a headwind. I think that's highly unlikely. And I don't think there will be a headwind for our portfolio because we didn't hold rooms of the market for any of the PPA blocks that we had. And we haven't -- we certainly have deterred other business coming into the market. And I think, again, unlike I don't know, maybe Super Bowl or an inauguration or some monstrous event. Some of these events are that large that they're deterring normal business coming into the market. And the gains are all over the place, and they're generally not back to back in the market. There's gas. So I don't really think that's going to be the case. The other thing we've seen is, I mean, the [indiscernible] business is booked in it. They're markets like L.A., where we have a huge number of concerts in July -- in June and July, sort of mixed in through World Cup, which we think will be big demand generators in that market as well. So I tend to think -- I have a hard time sitting [indiscernible] turning how to be headwind or certainly not for us and not for the industry. Aryeh Klein: Got it. That's helpful. And then maybe just would be great to get your updated views on San Francisco. Obviously, a really strong start to the year, some special events certainly help there. But I think EBITDA in 2025 was still quite a bit below 2019. I think it was 62%. Just curious how you think about that recovery moving forward and some of the tailwinds that you see as sustainable there? Jon Bortz: Yes. I mean, I mean San Francisco is crazy right now in terms of the boom recovery that's going on in that market and impacting all segments, whether it's business transient, business group, in-house group. Lease are coming back into the market that have stayed away during the pandemic and even many of the [indiscernible] pandemic years, it's really just starting to recover in the last year. and the convention calendar will continue to get better over the course of the next 3 to 5 years. So the city is on a roll, it's got good governmental policies. It's got good leadership in place. You see it in the other real estate categories the very strong, in fact, record office leasing going on in the market. The return to office that has been mandated. AI obviously being headquartered there, robotics, so many robotics companies are moving into the market. Robotics is being headquartered in San Francisco and the Bay Area. And so we certainly can see -- I mean, I'll give you an example this year, I think we're probably looking at RevPAR growth, again, aided by Super Bowl, I think, by about 4 points for the year. But we think RevPAR growth is certainly going to be between 12% and 15% for the year, unless some major macro event has an impact. And at that level of growth mean we expect to see the bottom line up 40% or more over last year. And you're right about being in the 60s, I think 62% or 65% 62%. If that's -- if you take that 62 and say we're going to be up we're going to be down still 40% compared to '19 levels. And -- but we think that with everything going on in San Francisco, and we're just starting to get pricing power back in the market as occupancies have been recovering, which are, by the way, still well below where we were in -- we think there's no doubt you can see double-digit RevPAR growth over the next 3 to 5 years in that market, assuming a reasonable macro environment. So we're pretty high on the market right now. And it looks a lot like it did back in the 2010 to '15, '16 period of time when it really exploded. Raymond Martz: The part of reference for 20 our services goals occupancies will -- should be somewhere in the 74%, 76% range. We'll see where we end at but that was at 87% in 2019. And that's how to say we're going to get back and the season at the same occupancy level, but it shows that San Francisco is truly a multiyear growth story, and we're just in the early innings of that. Jon Bortz: And pricing is so well now. from '19. So -- and that's just nominal pricing that's not in place and adjusted pricing. So I think there's huge opportunity in that market, and let's not forget, there isn't going to be any supply in that market for at least the next 5 years and arguably probably 5 to 10 years. Operator: Our next question is coming from Gregory Miller of Truist. Gregory Miller: Can you hear me better this time? Okay. Hopefully, they get to my questions. Appreciate it. I'm not sure if already asked about AI and bookings, but I thought I'd give a shot. I'm curious where you're at today in terms of your independent hotels showing up on the -- are you seeing any meaningful traction either from mature travelers that find your hotels that might not have heard of your hotels otherwise or from bookings impact itself. Raymond Martz: Sure. Greg, we've been very active in this area, which we think we're encouraged by where it could go in terms of the level of the planes deal with AI agents going directly to the hotels and looking to book direct search directly versus going through either some of the OTAs or the traditional brands. So we've been very active on that. All of our hotels are on a system which we've audited out and where it gets the maximum visibility through the agents. So there's in pages out there that all of our independent tells we've added that are now readable through that. So we've done a portfolio-wide partnership that our Corporate Vice President of Revenue Management is overseeing. So we're all working on that and monitoring those results. So we're on that side, we're excited and [indiscernible] will reach changing around some of our websites. And what created on the independent side, we have a lot more flexibility around doing that. And in addition to that, we're also looking at other tools and productivity at the property level. We just came to an agreement with Canary AI, which is a multimodule tools with panels calls and reservations and in those guest requests. So we're really excited about that. So again, with independent hotels, we could do a lot of those flexibility and [indiscernible], I cannot this technology is over. We're excited about where it's going and more reports to make more progress. Operator: Our next question is coming from Rich Hightower of Barclays. Richard Hightower: Obviously covered a lot of ground this morning, but I wanted to dig in a little bit more to the idea that I appreciate the level of caution that's sort of embedded in the guidance for the rest of the year. But you talked about booking window visibility maybe narrowing a little bit. And so I would assume that, that applies the 2Q outlook as well. And so my question is how much of the 2Q as we sit here at the end of April is really baked at this point? How confident are you in that particular part of the outlook? And how does that inform sort of the rest of the year as well? Jon Bortz: Yes, Rich, I think as it relates to Q2, I think we feel fine about our Q2 outlook with April just about done and some reasonable visibility into May. But we're -- again, we continue to be cautious because of how looks like trends can change. And particularly with the complex continuing on. And I think that also in fall out that we're definitely going to see how much it impacts travel, that's on down and so I think we're -- we learned a lesson last year, but we went into the year so positive. We had great pace. A lot of stuff happened last year that had, I don't know, you could call it self-inflicted, I guess, certainly came from governmental policies for the most part. And government-driven geopolitical issues. And so that sort of really the entire year over the course of the year. And so we're just going to maintain this approach of we're going to take it on for the time. If there's no fallout from the conflict, and there's no other major geopolitical events and policies that impact travel and the economy like happened last year, the numbers are going to be a lot higher than our help. And so that's the way we've approached the year. We just think with -- there's not a political statement, but it's a factual at with this administration. There's just a lot of stuff that keeps coming out are being created that positive disruption. And last year, a lot of that disruption impacted travel. So we're going to remain cautious. We built cautiousness in and we'll take a bit of time. Richard Hightower: Okay. That makes sense. And maybe just to dig in on L.A., specifically for a second, and I appreciate you guys have tried to maybe strip out all of the one-timers that impacted the first quarter and even into next year to some extent. But if we think about the underlying economy in L.A., it's obviously still recovering from the depths of COVID, like a lot of places on the West Coast, but maybe not as far along as the Bay Area might be. So what are you seeing in terms of the industry drivers, the types of companies that are booking business travel, the type of leisure demand. Is it more local? Is it some outside the region? Just what's really going on, on the ground in L.A. as we think about the health and growth in that market going forward. Jon Bortz: Yes. So I think there's a couple of major drivers in that market, obviously, the entertainment industry at the broadest level. So you're talking about TVs, movies, commercials. You're talking about tick top. You're talking about Instagram, you're talking about the music industry. I think these many dramas that are being created that are renting studios now in the market even appropriate periods of time. I think there's this transformation going on in the industry. And so I think what we've seen so far this year is we've seen improvement of demand coming from the entertainment sector, both TV and film and commercials and other. And then we've seen an increase in the bus industry coming through. And one of the things that happens in L.A. And we're not just talking about concerts that actually happened in L.A. But a lot of the music or come to L.A. to use the facilities, the studio facilities, the entertainment event facilities to practice for 2 or 3 weeks before they go out on the road on tour. And as we see more and more verse touring, more and more venues being created for music around the country, that industry is on a very strong growth path, which is helping the market. The fashion industry is another demand generator. That's improving at this point in time. We're definitely seeing demand from the fashion side. And then you see a lot of this internet venture capital, startup programs businesses that are being created in L.A. is somewhere near the level of VC capital coming into L.A. that's coming into San Francisco. But it's probably in the top 5 in the country. We're pretty close to that. So we are seeing industries being created. You're also a little further south of L.A. just down in El Segundo. You have the defense industry that's seeing a resurgence in the space industry as well related to it. So all of that is good right now for the industry. You need to change the politics and the policies in the market, similar to what happened in San Francisco. I think to really get more business confidence and more businesses being willing to grow or relocate into the market instead of relocating out of the market. But I'd like to think that the next election cycle will be more positive. And we certainly have been involved with and have seen a lot of business groups who've gone to the point that business has got to in San Francisco and said we've had it. And so you combine that with all these other spaces along with the sports industry which is booming in L.A. with book, you've had SoFi created. You've had where the clippers play and new events center being created the old ones get renovated. So there's definitely strong availability and growth on the sporting side as well. And obviously, you see that with is them tracking the Super Bowl back again to next year. SP-2 Very helpful. Operator: Our next question is coming from Duane Pfennigwerth of Evercore ISI. Duane Pfennigwerth: And great to hear Rich on the call. Maybe just to take it there. You talked a bit about the fundamental recovery in L.A. and San Francisco, but can you speak to the dialogue you're having about asset sales. And just -- you've probably addressed this before, but what was your optimal footprint in those markets look like versus where your exposure is today? Jon Bortz: Yes. I mean I think we're going to continue to be opportunistic as it relates to the disposition of assets within the portfolio it shouldn't surprise anyone to see additional sales occur in major cities in the U.S. That's, frankly, where all of our sales have been in the last 7 years. And I think Tom can probably speak a little more to where the investor sentiment is for those markets as well as sort of in general. Thomas C. Fisher: Yes, Duanne. I think in general, we've been talking about investor conviction in the muted transaction market over the last 2 years. The primary reason for that was growth or more importantly, the lack of growth. which made it hard for investors to underwrite. It seems like we're pivoting, and we're transitioning from that, especially given Q1 performance. And when you see markets that have bottomed like San Francisco, and you see the growth in 2025 and the continued growth in 2026, you see the growth in MA in some of these markets. What we've always said is capital files performance. There's also a number of high-profile kind of higher-end upper-upscale luxury properties in the market and in the final stage of marketing, and we'll be taking bids here over the course of the next 30 days. which I think will give a lot more clarity in terms of investor sentiment, investor depth, investor conviction and ultimately, investor pricing. So I think certainly by the second quarter call, we'll have a lot more visibility in terms of the market, as the market kind of recovered and are we continuing that momentum. So I think the setup for a functioning transaction market is there. That is still very available and is still very aggressive. But it all remains subject to the conflict in the Middle East, which could pause transactions momentum if it's not resolved in the short term. Operator: our next question is coming from Michael Bellisario of Baird. Michael Bellisario: Thanks, just on the auto room spending on I focus there. Maybe help us understand, what do you see throughout the quarter? What did you see in April? Has demand surprised to the upside? Any differentiation between group and transient out of route spend? And then sort of what is that telling you about the broader health of the traveler and broader consumer spending trends? Jon Bortz: Sure. So we haven't really seen any change in the Alger spending this year or in April. It remains healthy. It's interesting you read -- if you look at the consumer surveys and consumer confidence is at its almost in history, maybe or very close to it, yet what we find is when groups and leisure are on property, they spend, they want to have a great experience. enjoying the facilities and eating there and spending money on activities or treating themselves with spas. Or other unique activities it continues. And I think a big part of that continues to be not only the strength of the upper end consumer. But look, the wealth effect it has to be having an effect, right? The stock market at all-time highs or very bear. And I think that, ultimately, that's planned through and the comfort people have in spending. So, so far, so good. Mike, we haven't seen any change, and we find that very encouraging. Michael Bellisario: Got it. That's helpful. And then just one follow-up. Just sort of in terms of revenue management. And any change in what you are telling your operators to focus on? And is there still an imperative to build occupancy first? Jon Bortz: Yes, that's -- I appreciate the question because we are increasingly focusing on taking pricing opportunity where it exists. We've been doing that more so in the resorts were we've seen this sort of robust leisure growth occur and also with events and the better holiday calendar we're seeing more compression as we expected around those better holiday periods. So we are pushing price more. We're not doing it to the detriment of occupancy at this point. We're trying to do both because we think the opportunity continues to be there for both as we're nowhere near the level of occupancies that we would prefer to operate at on a stabilized basis. But we are taking price where the opportunity exists, and that opportunity seems to have increased over the course of the last 4 months. Operator: Our next question is coming from Chris Darling of Green Street. Chris Darling: What's the latest you can share as it relates potential redevelopment of Paradise Point, I think you have all the requisite permanent approvals, if I'm correct. So wondering if that's a project that you might consider kicking off sooner than later. Jon Bortz: Yes. So we'd love to, but we're enjoying -- we have the California Coastal approvals for the plan. Now we have a process to go through with the city in terms of getting permit approvals for the actual instruction. And that's taking anywhere from 6 to 9 months at this point in time. So there's also some additional work we have to do as part of the California coastal approval that relates to some studies on geological displacement as we do the construction. So it's all part of the process. But it continues to be lengthy and certainly longer than we'd like. So I don't really see the project kicking off this year. at this point in time. And -- but it's still on the calendar as we move forward. Operator: At this time, I would like to turn the floor back over to Mr. Bortz for closing comments. Jon Bortz: Thank you all for participating. We know you're really busy. We're here in the hard earnings season. And we look forward to seeing you in some various conferences, and we look forward to seeing you at NAREIT next and we'll be prepared to give you an update at that time. Thanks again. We look forward to talking with you. Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines and walk up the webcast at this time, and enjoy the rest of your day.
Operator: Good day, and welcome to the Blackstone Mortgage Trust First Quarter 2026 Investor Call. Today's conference is being recorded. [Operator Instructions]. At this time, I'd like to turn the conference over to Tim Hayes, Vice President, Shareholder Relations. Please go ahead. Timothy Hayes: Good morning, and welcome, everyone, to Blackstone Mortgage Trust's First Quarter 2026 Earnings Conference Call. I'm joined today by Tim Johnson, Chief Executive Officer; Austin Pena, President; and Marcin Urbaszek, Chief Financial Officer. This morning, we filed our 10-Q and issued a press release with the presentation of our results, which are available on our website and have been filed with the SEC. I'd like to remind everyone that today's call may include forward-looking statements, which are subject to risks, uncertainties and other factors outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and 10-Q. This audiocast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the first quarter, we reported a GAAP net loss of $0.04 per share, while distributable earnings were $0.21 per share and distributable earnings prior to realized gains and losses were $0.49 per share. A few weeks ago, we paid a dividend of $0.47 per share with respect to the first quarter. With that, I'll now turn the call over to Tim. Timothy Johnson: Thanks, Tim. BXMT's first quarter results clearly demonstrate the breadth of our platform and our ability to execute on both sides of the balance sheet amidst an ongoing real estate recovery. Our key competitive advantages drove distributable earnings prior to realized gains and losses of $0.49 per share, marking our third consecutive quarter of dividend coverage. We leveraged our scale and proprietary sourcing channels to capture attractive investments across a range of sectors, markets and strategies, with a focus on several of our highest conviction themes such as diversified industrial portfolios and essential use net lease properties. We also closed our first data center loan this quarter and invested in a diversified portfolio of low leverage loans originated by a leading U.K. bank, investments offering compelling relative value, which Austin will detail further in his remarks. Real estate fundamentals continue to recover, benefiting from steadily increasing values and the sharp decline in new supply across all major property types. The public equity markets recognize this, with REITs significantly outperforming the S&P 500 year-to-date. And despite recent global volatility driven by the conflict in the Middle East, real estate equity and debt markets have remained resilient. U.S. CMBS issuance is up nearly 15% from this time last year and on pace for yet another post-GFC record and spreads hit 15 basis points tighter compared to the beginning of the year. In Europe, we've observed a slightly larger impact with a slowdown in CMBS new issue activity and spreads modestly wider. However, real estate lending markets in the region remain open and active. Just a few weeks ago, we were fully repaid on a GBP 177 million U.K. student housing loan that was refinanced by a bank syndicate and we are aware of several other large recently awarded deals in the market. Importantly, we've observed no change in the fundamental performance across our U.K. and Europe portfolio. Today, BXMT is in an advantageous position. We have a well-invested portfolio generating strong in-place current income, allowing us to maximize return on new capital deployment. Leveraging our scaled platform of over 170 real estate debt professionals, we cast a wide net across the global real estate credit markets, both in terms of sourcing new opportunities and also driving strong capital markets execution, setting up diversified investments to generate highly compelling risk-adjusted returns. To that end, our investments this quarter generated levered returns of 900 basis points over base rates, in line with our investment activity over the past year. We also accretively refinanced $700 million of corporate debt issued $1.3 billion of securitized debt and added a new non-mark-to-market credit facility to our 16 counterparty complex, all further demonstrating the strength and creativity of our dedicated capital markets team. Moving to the portfolio. We continue to be pleased with performance. We received over $600 million of repayments with more than half in U.S. office. We resolved on impaired hospitality loan via foreclosure and we executed on the sale of a multifamily property, the first from our owned real estate portfolio to be capitalized on the supportive capital markets backdrop. While there is more work to do, including the eventual disposition of the remainder of our owned real estate portfolio, the trend in our business is now crystal clear. Resolutions and redeployment are driving earnings that cover our dividend and offer investors an attractive current yield of approximately 9.5%. These initiatives are supported by a compelling real estate credit backdrop with loans secured by hard assets property value is still early in their recovery and spreads still wide relative to other credit alternatives. With this setup, BXMT continues to be exceptionally well positioned with unique insights from our Blackstone real estate platform guiding our strategy and delivering strong results for our investors. I'll now turn it over to Austin to discuss our investments and portfolio in more detail. Austin Pena: Thanks, Tim. Our investment portfolio ended the quarter at just under $20 billion, consistent with year-end as the funding of new investments largely offset repayments collected in the quarter. Our loan portfolio comprises approximately 87% of our investments with our fixed rate and longer duration strategies like net lease and bank loan portfolios, representing 6% and our owned real estate accounting for the remainder. The broad capabilities of our platform were on full display in the first quarter as we closed $540 million of new investments across various geographies and strategies. Q1 investments included $275 million of loan originations with a weighted average LTV of 68%. The GBP 50 million investment in the U.K. bank loan portfolio that Tim mentioned earlier, and $197 million of net lease acquisitions at BXMT share, our most active quarter in net lease to date. Our loan originations were largely concentrated in residential and industrial, sectors with strong underlying fundamentals, where we continue to orient our investment strategy. Of note, we financed several of our Q1 originations through the syndication market on a nonrecourse non-mark-to-market basis, reflecting the sold positions, which are not included on our balance sheet, gross loan originations were over $800 million in the quarter. And our forward pipeline remains strong with over $1 billion closed during closing so far in the second quarter. As Tim mentioned, we closed our first data center loan in BXMT, financing a stabilized asset in Northern Virginia. 100% leased to an investment-grade hyperscale tenant and owned by an experienced sponsor. Leveraging our scale and capital markets capabilities, we originated a fixed rate whole loan and syndicated the senior mortgage, generating a mezzanine loan with a 14% all-in yield and 4.5 years of call protection. With $150 billion of data center assets owned and under development, Blackstone is the largest financial investor in data centers globally. As a result, BXMT sits in an extraordinary position to identify and underwrite investments in this space. With the AI megatrend driving unprecedented demand for compute and supporting critical infrastructure, we see more opportunities in this sector on the horizon. We also made a GBP 50 million investment in a portfolio of granular high cash flowing U.K. bank loans. The loans are backed by over 3,000 properties, primarily in the residential and industrial sectors with a weighted average LTV below 50%. Like the portfolios we acquired from U.S. banks last year, this investment adds diversification and duration with an underwritten term of over 5 years. The investment was sourced leveraging Blackstone's strong relationship with the bank, yet another example of our access to differentiated investments across the world. Our loan portfolio ended the quarter at $16.4 billion across 130 loans with more than 50% in multifamily and industrial and was 98% performing. We upgraded 4 loans this quarter. Additionally, post quarter end, the largest loan in our watch list, our Spanish residential NPL loan was modified, significantly enhancing our credit position. The modification includes a spread reduction and maturity extension in exchange for meaningful additional commitment and credit support from the borrower. As a reminder, this loan has repaid by more than EUR 550 million since origination, including another EUR 20 million last quarter as the borrower sells the underlying collateral. The loan remains performing, paying interest current, and we expect it to continue to pay down over time. We also added 2 office loans to our watch list and impaired 2 loans this quarter, booking modest additional reserves. Both were previously on our watch list. One was our only studio loan, a sector that has faced significant headwinds. Of note, this loan represents less than 1% of our portfolio and is secured by a 25-acre campus centrally located in Los Angeles, across the street from one of the most productive retail assets in the country, providing significant optionality and redevelopment potential. The other loan is secured by a portfolio of 1980s vintage multifamily properties located in Dallas originated in 2022. Older vintage properties in Sunbelt markets like this, have been impacted by a combination of elevated new supply and weaker demand, a different profile than the vast majority of our multifamily portfolio, which continues to attract strong demand and demonstrate steady performance. Across our 46 multifamily loans, we have just 6 with a similar profile, just 2% of our portfolio. One is on our watch list and the rest are all Risk Rated 3 and carry in-place debt yields north of 6%. We continue to make good progress on our own real estate as we leverage our platform to maximize values over time. As we've said in the past, we are not a forced seller. With our strong balance sheet, liquidity and earnings supporting our dividend, we can be patient. We make hold versus sell decisions like we do across our real estate business, using our data, insights and asset class expertise to underwrite go-forward returns compared to where we can reinvest. This quarter, we saw several positive developments. We sold 1 multifamily asset in Texas in line with our carrying value. We hit a key milestone on our Mountain View office asset, where we received local approvals to redevelop the site into for-sale residential, bringing us one step closer to unlocking significant value potential. And our fully renovated Hyatt Hotel in San Francisco continued to see improving performance as Q1 EBITDA more than doubled year-over-year. Finally, turning to net lease. Our portfolio continues to scale, reaching $516 million at share at quarter end, up from $66 million this time last year and with another $120 million in closing. Our dedicated team has assembled a high-quality portfolio, acquiring 260 assets at an average price of $2 million at a discount to replacement cost. The portfolio generates 3x rent coverage with 2% annual rent escalators and lease terms extending over 15 years on average. We believe our net lease strategy continues to provide compelling relative value in today's investment environment, naturally complementing our floating rate lending strategy with long duration, contractually increasing cash flow driving strong current returns. Overall, BXMT continues to demonstrate positive momentum, capturing diversified investments to drive strong earnings power and dividend coverage, underpinned by an investment strategy designed to deliver strong long-term performance for our investors. And with that, I will pass it over to Marcin to unpack our financial results. Marcin Urbaszek: Thank you, Austin, and good morning, everyone. In the first quarter, BXMT reported GAAP net loss of $0.04 per share and distributable earnings or DE of $0.21 per share. DE included $46 million of realized losses related to the resolution of an impaired San Francisco hotel loan. We foreclosed on the property and now hold it on the balance sheet as owned real estate with our basis representing an approximate 70% discount relative to the prior owner's cost basis. DE prior to realized gains and losses was $0.49 per share, covering our dividend for the third consecutive quarter. The $0.02 decline in this metric from the prior quarter was largely due to lower net operating income from owned real estate, reflecting the outsized seasonal benefit from hospitality properties recognized in the fourth quarter results which we discussed on our last earnings call. It is worth noting that we slightly amended our DE prior charge-offs metrics this quarter to DE prior to realized gains and losses. This amendment reflects the evolving composition of our portfolio, though the spirit of the metric remains unchanged, which is to provide investors with a measure that we believe represents the ongoing earnings power of our business. Our owned real estate portfolio generated $14 million of NOI this quarter and included a $3 million tax refund on one of our properties. Excluding this benefit, this represents an annualized asset yield on carrying value of approximately 3.5%, which we estimate is 250 to 300 basis points below yields we are achieving on new originations today. While some asset sales will take longer than others, rotating this capital provides further support to BXMT's earnings power over time. Book value ended the first quarter at $20.20 per share down modestly by 2.7% from the prior period, primarily due to a $0.33 per share increase in CECL reserves and $0.13 per share of depreciation and amortization or D&A related to our owned real estate assets. In total, book value includes $0.57 per share of accumulated D&A and $1.80 per share of total CECL reserves of which $1.30 per share is attributable to the general reserve. Turning to BXMT's capitalization. Our balance sheet remains in excellent shape. We ended the quarter with $1 billion of liquidity. Our Q1 debt-to-equity ratio decreased to 3.7x from 3.9x in Q4 and remains squarely within our target range. We were very active in the capital markets this quarter, taking advantage of robust liquidity and investor demand. We started by repricing approximately $700 million of our corporate term loan in early January, reducing our financing spread by 50 basis points. As a result of our proactive approach over the past few quarters, we ended Q1 with 4 years of weighted average remaining term on our corporate debt with no maturities until 2027. Later in January, we issued our second reinvesting CLO, a $1 billion transaction, largely collateralized by new vintage investments. Reflecting this issuance and the addition of the new lending facility Tim mentioned earlier, total nonmark-to-market borrowings now represent about 86% of total debt. and we continue to have no capital markets mark-to-market provisions throughout our capital structure. In March, we closed our inaugural asset-backed securitization in our net lease joint venture. The transaction was met with exceptional investor demand and was several times oversubscribed driving an accretive execution and resulting in highly compelling structure and terms. And lastly, as Austin mentioned earlier, we also executed several senior loan syndications with attractive terms, underscoring our broad access to various sources of capital, which we believe is one of our key competitive advantages in the market. The benefits of our leading global real estate platform are driving results on both sides of our balance sheet and help position BXMT to deliver attractive risk-adjusted returns to our investors over time. Thank you again for joining us today, and I will now ask the operator to open the call to questions. Operator: [Operator Instructions]. We will take our first question from Tom Catherwood with BTIG. Thomas Catherwood: Austin, maybe starting with you, I know loan originations can be lumpy quarter-to-quarter. But was Q1 activity impacted primarily by the timing of closings? Or was it just with more activity pushed into the second quarter? Or was there something else driving the relatively slower pace in the first quarter? Austin Pena: Yes. Thanks, Tom. Yes, I think there is always a little bit, as you said, of changes quarter-to-quarter in terms of origination volatility and a bit of seasonality that can impact those quarter-to-quarter numbers. As I mentioned earlier in my prepared remarks, when you look at our investment activity this quarter, there was a good amount of mezzanine loans or loans that we financed through the syndication market, which is not included in the roughly $0.5 billion that we mentioned in our reporting. And so when you gross up for those syndicated interests, the quarter was a pretty regular quarter in terms of overall lending activity. And as I also mentioned, we have a very good pipeline, over $1 billion for the second quarter. So I wouldn't read too much into the overall activity this quarter. I think it was a pretty regular quarter in terms of what we typically see and we continue to have a really good opportunity set that we're looking at. Thomas Catherwood: Got it. And very fair point on the syndications, I had not taken that into account. And then maybe turning over to the net lease side of the business, so which has now become a not insignificant part of the portfolio. Kind of 2 questions there, pipeline-wise, you mentioned $125 million in closing. How large -- what's the target that you have internally for that over the near term? And then the second part to it is, this is a competitive sector. It seems like everyone is out chasing net lease deals, be they other alternative asset managers or the REITs. What is it about this platform that's allowed it to do $500 million or I guess that's only your share. So north of probably $700 million of acquisitions in the past year alone. Austin Pena: Yes, thanks. It's a really good question. And as you noted, and as we noted earlier, we had a really active quarter in net lease this quarter, about $200 million of investments at our share and we've assembled what we think is a really great portfolio over the last year or so since we started this business. We do intend to grow this part of our balance sheet and our portfolio to about 3% of the overall portfolio today. And obviously, we look at risk-adjusted returns when we're looking at these investments relative to other things that we can do in terms of allocating our capital, but we would be very happy if this could become at least 10% of our portfolio over time. In terms of what we see in the marketplace today, as you say, there are a lot of players, but we think we have an excellent team. We have a dedicated team of experienced individuals led by someone who has been in this space for 30 or so years, they are finding, we think, really attractive investments. It is a granular investment profile, as I mentioned, about $2 million per property. So it really takes a lot of experience and relationships to identify investments. And when you look at the portfolio that we've assembled, as I mentioned earlier, over 15 years of duration, 2% rent escalators over 3x coverage. We really like that profile. We think it really complements our floating rate lending business, adding duration, adding an upward sloping set of cash flows that we think really provides a very nice complement to the other side of our business. Operator: We'll take our next question from Rick Shane with JPMorgan. Richard Shane: Look, you have 2 loans on your -- in your top 10 that are maturing this year. New York multiuse in Chicago office. One is rated 3, one is rated 4. Can you just talk a little bit about your strategy on those maturities and what we should expect? Austin Pena: Yes. Thanks, Rick. I can take that. I'd say we take a very active approach across our portfolio. We're obviously in conversations with our borrowers about their plans in terms of capital markets execution, really all the time. We go through every loan, every quarter. In terms of those specific deals without getting into specifics, we have dialogue with our borrowers around what their plans might be and I think we'll take a very proactive approach to the extent that their plans are evolving, we will be quite active on that approach. Richard Shane: Okay. I understand you need to be a little bit circumspect on that -- I get it. Second thing is you work through resolutions within the portfolio, and it sounds like you're going to be pretty aggressive there. What should we think about as the sort of ambient CECL reserve rate, general reserve for new originations, so we can sort of think about over time what the convergence back to general reserves would be. Marcin Urbaszek: Rick, it's Marcin. Thanks for joining us. Look, I think our general reserve right now, obviously, there's a lot of factors that go into it. It's somewhere around 100 to 120 basis points. Obviously, that's driven by, like I said, the age of the portfolio, historical loss rates and things like that. So we don't see that changing dramatically. Obviously, as we work through the resolutions and the realized losses become a little bit of a smaller factor over time that might decline. But again, in the near term, we don't see that changing dramatically. Operator: We'll take our next question from Chris Muller with Citizens Capital Markets. Christopher Muller: I'm hopping around calls this morning, so I apologize if I missed any of this. But I wanted to ask about the bank loan portfolio acquisitions. I guess what is driving these? Are the banks approaching you guys to reduce their CRE exposure? And do you expect more of this over 2026? Timothy Johnson: Sure. Thanks, Chris. This is Tim. I'd say it's a bit multi-dimensional. It can depend on the situation, the bank loan portfolio. This quarter was a little bit different in its structure as an SRT structure versus an outright acquisition. So in some cases, it's a capital relief transaction. In some cases, it's driven by M&A activity which we would say is probably the main driver between -- in terms of the portfolio loan sale activity. That's banks in the United States, predominantly going through M&A, a lot of it kind of the fallout from what happened in the regional banking industry in 2023. And that M&A activity tends to accelerate loan sale activity. So I'd say that's the biggest driver, but it does come from a few different dimensions. And I'd say from a sourcing standpoint, this is one of the main areas we spend our time on, both within our real estate debt business and broadly at the firm is working with financial institutions to help deliver them solutions across not just real estate, but the entirety of their credit portfolio. So it's a very, I'd say, diversified ecosystem of sourcing and really built on the banking relationships we have at the firm over a really long time. Christopher Muller: Got it. That's very helpful. And then I guess just a high-level one. The 10-year keeps creeping higher. It's at [ $4.38 ] right now. How is that impacting borrower sentiment that you guys are seeing? Timothy Johnson: Yes, I'd say in terms of borrower sentiment, the good news is that even though the tenure has moved up really as a result of the Mid East conflict and energy prices, the capital markets continue to be very, very active. CMBS issuance this year is up 15% on top of a year last year that was a post-GFC high. So we continue to see borrowers coming to the market. And I think that it might put a little bit of a potential slowdown on sales of real estate. That would be something that you might keep an eye on. But in terms of the credit markets, year-to-date CMBS spreads are actually 15 basis points tighter and so there's good credit availability and good capital availability. So borrowers are able to refinance their debt today and are doing so quite actively. Operator: We'll take our next question from Jade Rahmani with KBW. Jade Rahmani: Can you give any further color on what drove the $55 million CECL provision perhaps you could parse out how much ballpark related to the studio downgrade and what the outlook is there? Marcin Urbaszek: Sure, Jade. It's Marcin. Out of the $55 million, I would say about 20% of that was general -- general reserve and then the rest was on the specific. We don't want to get specific on particular assets. But I think if you look at what was added to the specific pool quarter-over-quarter vis-a-vis the impairments we had. These reserves are obviously a little bit smaller in terms of what we've seen in the past. Obviously, one of the assets is a multifamily. The other one, like you said, is a studio loan. So again, but I don't want to get into particular loans and specifics, but the reserves this quarter were pretty modest. Austin Pena: Thanks, Marcin. It's Austin here. I would also add, Jade, as we mentioned, obviously, you commented a bit on the nature of the loans in my prepared remarks. I think both of these loans were a little bit idiosyncratic in terms of our portfolio. As I mentioned, it's our only studio loan, the multifamily loan had an older vintage asset in a market that's been a bit more impacted by elevated supply, which is quite different from sort of the rest of the portfolio. So I think that's really what's driving things here. So I just wanted to add that additional commentary. Jade Rahmani: On the REO portfolio, can you give any updated thoughts as to time line for resolution. Would you expect to resolve 40%, 50% this year? Or should we think about a more extended time line than that? Austin Pena: Yes, thanks, Jade, obviously, that's a moving -- that's something we look at and we're very focused on exiting those REO assets over time. But as I said earlier in my remarks, we are not going to be a fore seller. We're not going to -- we're going to take a patient approach in terms of a long-term goal of maximizing value for investors. As I said earlier, we had a number of positive developments in terms of a few assets that have been making good progress towards getting to that place in terms of our ultimate exit plans. I mentioned the hotel in San Francisco that's seen good performance, positive elements on the Mountain View office asset. That obviously helps with moving towards that goal. I really wouldn't give a specific time line because I think we're going to be patient, as I said. But obviously, we're focused on exiting that over time because, as Marcin mentioned earlier, we do think that these assets are -- while generating cash flow today, rotating that capital over time will unlock additional earnings power for the business. Operator: We'll take our next question from Harsh Hemnani with Green Street. Harsh Hemnani: I guess, in terms of the SRT transaction, could you provide some details on where the underlying collateral of this loan portfolio is based geography wise? Austin Pena: Yes. Thanks, Harsh. This is Austin. I mentioned a few things in my prepared remarks. As I mentioned, it's a very granular portfolio. It is with a leading U.K. bank. So it's a U.K. focused portfolio, largely diversified across a lot of top markets in that area. What we really like about all of these bank loan transactions that we've completed, including this one, is the fact that these are low leverage, high cash flowing loans with a lot of diversification. And they're originated by banks and they're priced accordingly and they allow us -- these transactions allow us to invest in real estate credit that is at a lower risk tranche than we would typically see in terms of our direct originations, but still generate really attractive returns. And so if you look at the return that we think we're getting here, we think it represents a very compelling risk-adjusted return and a premium to where similar risk tranches would be available in sort of other credit alternatives. Harsh Hemnani: Got it. That's helpful. And then understanding that you can't touch on any specific deal. But maybe more generally, when you're underwriting stabilized data center assets, is it probably fair to assume that the spread on the whole loan may not be adequate to meet your return hurdles? And if we see more data center deals, it would be more similar to what we've seen this quarter where maybe you're retaining a subordinated position in the loan? Austin Pena: Yes. I would say, obviously, we're very excited and about the first data center loan that we're making. We think the space overall is going to grow. We do see a lot of opportunities and the capital needs across the data center sector, we do think it's going to mean, we're going to see more opportunities over time. I think we're going to be very thoughtful about where the opportunities work for us, both from a credit perspective as well as a return perspective. I think the deal you saw us do this quarter reflects our creativity and how to access that market and generate returns that we believe are really quite compelling and certainly meet our return requirements. I think as we look forward, because of the capital needs of the space, we think that there's going to be a growing demand for capital from groups like us. To date, a lot of the activity in the market has been done by the bank market or in other forms of the public markets, but the capital needs, we think, are going to mean there's going to be more things that fit our profile. Harsh Hemnani: Got it. That's helpful. Maybe 1 last 1 for me. I might have missed this, but of course, there's about $1 billion that's closed or in closing post quarter end. Could you maybe share how that breaks down between net lease bank loans and internally originated loans? Austin Pena: I would say it's pretty diversified, Harsh. We continue to see good opportunities, as I mentioned, $120 million that's in our net lease pipeline right now, not sure all of that $120 million will close in the second quarter. That's a little bit timing dependent. But we really -- when we look at our pipeline, it's still quite diversified across profile. And look, quarter-to-quarter, the composition of the investments are going to change. I think what our team is really focused on is really finding the best opportunities out there. Operator: We'll take our last question from Don Fandetti with Wells Fargo. Donald Fandetti: Can you just talk a little bit about what you're seeing in the office market. It looks like you added 2 office loans to the watch list, but also getting repaid as well. So maybe just kind of give us your thoughts. Timothy Johnson: Yes, I'd say it's relatively consistent with what it's been in prior quarters. As you noted, we had a little bit of movement in our portfolio in terms of risk ratings related to office, but I think relatively small in total. And I'd say that broadly, leasing activity market by market, of course, but broadly, leasing activity is picking up and liquidity in the capital markets, debt capital availability, et cetera, continues to be generally on a positive trend. So I'd say the fundamentals although still quite challenged relative to what they've been historically are improving and the capital markets activity continues to be solid and improving as well. Operator: Thank you. That will conclude our question-and-answer session. At this time, I'd like to turn the call back over to Tim Hayes for any additional or closing remarks. Timothy Hayes: Yes. Thank you, Katy, and to everyone joining today's call. Please reach out with any questions.
Operator: Greetings, and welcome to the PureTech Health 2025 Annual Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allison Mead Talbot, Senior Vice President of Communications. Thank you, Allison. You may begin. Allison Talbot: Thank you, everyone, for joining us for PureTech's 2026 Annual Results Webcast. Our annual report will be made available later today, portions of which are also filed with our Form 20-F. This information is available on the Investors page of our website at puretechhealth.com. I would like to remind you that during today's call, we will be making certain forward-looking statements. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially, and we ask that you refer to our annual report and our SEC filings for a complete discussion of these items. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. I also want to remind you that we will be referring to certain non-IFRS measures in this presentation. The presentation of this non-IFRS financial information is not intended to be considered in iCeleation or as a substitute for financial information presented in accordance with IFRS. A reconciliation of the IFRS to non-IFRS measures that we will be referring to today can be found in this presentation and is also available on our Investor Relations website at investors.puretechhealth.com and in our SEC filings. I'm joined today by members of our senior management team: Robert Lyne, Chief Executive Officer; Eric Elenko, Co-Founder and President; Chip Sherwood, General Counsel; Michael Inbar, Chief Accounting Officer; as well as Sven Dethlefs, CEO of our founded entity, Celea Therapeutics. Rob and Eric will discuss our strategic vision and path to value creation, including updates across our portfolio and our differentiated innovation engine. They will also provide a deep dive into the Gallop program, review our financial highlights and outline our anticipated catalysts for the remainder of the year. With that, I will now turn the call over to Rob, our Chief Executive Officer. Robert Lyne: Thank you, Allison. Welcome, everyone, and thank you for joining us today. We are at a pivotal moment in the company's trajectory. Having announced our near-term operational focus in December, I'm pleased today to walk you through our refined strategy and portfolio progress. This next phase of our evolution is designed to translate our proven innovation model into greater shareholder value. As a reminder, PureTech is a Boston-based LSE-listed biotherapeutics company operating a hub-and-spoke model with a proven clinical and financial track record. Programs originate within the PureTech hub based on a thesis of targeting molecules with validated pharmacology and are then advanced through early clinical and technical derisking. At defined value inflection points, we scale them through founded entities backed primarily by external capital. This model is both powerful and differentiated for two reasons. First, it improves how we innovate. We focus on opportunities where the underlying mechanism has already shown evidence in humans, allowing us to reduce technical risk while improving probability of success. Secondly, it improves how we allocate capital. By leveraging external capital at the founded entity level, we maintain portfolio breadth, preserve balance sheet strength and retain long-term upside through equity milestones and royalties. Because we develop these programs internally, we typically begin with full ownership of assets and proprietary IP to which we can attach nondilutive milestones and royalties. This means that in contrast to traditional venture capital investors, we do not need to continue to write large checks for every subsequent funding round in order to preserve a meaningful equity stake. Instead, our model allows for prudent equity dilution, allowing us to retain large equity positions in multiple founded entities whilst they diversify their own shareholder registers. Having a balanced shareholder register makes it easier to raise external equity and is vital if our founded entities are to IPO. Throughout this process, our royalties and milestones are protected, providing optionality for derisking ahead of inflection points and preservation of long-term value for PureTech. This result is a model designed to create superior overall financial returns while limiting concentration risk. Through this model, we have developed meaningful clinical and regulatory success. We have generated 3 FDA-approved therapeutics from our innovation engine to date, including the schizophrenia treatment, Cobenfy. We've also achieved substantial cash flow, generating over 1 billion growth from monetization of our economics in our founded entities, all while continuing to build a diversified pipeline of future opportunities. Looking ahead, our focus is clear: sharpen execution, strengthen capital discipline and ensure that PureTech's distinctive model continues to translate breakthrough science into meaningful value for both patients and shareholders. To deliver on our strategy, we have focused on 4 pillars of operational refinement, a streamlined structure. We intend to operate a significantly leaner and more efficient hub following the completion of the CLA financing. As part of this initiative, we announced this morning our intention to voluntarily delist from NASDAQ, recognizing that the vast majority of our trading remains on the LSE some 5 years after our initial NASDAQ list. This step simplifies our structure and reduces cost and administrative burden for the business, whilst retaining our primary London listing, providing access to both U.K. and global investment community. Launching founded entities early. In recent years, we've advanced certain programs further internally before transitioning them to founded entities. While this allows us to retain larger equity stakes, it required greater capital and operational infrastructure at the PureTech hub level. Going forward, we intend to establish and capitalize these entities earlier in the development life cycle once programs have reached key clinical value inflection points. Since return on capital is typically higher early in the cycle, this approach will allow for the creation of a greater number of founded entities. And we believe, therefore, that overall financial performance from the portfolio will improve. A refined innovation focus. Our innovation engine remains the foundation of future growth. Led by my colleague, Eric Elenko, our expanding innovation team continues to progress their work with this goal in -- over the next 3 years, we plan to generate up to 2 development candidates, each of which has the potential to become a new founded entity supported by external capital, allowing us to drive the next wave of growth for PureTech. Moving to capital returns. Finally, this refreshed strategy strengthens our capital discipline and enhances our flexibility. To ensure shareholders benefit directly from our success, we intend to return a greater proportion of future cash generation to shareholders, particularly in the event of an outsized return, whilst maintaining appropriate operational runway for the business. PureTech's value today is underpinned by multiple distinct components. These include our economics in Cobenfy, Seaport Therapeutics, Celea Therapeutics and Gallop Oncology as well as an innovation engine capable of generating future opportunities. We believe this diversified structure is a meaningful strategic advantage and one that is not fully reflected in our current valuation. Across our portfolio, I'm pleased with the progress that was made during 2025 and so far this year. Celea is our most clinically advanced founded entity developing deupirfenidone for the treatment of idiopathic pulmonary fibrosis. Deupirfenidone demonstrated a robust efficacy with the potential to replace standard of care treatments in its Phase IIb trial and is now Phase III ready. I'm pleased to share today that Celea's fundraising is substantially complete, subject to continued negotiations. Plea has secured multiple nonbinding commitments from external investors in addition to participation from PureTech. Whilst mindful of macro factors, Celea is targeting to close the financing by early in the third quarter of 2026. The financing is intended to support the Phase III SURPASS-IPF trial, which Celea expects to commence in close proximity to closing the financing. This would represent an important value inflection point both for Celea and for PureTech. Next is Gallop, which is another founded entity, which we currently own 100% of. Last week, we announced positive top line data from the Phase Ib trial of LYT-200 in relapsed/refractory high-risk myelodysplastic syndrome, or MDS, and relapsed/refractory acute myeloid leukaemia. We are pleased with the data, which guided our strategic focus to advance LYT-200 for relapsed/refractory high-risk MDS. Gallop is now preparing to engage with the FDA regarding a potentially registration-enabling trial design in this indication. As Eric will discuss shortly, we believe Gallop represents another strong example of our model in action, differentiated science, disciplined development and the ability to attract external capital at the appropriate stage. Seaport is our most operating advanced founded entity. The company has progressed 2 clinical trials for neuropsychiatric conditions in 2025 and 2026. And as many of you will have seen, Seaport filed a registration statement for a potential initial public offering on NASDAQ. This progress further validates our ability to create and scale attractive stand-alone biotechnology companies from within the PureTech hub-and-spoke model. Beyond our core founded entities, we also retained rights to Cobenfy, a commercial stage product that originated in our innovation engine. PureTech is a co-inventor of Cobenfy, which we house in a founded entity called Karuna Therapeutics. Karuna was acquired by Bristol-Myers Squib $14 billion, though we continue to hold significant non-dilutive economic rights. Based on current analyst consensus of BMS sales expectations, the projected value of PureTech is approximately $160 million from these rights through 2033. Due to the nature of our Cobenfy economics, we are only exposed to the early performance of Cobenfy sales and any reduction in analyst forecast of early sales, even if modest, can therefore have a material impact on projected inflows. Nonetheless, we expect substantial financial inflows of PureTech from COBENFY and are confident that it will improve the lives of large numbers of patients around the world. Going forward, we intend to provide regular updates to PureTech's economic forecast of Cobenfy sales based upon evolving marketing consensus at important points during our earnings webcast in the future. We also note that any monetization events from any of our funded entities, including the Cobenfy economics, represent pure upside. We do not factor any potential inflows from these entities into our runway assumptions. Indeed, whilst we have the option to collect royalties and milestones as they fall due, we also have the flexibility to monetize such rights ahead of time. This was the case with Cobenfy, where we have already secured approximately $125 million in payments to date from a previous royalty sale. This provided PureTech with capital that is unaffected by future commercial sales fluctuations and demonstrates our disciplined approach to structuring founded entities and managing upside thoughtfully. Beyond these founded entities, we also maintain the interest in what I'll call our legacy holdings. These are historical founded entities that continue to have the potential to be a source of capital to us, but they are not a current focus of our capital allocation, nor do we currently expect them to have a material impact on the overall value of PureTech moving forward. As our founded entities continue to mature and secure external funding, we intend to provide greater transparency around valuation benchmarks where appropriate. This is consistent with our capital-efficient model of maintaining a lean hub while creating value through externally financed founded entities. It also builds on Seaport post-money disclosure, which we introduced last year. Our objective is straightforward: to help investors better model the embedded upside across our portfolio, bridge what we believe is a disconnect between intrinsic value and current market value and ultimately support stronger shareholder returns. As part of this transparency, we are today providing an update on our Q1 cash position with PureTech level cash and cash equivalents as of March 31, '26, standing at approximately $248 million on an unaudited basis. I would now like to welcome Eric Elenko, our Co-Founder and President. It is no overstatement to say that Eric has been instrumental to our many successes to date. He will walk us through the latest progress at Gallop Oncology as well as share what he and the innovation team are currently working towards. Eric Elenko: Thank you, Rob, and thanks for the kind introduction. As Rob mentioned, PureTech is focused on how we translate scientific opportunity into programs that can ultimately deliver a meaningful impact for patients and value for shareholders. At PureTech, that involves both identifying new opportunities and making disciplined decisions about how to advance them, where to focus, how to allocate capital and how to position programs to reach their next value inflection point. Gallop Oncology being a recent example of our disciplined approach. Last week, we announced positive top line results from the Phase Ib trial of LYT-200, which is being developed through our 100% owned subsidiary, Gallop Oncology. I will briefly review the data, but more importantly, what it means for the program and how we are thinking about the path forward. LYT-200 is a monoclonal antibody that targets galectin-9. It is thought to work through 2 complementary mechanisms in the context of the haematological malignancies we studied in our trial. First, it relieves immunosuppression to enable the immune system to act on the cancer cells. Second, it directly kills cancer cells by inducing cell death through DNA damage and apoptosis. The trial was in relapsed/refractory high-risk myelodysplastic syndrome, or MDS, and relapsed/refractory acute myeloid leukaemia or AML, which are closely related to blood cancers where patients unfortunately typically have poor outcomes. The trial evaluated LYT-200 in a dose escalating manner, both as a monotherapy and in combination with a hypomethylating agent or HMA in patients with MDS and in combination with an HMA and venetoclax in patients with AML. All the patients were heavily pretreated. For example, 100% of the MDS patients had previously received an HMA. The objectives of the study were straightforward, establish safety, identify a dose for further development and generate the data needed to determine whether Gallop should prioritize MDS or AML for a subsequent study. We achieved all 3 objectives. LYT-200 had an excellent safety profile with no dose-limiting toxicities or myeloid suppression, which has historically been a challenge in developing treatments for MDS. We also observed a dose-dependent efficacy response and identified 12 mg per kg of LYT-200 as a dose for the next study. The data were strong across both patient populations studied. And importantly, the study provides the clarity needed to define our next step. I want to provide some additional context on how we arrived at the decision to prioritize relapsed/refractory high-risk MDS as our next indication. This decision reflects both the clinical data generated in the study and strategic considerations. Going into the study, we had preclinical data supporting the potential for LYT-200 in AML, whereas MDS is a more challenging setting to study preclinically. AML and MDS are both myeloid malignancies and are closely related. MDS can progress to AML and they share underlying disease biology. Because of this, it's common in early-stage oncology development to evaluate therapies across both populations within a single Phase I study to efficiently assess safety and initial activity. As a result, the trial was designed to generate the clinical data needed to inform indication prioritization. The data were strong in both MDS and AML. Advancing a potentially registrational enabling study requires significant capital and our clinical strategy has to intersect with our financing strategy. We seek to balance dilution for PureTech with ensuring that a founded entity is sufficiently capitalized to reach a meaningful value inflection point. As a result, it is important to prioritize where we believe we can create the greatest near- to medium-term value. If capital were unconstrained, we would consider advancing both MDS and AML in parallel. We decided to prioritize MDS given that it emerged as a particularly compelling opportunity. Historically, nothing has meaningfully moved the needle for patients with relapsed/refractory high-risk MDS following HMA failure. In fact, literature suggests that 0% to 5% of these patients respond if they're treated again with an HMA. Against this backdrop, the activity we observed in this study was particularly encouraging. The broader competitive landscape, both commercially and in terms of clinical trial patient recruitment are also compelling for MDS. There is only one approved drug, which is applicable to only 3% to 5% of the population. An efficacious drug with an excellent safety profile of the type observed in Phase I would have blockbuster potential. And the competitive pipeline is thread there, and therefore, there is less competition to recruit patients compared to AML. At the same time, we continue to believe LYT-200 has broader potential across other haematological malignancies, including AML, which we intend to explore over time. Consistent with this approach, Gallop intends to pursue third-party capital to support a potentially registration-enabling trial in MDS with the majority expected to come from external investors. Our objective is to ensure the program is sufficiently funded to reach a meaningful value inflection point while maintaining discipline around dilution for PureTech. The next step is interacting with the FDA later this year. In parallel, we are actively generating the next set of programs that will form the basis for future founded entities. Historically, many of our programs and PureTech's greatest successes have come from identifying therapies with validated pharmacology and addressing the specific issues that limited their potential. Our founded entities, Karuna Therapeutics, Seaport Therapeutics and Celea Therapeutics all exemplified the approach. Going forward, innovation will focus on validated pharmacology. We have refined and formalized this approach over the last few decades into what we call the light model, launching innovation from existing pharmacology. As shown on this slide, the life model is a systematic framework for identifying areas of high unmet need, selecting drugs with demonstrated human efficacy, understanding what has constrained their full potential and designing targeted solutions to fully unlock their value. We then conduct focused pillar experiments with rigorous predefined success criteria established in advance of data readout to ensure this process remains highly capital efficient. In addition, any solution must support strong intellectual property and be attractive to both physicians and payers. Importantly, this approach allows us to innovate with greater speed, lower technical risk and significantly greater capital efficiency than traditional de novo drug discovery. Using this approach, we expect to focus primarily on small molecules while remaining open to traditional biologics such as antibodies where the opportunity is compelling. While we consider opportunities across a range of therapeutic areas, we anticipate an emphasis on areas of traditional strength such as CNS. Looking ahead, we aim to progress up to three concept stage pharma programs with modest capital deployment. We define a concept stage program as a therapeutic opportunity that has passed initial internal diligence and is continuing to be derisked. We are currently progressing several promising programs to a concept stage process with the goal of nominating up to two development candidates over the next three years that could serve as the basis for future funded entities. Innovation has historically been the foundation of value creation of PureTech. We're excited about leveraging the best approaches we have learned and applying them to develop new therapies that have the potential to help patients and create value for our shareholders. Now I'll turn it back to Rob. Robert Lyne: Thanks, Eric. We are indeed very excited about the potential with Gallop and the work of the innovation team in progressing the next wave of founded entities. Now I'd like to go over our financial highlights. At the PureTech level, we ended 2025 with cash, cash equivalents and short-term instruments of $277.1 million compared to $366.8 million at the end of 2024. On a consolidated basis, our cash, cash equivalents and short-term investments were $277.3 million at the end of '25 compared to $367.3 million at the end of '24. At the PureTech level, as of March 31, '26, we held unaudited cash and cash equivalents of $248.1 million. On a consolidated basis, our cash and cash equivalents were $248.2 million. Based on our existing financial assets as of December 31, '25, we expect to have operational runway at least through the end of 2028, which is inclusive of our expected participation in certain and fundraisings. Our revenues are mostly driven by milestone-based payments and royalties from license agreements and are expected to continue to fluctuate from year-to-year. On a consolidated basis, our revenues in '25 were $4.7 million compared to $4.8 million in 2024. We reported a lower operating loss of $98.5 million in 2025 compared with $136.1 million in 2024. This decrease is largely due to lower G&A expense as a result of the deconsolidation of Seaport in 2024, which reduced workforce-related costs, including payroll and noncash stock-based compensation expenses and new stock awards granted to founders, directors, employees and executives of Seaport in 2024 prior to its deconsolidation. Decrease is also attributed to lower R&D expenses in 2025, mainly as a result of the deconsolidation of Seaport in 2024. On a consolidated basis, we reported a net loss of $110.1 million for 2025 compared to net income of $27.8 million for 2024. The change primarily due to the absence of $151.8 million onetime gain from the Seaport deconsolidation, which was recognized in 2024. By excluding that item, we saw improvement in operating costs in both G&A and R&D, as mentioned above. Looking ahead, we expect to streamline expenses and operate the lean model following the completion of the SLA fundraise in line with our refined strategy. This measured approach allows us to protect our balance sheet and preserve capital flexibility to fund opportunities with asymmetric value potential. In summary, I am pleased with the operational and clinical progress we are making at PureTech and across our founded entities. At the same time, we remain focused on execution. In 2026, our priorities include advancing SLA and Gallop, both operationally and financially, driving value from our founded entities opportunistically and progressing our innovation engine towards new candidate nominations. We believe our refined strategy positions us well to do so with greater focus, discipline and capital efficiency. In closing, I'd like to thank the various stakeholders who make PureTech what it is today, including our team, shareholders and the broader clinical community who are vital to the important work we do. It's a privilege to lead PureTech at this important moment. We have a differentiated model, a strong foundation and meaningful opportunities ahead, and we remain firmly focused on translating that potential into sustained progress and value creation. I'll now turn to the operator to take questions. Operator: [Operator Instructions] Our first question comes from Miles Dixon from Peel Hunt. Miles Dixon: Forgive me if some of the questions go over topics that you've already talked about, my line dropped a few times. But can I just double check on cash, firstly, I mean, it's a change in the guidance from into 2028 to the end of 2028. Can I just double check on two important points. Firstly, this is at least until the end of 2028, subject to further realization and that it's inclusive of any participation, I know as you said, in entity fundraising, but also specifically for Celea, where the trial cost might be slightly higher? That's the first one. Robert Lyne: Myles, thanks for joining. Yes, no, absolutely. As you say, it's at least through 2028, and that reflects the conservative approach that we take to cash runway. So as you say, we don't factor in any realizations into that cash guidance, and we are assuming commitments into SLA and also support for Gallop as well in that runway guidance. Miles Dixon: Brilliant. And then moving on to LYT-100 and Celea. I mean, obviously, the IPF landscape continues to evolve and heat up, suggesting more and more people are looking at it. But -- and clearly, your data today is great, but how are talks progressing with the funding partners? You said you've used the word substantially complete. But can you give us anything on the profile of this potential partner in the endeavor? Or in the earlier comments that we've just made about cash, I'm assuming that the majority of the kind of liability is going to be settled by the partner in this. If you can just give a bit more color, that would be really helpful. Robert Lyne: Yes, absolutely. So as we're updating today, we've made very substantial progress on this fundraise. Obviously, these things are never done until they're done, and there are various things that need to fall into place before we'll be able to announce any completion of the fundraising. However, we've made very substantial progress now, and we have a clear line of sight to getting this done. As you've indicated, Myles, we are looking to raise a very significant amount of capital in this raise, but the majority of that capital is very much coming from external partners, and that is reflecting our model of leveraging external capital whilst providing the commitments that we need in order to maintain meaningful equity stakes in these founded entities. Miles Dixon: Great. And now just moving on to the other exciting bit of clinical data news Gallop Oncology. Eric, I think I caught you talking about the selection of MDS versus AML. And I very much understand that it was about capital. But could I also ask whether there's any read across from trials, whether it be TIBSOVO and this label extension when you were thinking about potential patient cohort size? And should we make any read across from that? I think it was 170-patient expansion from AML into MDS for TIBSOVO. Eric Elenko: Yes. Myles, thanks for the question. We're prioritizing MDS because of the very compelling clinical data. And really, as you indicated, there's really only the one drug approved in the relapsed/refractory population, which is TIBSOVO. And TIBSOVO because it's appropriate for patients with a specific mutation, that's really why it's limited to that 3% to 5% of the relapsed/refractory population. And that really creates a tremendous need. And if you look more generally with regards to the pipeline and what exists and what's being developed, it's really thread there. And what that means is that a drug that if it is approved in the relapsed/refractory high-risk MDS population has blockbuster potential. It also means from a clinical trial perspective that there's less competition for patients when it comes to recruiting. So the decision with regard to prioritization was driven by the very compelling clinical data we had, but also the other factors that I was describing. Miles Dixon: Great. And then lastly for me before I get back in the queue on Seaport, obviously, some more progress currently being made. Robert, can I just ask, I mean, obviously, the S-1 registration document suggested that you have, I think it was 42% or 43% versus the original 35% that was disclosed. Will you guys be thinking about taking a board seat post any IPO? And I mean, again, you talked about the 3% to 5% tiered royalties that you would have. Is that on all Glyph products on that potential platform or just those in the existing pipeline? Any color that you can give me on those topics would be great. Robert Lyne: Absolutely, Miles. Obviously, we're limited in what we can say at the moment about Seaport given that they're on file for IPO in the U.S. But it is our general practice with founded entities that we don't take board seats once they IPO. And that is a general approach that we've taken in the past and we would expect to be taking going forward. It's also the case that we do have royalties beyond just the GLP application in terms of the economics that we have there from -- and again, that stems from the -- obviously, the developmental work that was done at PureTech around that technology. Operator: We will now move on to our written questions. Our first question is, are you keen to hold a significant stake in Seaport beyond future funding rounds? Robert Lyne: It's a great question because it really goes to the heart of our hub-and-spoke model. We -- obviously, because as indicated just with the Gallop platform, because we undertake developmental work on these programs internally at PureTech at the hub level, we typically start out with 100% ownership of our founded entities. What that means is as we leverage external capital, we often retain very large equity stakes in our founded entities even once they've raised large amounts of capital. So very often, you'll see that even through private rounds and even potential public fundraisings, we typically may end up even at that stage still being the largest individual shareholder. So why do we end up in that situation? Well, look, for us, it has two benefits. One is to PureTech. It means we don't have to keep writing ever-increasing checks to hold our corner and to maintain a significant equity percentage. instead at the PureTech level, we can allocate that cash to other programs, typically earlier-stage innovation, where we will often see the potential for a higher return on capital than we would in investing in later-stage rounds of our founded entity fundraisings as well as capital allocation within PureTech and aiming to increase our overall financial returns, it also allows the founded entities to diversify their shareholder registers. This is vital if they're going to raise external capital, particularly if they do ever want to IPO, that would not be practical in a situation where PureTech was the 100% shareholder of the business. So we see that dilution as beneficial both to PureTech and to the founded entities, but also it's allied with the nondilutive economics, which we retain in founded entities, which obviously are unaffected by the equity dilution that we may see. Operator: Our next question comes from Christian McGlenny from Stifel. Unknown Analyst: I just follow up then on the -- around the new asset formation, the concept stage. Just a bit more around that. I mean, is this sort of ballpark figure in terms of how much it costs to do those sort of concept stage assets? And then just to clarify, were you talking about new candidates on the candidate side, 2 assets, was that over a 3-year period? Or was that 2 assets per year? And then just finally, therapeutic areas of focus here. I mean, you've got a pretty broad spread in terms of your existing portfolio. Is that likely to continue fairly agnostic on therapeutic area? Or do you see some areas where you think are particularly of interest for those sort of new concept assets? Robert Lyne: Thanks for the questions, Christian. Look, just taking them in order, what we find so exciting about innovation is we can actually make really significant progress with pretty modest amounts of capital. So when we're doing very early derisking or proof-of-concept studies, we can make really great progress with 6-figure -- modest 7-figure amounts of investment. And maybe to one of the earlier questions that we just spoke to, you can give an idea then of the kind of return of capital that we can make on that kind of modest early capital deployment compared to later-stage investments in founded entities. So that's one of the reasons that we find innovation so exciting, both in terms of what we can do for patients, but also in terms of the financial returns that we can generate there. And just to your specific question, we're looking at two developmental candidates over a 3-year period in terms of the cadence going forward. In terms of sort of therapeutic areas and how we think about that, I might turn that over to Eric to answer that piece of the question. Eric Elenko: Yes. A lot of our focus is really in areas where we've had historic success and strength. For example, central nervous system CNS is an area of great focus. There are other areas of interest, for instance, I&I. We do maintain a therapeutic area agnostic policy so that if we do see an opportunity that we want to pursue that's available to us -- but given that our approach is proactive, we do tend to concentrate in certain areas and again, particularly CNS being really one of the biggest areas of focus. Operator: Our next question is, thank you for the transparency on the runway to 2028. It's good that you don't pencil in any credency realizations in this guidance. Can you clarify how this runway might be impacted from a more rationalized group post Celea finance completion? Also, what monies have you set aside for funding some of these financing rounds as well? Robert Lyne: So as we indicated, we take a conservative approach in terms of our runway guidance. And so I'm quite right to identify that we don't have any commentary realizations. We also don't assume any other realizations from any founded entities that may come through. We are looking and in our assumptions, we are planning for some reduction in our cost base following the spinout of Celea. Once we get that spinout completed, we'll be looking to revisit that cost reduction and try and reduce that as far as possible to see if we can stretch that runway even further as well as not including any income from any monetizations. We have included participation in both the Celea fundraise, which as we've indicated, is now coming up to a place where we think we've got line of sight to completion in due course. We also are reserving more modest amounts for supporting Gallop oncology as well, which we've guided that we'll be looking to commence fundraising towards the end of this year, looking to try and complete a fundraise by the first quarter of next year. The exact amounts there are still to be determined because it's subject to commercial negotiations on the 2 fundraising structures. But it's in terms of guidance, we certainly expect a significant commitment into the Celea round given the scale of fundraising necessary there for a Phase III, and we would be considering a more modest commitment into Gallop. And obviously, as and when we're in a position to complete those financings, we'll be able to provide full detail on the capital commitment that PureTech will be making. Operator: Our next question is, should we be ascribing any value or realizations from Silica, Vedanta, Sunday, Elvio or Integra? Robert Lyne: Look, we're very proud of the innovation and work that went into these founded entities. However, in terms of helping shareholders understand where we see value in the business at the half year last year, we introduced the concept of legacy holdings, which is where we're now bucketing these founded entities. We are continuing to support those that have operations still where we think that we may still be able to extract some value. However, in terms of modeling guidance, we are guiding that we do not expect material financial returns from any of these assets. To the extent that changes, we'd obviously be delighted to update shareholders. But for modeling purposes, we don't ascribe material prospect of material inflows from these founded entities. Operator: Our next question is, can you outline your thinking on capital allocation, specifically in terms of where potential capital return sits in terms of your updated priorities? Robert Lyne: Certainly. So one of our focuses since we've been refining our strategy over the last 9 months or so has been to put an emphasis on capital returns. We recognize that ensuring that our shareholders participate in the scientific, but also most important, the financial success of PureTech is absolutely critical. This is one of the reasons why we've deliberately taken a cautious approach to our cash runway, ensuring that we are able to fund an ongoing business without relying on realizations coming into the business. Because of that, we will be looking to ensure that when we do have significant financial inflows into the company, which we've had in the past, and we see potential for again in the future, that we will be looking to return meaningful proportions of those inflows back to shareholders directly. The exact form of that return would need to be decided at the time, but it is our intention that those significant wins back into PureTech will result in financial flows back to shareholders directly. Operator: Thank you. That's all we have time for today. I'd like to thank you all for joining, and you may now disconnect your lines.
perator: Good day, and thank you for standing by. Welcome to the Constellium First Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jason Hershiser, Director of Investor Relations. Please go ahead. Jason Hershiser: Thank you, Shannon. I would like to welcome everyone to our first quarter 2026 earnings call. On the call today, we have our Chief Executive Officer, Ingrid Joerg; and our Chief Financial Officer, Jack Guo. After the presentation, we will have a Q&A session. A copy of the slide presentation for today's call is available on our website at constellium.com, and today's call is being recorded. Before we begin, I'd like to encourage everyone to visit the company's website and take a look at our recent filings. Today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company's anticipated financial and operating performance, future events and expectations and may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the factors presented under the heading Risk Factors in our annual report on Form 10-K. All information in this presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. In addition, today's presentation includes information regarding certain non-GAAP financial measures. Please see the reconciliations of non-GAAP financial measures attached in today's slide presentation, which supplement our GAAP disclosures. And with that, I would now like to hand the call over to Ingrid. Ingrid Joerg: Thanks, Jason. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Before we start, I wanted to say we are very pleased with our first quarter performance, including record adjusted EBITDA. We are also raising our outlook for the full year and expect 2026 to be a record year for the company, both in terms of adjusted EBITDA and free cash flow. Okay. Let's begin on Slide 5 and discuss the highlights from our first quarter performance. I would like to start with safety, our #1 priority. We delivered strong safety performance in the first quarter with a recordable case rate of 1.16 per million hours worked versus 1.91 in 2025. Despite this strong achievement, our safety journey is never complete. We remain focused on this critical priority every day, including achieving our safety target to reduce our annual recordable case rate to 1.5 per million hours worked. Turning to our financial results. Shipments were 370,000 tons in the first quarter as higher shipments in A&T were offset by lower shipments in PARP and AS&I. Revenue of $2.5 billion increased 24% compared to the first quarter of 2025 due to the higher revenue per ton, including higher metal prices. Remember, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which minimizes our exposure to metal price risk. Our net income was $196 million in the quarter compared to net income of $38 million in the first quarter last year. The main drivers of the increase were higher gross profit and favorable changes in other gains and losses in the quarter versus last year. Compared to the first quarter last year, adjusted EBITDA increased 93% to $359 million in the first quarter this year, so this includes a positive noncash impact from metal price lag of $97 million. If we exclude the impact of metal price lag, which, as you know, is the way we view the real economic performance of our business, we achieved an adjusted EBITDA of $262 million in the quarter. This represents an all-time record for the company and is up 78% versus the $147 million in the first quarter last year. Adjusted EBITDA was up in each of our operating segments in the quarter versus last year, including a new quarterly record for PARP and a new first quarter record for A&T. Our free cash flow was $5 million in the quarter. And during the quarter, we returned $28 million to shareholders through the repurchase of 1.2 million shares. In March, we announced that our Board approved a new $300 million share repurchase program that expires in December 2028 and that will replace our existing program following our Annual Shareholders Meeting this May. We delivered strong results this quarter, which were ahead of our own expectations despite macroeconomic and geopolitical uncertainties. During the quarter, we benefited from current market dynamics, including supply shortages of automotive rolled products in North America, improved aerospace and TID environment and highly favorable scrap and metal dynamics in North America. Before turning the call over to Jack, I wanted to make a few comments regarding the expected impact from the conflict in the Middle East. In terms of metal supply, we do source some metal from the Middle East today, both slabs and billets, but they represent a small percentage of our overall needs. As such, we believe the impact on metal supply for us is limited at this stage, and we should be able to resource through a combination of internal and external metal flows. On energy, most of our energy costs are locked in for 2026. For the small portion, which we chose to leave open, the impact of higher energy costs should be modest. In other cost categories, we are beginning to see some inflationary pressures in freight, lubricants and coatings, but we expect the net impact from this to be manageable. We currently do not expect any impact on our supply chain from lack of freight capacity. In terms of other indirect impacts from the Middle East conflict, we have not seen much end market disruption at this stage, so we will continue to monitor it closely. To wrap up on this topic, the overall impact from the conflict in the Middle East appears digestible at this point. The longer-term impacts remain uncertain and difficult to predict, but we are confident in our ability to manage our business in any environment. With that, I will now hand the call over to Jack for further details on our financial performance. Jack Guo: Thank you, Ingrid, and thank you, everyone, for joining the call today. Please turn now to Slide 7, and let's focus on our A&T segment performance. Adjusted EBITDA of $102 million increased 24% compared to the first quarter last year and represents a new first quarter record for A&T. Volume was a tailwind of $32 million due to higher shipments in both Aerospace and TID. Aerospace shipments started the year strong and were up 13% in the quarter versus last year. TID shipments were up 18% versus last year as we continue to see increased demand from onshoring in the U.S. TID also benefited from automotive coil shipments from Ravenswood due to the current supply disruption in automotive rolled products in North America. Price and mix was a headwind of $2 million due to unfavorable mix in the quarter, mostly offset by improved contractual and spot pricing in Aerospace and TID. Costs were a headwind of $16 million, primarily as a result of higher operating costs given higher activity levels. FX and other was a tailwind of $6 million in the quarter due to the weaker U.S. dollar. Now turn to Slide 8, and let's focus on our PARP segment performance. Adjusted EBITDA of $151 million increased 152% compared to the first quarter last year and is a new quarterly record for PARP. Volume was a headwind of $6 million in the quarter as higher automotive shipments were more than offset by lower packaging shipments. Packaging shipments decreased 6% in the quarter versus last year, though underlying packaging demand remained healthy in both North America and Europe. Automotive shipments increased 12% in the quarter as we benefited from the current supply shortages in North America of aluminum automotive body sheet. Price and mix was a tailwind of $26 million as a result of improved pricing and favorable mix in the quarter. Costs were a tailwind of $65 million, primarily as a result of favorable metal costs given higher throughput and improved productivity in our recycling and casting operations, continued improvement in scrap spreads and significantly higher metal pricing environment in North America. FX and other was a tailwind of $6 million in the quarter. Now turn to Slide 9, and let's focus on the AS&I segment. Adjusted EBITDA of $24 million increased 50% compared to the first quarter last year. Volume was a $4 million headwind as a result of lower shipments in automotive and industry extruded products. Automotive shipments were down 3% in the quarter, mainly due to weakness in Europe. Even though the automotive markets in North America are relatively stable, our automotive structures business was negatively affected by the current supply shortages of aluminum automotive body sheet and its impact on production of certain platforms in the region. Industry shipments were down 5% in the quarter versus last year, though industrial markets in Europe have stabilized at these low levels. Price and mix was a $2 million headwind in the quarter. Costs were a tailwind of $11 million, primarily due to lower operating costs. FX and other was a tailwind of $3 million in the quarter. It is not on the slide here, but our holdings and corporate expense was $15 million in the quarter. Holdings and corporate expense was up $4 million from last year due to higher labor costs and unfavorable foreign exchange translation. As we said last quarter, we expect holdings and corporate expense to run at approximately $50 million in 2026. It is also not on the slide here, but I wanted to summarize the current cost environment we're facing. As you know, we operate a pass-through business model, so we're not materially exposed to changes in the market price of primary aluminum, our largest cost input. On other metal costs, which includes our recycling profits, we have seen unprecedented levels of volatility over the last 18 months. Following the U.S. tariff announcement in 2025, market aluminum prices in the U.S., which includes the LME aluminum price plus the Midwest Premium have risen sharply to historical levels. The current conflict in the Middle East has put additional upward pressure on global market aluminum prices. Spot scrap spreads for aluminum, mainly used beverage cans or UBCs, have also improved to historically wide levels in the spot market today. Both of these dynamics represent a sharp contrast from the lower metal price environment and historically tight scrap spread levels we experienced in the second half of 2024 and through the first half of 2025, during which period we were negatively impacted. As discussed last quarter, we benefited from the improvement in scrap and metal pricing environment in the fourth quarter last year, and we saw more benefits in the first quarter this year. Looking ahead, most of our scrap needs in the second quarter are locked in at favorable levels, and our team is working tirelessly to secure additional scrap supply for the second half in an environment that remains volatile. It is important to bear in mind that recycling is core to what we do as it takes a significant amount of investments and know-how, and we are focused on making the best out of the current favorable conditions and delivering a strong return on our recycling investments for our shareholders. Moving on from metal costs. Inflationary pressures continue today across multiple operating cost categories, including labor, energy, maintenance and supplies, albeit at more normal levels. As Ingrid mentioned previously, we're beginning to see some elevated inflationary pressures in other categories such as freight, lubricants and coatings as a result of the conflict in the Middle East, though we expect the net impact from this to be digestible at this point. Regarding tariffs, we have made progress on pass-throughs and other actions to mitigate a portion of our gross tariff exposure, and we believe at this stage, our direct tariff exposure remains manageable and is consistent with our prior expectations. The indirect positive impacts from the tariffs continue to ramp up, including higher demand for U.S. domestically produced aluminum products, a more favorable pricing environment compared to expensive imports and improved recycling process in the U.S. Put it all together, we continue to believe that the current tariff and trade policies should be a net positive for us. All of the known tariff impacts, both direct and indirect and all of our mitigation efforts to offset the direct impacts are included in our guidance today. Wrapping up on costs, we have demonstrated strong cost performance in the past, and we're confident in our ability to maintain a right-sized cost structure in any environment. Now let's turn to Slide 10 and discuss our free cash flow. We generated $5 million of free cash flow in the first quarter. The increase in free cash flow versus 2025 was primarily a result of higher segment adjusted EBITDA, partially offset by an unfavorable change in working capital and higher capital expenditures. Looking at 2026, we now expect to generate free cash flow in excess of $275 million for the full year. We expect CapEx to be approximately $330 million, which is up from $315 million previously. Unchanged from previous guidance, CapEx still includes approximately $100 million of return-seeking CapEx, primarily related to key aerospace and recycling and casting projects we announced previously at Issoire, Muscle Shoals and Ravvenwood. We expect cash interest of approximately $125 million, in line with prior guidance and cash taxes of approximately $80 million, up slightly from prior guidance, mainly due to the expected increase in profitability for the year. We expect working capital and other to be a larger use of cash for the full year than prior guidance, mainly due to higher metal prices. We expect to use the free cash flow generated this year for our share repurchase program and for gross debt reduction. As Ingrid mentioned previously, we continued our share buyback activities in the quarter. During the quarter, we repurchased 1.2 million shares for $28 million. Since we started the share repurchase program, we have repurchased 14.7 million shares for $221 million. Also, as Ingrid said earlier, in March, we announced that our Board approved a new $300 million share repurchase program that expires in December 2028, and that will replace our existing program following our Annual Shareholders Meeting this May. Now let's turn to Slide 11 and discuss our balance sheet and liquidity position. At the end of the first quarter, our net debt of $1.8 billion was stable compared to the end of 2025. We reduced our leverage to 2.2x at the end of the quarter, which is within our target range. We expect leverage to trend lower in 2026 and to maintain our target leverage range of 1.5x to 2.5x over time. As you can see in our debt summary, we have no bond maturities until 2028, and our liquidity increased by $38 million from the end of 2025 and remains very strong at $904 million as of the end of the first quarter. With that, I'll now hand the call over to Ingrid. Ingrid Joerg: Thank you, Jack. Let's turn now to Slide #13 and discuss our current end market outlook. The majority of our portfolio today is serving end markets benefiting from durable and attractive secular growth trends in which aluminum, a light and infinitely recyclable material plays a critical role. Turning first to the aerospace market. Commercial aircraft backlogs are at record levels today and continue to grow. Major aerospace OEMs remain focused on increasing build rates for both narrow and wide-body aircraft. This is evidenced by higher plane deliveries year-over-year and rising delivery ambitions in the near term. Although supply chain challenges have continued to slow deliveries below what OEMs were expecting for several years in a row now, demand is steady for the most part and aluminum destocking in the supply chain appears to be easing. Demand for high value-add products, which is one of our core focus areas, remains strong. We remain confident that the long-term fundamentals driving commercial aerospace demand remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. In addition, demand remains stable in the business and regional jet market, whereas demand for space and military aircraft is strengthening. We believe we are a leading provider of proprietary aluminum solutions for those customers in the space and military aviation markets today. As you know, we are investing in additional capacities and capabilities, such as our third Airware casthouse in Issoire, which we expect to start up by the end of this year to further strengthen our position in the future. Looking across our entire commercial and military aviation and space businesses, we believe our product portfolio is unmatched in the industry, and we have industry-leading R&D capabilities for aluminum aerospace solutions. Turning now to packaging. Demand remains healthy in both North America and Europe. The long-term outlook for packaging continues to be favorable as evidenced by the growing consumer preference for the sustainable aluminum beverage can, capacity growth plans from the can makers in both regions and the greenfield investments ongoing here in the U.S. We continue to see aluminum gain share against other substrates in the beverage market and the majority of new beverage products are launched in aluminum cans today due to its sustainable attributes. Aluminum cans are highly recyclable, and we are well positioned to capitalize on the benefits from recycling packaging materials at our facilities in Muscle Shoals and Neuf-Brisach. Packaging markets are relatively stable and recession resilient as we have seen many times in the past. Longer term, we continue to expect packaging markets to grow low to mid-single digits in both North America and Europe, providing a strong baseload for our operations in both regions. Let's turn now to automotive, which continues to be a bit of a different story in North America versus Europe. In North America, demand is relatively stable, though the tariff environment continues to create some uncertainty. Last year, a U.S.-based facility at one of our competitors was impacted by fire, a very unfortunate event and which has created an interruption in the aluminum rolled product supply chain in North America. The entire industry continues to mobilize to ensure we limit the impact on our customers. We continue to benefit from this in the first quarter this year in both our PARP and A&T businesses as we were able to help our customers during this outage. On the automotive structures side, we are negatively impacted as some OEMs were forced to reduce production on certain platforms impacted by the disruption on the rolled product side. The overall impact in 2026 is a net positive on our results, which we expect to continue throughout the year. Automotive demand in Europe remains weak, particularly in the premium vehicle segment where we have greater exposure. European markets are seeing increased Chinese competition and have lowered their BEV ambitions. Automotive production in Europe is also feeling the impact of the current Section 232 auto tariffs, given the number of vehicles Europe exports to the U.S. Longer term, though, we believe electric and hybrid vehicles will continue to grow, but at a lower rate than previously expected. Secular trends such as lightweighting, fuel efficiency and safety will continue to drive the demand for aluminum products. As a result, we remain positive on this market over the longer term in both regions despite the weakness we are seeing today. As you can see on the page, these 3 core end markets represent over 80% of our last 12 months revenue. Turning lastly to other specialties. These markets are typically dependent upon the health of the industrial economies in each region, including drivers like the interest rate environment, industrial production levels and consumer spending patterns. Industrial market conditions in North America and Europe became more stable in the second half of 2025, and we believe the markets, particularly in Europe, have bottomed after 3 years of market downturn. Nevertheless, we expect the specialties markets in Europe to remain relatively weak in the near term. We do believe TID markets in North America provide us with some opportunities today given the current tariffs make imports less competitive compared to domestic production. We also believe there are some opportunities in land-based defense and semiconductor markets given current market dynamics. As you know, we are focused on niche high value-added applications in most industrial markets. To conclude on the end markets, we like the fundamentals in each of the markets we serve, and we strongly believe that the diversification of our end markets is an asset for the company in any environment. Turning lastly now to Slide 14, we detail our key messages and financial guidance. Our team delivered strong first quarter results that were ahead of our expectations despite macroeconomic and geopolitical uncertainties. We achieved record quarterly adjusted EBITDA, and we returned $28 million to shareholders with the repurchase of 1.2 million shares. I want to thank each of our Constellium team members for their continued focus on strong cost control, free cash flow generation and commercial and capital discipline. Based on our current outlook for 2026, we are now targeting adjusted EBITDA, excluding the noncash impact of metal price lag in the range of $900 million to $940 million and free cash flow in excess of $275 million. Our guidance for 2026 assumes that favorable market conditions will continue into the rest of 2026. These include benefiting from the current supply shortages of automotive rolled products in North America, and improved aerospace and TID environment and favorable scrap and metal dynamics in North America. Our guidance also assumes the recent demand trends in our end markets that I described earlier will continue and the overall macroeconomic environment to remain relatively stable. Looking to the future, we remain laser-focused on executing our road map to delivering adjusted EBITDA, excluding the noncash impact of metal price lag of $900 million and free cash flow of $300 million by 2028. The key drivers behind these targets compared to 2026 performance include executing on various return-seeking CapEx projects, strong cost control and productivity improvements, including our Vision 2028 program and continued price discipline. Our 2028 targets also assume additional growth in markets such as aerospace, TID and packaging. As a reminder, these targets do not include the favorable scrap spread environment we are seeing today or the benefits we expect in 2026 from the current supply shortages of automotive rolled products in North America. To conclude, we are extremely well positioned for long-term success and remain focused on executing our strategy and shareholder value creation. With that, operator, we will now open the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Corinne Blanchard with Deutsche Bank. Corinne Blanchard: Congratulations. This is a very strong quarter and an amazing lift for the guidance. That being said, so I have a few questions around the cadence maybe that we can expect, especially 2Q versus the second half of 2026. And then the second part of the question would be, can you help us bridge 2027 and 2028. I know Ingrid and Jack, you mentioned that there is no tailwind from the current scrap spread environment. But how do we think about '27 and '28? Do we think of it as EBITDA slightly flat or going down in '27 and then going up again in '28? So that would be very helpful. Ingrid Joerg: First of all, thank you very much, Corinne, and thank you for your questions. I'll start on the first one on the cadence, and then I'll let Jack complete on it. You know that traditionally, our first half of the year is much stronger. We have seasonality in our earnings, but driven by volumes in our respective end markets, particularly the second quarter tends to be quite strong on the packaging side. And then we have higher costs in the second half of the year because of our annual outages in the summer period and around the Christmas period where we do our major maintenance work, which is also driving additional cost and I'll let Jack compete on the sequence of earnings. Jack Guo: Yes. So that's exactly right. And Q2 tends to be seasonally the strongest quarter in the year, and that's our expectation for the time being. And I think just looking ahead, we have good momentum in the business. We have good visibility into the second quarter. Now the macro environment, the geopolitical environment is very volatile, as all of you know, so there's higher degrees of kind of uncertainty, which may impact -- may or may not impact the broader demand in the second half. Ingrid Joerg: Okay. As it relates to our targets for 2028, I think you have to see 2027 as a transition year in the execution of our strategic milestones that we presented some time ago. 2027, we will see the complete ramp-up of our recycling center in Neuf-Brisach. We will have our DC casting pit in Muscle Shoals ramping up in 2027 as well as our Airware casthouse investment, which will start up at the end of this year. So those investments are going to be complete or will start up. So we will have a kind of transition results. We also still believe that 2027 will see a little bit of strength on the aerospace side as destocking may come to an end. I think we all know that the supply chain remains challenged, also particularly on the engine side. But we believe 2027 could be a turning point. Packaging is expected to remain strong and TID North America is also going to be stronger in 2027 from what we can see today. I think on the drawbacks potentially, we don't know the full impact of the Middle East crisis today. We talked about inflationary pressures that we are seeing today. But the end market impact from the Middle East crisis that the longer it lasts may have some impact on some of our markets, and that really remains to be seen. We do not expect any improvement on the automotive side. We expect 2027 to be rather weak on automotive, particularly in Europe and maybe a little bit better in North America. I think these are the puts and takes for the 2027, which is really a transition year to our 2028 guidance. Corinne Blanchard: That's very helpful. Maybe if I may, just quickly, like on aerospace, I know you commented and we saw some new contracts being signed. Can you just talk about expectation or your view on volume versus the high margin that you're getting from [ TID ]? Like how do we think about it for the rest of the year? Ingrid Joerg: Yes. So the contract that we just announced is a multiyear contract with Airbus that is covering various extruded products delivered from our French operations, including some proprietary materials like our Airware aluminum-lithium technology. And it's really cementing the good relationship and partnership that we have with Airbus for a very long period of time. It's more to be seen as a continuation and strong mix for our extrusion business for the future. Operator: Our next question comes from the line of Katja Jancic with BMO Capital Markets. Katja Jancic: Maybe staying on the '26 guide. Jack, you mentioned that your scrap is secured or locked in for 2Q, but that your team is still looking to lock in some for the second half of the year. Can you talk about what does your guide assume for scrap spreads for the rest of the year? Or how should we think about it? Jack Guo: Yes, sure. So the second quarter, as we said, is essentially locked in at this stage. It's important to kind of remain focused on -- for us to remain focused on productivity and operational excellence. And in terms of the economics, if you will, the UBC spread is more favorable in the second quarter compared to our experience, what we experienced in the first quarter. And our assumption is the metal price conditions, which is pretty much at the all-time high, are expected to remain quite elevated, at least over the short term. Now moving to the second half of the year, over -- I would say, over 50% of the needs are locked in at this stage. So there's still quite a bit that's open. The market remains, as you know, highly dynamic where you can use volatile as a word, right? And there are a number of factors that could drive you to a different set of scenarios. So there's a high degree of variation potentially. But for the remaining volume for our guide, we took sort of a middle of the road approach, that's still above our prior expectations for the second half. But it's not as aggressive as the first half of '26, but it's not nearly as conservative as what we have experienced in the second half of 2024 and through most part of 2025. Katja Jancic: Okay. And then maybe your free cash flow generation is going to increase in the rest of the year versus the first quarter. You've been buying back shares. Is there an opportunity for you to accelerate the buybacks versus what you did in the first quarter? Or how are you thinking about it? Jack Guo: Yes. So it's a good question. So number one, I think when it comes to the buyback or just overall capital allocation, our approach has always been kind of maintain a balanced approach. Now more specifically with the share buyback, we're comfortable with the existing pace of running the buyback program. And as a reminder, it's $300 million over 3 years and having a steady pace has worked for us in the past, and we still view buying back shares as attractive. So we look to maintain this similar type of pace going forward. Operator: Our next question comes from the line of Bill Peterson with JPMorgan. William Peterson: Congrats on the strong results and raise. I wanted to ask actually a question, I don't think you really talked about during your prepared remarks. There have been some changes in the Section 232 derivative tariffs. I'm wondering how you're thinking about the potential impacts and how that may have on your business, whether it be supporting prices? Or what are you hearing from your customers on this front? Ingrid Joerg: Thanks for the question, and thank you, Bill, for your comment. I think the last changes on the Section 232 do not really impact us. We have a very, very minor impact in our AS&I business. But overall, it's just a confirmation that tariffs are going to stick. And so we think the indirect benefits of Section 232 will continue for us. So no changes in our other businesses. William Peterson: And then on automotive, you've mentioned about the U.S. being better than Europe, and I think you've benefited somewhat at the margin from the unfortunate incident that you talked about. Is that -- should that benefit really be, in your view, concluded in the second quarter? Or how are you thinking about the cadence of automotive for the remainder of the year, both in PARP and AS&I? Ingrid Joerg: Yes. So I think on the PARP side, we are, at this stage, pretty confident that the benefits we have been seeing from the outage is going to continue. We are supplying basically from Europe. We are maxing out capacity in the U.S., and we are supplying material also from Ravenswood to feed into our rolling system so we can maximize overall capacity. That is allowing us to gain additional qualifications and supporting, obviously, the relationships with customers beyond what we are experiencing today. AS&I is mostly impacted by slower ramp-up of production from -- on a certain platform. And we have no clear visibility of how the full year is going to look. But the impact of it, financially speaking, is rather minor for the company. And it is actually, if you think about the net impact, it remains largely very, very positive. Operator: [Operator Instructions] Our next question comes from the line of Timna Tanners with Wells Fargo. Timna Tanners: I just wanted to drill down a little bit more on some of the discussion about the European market, in particular on the auto side. So getting some questions about the BYD getting built in Europe and the implications for Constellium and any thoughts on aluminum versus steel consumption there and in the U.S. given some reports of switching? Ingrid Joerg: Thank you for the question, Timna. So I think on the European automotive market, it's true that BYD has announced building production in Hungary and in Turkey, if you consider the wider Europe. But the cars that they are building have much more content of steel in the body of the car. So we don't really expect much impact in this. I mean our focus in Europe is mostly on premium vehicles with the German OEMs, but also others. And we do not see any impact at this point. We're also producing mostly local for local, right? We're not generally shipping automotive material across. In the U.S., with respect to switching, we have not seen any evidence of people switching other than normal course of business. So we really expect that the need for fuel efficiency is going to continue. And this is what we see on both sides of the Atlantic. Timna Tanners: Okay. Regarding the scrap spreads, if they persist at these levels, is there a much ability to increase the proportion of your product that's made from scrap? Meaning can you try to expand that production, especially given the tight markets that could persist in the broader U.S. and I guess, Europe? Ingrid Joerg: I'll start and then I'll let Jack continue. So in fact, all of our businesses are using scrap. We mostly talk about UBC for the packaging market, but we're also using a lot of scrap in the rest of our operations. So certainly, with everything that's going on in the market, we have already been working in improving our metal costs through usage of more scrap and different types of scrap and also more difficult types of scrap. You know that the industry is moving towards upcycling scrap streams that exist in the market through sorting technologies, and we are actively involved in this as well. But we also recycle material for our aerospace business, for TID business. And also on the extrusion side, we have a share of recycled content in all of the alloys that we produce today. Jack Guo: And just more broadly speaking, I mean, recycling and casting is core to what we do. So if you look at our capital expenditure profile, especially when it comes to return-seeking CapEx is going towards recycling and casting investment. So that's definitely a focus area for us, Timna. Timna Tanners: Can you quantify any of your ability to expand recycling, again, given that we may have shortages of billet and the market has gotten quite tight there with the smelter disruptions. Is there any ability to expand the amount of finished aluminum you produce using scrap? Ingrid Joerg: I wouldn't say that the shortage of primary aluminum is the main driver for us. I think it's an ongoing program where we continue to use as much scrap as we can find in the market in the alloys and the shapes that are available in the market. So it's quite volatile as well because not every scrap can go somewhere. But it's a focus of us for many, many years already to optimize as much as we can. But it's very much dependent on availability of the right type of scrap in the right moment. So we have potential to improve, but it would be not additional casting output, if you want. It would be a lower metal cost because we would be replacing prime metal with scrap in our operations. Operator: And I'm currently showing no further questions at this time. I'd like to turn the call back over to Ingrid Joerg, CEO of Constellium for closing remarks. Ingrid Joerg: Thank you. Well, thank you, everybody, for your interest in Constellium. As you can see, we are off to a very strong start to the year. We delivered record performance in the first quarter and increased our outlook for 2026. We are very happy with the steps we are making towards our 2028 targets, and we look forward to updating you on our progress in July. Thank you very much. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.