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Operator: Greetings, and welcome to SiteOne Landscape Supply First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Elema, Chief Financial Officer. Thank you. You may begin. Eric Elema: Thank you, and good morning, everyone. We issued our first quarter 2026 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I am joined today by Doug Black, our Chairman and Chief Executive Officer; and Daniel Lafon, SVP, Strategy and Development. Before we begin, I would like to remind everyone that today's press release, slide presentation and the statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, we will discuss non-GAAP measures which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the select presentation. . I would now like to turn the call over to Doug Black. Doug Black: Thanks, Eric. Good morning, and thank you for joining us today. We are pleased with our first quarter 2026 performance as we overcame the weather and market-related softness in sales volume and delivered 14% adjusted EBITDA growth compared to the prior year period with meaningful gross margin expansion and tight SG&A management. Furthermore, during the quarter, we acquired Reinders, a strong fifth generation market leader in irrigation, agronomics and landscape lighting in the Midwest, which will contribute to our growth this year. We have seen volumes improve in April with the oncoming of the delayed spring season. However, with the recent increase in macroeconomic uncertainty, we believe that our end markets could continue to be soft this year. On the other hand, we expect pricing to be stronger which will benefit organic sales growth and gross margin expansion. With the benefit of our commercial and operational initiatives, we remain confident in our ability to gain market share and expand our EBITDA margin in 2026. Coupled with a solid pipeline of potential acquisitions, we believe that we are well positioned to deliver solid performance and growth for our shareholders in 2026 and in the years to come. I will start today's call with a brief overview of our unique market position and our strategy, followed by the highlights from the first quarter. Eric will then walk you through our first quarter financial results in more detail and provide an update on our balance sheet and liquidity position. Daniel Laughlin, will discuss our acquisition strategy, and then I will come back to address our outlook and guidance for 2026 before taking your questions. As shown on Slide 4 of the earnings presentation, we have a strong footprint of more than 680 branches and 5 distribution centers across 45 U.S. states and 5 Canadian provinces. We are the clear industry leader approximately 3x the size of our nearest competitor, we estimate that we only have about a 19% share of very fragmented $25 billion wholesale landscaping products distribution market. Accordingly, our long-term opportunity to grow and gain market share remains significant. We have a balanced mix of business with 66% focused on maintenance, repair and upgrade, 20% focused on new residential construction and 14% on new commercial and recreational construction. The only national full product line wholesale distributor in the market, we also have an excellent balance across our product lines as well as geographically. Our strategy to fill in our product lines across the U.S. and Canada, both organically and through acquisition further strengthens this balance over time. Overall, our end market mix, broad product portfolio and geographic coverage offers multiple avenues to grow and create value for our customers and suppliers while providing important resilience in softer markets. Turning to Slide 5. Our strategy is to leverage the scale, resources functional talent and capabilities that we have as the largest company in our industry, all in support of our talented, experienced and entrepreneurial local teams to consistently deliver superior value to our customers and suppliers. We've come a long way in building SiteOne and executing our strategy, but we have more work to do as we develop into a world-class company. The current challenging market conditions require us to adopt new processes and technologies faster and to be even more intentional in driving organic growth, improving our productivity and mastering the unique aspects of each of our product lines. Accordingly, we remain highly focused on our commercial and operational initiatives to overcome near-term headwinds, but more importantly, to build a long-term competitive advantage for all our stakeholders. These initiatives are complemented by our acquisition strategy, which fills in our product portfolio, moves us into new geographic markets and adds terrific new talent to SiteOne. Taken all together, we expect our strategy to create superior value for our shareholders through organic growth, acquisition growth and EBITDA margin expansion. On Slide 6, you can see our strong track record of performance and growth over the last 10 years with consistent organic and acquisition growth. From an adjusted EBITDA margin perspective, we benefited from extraordinary price realization due to rapid inflation in commodity products during 2021 and '22. In 2023 and 2024, we experienced significant headwinds as commodity prices came down. In 2024, we also experienced further adjusted EBITDA dilution and from the acquisition of Pioneer, a large turnaround opportunity with great strategic fit and from our other focus branches, which resulted from the post-COVID market headwinds. In 2025, pricing improved from a 3% decline in 2024 to flat, and we achieved excellent progress with Pioneer and our other focus branches both of which contributed significantly to our improvement in adjusted EBITDA margin despite the soft end markets. In 2026, we expect pricing to be up 2% to 3%, and we expect to continue achieving improvements with our focus branches. Accordingly, with the benefit of our other commercial and operational initiatives, we expect to continue expanding our adjusted EBITDA margin despite the continued market softness. For the longer term, we believe that we have significant room to improve our adjusted EBITDA margin as we execute our strategy and reach our full potential as a business. We have now completed 108 acquisitions across all product lines since the start of 2014, adding approximately $2.2 billion in trailing 12-month sales to SiteOne, which demonstrates the strength and durability of our acquisition strategy. These companies expand our product line capabilities and strengthen SiteOne with excellent talent and new ideas for performance and growth. Our pipeline of potential deals remains robust, and we expect to continue adding and integrating more companies in 2026 to support our growth. Given the fragmented nature of our industry and our current market share, we believe that we have a significant opportunity to continue growing through acquisition for many years to come. Slide 7 shows the long runway we have ahead in filling in our product portfolio, which we aim to do primarily through acquisition, especially in the nursery, hardscapes and landscape supplies categories. We are well connected with the best companies in our industry, and we expect to continue filling in these markets systematically over the next decade. I will now discuss some of our first quarter performance highlights as shown on Slide 8. Net sales were $940 million, essentially flat year-over-year, with organic daily sales down 1%. Due to the timing of winter storms, the spring selling season was delayed in March. Additionally, we believe that the increased macroeconomic uncertainty and higher interest rates are negatively affecting an already soft new residential construction market and the more resilient repair and upgrade market. These factors resulted in a 4% decline in organic sales volume for the quarter, which was partially offset by 3% growth from pricing. Gross profit increased 3% and gross margin improved by 90 basis points to 33.9%, driven by effective price realization and continued progress with our commercial initiatives including strong growth in private label products and with small customers. SG&A as a percent of net sales increased 70 basis points to 37.2% and due to the organic sales decline. That said, we were pleased to have kept our base business SG&A flat versus prior year on an adjusted basis. During the quarter, as we benefited from the 2025 branch consolidations and closures and continue to execute our operational initiatives. Adjusted EBITDA for the quarter increased 14% to $25.5 million versus the prior year period, and adjusted EBITDA margin expanded 30 basis points to 2.7% despite the flat sales, demonstrating our ability to successfully navigate the market headwinds with disciplined execution of our strategy and initiatives. In terms of initiatives, we made good progress during the quarter, executing specific actions to improve our customer experience, accelerate organic growth, expand gross margin and increased SG&A leverage. For gross margin improvement, we achieved positive organic daily sales growth with small customers and grew our private label product sales by over 40% during the quarter. Both contributing to our strong gross margin expansion. These 2 initiatives not only help us expand gross margin, but also help us gain market share and outperform the market. To further drive organic growth, we increased our percentage of bilingual branches from 67% of branches to 68% of branches during the quarter, while continuing to execute our Hispanic marketing programs. We are also continuing to make good progress with our sales force productivity as we leverage our CRM to focus on disciplined revenue-generating actions from our inside sales associates and over 600 outside sales associates. We increased our digital sales on siteone.com by over 60% in the first quarter versus the prior year period. while also increasing regular active users by approximately 60%. We believe we are gaining market share with the customers who are engaged with us digitally as we achieved strong positive total sales growth with these customers during the quarter. siteone.com helps customers to be more efficient and helps us to increase market share while making our associates more productive, a true win-win-win. On the SG&A front, we continued to lower our net delivery expenses during the first quarter, driven by delivery associate and equipment efficiency gains along with improved pricing. Note that our teams have done a good job of working with our customers to pass through fuel surcharges to mitigate the significant near-term increases in fuel cost. We expect to reduce net delivery expense in 2026 and for the next several years as we execute our local market delivery strategy and best practices. We also continued to achieve improved profitability with our underperforming branches or focus branches during the quarter, though they were also negatively affected by the delayed start to the spring season. As a reminder, we achieved an over 200 basis point improvement in adjusted EBITDA margin of our focused branches in 2025 and are looking for strong improvement with these branches once again in 2026. In total, we are making great progress on our commercial and operational initiatives, which will help us gain market share drive organic sales growth, improved gross margin and achieve operating leverage in 2026 despite low sales growth. Furthermore, these initiatives will help us expand our adjusted EBITDA margin over the next several years towards our long-term objectives. On the acquisition front, we've added 2 companies to our family so far in 2026 with approximately $110 million in trailing 12-month sales including Reinders, a strong market leader in the Midwest for irrigation, agronomics and lighting products. Reinders is a good example of a company that we have been courting for many years before they decided to sell their fifth-generation family business late last year. Reinders family carefully consider their options and chose SiteOne as the best long-term home for their company. We have built a solid backlog of additional companies, and we expect to close more acquisitions during the year, yielding a more typical year in terms of total sales acquired. With an experienced acquisition team, broad deep relationships with the best companies, a strong balance sheet and an exceptional reputation as the acquirer of choice. We remain well positioned to grow consistently through acquisition for many years, in the very fragmented wholesale landscape supply and distribution market. In terms of our acquisition team, I'd like to take a moment to recognize Scott Salmon who retired from his role last month after leading our strategy and acquisition team for the last 7 years. Over that period, we added over 70 companies with over $1.3 billion in trailing 12-month sales to SiteOne, while significantly improving our integration processes. Scott has been a tremendous leader and colleague, and we are very grateful for his significant contributions at SiteOne. Fortunately, we have a very strong successor for Scott with Daniel Laughlin, stepping into the role to lead our strategy and acquisition efforts going forward. Daniel is a critical member of our acquisition team meeting some of the most successful acquisitions from 2014 through 2021. Recently, joined us in January and has been part of a smooth leadership transition. We're very confident in Daniel's experience, capability and deep knowledge of SiteOne and our industry, and we look forward to further executing our acquisition strategy under his leadership in the coming years. as we build on the strong foundation that's been established. Now Eric will walk you through the quarter in more detail. Eric? . Eric Elema: Thanks, Doug. I'll begin on Slide 9 with some highlights of our first quarter results. Net sales were approximately $940 million, up modestly from the $939 million for the first quarter of last year. There were 64 selling days in the first quarter, which is the same as the prior year period. Organic daily sales decreased 1% as a result of a 4% decline in volume, partially offset by a 3% increase in pricing. February and most of March, were particularly slow from a sales perspective as winter storms across several regions, limited customer activity and delayed applications, driving a weaker volume result. We saw increased sales activity toward the end of the quarter with better weather conditions. As Doug mentioned, sales volume has improved in April compared to the first quarter. . Pricing performance was strong and broad-based. While we continue to see deflation in grass seed and PVC pipe, which were down 10% and 8%, respectively, in the quarter, the collective magnitude has moderated versus prior periods and was more than offset by price increases across other product lines. In addition, at the start accordingly, we now expect prices to contribute 2% to 3% to 2026 sales growth, while acknowledging the ongoing global uncertainty. Organic daily sales for agronomic products, which include fertilizer and control products, ice melt and equipment, increased 2% for the first quarter due to improved pricing partially offset by the later start to the spring selling season, which delay applications. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories, decreased 3% for the first quarter due to adverse weather and soft demand in the new residential construction and repair and upgrade end markets. Geographically, our Eastern regions were more affected by weather, where persistent storms materially disrupted early season customer activity. More broadly, sales were down for the first quarter in 5 of our 8 regions compared to the prior year period. Our central region was a bright spot, achieving double-digit organic sales growth with solid demand and less disruption from winter storms. Acquisition sales, which include sales attributable to acquisitions completed in 2025 and 2026, contributed approximately $12 million or 1% to net sales growth. Daniel will provide additional details regarding our acquisition strategy later in the call. Gross profit increased 3% to $319 million, and gross margin improved 90 basis points to 33.9% for the first quarter. The year-over-year improvement reflects strong execution of our commercial initiatives, including continued momentum in private label sales and growth with small customers, along with solid price realization and vendor support. These gains were partially offset by higher freight and distribution costs as well as continued deflation in certain commodity products. Selling, general and administrative expenses increased to $350 million for the first quarter from $343 million for the prior year period. SG&A as a percentage of net sales increased approximately 70 basis points to 37.2%, driven primarily by the decline in organic daily sales during the quarter. Despite the sales headwind, we continue to tightly manage costs and drive productivity across the business. SG&A in the base business, on an adjusted basis, was flat for the first quarter compared to the prior year period. The effective tax rate was 28.9% for the first quarter compared to 25.5% for the prior year period, primarily due to an increase in excess tax benefits from stock-based compensation year-over-year. We continue to expect the effective tax rate for fiscal 2026 will be between 25%, 26%, excluding discrete items such as excess tax benefits. Net loss attributable to SiteOne was $26.6 million for the first quarter compared to $27.3 million for the prior year period, primarily reflecting higher gross profit, partially offset by our SG&A. Our weighted average diluted share count was approximately $44.6 million during the first quarter compared to approximately $45.1 million for the prior year period. In the first quarter, we repurchased approximately 155,000 shares for approximately $20 million at an average price of $128.90 per share. Post quarter end, we repurchased an additional 6,000 shares for approximately $800,000. Adjusted EBITDA increased 14% to $25.5 million for the first quarter and adjusted EBITDA margin expanded 30 basis points to 2.7%, reflecting the improvement in gross margin and disciplined cost management during the quarter. Adjusted EBITDA for the first quarter includes adjusted EBITDA attributable to noncontrolling interest of $700,000. Now I'll provide a brief update on our balance sheet and cash flow statement as shown on Slide 10. Working capital at the end of the quarter was approximately $1.1 billion compared to $1.0 billion at the end of the same quarter last year. Cash used in operating activities decreased approximately $8 million to $122 million due primarily to a modestly lower net loss and the effect of working capital changes. We made cash investments of approximately $102 million for the first quarter compared to approximately $21 million for the same period last year. The increase primarily reflects the acquisition of Reinders as well as higher capital expenditures. Capital expenditures for the quarter were $23 million compared to $15 million for the same period last year. due to increased investments in our branch locations. Net debt at quarter end was $585 million, and net debt to trailing 12-month adjusted EBITDA was 1.4x which is within our targeted range of 1 to 2x and lower than the 1.5x at the end of the first quarter of last year. Available liquidity at the end of the quarter was approximately $502 million consisting of $84 million of cash on hand and $418 million in available borrowing capacity under our ABL facility. Post quarter end, we amended our ABL facility and extended the maturity date to April 2031. As a reminder, our priority from a balance sheet and liquidity perspective is to maintain our financial strength and flexibility so that we can execute our growth strategy in all market environments. I will now turn the call over to Daniel for an update on our acquisition strategy. Daniel Laughlin: Thanks, Eric. As shown on Slides 12 and 13, we completed 2 acquisitions during the first quarter representing approximately $110 million of trailing 12-month net sales. Both of these companies align well with our strategy of expanding our product offering, strengthening our presence in attractive local markets, and adding high-quality teams to SiteOne. On January 13, we completed the acquisition of Bourget Flagstone Company, a wholesale distributor of hardscape products with 1 location in Santa Monica, California. This acquisition establishes our presence in the Santa Monica market and the surrounding Malibu and Pacific Palisades areas and provides a strategically located site to expand our hardscapes offering in Southern California. Bourget Blackstone brings a long history in the market, strong customer relationships and deep expertise in natural stone and hardscape products. On March 16, we completed the acquisition of Reinders a leading fifth-generation, family-owned distributor of irrigation, agronomics, holiday and landscape lighting and landscape supplies with 12 locations across the Midwest. Reinders significantly expands our presence in the Midwest and strengthens our capabilities in irrigation and agronomics, supported by a team known for technical expertise, on-site diagnostics and strong customer service. The Reinders leadership team will remain with the business, preserving its legacy and customer relationships while benefiting from SiteOne scale, resources and infrastructure. I want to thank the entire SiteOne team for their passion and commitment to making SiteOne a great place to work and for welcoming the newly acquired teams when they joined the SiteOne family. Looking back since 2014, we have completed over 100 acquisitions, representing approximately $2.2 billion of trailing 12-month net sales added to SiteOne. These companies have steadily expanded the number of markets where we can offer a full product line while strengthening our local teams. Summarizing on Slide 14, our acquisition pipeline remains active, supported by long-standing relationships across the industry in a disciplined, consistent approach to evaluating opportunities. While many factors can influence timing, our focus is unchanged, partnering with well-run businesses that fit strategically aligned culturally, and create long-term value for our customers, suppliers, associates and shareholders. With a strong balance sheet, a dedicated acquisition team and a proven integration model, we remain confident in our ability to continue executing our M&A strategy in supporting SiteOne's growth in 2026 in the years to come. I will now turn the call back to Doug. Doug Black: Thanks, Daniel. I'll wrap up on Slide 15. As mentioned, the spring season was delayed in March, and we have seen improved sales volume and overall positive organic daily sales growth in April so far. However, the recent energy volatility and higher interest rates have increased the macroeconomic uncertainty, and we believe this is having a negative effect on the already weak new residential construction end market and the more resilient repair and upgrade end market. On the positive side, as mentioned earlier, we now expect to achieve 2% to 3% growth in pricing, which will support organic daily sales growth and gross margin expansion. Overall, we continue to expect low single-digit growth in organic daily sales for the year. In terms of end markets, we are experiencing weakness in new residential construction demand, which comprises 20% of our sales and we expect this market to be down for the full year 2026. New commercial construction demand, which represents 14% of our sales was solid in 2025 and we believe it will remain flat in 2026. Main activity from our project services teams continues to be slightly positive compared to the prior year, which is a good indicator of continued demand. The ABI Index has improved recently, and our customers remain bullish for the remainder of the year. We believe that this end market will be flat this year. We believe the repair and upgrade market, which represents 30% of our sales, was down in 2025, but seemed to have stabilized during the second half. So for this year, the repair and upgrade market has been resilient but sluggish with lower consumer confidence. While the long-term fundamentals for repair and upgrade are strong, we believe that repair and upgrade demand will be down slightly this year due to the increase in macroeconomic uncertainty. Lastly, in the maintenance end market, which represents 36% of our sales we achieved excellent sales volume growth in 2025 as our teams gained profitable market share on top of steady demand growth. We have seen the same trends this year so far, and we expect the maintenance end market to continue growing steadily in 2026. In total, after almost 4 months of activity, we expect end market demand to be down modestly this year with weakness in new residential construction and repair and upgrade more than offsetting growth in maintenance. Given this backdrop and with the benefit of our commercial initiatives, we expect flat sales volume, which when coupled with 2% to 3% growth in pricing is expected to yield low single-digit organic daily sales growth for the full year 2026. We expect gross margin in 2026 to be higher than 2025, and driven by price realization and our commercial initiatives, partially offset by higher freight and logistics costs supporting our growth. With our continued strong actions to improve our productivity, and by continuing to address our focus branches, we expect to achieve operating leverage in 2026, yielding solid improvement in our adjusted EBITDA margin. In terms of acquisitions, as Daniel mentioned, we have a good pipeline of high-quality targets, and we expect to add more excellent companies to SiteOne throughout 2026. Lastly, we have an extra week in 2026. Unfortunately, this extra week occurs in fiscal December during a very slow sales period, which is a traditionally loss-making period for SiteOne, as a result, we expect the extra week will reduce our adjusted EBITDA by $4 million to $5 million. With all these factors in mind and including the negative effect of the 53rd week, we expect our full year adjusted EBITDA for fiscal 2026 to be in the range of $425 million to $455 million. This range does not factor in any contribution from unannounced acquisitions. In closing, I would like to sincerely thank all our SiteOne associates who continue to amaze me with their passion, commitment teamwork and selfless service. We have a tremendous team, and it is an honor to be joined with them as we deliver increasing value for all our stakeholders. I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from David Manthey with Baird. David Manthey: Thank you. First off, Doug, I'm most interested in your commercial and operational initiatives, of course, in this sort of slow period. Was hoping maybe you could scale the long-term margin improvement opportunity here, say, next 3 to 5 years? What do you think you can drive out of these many efforts that you have going on, and then as it relates to 2026, maybe if you could highlight the top 2 or 3 that will have the biggest impact this year? Doug Black: Yes. Thanks, David. Longer term, we have a -- we have our path to 13%, and that's been our target for a while, and we feel good that we can get there with the combination of our commercial initiatives driving organic growth, gross margin expansion and then SG&A efficiency levered. And so the biggest opportunities to drive that I would say on the gross margin side, private label is obviously a big one, and we've got great progress going on there. We're also penetrating with small customers. We have a lower share with small customers than we have with the larger customers. And as we penetrate those small customers, that's a good gross margin driver for us. On the SG&A side, we have our focus branches. That's a big opportunity for us. We made a lot of progress last year. We aim to continue to make progress over the next to 3 years with those lower-performing branches as we raise them up, that's largely SG&A reduction. And then our delivery efficiency is a big opportunity for us to reduce our last leg of delivery expense. As you know, over the years, we've worked on our inbound freight and our supply chain. We're now putting a lot of focus on our outbound delivery from the branches. And so those are some of the bigger opportunities. And of course, just the general leverage we get by driving organic growth, which the aiders there are our digital is a big driver of our sales force performance efforts. And then private label and small customers would also contribute to organic growth. So you put those together, we have lots of opportunity. We're mining those this year to drive our business. Longer term, we feel like that can get us up into the double digits on for that 13% objective. David Manthey: That's great. Maybe I could double-click on the private label. I believe you said it grew 40%, maybe I heard that wrong. But what percentage of total sales are private label as we sit here today? And then could you talk about just what are the key products that are driving the outsized growth there? Doug Black: Yes. I want to clarify that the 40% were our high-growth private label product lines, which are pro trades the lead there that's in lighting and landscape supplies, portfolios or nursery private label and Solstice Stone is our hardscape private label. When you take those 3, they grew at 40%. If you add in LESCO and our total private label, it grew at 10% in the quarter. So still moving ahead we're approximately 15% private label, and we're looking to increase that by 100 basis points a year. And so we accomplished that last year and we aim to keep ticking that up over the next 5 to 10 years, quite frankly. Our goal there would ultimately be kind of 25%, 30% private label. And so, we've got a good start this year to being on that same pace heading towards that goal. Operator: Our next question comes from Ryan Merkel with William Blair. Ryan Merkel: I want to start off with the quarter. Doug, can you talk about what was the impact of weather? You missed the Street by about $40 million. I know that's difficult, but any help there would be helpful. And then how much was macro being weaker in the quarter? You called out new resi construction. Just curious what you saw there. Doug Black: Right. Well, it's kind of hard to discern because both are happening at the same time. I would say that maintenance is 36% of our business. And that's the 1 that gets the most deferred as we're moving kind of from quarter-to-quarter based on when the spring starts and so as we mentioned, and we've seen the volumes improve in April. We haven't caught all the way back up to where we aim to be for the year, but we've seen that improvement, and that's largely that maintenance and some of the new construction came in seasonally. On the macro side, we just -- you can see that we've dropped our guide for the market, we would have initially said it was flat. Now we're saying it's going to be modestly down. I think that's -- that quantifies the macro uncertainty. We feel like we're seeing that and that we'll continue to see that throughout the year. Consumer confidence is low, gas prices are up. It's just -- it's not a great environment. And that makes the weakness in new resi a little bit worse. And we've seen some of that. And it weakens the repair and remodel market, which we've seen some of that. It's mixed. It's not falling off the cliff. We still believe that the remodel market is resilient, but you can certainly see some jobs being deferred and there's weakness here and there in that market. Ryan Merkel: Okay. That's fair. I know quantifying weather is difficult. So I appreciate that. My second question is on price. You're raising it a little bit, but I thought you might raise it more -- so I'm curious, like is the cadence just sort of 3% across each of the quarters, the rest of the year? And what are you assuming now for PVC and fertilizers because I think there's probably some inflation there. Doug Black: Yes. Good question, Ryan. When we talked to it last quarter, we were thinking 3 in the first quarter, stepping down to 2%. And then in 1 in the second half, we were comping the increases in June time frame of last year. Our thinking now is through -- we did 3 in Q1. We see continuation with that. It's probably even a little firmer 3 here in the second quarter. And then there's some uncertainty. So we think 2 maybe in the second half gets you kind of midpoint of that 2% to 3%. There is some upside and -- but there is also some uncertainty. We're still evaluating PBC. We're working closely with our suppliers expecting those price increases here during the quarter and monitoring overall price increases across the rest of our supplier base -- there's just a lot of uncertainty looking out in the rest of the year. So I think 2 to 3 is a fairly conservative point right now for where we sit. Certainly, there is some upside opportunity in the rest of the year and we'll have a better view of that as we progress through the second quarter. Operator: Our next question comes from Mike Dahl with RBC Capital Markets. Michael Dahl: Just to touch on kind of the margin breakdown. I think last quarter, you articulated that within the year-on-year composition like the gross margin and SG&A contribution would be relatively dimmer, just given the moving pieces, price better, volume a little worse, a good start to the year on gross margin. Can you just help us understand kind of within your expectations today, how you would think about the breakdown between gross margin and SG&A leverage this year? Eric Elema: Yes, we still expect to get SG&A leverage for the full year. we're looking at Q2 and Q3 for that to occur. Q4, we have the extra week, so that will be dilutive. So we don't expect to get SG&A leverage in the fourth quarter. But to your point, we do believe that gross margin now expected to be higher, you can see what we did here in Q1, expect to expand gross margin in Q2. We were thinking more flat in gross margin in the second half of the year when the year started. So there's some upside opportunity, I would say, Q3 probably a little better than we thought Q4 unknown. SG&A right, with a little bit of a change in the end market outlook. So SG&A, gets a little bit harder to leverage. We feel like we're doing a really good job managing the cost side of it, but organic, we still believe low single digits. I would say it's probably tilted a little more in favor in gross margin at this point. We thought 50-50 contribution when the year started. And I would say that's shifted up in favor of gross margin. Michael Dahl: Okay. That's helpful color. And just as a follow-up on the SG&A dynamics, I mean, with the more subdued outlook on kind of market dynamics, obviously, you have all the initiatives in place, but is there anything else kind of more discrete or incremental that you're now contemplating in terms of further cost-out actions? Doug Black: Yes. I think we always win if the market is tougher, if volumes are lower, we'll take action manage labor tightly, other expenses more tightly, et cetera. So there are certain actions we can take. But as Eric mentioned, SG&A leverage is certainly more challenging as the volume goes down. So we would expect a little bit more -- less leverage more on the gross margin side for the remainder of the year. If things get tougher, we can certainly fight to maintain that leverage. And we'll continue to manage it tightly in any case and then see how it works out on the volume side. Eric Elema: The other point I would add to on SG&A is the rising fuel cost for delivery goes through SG&A. And we've talked about fuel surcharge that we implemented at the end of March. The charge for that is in sales. So you can see a little bit of a negative impact on SG&A from the dollar side. Operator: Our next question comes from Keith Hughes with Truist Securities. Keith Hughes: So talk a lot about inflation on this call. Are you seeing any signs that you're not able to get any of these price increases through on customers given what's kind of a shaping demand environment right now? Doug Black: Our market is pretty efficient, and it's been traditionally pretty efficient and pass it through price increases. So, so far, we -- obviously, we work with our customers on that. But so far, we've been able to pass through price increases, and we feel pretty confident that we can continue to do that, working with our customers and suppliers to make it as seamless as possible for our customers, but our market tends to be pretty efficient there, and we don't expect that to change. Keith Hughes: And I mean there are some categories where there could be a lot more inflation specific PVC pipe. When you get increases from your suppliers, how long does that take to get implemented? Is there usually any drag when numbers go up notably? . Eric Elema: No. It's pretty much concurrently. We're in contact with suppliers. We've been signaled ahead of time and we plan accordingly and provide notice to our customers in advance of those price increases. Doug Black: Especially with things like pipe and fertilizer and products that move around, the market, there's a good communication in the market where we can give the customers heads up and we're giving a heads up by the suppliers and it happens pretty quickly. I was going to say we're in the height of the fertilizer season. So this price increase has been in effect since 41. So we've managed through that and nothing significant to call out. I would say it's fairly inelastic and PVC pipe. We'll work through that in the coming months, but I would like to highlight the last 3 years, '23, '24, '25, they've been significant declines in PVC pipe in price. So we wouldn't expect these increases that are being contemplated to be an elasticity issue. Keith Hughes: Okay. Just a final 1 on grass seed, still looking for grass seed, whatever price does there, it's still a third quarter reset. Is that still the case? Eric Elema: That's correct. Operator: Our next question comes from Matthew Bouley with Barclays. Matthew Bouley: So on the gross margin, you have that 10% growth in private label and it sounded like success with smaller customers. So it seems like that would move the needle a bit on margins. You have the 90 basis points there. So question is I want to see if you can quantify how much of the margin expansion is coming from some of these commercial initiatives that presumably are more structural in nature versus if there's any kind of temporary benefit that you sometimes see due to inflation. You had the 3% price just to sort of help us kind of dial in gross margin forecast in a more normal environment. Doug Black: Yes. we typically don't give a breakdown specific by initiative. And so I don't think we can offer any help there. It's just I would say that private label small customers contributing strongly as is the price realization that we're getting on the other side. I don't know, Eric, anything to comment on that? Eric Elema: Yes. And I think of this quarter is if we look in the light of Q3, Q4 in the line of the basis point contribution, you can see where price has been benefiting us. So we're a little bit better there, but I would say that we've had pretty good run rate now with private label contributing to gross margin expansion for a number of quarters. Matthew Bouley: Okay. Got it. That's helpful. Yes. Sometimes in the past, you guys have quantified at least the temporary benefit. But I guess the second question is on Reinders just because it's a fairly large deal. Obviously, in the past, some of the bigger deals, you guys have taken a little bit of time to sort of integrate them into the whole system. So -- just any color on kind of the margin profile of this business? And if there is opportunity for you to expand margins further with this business as you do integrate it in the cycle . Doug Black: Yes. No, Reinders is a strong company. We're excited to have them join. There are pretty significant synergies with Reinders they're in irrigation, agronomics, lighting landscape supplies. And so on those product lines, we tend to have higher synergies. And so there's good synergies there. We'll get some of those synergies this year. We are system-wise, we'll integrate them next year, but we are syncing up with their teams and capturing some of those opportunities. We do expect them to be nice and profitable this year around -- probably around where we are and in the future, there's significant upside there as our synergies fully kick in. So excited about the deal. It's a strong company. They've got a great team. and we can certainly add value. They actually do a lot of digital. They're 1 of the leaders in the market with digital. And so we're going to take our time integrating with their digital and ours. But it's good to join forces with a company that's more progressive relative to other companies in the industry. And Reinders is 1 of those companies. Operator: Our next question comes from Jeffrey Stevenson with Loop Capital Markets. Jeffrey Stevenson: Are there any concerns of fertilizer shortages or potential inflation pressures and other commodity products, such as PVC piping could have an impact on maintenance demand similar to a couple of years ago when customers were holding off on certain maintenance projects due to elevated commodity price levels. Doug Black: Right. Yes. And you're referring to the kind of COVID where prices move significantly in fertilizer. And that did hurt demand in that year exactly which year it was. But the nature of the increase around 5% for fertilizer is not to the magnitude that we feel like it will create any kind of demand degradation. Fertilizer does move around from routinely a couple of percent here and there. So 5% isn't a tremendous move and we feel like our customers will be able to handle that and it won't affect the applications. In terms of supply shortages, we've got a great supply chain. We've got multiple sources for most of our products, but we don't anticipate, at least at this time, that there will be any shortages in supply that will drive additional inflation. So we feel pretty good about where we are and the ability of the market to absorb some of these price increases that are obviously, we never enjoy absorbing price increases into a market, but 5% is a manageable level there. Jeffrey Stevenson: Okay. No, that's very helpful, Doug. And then I just wonder if you could quantify any more of the magnitude of expected new residential declines this year. And then on top of that, kind of what you're hearing so far from builders or in the spring selling season and if I remember correctly, typically, there's an 8- or 9-month lag between when there's a single-family housing start and when that shows up in demand and if that's the case, if there's any improvement and starts as we move through the year, is that going to be more of a kind of late '26, 2027 when it will show up in demand? Doug Black: Right. Yes, you're correct. I mean we go by completions, not start. And there is a lag there in 6 months, 6 to 9 months, et cetera. So we feel like the new res market is going to be down mid- to high single digits this year. And we're getting mixed. There's mixed messages from builders. Some are more positive, some are less positive. But our view is that we're probably not going to see much improvement this year and it starts to improve this year, that will certainly help us in 2027, but not in 2026. Operator: Our next question comes from Charles Perron-Piche with Goldman Sachs. Charles Perron-Piché: First question, as you look to drive efficiency -- as your customers look to drive efficiencies, are you seeing them leaning more into sites, digital and delivery tools and a higher freight cost environment and more broadly, how can you have your investment in technology help you again the current backdrop? Doug Black: In terms of our customers, yes, we do see them using digital more and as we mentioned, our digital sales are up 60% or we expect them to be up substantially this year and more and more customers are utilizing digital just to make their ordering and interactions and transactions with us more efficient. In terms of fuel prices are up, Eric mentioned that we've implemented fuel surcharges. We work with our customers routinely to get the product to their job sites at the lowest possible cost. And so yes, our delivery capability gives us a ways of working with our customers and getting it there in a low-cost fashion. And so we have a fair bit. We have about 1/3 of our business is delivered -- and we see that going up as things get tougher and customers kind of allowing us to help them get the materials there and get the job done at a lower cost. Charles Perron-Piché: Got you. That's good color, Doug. And shifting gears to capital allocation. You repurchased $20 million of shares in Q1, which is quite high for relative to the other first quarters in the last few years. How does he inform your willingness to do more? And at the same time, can you talk a little bit more about the M&A pipeline and your confidence to close more deals in 2026. Eric Elema: Yes, I'll take the first part of that. we continue to be opportunistic. We're going to look at the whole year and making sure that we're first focused on growth, M&A. We we had good visibility that Reinders acquisition was going to close in Q1 a seasonal slow quarter for us. But obviously, where the stock is, represents a good buying opportunity. We're going to continue to be opportunistic the rest of this year. We see that balanced capital approach, and we did close to [ $ 100 ] million in repurchases last year. So depending on where M&A turns out, we'll balance that out in how we buy back shares. But we'll continue to be opportunistic again where the price is. Doug Black: Yes. In regards to M&A, the pipeline is healthy, we're constantly in discussion with owners and confident we can continue to have success for the rest of 2016 and beyond. Operator: Our next question comes from Sean Calnan with Bank of America. Shaun Calnan: Just first, can you kind of quantify the improvement in volumes that you're seeing in April? And should we expect Q-Q to be the highest growth quarter, just given the shift in sales from 1Q to 2Q? And then the fertilizer pricing increase with April being a big month for that. Doug Black: Yes. I would just say that volumes have improved. Volumes aren't positive in the first -- in April, but they have improved versus where they were in the first quarter. And in terms of volume by quarter, there's no real gauge that would make the second quarter. I mean, obviously, first quarter is lower. You do some catch-up in the second quarter. It's going to tend to be higher, but we're talking percentage 1, 2 percentages. And the third and fourth quarter also kind of split by the season. spring season in September, October. And obviously, that's third and fourth. So it's really hard to call volume growth by quarter. What makes more sense to us is kind of half year what it is at the end of June and what it is at the end of the year is a better way to kind of think about volume and because you get the full screen season and you get the full fall season, if you take that book. So we'll see how the spring continues to evolve, and we'll have a better read when we get to June. Shaun Calnan: Okay. Great. And then when you have expectations for price increases, like we have right now, do you typically see customers try to get ahead of those price increases and pull forward their purchases? Doug Black: Sure. That tends to happen, especially on fertilizer pipe, but keep in mind, our customers don't have massive storage. So they're taking some product to the extent that they can. And we work with customers on commercial jobs that are already in progress. And so yes, some of that goes on whenever there's a price pass-through, and that's why we give our customers as much lead time as possible so that they can they can adjust and do their purchasing to try to get ahead of it themselves. Operator: Our next question comes from Collin Verron with Deutsche Bank. Collin Verron: I just want to dive into the cost a little bit more. It looks like inventory costs in the COGS line dipped around 3% in the quarter despite the total sales being relatively flat. So can you just walk us through the moving pieces there? Is that the mix improvement toward private label showing up or are there some other factors in there that we should be considering? And how are you thinking about that going forward? Is there any reason that, that year-over-year decline might move throughout the year? Eric Elema: Yes. I think you hit on it it's private label, it's product mix, but we also have the lower. We had -- we were fully stocked for the spring selling season with fertilizer in particular. So I would say that, that continues a bit into Q2. But beyond that, I would expect that not to continue. Collin Verron: Great. That's helpful. And then just on the freight handling distribution expenses, I saw a sizable increase I know it's a small piece of the COGS bucket, but it was just a notable headwind in the first quarter. So can you just talk about what was driving that inflation and sort of the magnitude that you're baking into the guidance for your freight handling distribution expenses in that bucket? Eric Elema: Yes. So there's the rising cost of diesel in there for Q1 that's in March. That's a component. We've got international freight to related to our private label products. We got the increase there. But also keep in mind that we have our fifth DC in the cost there with that not in the Q1 prior year. So we mentioned that too on the last call that we would have an increase in distribution costs. So that's in there as well. Operator: Our next question comes from Matt Johnson with UBS. Matthew Johnson: Appreciate the time. I guess, first off, if we could just dive into the fertilizer piece a little more. I know it's given the disruption in the Middle East, it sounds like you guys took a 5% price increase there. But could you just give us an update on how much inventory you guys have in your distribution centers. And then, I guess, assuming that urea prices stay at these levels, I think they're up somewhere around 40% to 50% year-over-year. But how should we think about the impact of fertilizer costs for you guys as that starts to come through? Doug Black: Yes. So urea is up substantially. Keep in mind that it's only 1 component of fertilizer and we can actually move components around and fertilizers. So there is some latitude there and we take advantage of that to try to minimize the effect on our customers, the 5%, as I said, is a reasonable reflection of passing through cost, maintaining our margin. We obviously that price increase is mid-season. So we have -- we stock up for the season. And so we obviously have some product in our branches that we're shipping. And as I mentioned, we -- so far, we've not experienced any supply shortages that would that would not have -- have product available for our customers or allow us to gain market share. So we feel like we're in pretty good shape there, and we think it will be continue to be a successful season. Eric Elema: Yes. I think we're going to get good place on supply. We're working with our category team leaders. So we feel good not only about the season, but into the fall. And as we get later in the year, we'll continue to evaluate those opportunities. Matthew Johnson: That's great. I appreciate that. And then I guess if we could just talk a little more about the focus branches. I think you guys drove a little over 200 basis points of EBITDA margin improvement at those branches in 2025. I guess given all the kind of disruption and noise in the market right now, how do you guys feel about your ability to achieve a similar result this year at those focus branches? Doug Black: Yes. Well, we feel good about it. I mean, obviously, if the market turns out to be tougher and we're lower on volume that will affect the focus branches, but we -- we had improvement in the focus branches, good improvement in the first quarter, and we feel very good about our being able to turn those branches improve the profitability even in a soft market condition. So we feel good at this point, the tougher the market gets, the tougher that gets, but we can move the needle even in the softer market there. Operator: Our next question comes from Andrew Carter with Stifel. W. Andrew Carter: I just want to follow back up on Reinder. It's $100 million incremental -- and you said it's similar to company margins, and you also acquired it right before -- right ahead of the spring season. So why shouldn't this be an $8 million or $9 million kind of type contribution to EBITDA for the year therefore, your kind of EBITDA range has some added flexibility. Doug Black: Yes. You kind of nailed it. That's what we expect. And yes, it provides, I guess, more insurance for our range. Keep in mind that, obviously, we won't reflect the full $100 million. We did miss almost 3 months of that. But yes, we do expect it to be profitable along the lines of what you're saying there. And that helps us have confidence in our range, given kind of softer market conditions and overall uncertainty that we need to keep in mind. W. Andrew Carter: Sounds good. I appreciate that candid answer. I'll pass it on. Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Doug Black for closing comments. Doug Black: Well, thank you all for joining us again today. Before I conclude, I want to highlight an upcoming event we have. We're hosting our 2026 SiteOne Investor Day on June 23 and 24 in Atlanta, we'll be going through a comprehensive update on our performance, our strategy, our long-term initiatives and offer investors an opportunity to engage with our executive leadership team, which we're quite proud of. And so we look forward to welcoming investors and analysts to our event in June. We appreciate your interest in SiteOne. We look forward to speaking to you again at the end of the next quarter. Again, a big thank you to our terrific associates and to our customers for allowing them to us to be our partner and to our suppliers for supporting us. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to Humana's First Quarter Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Lisa Stoner, Vice President of Investor Relations. Please go ahead. Lisa Stoner: Thank you, and good morning. I hope everyone had a chance to review our press release and prepared remarks, which are available on our website. We will begin this morning with brief remarks from Jim Rechtin, Humana's President and Chief Executive Officer; and Chief Financial Officer, Celeste Mellet. Following these remarks, we will host a question-and-answer session where Jim and Celeste will be joined by George Renaudin, Humana's President of Insurance segment; and Dr. Sanjay Shetty, President of Center well. Before we begin our discussion, I need to advise call participants of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our latest Form 10-K, our other filings with the Securities and Exchange Commission and our fourth quarter 2025 earnings press release as they relate to forward-looking statements, along with other risks discussed in our SEC filings. We undertake no obligation to publicly address or update any forward-looking statements and future filings or communications regarding our business or results. Today's press release, our historical financial news release and our filings with the SEC are also available on our Investor Relations site. Call participants should note that today's discussion includes financial measures that are not in accordance with generally accepted accounting principles, or GAAP. Management's explanation for the use of these non-GAAP measures and reconciliation of GAAP to non-GAAP financial measures are included in today's press release. Any references to earnings per share or EPS made during this conference call refer to diluted earnings per common share. Finally, this call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana's website, humana.com, later today. With that, I will turn the call over to Jim. James Rechtin: Thank you, Lisa, and good morning, everyone. Thank you for joining us today. We have a few headlines. Let me start with we are pleased with our first quarter, and that is because we are where we expect it to be. And I'm just going to repeat that for emphasis. We are pleased with our first quarter because we are where we expect it to be. And right now, second headline, we are turning our attention to bids and we are approaching bids with a focus on returning to a sustainable margin of at least 3% in 2028 and making progress against that in 2027. We know that we need to make some progress against that in 2027. Those are the commitments we laid out in June of last year at Investor Day, and we stand by those commitments. The primary headline here is that we believe that we are on track to meet our commitments from Investor Day, and we're doing the things to follow through on that. So as usual, I will frame my comments today around the 4 drivers of our business. First is product and experience, which drive customer retention and growth; second is clinical excellence, which delivers clinical outcomes in medical margin; third, highly efficient operations; and fourth, capital allocation and growth in both CenterWell and [ Medicaid ]. So I'll start with product and experience where there are 3 things that I want you to take away. First of all, our member growth trajectory is on track. Now we will, and we have and we will continue to manage distribution and growth dynamically if things change, but our growth trajectory is on track. Second, I want to emphasize that membership, both new and returning, is performing as expected 3 months into the year. Now as we turn our attention to bids for the 2027 plan year, we want express appreciation for CMS' engagement on the improved rate notice. This helps promote more stability in the industry as a whole, and it has a positive impact on the health of our seniors. Nevertheless, medical cost trend continues to outpace program funding. And so our third takeaway, which is something we have noted previously, is that we will adjust benefits to remain on track to deliver our 2028 commitment of returning to a sustainable margin of at least 3%. And again, we expect to make the necessary progress towards that goal in 2027. We are very aware that we need to make some progress in '27. So turning to clinical excellence. Our outlook on BY '28 Stars has not changed. We continue to be confident that we're on the right track to return to top quartile Stars results in BY '28. Our performance on the Stars compensation metric as disclosed in our proxy is a good indicator of our progress. However, as you know, we don't know industry thresholds. And so while we feel good about our progress, we cannot guarantee an outcome in October. We will share more about our progress in the Q2 earnings call once the hybrid season is complete. For BY '29 Stars, we are seeing a strong early start. We have early engagement efforts. These are new efforts, early engagement efforts, which are translating into improved member activation and improved outcomes. To provide just one example, we're identifying certain chronic conditions among new members faster than we have in the past. What this allows us to do is to better target our gap closure efforts. And as a result, at the end of Q1, we are about 5% ahead of last year's GAAP closure pace on a per member basis on certain key HEDIS metrics. Now regarding highly efficient operations, we continue to make progress on our operating model changes. This includes centralizing certain teams, expanding outsourcing and increased automation of processes. All of these things are increasing efficiencies. And then finally, on capital allocation, we recently completed the acquisition of Max Health. This is a Florida-based primary care organization that will expand CenterWell's reach into new critical markets. We also saw Medicaid membership grow by approximately 50,000 lives, and this is largely driven by the January start of programs in Michigan, Illinois and South Carolina. So in conclusion, we expect to double individual MA margin in 2026 adjusted for Stars. We expect to double individual MA margin. We continue to feel good about the way our member growth is setting us up for this year in subsequent years. We are making good progress on Stars. We will continue to be disciplined in pricing with a focus on unlocking the earnings power of the business by 2028. As a final note, before I turn it over to Celeste, I want to share an update on the insurance leadership transition that we announced in December. George Renaudin, Insurance segment President, will retire effective June 29, 2026. Until then, he will focus primarily on the annual MA bid process, and he will continue to serve as a strategic adviser through at least the end of 2026. Aaron Martin, who is currently President of Medicare Advantage, will begin leading the day-to-day management of the insurance segment now. He will continue to report to George and he will formally assume the role of Insurance Segment President when George retires. John Barger, a 30-year industry veteran with more than a decade in Medicare Advantage, will lead MA operations effective immediately and will formally assume the role of President of Medicare Advantage when Aaron transitions. I want to personally thank George for his nearly 3 decades of service to Humana and its instrumental impact on growing the Medicare Advantage business. And with that, I will turn it to Celeste for a few remarks before we get to Q&A. Celeste Mellet: Thank you, Jim. There are a couple of items I will briefly address before we begin Q&A. First, we are pleased that available information to date suggests that our Medicare Advantage members, both new and existing, are performing in line to better than our guidance, even after adjusting for a more subdued flu season and the winter storms. This data, including what we continue to monitor in April, includes risk scores, hospital admits per thousand, or APTs, pharmacy claims, and initial medical claims, which are continuing to complete for the first quarter. And we continue to enhance our claims and cost trend monitoring practices, including anomaly detection to identify and react to claims and payment trends faster as well as to improve first-time payment accuracy. This work -- this important work improves visibility into cost trends and further strengthens payment integrity. Turning to capital deployment and the balance sheet. In the first quarter of last year, I posited that there was a real opportunity to increase the efficiency and resiliency of our balance sheet. Over the last 12 months, we have made considerable progress towards this end. Our efforts include bolstering liquidity and addressing future funding needs with rating agency-friendly instruments, such as the $1 billion junior subordinated notes we completed in March, which is expected to fund 2027 maturities. In addition, we executed on several initiatives to optimize the balance sheet, including deploying subsidiary reinsurance and augmenting legal entity structures successfully mitigating over $3 billion in capital contribution requirements for 2026. We are maintaining dividend levels and limiting share repurchases to amounts necessary to offset dilution from employee stock compensation, and we intend to increase both when our cash flows and funding capacity grow with the execution of the plan laid out at our Investor Day. And we are pursuing noncore asset divestitures to help fund strategic acquisitions and expect to share more news with you on this front over the next several months. All in, we are pleased with the results of our balance sheet enhancements and are comfortable with our capital levels, which provide a prudent buffer above regulatory and rating agency requirements. Consistent with this disciplined approach, we continue to evaluate a pipeline of initiatives to further strengthen the balance sheet. Lastly, let me reiterate the key messages that Jim highlighted. We are pleased with the solid start to 2026 and believe our expanded membership base, relentless focus on returning to top quartile Stars and pricing discipline position us well to deliver stable and compelling MA margin and unlock the earnings potential of the business by 2028 as laid out at our Investor Day last year. We remain committed to taking appropriate action to meet the commitments we have made to you. I will now turn the call back to Lisa to start the Q&A. Lisa Stoner: Thank you, Glen. Before starting the Q&A, just a quick providers. That's in fairness to those waiting in the queue. We ask that you please limit yourself to 1 question. With that, operator, please introduce the first caller. Operator: Our first question comes from Ann Hynes with Mizuho. Ann Hynes: I would just like to dig into DCP and IBNR a bit. in the press release, it looks like IBNR grew about 35% sequentially, and this is versus a 22% membership growth when looking at just total Medicare Advantage. Could you provide some insights into the drivers of this elevated IBNR growth relative to the membership growth? And also relative to your expectations coming online, if it came in line with your expectations? And is this a conservatism on your part? Anything would be great, any more details would be great. Celeste Mellet: Ann, thanks for your question. So consistent with the prudent assumptions we embedded in our guidance at the beginning of the year, which we are maintaining. We did take a prudent approach to claims reserves for the quarter given how early it is in the year and given the membership growth. So you are right. IBNR was up 35%, well above the growth in membership. We typically point you to looking at membership growth to understand how IBNR ship flows. So we believe we are prudently reserved coming out of the first quarter, just given the year ahead. I want to reiterate that we feel very good about what we saw in the first quarter and through the end of April in terms of all of the early indicators and completed claims. And what we're seeing in April so far is fairly consistent with what we saw in the first quarter. Operator: Our next question comes from Andrew Mok with Barclays. Andrew Mok: I wanted to ask about the Welsh Carson put call options given some near-term exercise windows. First, do you plan to exercise your June call options for the first 2 clinic cohorts? And second, if Welsh Carson were to exercise the full amount of its put options, what would the total cash obligation look like in '27 and '28? Celeste Mellet: Andrew, it's Celeste. So we need to make a decision on the put call option in the middle of this year. We will obviously be mindful of all of the other things that are going on in our cash position on our balance sheet. I would say that Welsh Carson has been an amazing partner to us, and we're proud of what we've built together and meeting in a leading primary care business for seniors and continue to see structural value in this type of relationship. In terms of if they put to us, next year, so next year would be the beginning of the first quarter, it would be about $1 billion to $1.5 billion in 2027. And to be clear, they can only put the '25 cohort to us in 2027, but both would be about $1 billion to $1.5 billion. And we have included any outflows related to puts or calls in our funding plan. Operator: Our next question comes from Justin Lake with Wolfe Research. Justin Lake: I wanted to talk a little bit more about your '27 bidding strategy. I appreciate your prepared remarks around rates and trend for '27, and how you'll be reducing benefits to bridge the delta between those 2 numbers and protect margins. But I want to ask your thoughts about protecting margins beyond that. Specifically, the reality that the full cost profile of your members probably won't be known for a couple of months, combined with the fact that you're in my confidence that you're going to get your Stars back for '28 will reduce your TBC for 2028? So I want to ask how investors should think about the potential that the company might get some cushion to bid above and beyond that retrend differential you talked about to reflect this new member uncertainty in the 2028 TDC reality in order to protect 2027 margins? James Rechtin: Justin, thanks for the question. I'll start, and then George will probably jump in here as well. So let me just be clear about how we're thinking about bids as we go into the year. Obviously, there's only so much detail that we can get into, but we can certainly share kind of philosophically what our principles are as we approach the bid. So Number 1 is the focus on being back to a normalized margin of at least 3% in 2028. And so to be there in 2028, we have to look at 2027, and we have to be mindful of the progress that we need to make in order to be on track for 2028. That certainly takes into account TBC considerations, it takes into account what we do and what we don't know about the current cohort, all of those things have to be accounted for in our bid strategy this year. Like that is priority Number one. Priority Number 2 is within the constraints of priority Number 1, and I'm just going to -- again, I'm going to emphasize that one more time. Within the constraints, the priority Number 1, we want to provide as much stability as we can reasonably to our members so that we retain them. So retention is priority Number 2, retention, retention, retention. And the way that you do that is you have to understand the different segments of your customers, you have to understand what their needs are. And to the extent that you make adjustments to benefits, you do it in a way where it has the least impact on the things that are most important to them. It doesn't mean you don't make adjustments. It means you do it in a way that is thoughtful to your members. And then, look, the third priority is growth, and that's a distant third priority. If we happen to grow some, great, but the priority is not growth. The priority is; Number 1, being on track for 2028, and; and Number 2, retaining the members that we have because, again, churn is expensive, and we want to minimize churn the most we can. George, what would you add to that? George Renaudin: Yes. Thanks, Jim. Justin, the other thing just to consider is that as we're looking through this, we are going market by market. So it's not just a matter of taking a look at the various benefits and paying a lot of attention to those that Jim mentioned our members care about most and it also helped drive better health outcomes and better Stars results. But it's also looking at it market-by-market, understanding the environment we're in with various providers and going through each one of those geographies because it's not just a matter of benefit changes, you also have to look at geographies and make sure that every geography is going to be supportive to the long-term trajectory of what we're trying to accomplish to get to our '28 targets, and we'll make a lot of progress in '27. We also do have a fairly good amount of information now about the new cohort. It's not perfect information by any means, but as Celeste has mentioned, all the key indicators of both our new and concurrent members we have, and those are lining up according to expectations, our APTs, our authorizations, pharmacy, MRA, all those things are lining up the way that we are expecting, as Celeste mentioned in her opening comments. And the other thing just to emphasize here is, one of the things that we are seeing in the industry today is that the industry is taking it appears to be any way, a more measured approach given the funding environment medical trend. The help we received from CMS is helpful, but it is not, as Jim said, keeping up with medical trends. So we and others are having to make benefit adjustments, geographic adjustments in line with those expectations to continue to make progress towards our '28 goals. Operator: Our next question comes from Jason Cassorla with Guggenheim Partners. Jason Cassorla: Maybe just a quick 1 on earnings seasonality. You guided 2Q MLR slightly above [ 91 ]. It represents a deceleration in the year-over-year step-up in MLR compared to this first quarter. I guess with your significant new member growth and as far as headwind, maybe can you just help bridge us to that MLR expectation for the second quarter that would be helpful. Celeste Mellet: Yes. So the first quarter to second quarter change this year versus last year is very much affected by the levels of PPD. So a year ago, we had higher PPD in the first quarter. If you recall, we've talked about how we reserve fairly conservatively at the end of '24 given the regulatory uncertainty, we were in a more regular position at the end of '25. So we released more PPD in the first quarter of '25 than the first quarter of '26 so the seasonality from the first quarter to the second quarter is less pronounced than it was last year. Operator: Our next question comes from Stephen Baxter with Wells Fargo. Stephen Baxter: I was hoping you could maybe expand a little bit on trend dynamics in the quarter. I guess maybe speaking ideally to how much of a benefit you think you might have seen from flu and weather in the quarter. And then also potentially whether there's any difference in trend dynamics, if you were to focus maybe more on the retained membership you had in the MA book. Celeste Mellet: Thanks for your question. So first of all, if you recall, we reported our fourth quarter and gave our guidance for the year in early February. So we already had a pretty good understanding of flu, and we had captured the more beneficial flu season in our guidance. It was very, very modestly better than we had expected, but de minimis. As it relates to weather, it's fairly easy to isolate the impact. And if you think about where we are most concentrated from a plan perspective, it's an area that were less affected by weather. So we were able to strip out the impact of weather, and we're still seeing favorability running in line to ahead on all of the indicators that I mentioned to you. Operator: Our next question comes from David Windley with Jefferies. David Windley: I wanted to switch to CenterWell and the operating cost ratio there, which ran a little higher than we were expecting. I wondered how much of that might be a result of the acquisitions and onboarding those? And then for the consolidated relatedly, the operating cost ratio seems to need to have a flatter trajectory through the year than would be normal for you? And how are you planning to execute that? I'm wondering if those 2 are related? Sanjay Shetty: Great. Well, this is Sanjay. Thanks for the question. So first off, just stepping back and looking at Center wall more broadly for the quarter. I would say we're really pleased with the solid growth across each of our lines of business in the first quarter. We're seeing that both because of the growth in Humana's membership as well as our continued agnostic expansion. And so you can kind of see that across each of the 3 businesses. Starting with pharmacy, we continue to see industry-leading mail order penetration for our Medicare members and have seen really nice uptake by new members in 2026. We're also continuing to expand our agnostic volume across specialty, direct-to-consumer and direct-to-employer, including looking forward to the new [indiscernible] partnership that we announced earlier this week. Second, in primary care, we're seeing really nice patient growth year-to-date, so sequentially 110,000 patients or 22.5% sequential growth. And that's both through organic growth as well as through our recent acquisition of Max Health. And in the home, we're seeing solid growth in Central Home Health and within One Home and that includes through the launch of the next phase of our skilled nursing facility value-based care model now covering an additional 2 million patients. So all in, we're really pleased with the growth and execution across CenterWell. I think one of the things you may have noticed is that in the first quarter, we did have a handful of items that will not repeat, and in some cases, will actually reverse later in the year. And so I think that's what you're getting at. A couple of examples of what those are include the skin substitutes in our ACO reach program in the primary care organization. That's both current year and continued runout from the prior year, for which CMS will hold us [indiscernible]. Second, some timing-related items related to the Villages Health acquisition that as we continue to integrate, we'll see improvement for the rest of the year. And finally, some transaction and integration costs associated with the Max Health acquisition that were not previously contemplated in our Q1 guidance. Celeste Mellet: Thanks, Sanjay. And I'm just going to add to that -- sorry. And Sanjay, I'm just going to add to that, first, if you're comparing to the first quarter of last year, particularly in Central, it is a tough comparison. If you recall, we did mention onetime positivity, particularly in specialty pharmacy, which is driven by better-than-expected drug mix, and we also had some favorability in 1Q '25 in PC. If you take a look at the OCR and center well, it does actually tie to your question, it was, in 1Q '25, it was well below the rest of 2025. This year is you're going to have a more normalized OCR level throughout the year rather than the ramp that we saw in 1Q '25 through the rest of the year. And just generally in CenterWell, I would look to 2024 for seasonality. We had about 20% of our earnings in CenterWell in the first quarter of '24, we expect about the same in 2026. And then just taking a step back to the consolidated OPR, yes, the first quarter was impacted by some of the noise in the comparisons in CenterWell. Our expectations for the year are in line with what we laid out in our guidance. And if you want to -- if you look towards the insurance business, you can see really nice progress there on the OCR. But we are still expecting a significant pickup in the OCR this year -- or improvement, I should say, not pick up. Operator: Our next question comes from A.J. Rice with UBS. Albert Rice: Maybe just going back to the MA side of things. I appreciate the comments about all the metrics you're tracking and they're tracking well. I think historically, there's always been this view that -- and what reality has shown out is the second quarter claims experience really tells you whether you've got a problem or not. It sounds like some of these metrics are things you just normally would have tracked in prior years, but maybe some are new that you've done because of your initiatives. And I wondered if you could just give us a flavor for how much incremental information given the initiatives you have that you feel like you have to sort of get ahead of what normally shows up in the second quarter? And just to follow up on one of the previous discussions about the bids. If your expectation and a lot of what you're gearing for is the earnings power in 2028, understanding the restrictions on TBC from year-to-year and understanding the desire to hold benefits constant, does that cause you to lean in to making sure you hold on to membership because you're going to get this big lift on Stars next year and maybe in a normal year, you go from more margin improvement next year. But because you know Stars and some of the other things happening for '28 are going to be positive, you'd sort of be willing to slow that progression just to hold on or even grow membership? Any thoughts on that aspect of your bid strategy? James Rechtin: A.J., let me start -- first of all, there's a lot in there. I'm going to try to tease it apart and hit the different components of it. I'll start, I'm sure either Celeste or George want to weigh in as well. So let me just start with kind of the leading indicators. I think the way to think about our understanding of trend as it progresses through the year is that each incremental month is narrowing the range of possibilities of what you might see then for the balance of the year. So you don't -- of course, you don't have perfect information at the end of March. You don't have perfect information at the end of April. You don't even have perfect information, frankly, at the end of June. But each of those months is narrowing the range of outcomes that you might see for the rest of the year. And so we're obviously looking at the first quarter. And as Celeste indicated, we have also taken an early look at April as it's coming in. And all of the indicators look as expected in that period of time. And then what I would say is it's not so much that we're looking at new and more indicators, it's more -- the way I would describe it is we are being more disciplined in looking at them on a regular basis and a regular cadence so that we understand that trend even more in real time than we have in the past. I mean that's that's the way I describe it. So are we feeling better each month? Yes. Do we also want to see what happens at the end of the second quarter? Of course. Clearly, we want to see what happens at the end of the second quarter. And clearly, we will feel better than we feel now. So that's kind of how we think about that. On the second part, which I'm going to now blink on is the bids, yes, bids in '28. Look, the way that we have thought about this, including last year, including this year, including next year, is that we have a margin expectation that is kind of consistent with over time being at a place that provides a sustainable attractive margin for the business and a good return on capital. And that during this period of time, where we have the Stars challenges, we are making adjustments so that we can protect the business through that period of time while also making progress against margin. And so we're starting with where does our margin need to be each year. We did that this year. We started with where does our margin need to be this year. We don't start with, hey, how much do we want to grow? We start with, where does our margin need to be to be on track to 2028 and and back to a sustainable and durable long-term margin? That is the first principle that we started with. That is the same thing we started with a year ago, frankly. And so yes, we have an idea of the various scenarios that may play out in 2018. Obviously, we don't know what 2028 is going to look like, but we can kind of hone in on these 4 or 5 different scenarios that might play out, and we need to plan for '27 in a way that puts us in a situation where we can accommodate each of those scenarios. And when I talk about multiyear planning, which I've done a lot of over the course of the last few years, that's what we're talking about. We should always be looking out 2 to 3 years in trying to understand how the external environment might evolve and making sure that we are putting in place plans and contingency plans that can accommodate the unknown across that period of time. And that's really what we're doing. So let me open it up to Celeste or George to add. Celeste Mellet: I just want to add on the claims work. There's -- we're doing a lot more both in the front -- particularly on the front end of claims, where we are looking for anomalies and differences in terms of regional provider CRGs, just looking for things that might indicate that something which would normally be identified down the pike, something is different than our expectations. And we're also spending a lot more time looking at the inventory, what's in there and some of the drivers of that. And then on the back end, we're going deeper on the new member components than we typically would as well as the overall, but breaking down in much more depth and more green some of the things that we would look at so we are -- we can identify hotspots faster if they exist. And as I said previously, the early indicators and then the ongoing claims that we see are running in line to better than our expectations. George Renaudin: It's George. Thanks, Celeste. I'll just add 2 quick things. One is we've talked in the past about how much progress we're making into operability and the work we're doing in Stars where we're getting out of head, jim mentioned all the things we've done to be able to reach out on the front end to our members as they're coming in, our new members, that also is helping inform where we are. So that's yet one more indicator. And then on -- I want to be very direct on your question about TBC. We are very well aware of the TBC limitations. We're very well aware of what happens when TBC comes back when -- with our expectations on what we're going to recover in Stars. And so that is very much part of our planning process as we're going to the '27 bids. Operator: Our next question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: Great. I guess I really do like the commentary around focusing on margins, first and foremost. But I just wanted to understand a little bit because this commentary because this year, you expect to double margins on an M&A basis. And now you're saying next year, you're willing to cut benefits even though this year you were able to do that without -- with a relatively stable benefit design. So are you saying that the funding shortfall for '27 is bigger than this funding shortfall for '26 as far as Humana goes? Or is there something else around the timing of some of the cost-cutting initiatives on the G&A side that make next year potentially more reliant on benefits? I'm just trying to understand a little bit of a change in tone here about margins and cutting benefits if necessary to achieve margin improvement. James Rechtin: Yes. Again, I'll kick off. Anybody who wants to add, feel free to add. The short answer is, yes, the gap between funding and medical cost trend is larger going into this bid season than it was a year ago. Like it just -- it's very clearly larger than it was a year ago. And that is really what is driving our thinking. And we're still on track on our plans around cost management. We're still -- the other components that go into our margin that we laid out last year in June, they are all largely on track. The difference right now is the funding environment relative to medical cost trend. And that's mostly the funding environment. Medical cost trend has been relatively stable now for 2 years so... George Renaudin: If I could just add 1 other piece of that, Kevin. And that is that while we appreciate what CMS has done to create a more stable environment, as we've said, the funding still doesn't keep up. And we will, this year, as we have in past years, make the appropriate adjustments. If you -- just as a reminder, we were having to adjust benefits for 2 years, and we made those adjustments earlier than most of our competitors did. And so we continue to take a very disciplined approach as we go into this bid cycle, and you can expect that going forward. Operator: Our next question comes from Scott Fidel with Goldman Sachs. Scott Fidel: I wanted to ask us 2 more targeted questions with the 2 of the Medicare lines of business and just around the themes in terms of the monitoring and sort of early utilization trends. First would be just on individual MA, how you're seeing sort of those trends on the new members of particular maybe playing out between HMO and PPO? And then also, we really haven't talked much on PDP yet where you have had pretty substantial growth. So curious around how the PDP line of business appears to be performing from a utilization perspective relative to the margin targets that you laid out in your guidance? James Rechtin: Let me just hit PPO and HMO here for a second, and then I'll hand it off to the others to handle PDP and add to the commentary on PPO and HMO. Look, the short answer is our portfolio as a whole is performing the way we expected it to perform, like that's the headline. But I think more importantly, I just want to continue to reinforce the message that we have delivered now for a couple of quarters, which is there is nothing inherently good or bad about any type of product. There's nothing inherently -- there's nothing inherent in the product that doesn't work. it is all about how do you price the product and how do you structure the product to target the right segments in the right way? And if you kind of look back in time, because I know there's all this talk about, hey, PPO is bad, PPO is not good. Look, if you look back in time, we had a number of years where the industry priced PPO aggressively and they were -- we, the industry, were using PPO as a growth engine, pricing aggressively and you saw disproportionate growth in PPO. And you saw that happen at the expense of margin in that product. We spent 2 years repricing our PPO product. We spent been 2 years repricing our PPO product, and most of the industry either did it with us or followed suit shortly thereafter. And the result that you're seeing is that growth is rebalancing back to being more equal between HMO and PPO across the industry, we believe. And again, that is a result of the industry taking a different approach to how they price that product. And when we do that, that product can perform financially, and we see that product performing financially. Now look, every year, we're going to step back, and we're going to look at our whole portfolio. And we're going to say, "Hey, are there pieces, are there geographies, are there pieces that we need to reconsider based on new information?" But the practical reality is all product, if priced appropriately, is good product. And right now, when we look at our portfolio, our portfolio is performing. Celeste Mellet: And just to add quickly, while we don't get into cohorts beyond new and concurrent members, as we called out, are what we're seeing from a claims perspective and an early indicator perspective on both new and concurrent members are running in line to better than expected. George Renaudin: It's George. Scott, you also asked a question about PDP. As we look at our PDP business today, it's still -- it's on line with our expectations. The membership mix, the pharmacy trends we're seeing and member behavior are in line with expectations. So we remain confident our '26 pricing. If you remember, our guidance is right along the same lines as our guidance for '25. So relatively flat, but what we're seeing so far looks fairly good. Operator: Our next question comes from Erin Wright with Morgan Stanley. Erin Wilson Wright: Operating leverage still stands as a meaningful contributor to that 2028 bridge. Just can you remind us on the progress on addressing some of the operating costs? Was there any timing dynamics to call out in the quarter? Anything we should think about for the year? I guess, can you remind us of some of those components of the cost levers embedded in 2026 guidance? And what are some of the longer-term opportunities, the progress relative to what you were thinking maybe a year ago at the Investor Day and just have there been any changes or surprises on that front in terms of those levers near and longer term? Celeste Mellet: Yes. Thanks for your question. So we are making great progress against our operating cost targets. In terms of the particular quarter, as I mentioned earlier, there's a little bit of noise just given the tough comparison to last year in CenterWell versus some of the less favorable onetime noise in CenterWell this year, but our expectations for the year are on track for what we had guided to you or at the beginning -- on our fourth quarter call. As it relates to the cost cutting, both tactical and strategic, we are making really excellent progress there. So in terms of the tactical cost-cutting measures that we talked about, we -- Jim announced the early retirement program last year. We're continuing to see those employees exit. The last of them will leave at the end of the second quarter. That gives an opportunity to folks who've been here for a really long time to if they'd like to go do something else or fell off into the sunset and enjoy their lives outside of Humana. They can do that. We've been optimizing our internal policies. They squeeze out differences. They also, in some cases, get us more in line with corporate best practices. We've been improving productivity and increasing volume discounts, while also improving payment terms with vendors. And we've been consolidating our supplier base to drive better supplier relationships. Those are some of the more tactical things. Some of the more strategic long term, some of which are running through 2026 are changing and expanding our outsourcing capabilities. What 2026, you'll see where we're seeing the improvement is really in some of our corporate functions where we were well below industry benchmarks in terms of outsourcing percentages. We're getting close to those benchmarks. So in finance, for example, and HR recently made some changes there as well. Over the longer term, we see significant opportunities to consolidate our relationships and increase service and quality for our membership and our patients, at the same time, it will also reduce costs, continuing to standardize and simplify our processes while leveraging technology to use more automation and create efficiency. And Jim talked about our operating model changes. There are some components that have shifted already. We've been really focused on centralizing the things that make sense to centralize. We believe it makes sense for us strategically, but it also does have -- is beneficial to our cost, and I think provides better and more consistent experiences for our members and our patients across the country. So those are just a few examples. And again, we are very confident in the progress that we are making this year and the targets we laid out for 2028. Operator: Our next question comes from Ben Hendrix with RBC Capital Markets. Benjamin Hendrix: Just wanted to follow up on some of the CenterWell commentary. I'm just hoping to get any early observations within CenterWell on trend. Anything to call out on patient profiles or patient behavior that you've observed across your expanded Medicare membership versus the growth that you're seeing in the carrier agnostic population? Sanjay Shetty: So this is Sanjay. Thank you for the question. So broadly speaking for CenterWell, the growth in Humana is definitely a tailwind to the business across the 3 businesses. We see that within the pharmacy business through the mail order penetration that we have in our Medicare business. We see that within the Home Solutions segment, both in CenterWell home health as well as within One Home, which, as a reminder, is our post-acute value-based convener. And specifically within the primary care organization, that growth has been helped by the growth of Humana. Broadly speaking, what we're seeing in that population is in line with what the plan is seeing as we enter the new year, although it is very, very early for us in the year. So I think we will continue to monitor that. As an early indicator, though, some of the things that we track are engagement of those new patients and those are tracking very much in line with expectations. Operator: Our next question comes from Lance Wilkes with Bernstein. Lance Wilkes: Great. I was wondering if you could help us understand some of the management processes that you put in place in order to drive the a large number of key initiatives you've got. So the first key question I had was just with Stars, with the integration in value-based care of the acquisitions, Medicaid rollout, the PBM initiatives, and outsourcing initiatives, are those things that are being done sort of within each of the units? Or are you setting up kind of flex corporate staff that are getting injected into those? And how are you monitoring and managing that? And a kind of comparable question is, you've commented on how you're looking at cost trends, other key operating metrics. And just interested in how you're doing that more and faster? Is that an AI thing? Is it merely you just put more staff to look at things more frequently? Or if you had any other sort of adjustments to some of the financial systems and clinical systems that enable you to do some of this? James Rechtin: Yes, let me go ahead and touch on kind of management process around all the initiatives that we have. We actually did stand up a transformation office probably 15 to 17 months ago. We have staffed that with a combination of hiring some people from the outside, and we've moved some legacy teammates into that organization as well. And the way to think about it is, they do 2 things. One is they're helping to kind of track initiatives, just make sure that we're on track in making the progress that we expect, flagging issues or problems and escalating those to the appropriate place so they can get resolved. And then the second thing that they're doing is they're providing surge resources to the business is kind of the way to think about it where there are temporary need for surge resources. Sometimes that surge resource is extra analytical horsepower, sometimes it's the arms and lengths to get things done. But the primary owner and driver of the change is the business. It's the individual functions and teams that need to work differently over time for this to be sustainable change. What the transformation office is, is an enabler and accelerator more than it is the entity that is making the change happen itself. The change has to occur in the base business and the base business appropriately needs help sometimes getting that done. And so that really is what we put in place. Look, realistically, again, I think it was probably about 17 months ago that we put this in place. It took 3, 4, maybe even 5 months for it to get up and running the way we wanted it to run. These things, when you start them off, they're always a little bit bumpy. Everybody is trying to figure out how to work together. Right now, it's working quite well, and you're getting good feedback from the business in terms of the support they're getting and the transformation office is kind of picking up momentum as we go. So that's the way I would describe it. Again, if others have anything to want to add. George Renaudin: Jim, one thing I would just add is 1 of the things that the transformation office has added that's really helpful to us as operators is that as we are tracking towards our 5-year plan, which we talked about at Investor Day. And as we're talking about returning to our margin in '28, one of the things the transformation office helps us ensure we do at the business level is it keeps our eyes on the horizon where we're trying to go. And so that's one of the major inputs that the transformation office is doing beyond the surge help that Jim talked about. Operator: Our final question comes from Michael Ho with Baird. Hua Ha: Great. I wanted to reframe Justin, A.J., and I guess, Kevin's question a little differently about the '27 margin setup. So if I were to use 2025 a year with flat rates, poor funding environment, where Humana was still able to drive individual MA margin improvement, I believe, doubling it to around 1% as sort of a comparison year. The setup for '27, stronger rate notice, stronger year-to-year star ratings improvement granted your star in payment year '25 or higher overall, but your diversification efforts are driving a stronger year-to-year improvement into '27 and now potentially similar conservative posture on benefits from pricing. Would it be fair to make this comparison and say the year-to-year set up into '27 actually feels even better than '25 when it comes to your ability to drive margin improvement? James Rechtin: So here's kind of the way that I would characterize it is, as we're heading into '27 bids, our transformation efforts are more mature -- well, frankly, they're stood up, they're more mature, they're giving us more tailwind operationally in a whole bunch of different areas, G&A cost management, clinical cost management, et cetera. And because of that, we do have a broader array of other levers that can help us achieve the target margin that we're trying to achieve next year. And so every year, we are looking at what is the funding gap or surplus relative to medical cost trend? What are the things that we can do operationally to close a gap or increase the surplus in a way that then minimizes the impact that we have to have on our members? But then ultimately, you still have to come back and say, okay, but what are the changes that you have to make to benefits in order to get to your target margin, so in order to get to a sustainable, durable, attractive long-term margin that gives us an appropriate return on capital? That's the logic you're going through each and every year. And again, what I would say is I do think we have more momentum on the transformation side that is giving us other levers -- giving us more levers outside of benefits than we had 2 years ago, but you're going to have to look at both. At the end of the day, you're going to have to look at both. So look, with that, let me just move to close real quick. I want to thank everybody for joining us this morning and for your interest in Humana. We very much appreciate that. And I also want to say thank you to our 65,000 associates who serve our members and our patients every day. It's the work that those associates do that makes things happen here. And we appreciate your support. We appreciate their support, and we hope you have a great day. Thanks. Operator: This concludes the conference call. Thank you for participating. You may now disconnect.
Operator: Good day, and welcome to Blackbaud's First Quarter 2026 Earnings Call. Today's conference is being recorded. I'll now turn the conference over to Tom Barth, Head of Investor Relations. Please go ahead, sir. Tom Barth: Good morning, everyone. Thank you for joining us on Blackbaud's First Quarter 2026 Earnings Call. Joining me today on the call is Mike Gianoni, Blackbaud's CEO, President and Vice Chairman; and Chad Anderson, Blackbaud's Executive Vice President and Chief Financial Officer. Please note that our comments today contain forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our most recent Form 10-K and other SEC filings for more information on those risks. Today's discussion will focus on non-GAAP results. Please refer to our press release and investor materials posted to our website for full details on our financial performance, including GAAP results, full year guidance and long-term aspirational goals. We believe that a combination of GAAP and non-GAAP measures provides a more representative view of how we measure our business. Unless otherwise specified, we will refer only to non-GAAP financial measures on this call. Please note that non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures. We've also provided a slide presentation with supplemental data and additional highlights and financial metrics. The earnings release, supplemental tables and presentation are available in the Investor Relations section of our website on blackbaud.com. And with that, let me turn the call over to you, Mike. Michael Gianoni: Thank you, Tom. Good morning, everyone. We appreciate you joining today. We delivered solid execution against our operating plan to start 2026 with a continued focus on efficiency and a strong pace of product innovation. AI enablement remains key to our success, both in terms of the capabilities we're delivering to customers and in the way Blackbaud is operating. We continue to invest aggressively in innovation to produce meaningful product enhancements throughout our portfolio, including generative and agentic AI capabilities. Our products enable our customers to dramatically improve engagement levels, raise more money and lead their organizations while increasing operational efficiency, ultimately allowing them to spend more time executing on their missions and less time on administrative tasks. No company can better help our customers deliver on their meaningful missions in Blackbaud. Blackbaud brings nearly 45 years of specialized domain expertise, serving as a system of record for our customers with deeply embedded workflows purpose-built for the social impact sector. Further, we have invested and continue to invest heavily in cybersecurity and AI governance to help ensure that our customers' data remains secure and that our AI solutions use data responsibly. Many organizations in our vertical markets have limited IT resources and face turnover and staffing shortages. We win because our solutions are intuitive, require fewer complex customizations and integrations and translate advances like AI into practical outcomes customers can trust, building confidence that is supporting longer contract terms at renewal. As I mentioned last quarter, over 20% of our customers are on 4-year or longer contract terms. This quarter, we continue to see a nice mix of new customer logo wins and selling additional solutions to our existing customers. Some examples of new logos were competitive displacements across many of our verticals. This includes several private K-12 schools that purchased our total school solution, a performing art center who moved to Financial Edge NXT and Advisory+ to unlock potential donors and meet their expansive goals, a well-known veterans organization, which replaced a fragmented siloed fundraising environment with our end-to-end solution, allowing a better view of their donors and improving their collaboration across the fundraising team and a U.K.-based nonprofit buying Raiser's Edge NXT as part of a wider digital transformation project and now can benefit from our AI innovation and solutions. To be clear, we are all in on AI and are confident that AI strengthens our ability to deliver differentiated solutions and drive future growth as well as also improving how we run Blackbaud. While in the first quarter, our first agentic AI offering, the fundraising development agent launched into general availability ahead of schedule, we're still early stages of broader commercialization, which we view as potential upside over time as we make guidance and investment decisions. Our engineering teams are using leading generative AI tools, such as Microsoft GitHub Copilot, Anthropic Claude and other approved solutions to accelerate development, reduce time to remediate software issues and increase throughput on new product delivery. We're also expanding generative AI features across our portfolio, including Blackbaud AI Chat, which provides contextual answers and can initiate actions within workflows. Blackbaud AI Chat is differentiated because it's embedded within our systems of record, leveraging customer permissioned data, Blackbaud-specific data and years of social good benchmarks within a governed environment. Our competitive differentiation is clear. We have a data moat, one of the most robust sets of philanthropic and social impact data processed and secured in real time, combined with decades of domain expertise, native integrations across systems of record, engagement, financial accounting and intelligence further strengthen that advantage. These AI capabilities are seeing strong adoption momentum. Usage of AI-powered workflows has expanded meaningfully over the past several quarters and more than half of our Raiser's Edge NXT customers use machine learning-enabled donor prospecting, generating nearly 30 billion predictions annually and creating a feedback loop and improves outcomes across our customer base. These capabilities are powered by an extensive and diverse set of data sources, including Blackbaud Institute survey and benchmarking data, licensed data sets from leading providers, identity resolution capabilities and specialized philanthropic data sets, such as Blackbaud Giving Search. Our applied intelligence layer aggregates behavioral signals across the ecosystem to feed predictive analytics and advanced AI models, supported by strong governance, cybersecurity and a focus on data integrity. We have embedded new agentic AI solutions in our products that can operate with appropriate access to customer permissioned data and workflows. Agents For Good is a new product category for Blackbaud. And as I mentioned earlier, in Q1, we launched our first Agent For Good solution, the Blackbaud Fundraising Development Agent, which is an agentic virtual team member that can proactively take on complex tasks, workflows and initiatives while operating within strong governance and oversight by power users. This agent natively embedded within the trusted Blackbaud environment enables teams to identify and steward donors that they do not have the capacity to reach today, unlocking new revenue streams at a fraction of the cost possible in the past. This fundraising development agent is a new revenue line and a significant accomplishment for Blackbaud. To frame this a bit, the pricing model is an annual subscription fee similar to the majority of our products. It's still early, but we expect the price will be in the tens of thousands per year, and we expect to cross-sell subscriptions to thousands of existing customers in addition to new logo sales. Applicable donations raised by the development would be processed through Blackbaud Integrated Payments platform, driving additional transactional revenue. This new development agent is already producing results for our early adopter customers and is now commercially available with several new customers in Q1. Additionally, we have run a number of webinars and sales events for our existing customers where attendance was oversubscribed and the reception was enthusiastic. We couldn't be more pleased. And this development agent is the first of many agents we plan to introduce across our product portfolio as part of our Agents For Good initiative. To reiterate, we believe this agentic AI solution embedded within our system of record provides a competitive advantage to Blackbaud. Our agents leverage our proprietary and customer-specific data within existing workflows, underpinned by strong AI governance and cybersecurity framework. Additionally, we offer our solutions through multiyear subscription model and do not utilize seat-based pricing. Now turning to how we use AI internally. We continue to identify, experiment and scale solutions across engineering, sales and marketing, customer success and the back office to improve speed and operational efficiency. For example, we're using AI to write code, better qualify inbound interest, support sales development and improve customer support workflows, helping teams focus more time on high-value interactions. While our record of past performance is compelling, we're just getting started. In addition to improving our operations, go-to-market capabilities and increased pace of innovation, we have successfully addressed many of the challenges the company faced over the past few years, allowing us to focus on the value creation opportunities ahead in the near, mid and long term. Last quarter, I walked through our longer-term aspirations. As a reminder, from 2026 through 2030, we are targeting double-digit annual EPS growth driven by the following: organic total revenue growth of 4% to 6% annually with potential upside based on viral events and new product launches, such as our Agents For Good catalog. Adjusted EBITDA growth of 6% to 8% annually while expanding our adjusted EBITDA margin to 40% plus. Slide 24 in our investor deck provides more detail on the planned initiatives to drive continued margin expansion, most of which are already underway. We expect this improvement in EBITDA to translate to strong free cash flow growth. The $285 million midpoint of our 2026 cash flow guidance range represents a 25% CAGR since 2020. These strong cash flows drive a purposeful capital allocation strategy with consistent stock repurchases as a core tenet. We expect to deploy 50% plus of our cumulative free cash flow generated between 2026 and 2030 towards stock repurchases and continue to reduce our common stock outstanding. This is a continuation of our significant stock repurchase program over the last couple of years in which we reduced common stock outstanding by approximately 14% since Q4 2023. Based upon the planned growth across revenue, EBITDA and cash flow as well as our aggressive repurchase of our shares, our goal is non-GAAP EPS CAGR of 13% plus between 2026 and 2030. We're off to a good start in 2026 in that regard, with expected non-GAAP EPS growth of 17% at the midpoint of our 2026 guide, and we're confident in our ability to deliver double-digit EPS growth in '27 and beyond. To conclude, we believe Blackbaud is a compelling investment with multiple opportunities for strong shareholder returns. From an operating, financial and strategic perspective, we are pleased to be carrying momentum into the years ahead. We look forward to our continued journey. I would like to congratulate the entire Blackbaud team for a good start here in 2026. And as always, thank them for their job well done. Thank you. I'd now like to turn it over to Chad to walk through Q1 results and our guide for the remainder of 2026. Chad? Chad Anderson: Thanks, Mike, and good morning, everyone. I'll walk through our first quarter 2026 financial performance and then discuss our full year 2026 outlook. In Q1, we continue to balance cost management with growth opportunities and innovation. As we do each quarter, we were focused on durable subscription-led performance, prudent expectations around transactional revenue and steady progress on profitability and cash flow. Our Q1 performance reflected continued demand for our mission-critical solutions and growth in transactional revenue volumes. As always, transactional revenue can be variable quarter-to-quarter, and our guidance philosophy assumes performance that is consistent with historical patterns and does not include any assumption for viral giving events. Q1 organic revenues grew 4.2% to $281 million. Non-GAAP adjusted EBITDA of $99 million was up $7 million with an approximately 1 percentage point improvement to adjusted EBITDA margin. The mid-single-digit organic revenue growth and improved EBITDA margin speaks to the power of our operating focus, which positively impacted earnings per share. Non-GAAP EPS increased to $1.14, up 20% compared to $0.95 last year, and our free cash flow was up nearly $50 million year-over-year to $37 million in the quarter. Our strong expected free cash flow for the year gives us confidence to continue investment in a number of critical areas like go-to-market initiatives, product innovation and share repurchases. In Q1, including the net share settlement of employee stock compensation, we bought back approximately 4.5% of our shares outstanding at the end of '25 -- 2025 and continue to demonstrate a strong commitment to our belief in the value of Blackbaud. It was a solid start to the year. Now moving on to our 2026 outlook. Based on our first quarter performance and our current view of the operating environment, we are reaffirming the full year guidance ranges and assumptions we provided in February, including significant earnings and cash flow improvements. The detail on these ranges can be found in our earnings release and investor presentation on the website. As a reminder, we expect 2026 quarterly financial performance, including revenue growth and profitability to be heavily weighted to the back half of the year and particularly the fourth quarter. Looking to 2026 and beyond, we believe free cash flow will grow significantly, and we anticipate utilizing at least 50% of our cumulative free cash flow from 2026 to 2030 for share repurchases. Beyond that, the company has tremendous optionality for dynamically allocating capital to its highest and best use based on market conditions, including additional stock repurchases, repayment of debt or synergistic tuck-in M&A. We have a lot to be proud of, executing well through recessions, financial crisis, COVID and the shift to the cloud through a commitment to providing meaningful solutions to our customers and strong execution of our operating plan. On our journey to becoming a Rule of 45 company, we remain committed to providing investors with an attractive financial model balanced between growth of revenues, earnings and cash flows, along with prudent and purposeful capital allocation strategy, and always, we remain focused on providing enhanced value to our customers and our shareholders. Thank you all. Mike and I would be happy to take your questions. Operator? Operator: [Operator Instructions] We will now take our first question from Brian Peterson with Raymond James. Brian Peterson: Congrats on the strong quarter. So Mike, maybe starting with you. I know you made the comment on AI in thousands of customers on Agents For Good. Was that comment specifically about 2026 adoption or is that a little bit longer term? And as you've had these webinars and kind of early adopter customers, are there any cohorts whether that's by end market or maybe by products that they use that you think would be the first to lean into the agentic functionality? Michael Gianoni: Yes, Brian, thanks for the questions. So as I mentioned, we announced in general availability, our first fully agentic product, the development agent. Importantly, too, that we announced that we have a new category of products that will be announced throughout this year and go forward. That's the first one. There will be more coming. So that was in early adopter mode back half of last year, first part of this year, went to general availability in March. That is targeted to thousands of existing Blackbaud customers. That's the target. So we're ramping up sales. It just went to availability about a month ago, 6 weeks ago or so. It's a great opportunity. We've had hundreds and hundreds of customers on webinars super interested and excited about this new product. It provides them scale that they can't get to today. And it's a new category for us and for our customers. So really great start achieving our planned numbers, and it's product one in the category of many coming. Chad Anderson: Mike, since we're on the topic of AI, I just want to take a moment on how we're continuing to invest in AI. As I mentioned during the call, we're reaffirming our guidance for the year. However, just to ensure you model quarterly spreads correctly, we expect adjusted EBITDA dollars to decline slightly year-over-year in the second quarter due to planned AI investments for customer-facing products as well as for internal operations. Michael Gianoni: Yes. Just to hit on that a little bit. Our quarters are never linear anyway. They haven't historically been linear. We're always weighted to the tail end of the year with giving, holiday giving, things like that. Full year guidance is great. We're investing in AI. We're partnered with Anthropic, investing in their tools. So really happy for our first quarter results and the guide for the year. Operator: Our next questions come from the line of Rob Oliver with Baird. Robert Oliver: My question, Mike, and Chad, one for me, is you guys called out some nice new logo wins in the quarter. And I know you guys have talked in the last year or 2 about that being a really important part of your go-to-market motion now. So I was wondering if you could help us try to put some precision on that, quantify in any way sort of perhaps as you look at, say, new bookings, what percentage of that is perhaps new logos? And how does that change relative to before you guys started to really focus on the new logo motion? Anything there you can provide for us about some of the context around the new logo wins would be -- and the progress there would be helpful. Michael Gianoni: Yes, Rob, thanks. Our sales teams are divided into vertical market teams. So they're focused on specific markets. For example, K-12 teams only sell to K-12, nonprofits, higher ed, et cetera. And then they're further separated into back-to-base sales and new logo sales in each of those markets. And we've got really good motion in back-to-base and new logos. Back to base, just quickly mentioned, this new development agent is predominantly early targeted to back to base because it's embedded inside of our system of record products, like RE NXT. However, we think these new capabilities will drive new logos also because new customers will want to buy the system of record to get access to the agentic AI solution that's embedded inside of it. So that's kind of one part. But we're seeing a nice set of wins across the verticals in new logos and even on enterprise deals. One of the deals we closed in the first quarter is one of the largest deals in our history. And I think that deal was a 5-year contract. It's an enterprise deal with a large nonprofit. They bought pretty much the product portfolio to very large veterans, not focused nonprofit, which I think is outstanding. And they bought several products from us across the portfolio, a really great competitive enterprise win in a long-term contract. So K-12, nonprofits, YourCause, and I've named a bunch of customers in last quarters on YourCause, a lot of Fortune 500 customers signing up for YourCause. So we've got kind of a flywheel effect on new logos and stickiness for our existing customers. The other thing I'll mention is we've got some really unique Blackbaud-only things going on that we don't talk a ton about. We do with customers, but not in these calls. We got something called the Blackbaud Verified Network. That is a network effect where we've connected our YourCause customers to our nonprofit customers. So for example, a new logo customer buying, let's say, Raiser's Edge NXT will buy that platform to do fundraising, of course. But they're in the Blackbaud Verified network, which means they're connected to hundreds of YourCause customers and millions and millions of employees, and they can promote themselves in the network. So it's a connected network between nonprofits or fundraisers and kind of global Fortune 500 companies using those platforms, using our payments rails and it's only available at Blackbaud. It's a connected network effect, which is interesting, and that's getting attention from new logos as well. Operator: The next questions are from the line of Parker Lane with Stifel. Tom Roderick: When you look at the investments that you plan to make around the AI opportunity, I think you said adjusted EBITDA dollars might be a bit lower year-over-year as a result of that investment. How much of that is coming from... Michael Gianoni: Parker, we said in Q2. Tom Roderick: In Q2? Yes, okay. Michael Gianoni: It's a smoothing comment around the quarters, not the year. To be clear, we only guide to the year, as you know. But go ahead. Tom Roderick: So as we look at that investment, though, how much of that is going to come in the form of R&D and sales and marketing and other OpEx items versus potential impacts to gross margins as customers take on more consumption elements as part of these agents? Michael Gianoni: Yes. We see an opportunity to improve our gross margins year-over-year. We have in the first quarter, you could see with our results. So we've got some great gross margin improvement opportunities. Some of that is continued closure of 2 outstanding legacy data centers. Some of it is to get away from some legacy software infrastructure we use from vendors that we're not going to need in the future. Those will end. So we see gross margin improvement opportunities. Our investments -- a lot of the AI investments are for new product builds, like the Agent For Good category, and we'll be announcing new products as we go throughout this year, either in early adopter or general availability. Again, development agents is sort of the first one out in the gate from a general availability standpoint. We also have a lot of investments in tools we use and in engineering. There's just a tremendous opportunity for AI enhancements in engineering. We have agents now that we've built in engineering that obviously, we use things like Anthropic Claude for code generation, but things we've built for user stories, acceptance criteria, code scaffolding, and it's been reducing workloads from days to hours. And so we're building agents in engineering to run engineering to get more engineering scale. And that's a big flywheel effect, and we're seeing that happen already. AI assistant anomaly detections for governance, integration, just a lot of AI innovation in productivity in engineering. And that's sort of the inside picture, the outside picture is these new products we're bringing to market. Operator: Our next question is from the line of Kirk Materne with Evercore ISI. Peter Burkly: Mike, I was wondering, can you talk through some of the thought process on the pricing structure around sort of the agents and sort of subscription model? Obviously, a lot of folks are talking about sort of outcome-based pricing and things like that. I know ultimately, it's all about the value delivered to your customers. So how do you guys land on that? And how are you making sure they start seeing the value kind of out of the box to get them excited about and really creating a reference flywheel as well? Michael Gianoni: Yes, you bet. We're looking at all the pricing models available to us with these new AI products. So this first product, the development agent is a pricing model, which is like our other products. It's an annual subscription fee in a multiyear contract. It's not usage-based yet. So that's a great model. We don't have any seat-based pricing. I think you know that. So we've got annual fees for our subscription products. And then we've got -- more than 1/3 of our company is transaction-based pricing now, which is arguably outcomes-based because it's a percentage of a transaction, a little over 1/3 of our total revenue. But for the AI products, the first one is an annual subscription fee, and we're looking at other models. We've got more products coming out, so we're looking at usage models and other models of pricing, and there'll be various pricing models based on the product and where the product fits. The thing that's really exciting, though, Kirk, is the availability of the addressable market changes because our solutions are purchased from our customers' IT budgets, right? But there are other budgets that our customers have. They have budgets for hiring more people for fundraising, which is an available different budget, not an IT budget, right? There's budgets in other hires of different vendors that we can reach into outside of the traditional IT budgets where they purchased Blackbaud products. And so we're looking at total spend of our customers outside of IT budgets as a growing addressable market for us. Operator: At this time, I'll hand the floor back to management for any further remarks. Tom Barth: Okay. Well, thank you, everyone, for joining us today. We will be attending a number of investor events in May and June to include several investor conferences, which are listed on our IR website. We hope to see you then or hope to speak with you very soon and wish you continued success. Have a great day. Operator: This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation. Have a wonderful day.
Operator: Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to Avantor's First Quarter 2026 Earnings Results Conference Call. [Operator Instructions] I will now turn the call over to Chris Fidyk, Vice President of Investor Relations. Chris, you may begin the conference. Chris Fidyk: Thank you, operator. Good morning, and thank you for joining us. Our speakers today are Emmanuel Ligner, President and Chief Executive Officer; Brent Jones, Executive Vice President and Chief Financial Officer; and Steve [indiscernible], Senior Vice President and Chief Accounting Officer. The press release and our presentation accompanying this call are available on our Investor Relations website at ir.avantorsciences.com. Following our prepared remarks, we will open the call for questions. A replay of the call will be made available on our website later today. During this call, we will make forward-looking statements within the meaning of the U.S. federal securities laws, including statements regarding events or developments that we believe or anticipate may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Actual results may differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made. We do not assume any obligation to update these forward-looking statements as a result of new information, future events or other developments. This call will include a discussion of non-GAAP measures. A reconciliation of these non-GAAP measures can be found in the press release and in the supplemental disclosure package on our Investor Relations website. With that, I will now turn the call over to Emmanuel. Emmanuel Ligner: Good morning, and thank you for joining us today. Let me begin with a few financial highlights for the quarter. First quarter results exceeded our expectations due to improved execution in BioScience and Medtech product segments, and we have reaffirmed our full year guidance. VWR Distribution and Services generated $1.15 billion of revenue in the first quarter, down 5% organically versus the prior year. This performance was in line with our expectations despite soft market condition in Europe and adverse winter weather in the U.S. I'm pleased to report that in the quarter, the VWR e-commerce platform showed green shoots of improved performance in traffic, conversion and revenue growth following multiple upgrades as part of our digital road map as well as the successful relaunch of vwr.com. Importantly, Q1 results provide evidence that the VWR segment is stabilizing with financial performance in line with our expectations. Turning to BMP. BMP revenue was $431 million in the first quarter, down 2% organically versus the previous year. This was ahead of our expectations due to better-than-expected execution from process chemicals and new sales. Brent will discuss the details in his remarks, but [indiscernible] had a heavy influence on a year-over-year growth metrics. I'm pleased to report that revival efforts are already taking hold in BMP. In Q1, we saw modest improvement in BMP operational performance and we also saw strong commercial performance given the enhanced focus with which our team are working. BMP had a book-to-bill of more than 1.1x in the quarter. Other element of the P&L, including margins were generally in line with expectations, and we generated $0.17 of adjusted EPS in the quarter ahead of our expectation. There are 3 key messages I want to convey about their first quarter. First, Revival is already having a positive impact on Avantor. Across the organization, we see a clear improvement in execution and increased accountability. Our team has a more intense focus on serving customers and we are taking a data-driven approach to user their performance. Second, improved execution has translated into improved and more stable operational performance, most notably within the VWR platform and BMP manufacturing. Improved execution is also reflected in the strength of our order book and demand funnel. Third, we believe that we are turning a corner financially. We believe that VWR's growth rate reached a bottom in Q1 and that BMP's growth rate will reach a bottom in Q2, which position Avantor for organic revenue growth in the second half of this year. We moved the company forward in the first quarter, and I'm encouraged by the momentum and positive energy across the organization. In the interest of continued transparency, I want to share 2 examples of actions that we have taken as part of Revival. Please turn to Slide #4. Revival begins enhanced with people. And for Revival to be successful, we must have the right talent in place. One of the first things we have done is move with speed to recruit exceptional leaders and enhance our leadership structure. This slide summarize the change we have made to the senior leadership team, defined as my direct reports plus their direct reports. We have moved quickly to refresh approximately 25% of this leadership group filling positions such as Chief Operating Officer, Chief Procurement Officer, Head of VWR Sourcing and Head of VWR pricing. Recently, we welcomed [ James Finn, ] our Chief Digital Officer, who joined us from Medline. And last week, we announced that [indiscernible] will join us from [ Cytiva ] to lead BMP and serve as our Chief Transformation Officer. We expect to announce the addition of other high-impact leaders soon. Many of those talent investments are self-funded with increased productivity. Year-to-date, our overall headcount is down approximately 2%. I had a very clear vision on how the leadership team should be constructed and in short order, we have supplemented internal talent with external talent. We have a diverse set of leaders in place with skills and experience will allow us to best execute the Revival agenda. Please turn to Slide 5. Enhancing operation is one of our 4 most priorities. So I wanted to dig deeper into action underway within this important revival pillar, which is led by our COO, Mary Blenn. In the first quarter alone, we completed over 8 weeks of kaizen events across our operational network. I participated in several of those kaizen events as did other senior executives. In parallel, we established a CapEx council that meets monthly to plan, review, sanction and monitor our capital commitments with one eye focused on near-term needs and the other high focused on long-term strategic requirements. Our CapEx Council has sanctioned 12 projects recently, one of which is depicted in this slide. This project focuses on a downstream production process at an important North American manufacturing facility, where the current workflow is a people-intensive process with scope for improvement. We reimagine the process during a kaizen and as a consequence, are moving forward with a project to install modular automation equipment in a previously unused space in the facility. The before and after images on this slide demonstrate how this automation project will radically simplify workflows. Furthermore, this investment will enhance quality, compliance and throughput, it will reduce our cost per unit, and it will free up capacity for the team to focus on higher-value activities. We expect to earn highly attractive returns on the capital we deploy. This is just one example of the approach we are taking globally. In all our projects, including the $20 million of incremental investment we announced previously, we use tools such as [indiscernible] and kaizen to rethink the way in which we work, and we are marrying that with rigorous data-driven analysis to measure the financial consequence of our investment. I will conclude my opening remarks with a few words about the news that Brent will depart Avantor next month. Brent, we are all deeply thankful for your leadership and contribution to Avantor, including the development of a deep and talented finance team. I wish you and your growing family nothing but the best in the future. Thank you, Brent. R. Jones: Thank you for the kind words, Emmanuel. It's been a privilege to serve as the CFO of this great company, and I'm grateful to have worked with such a wonderful group of people. The finance function will be in good hands with Steve, who is an outstanding leader, and I remain completely confident in Revival and Avantor's future prospects. With that, please turn to Slide #6, where I will review our Q1 financial results. In Q1, we generated $1.581 billion of revenue, which was down 4% on an organic basis and flat year-over-year on a reported basis. Adjusted EBITDA in the quarter was $219 million, with a margin of 13.9%. Adjusted EPS in the quarter was $0.17 due to good execution in BMP, specifically process, chemicals and new sale, allowing us to outperform our expectations. Free cash flow in the period was $25 million. Excluding restructuring costs, free cash flow in the quarter was $39 million. Both figures were within expectations and reflect a meaningful and anticipated headwind associated with customer prebates. We repaid approximately $105 million of debt and ended the quarter with an adjusted net leverage ratio of 3.3x adjusted EBITDA. Leverage increased by 0.1 points sequentially and year-over-year, primarily due to lower trailing 12-month adjusted EBITDA. Please turn to Slide 7. Revenue for the VWR Distribution & Services segment was $1.15 billion in the first quarter, down 5% organically versus the prior year. The primary driver of the organic revenue performance was a decline in volumes with industry dynamics and European market weakness, both contributing. We estimate that severe winter weather in the U.S. negatively impacted segment revenues by about 50 basis points. The bulk of the revenue declined sequentially versus Q4 2025 is due to seasonality. In the quarter, the VWR e-commerce platform showed green shoots of improved performance in traffic, conversion and revenue growth rates in the U.S. and Europe. This followed multiple upgrades as part of our digital road map as well as the successful relaunch of vwr.com. Enhancing our digital capabilities remains one of our top strategic priorities. Adjusted operating income for VWR was $105 million in the quarter, representing an adjusted operating margin of 9.2%. The year-over-year decline in margin is due primarily to volume and net price capture. Increased freight costs were also a headwind. The bulk of the margin declined sequentially versus Q4 2025 is due to seasonal declines in revenues with a number of other puts and takes. There are 2 key takeaways from the VWR quarter. First, we are pleased with the positive impact our upgrades had on e-commerce performance. Second, and perhaps more importantly, the VWR platform is stabilizing with Q1 performance in line with our expectations. We will address the stability again in our guidance commentary. I will now discuss our other segment, Bioscience and Medtech products or BMP. BMP revenue was $431 million in the first quarter, down 2% organically versus the prior year. This was ahead of our expectations due to better-than-expected execution from process chemicals and new sale. In the quarter, process chemicals grew double digits organically due to improving operations and strong order performance. Fluid handling and new sales were down double digits in the quarter, due in part to difficult comps as we had anticipated, while research and specialty chemicals declined about 100 basis points organically. Pricing was positive in the quarter. Last quarter, we indicated new sale and the serum and electronic materials businesses within research and specialty chemicals would be headwinds to growth in 2026 and and that this comp headwind is primarily due to normalization of idiosyncratic customer ordering patterns and shipments in 2025. In the first quarter, this dynamic in aggregate was a mid-single-digit headwind and to the organic revenue growth of BMP. Adjusted operating income for BMP was $103 million in the quarter, representing an adjusted operating margin of 23.8%. The year-over-year decline in margin is due to inventory provisions, lower volumes and mix, among other things. Key headwinds in the sequential margin decline were volume and mix. There are 2 key takeaways from the BMP quarter. First, our efforts to enhance operations are bearing fruit as our operations showed increased stability in the quarter. More specifically, BMP back orders declined modestly in Q1, and we have better line of sight to improved operational performance. Second, we had strong order performance in the quarter with a book-to-bill of more than 1.1 for the whole of BMP. Order trends were healthy across all business units, and we saw particular strength in our process chemicals order book. I will now turn the call over to Steve Eck to discuss our guidance. Steven Eck: Thank you, Brent. Please turn to Slide 8. We reaffirmed our 2026 guidance this morning, but I want to make a few supplemental comments. In Q2, we expect to generate adjusted EPS of between $0.19 and $0.20 per share. Next, as everyone is aware, the Middle East conflict has created inflationary and supply chain pressures that are rippling around the world. At this stage, we are more concerned about the price of raw materials and services rather than their availability, but our concerns could evolve if the conflict persists. As of today, we estimate that inflationary pressures stemming from the Middle East conflict represent an incremental headwind of approximately $10 million to $20 million to our 2026 operating income, and our reaffirmed guidance incorporates this headwind. We have established a task force whose responsibilities to identify, monitor and mitigate these inflationary headwinds. Next, on VWR. The financial performance we saw in Q1 was largely in line with our expectations. We believe that VWR is turning a corner and that VWR's growth rate reached a trough in the first quarter. We expect that VWR's growth will improve gradually over the course of 2026, with the segment showing positive organic growth in the second half. In BMP, the year-over-year comp headwinds from the idiosyncratic customer ordering patterns and shipments mentioned by Brent and new sales, serum and electronic materials will increase sequentially from Q1 to Q2, and we faced another tough comp in fluid handling as well as tougher comp and process chemicals. Therefore, we expect BMP's year-over-year organic growth in Q2 will be worse than the Q1 experienced by more than 500 basis points. There is no new news in these comp dynamics as our assumptions about their impact are unchanged versus 90 days ago. We believe that Q2 will mark the low point for BMP growth in 2026. Finally, we expect the adjusted operating margins of both segments to increase sequentially from Q1 to Q2 in line with seasonal patterns. I will conclude with a comment on capital allocation. Debt reduction remains the top capital allocation priority, and we remain committed to reducing our adjusted net leverage ratio sustainably below 3x. With that, let me turn the call back to Emmanuel. Emmanuel Ligner: Thank you, Steve. I will conclude our prepared remarks by reiterating the key takeaways from the quarter. Number one, revival is already having a positive impact on the organization. Number two, improved execution has translated into improved operational performance. And number three, we believe that we are turning a corner financially and now believe that the growth rate of VWR reached a bottom in Q1 and that the growth rate of BMP will reach a bottom in Q2. This, combined with our tangible revival progress, give me confidence that Avantor will return to positive revenue growth in the second half of this year. Finally, I want to extend my gratitude to our Avantor associates across the globe for their dedication to serving our customers. Thank you for embracing revival and the new ways in which we are working together. I am incredibly pleased with the progress we are making together as a team. With that, operator, we are happy to take questions. Operator: [Operator Instructions] The first question today comes from Dan Leonard with RBC. Unknown Analyst: My first question, can you talk a bit more about any countermeasures you're taking to offset incremental inflation? And I'm thinking of transportation costs specifically, but it sounds like there are other watch areas as well. Emmanuel Ligner: Yes. I think, Dan, if I understand correctly your question, you're talking about the measures we are taking, again, the inflation that we are seeing. Is that correct? Unknown Analyst: Correct. Emmanuel Ligner: All right. Dan, first of all, thank you for the question. I think it's important to also review the fact that we have a new Chief Procurement Officer, [ Keith Balzo ] is joining us from Cytiva, I worked with them a lot in the past, is a really, really good person. We've put in place a task force. The good thing about what we see in the Middle East is that the inflation will happen in 2 areas. The first in inbound and outbound threat. And of course, the team is really looking at our contract and seeing what we can do on that side. And then the other thing is a few critical materials, which will not be in short supply, but really where we will see inflation. So we have a task force in place already evaluating the impact. I think, Steve, in the opening remarks, talked about the $10 million to $20 million headwind that we are seeing that we are contemplating in the reforming of our guide. And I think it's really an action for us in terms of monitoring and in terms of things what we can pass to our customers. Unknown Analyst: Okay. I appreciate that. And then as a follow-up, Emmanuel, can you talk about the significance of that book-to-bill in the BMP segment? And what is the lead time required to translate that greater than 1.1 book-to-bill to revenue growth? Emmanuel Ligner: Yes. No, it's a very good question, Dan. Look, I think if we look at what we shared in Q4, our order intake in process chemical was high single digit in Q4. And with the operation and the Revival impact on operation, we were able to deliver a double-digit growth in Q1 in terms of revenue. The very positive things and what we are very encouraged is that in Q1, our order intake was double digit. So there is a sequential acceleration, and it's down again to revival on the commercial side. A lot of those products are between between 30 to 60 days, 90 days lead times. It also depends on the customer that gave us some blanket order with a lot of visibility. We have asked the commercial team to work on this. to make sure that through the [indiscernible] process that we have put in place, we are helping as well the operation to have a good visibility of what is coming. So we are super encouraged with what happened in both operation and commercial due to revival. And so 60 days, 90 days. That's why we are positive and confident about the fact that we'll go back to growth in the second half of the year. Operator: The next question comes from Patrick Donnelly with Citigroup. Patrick Donnelly: I was hoping for just a few more specifics on 2Q. Helpful to hear the VWR and BMP pieces. Can you just talk about overall organic growth and then also the margins for each and how we should think about that margin cadence for 2Q and going forward? R. Jones: Yes. Yes, Patrick, it's [indiscernible] take this. Look, I think for Emmanuel and Steve as well as my comments there, you see a bottoming in VWR in Q1, we expect to see continued improvement in that business sequentially. There are more shipping days in Q2 than Q1. So even keeping at the same pace that we did in Q1, even though recognizing that's a seasonally lighter quarter that easily gets us within the range of our guidance there. Even though on BMP, you'll see lower organic growth that has to do more with the idiosyncratic competition we brought up it's a nice sequential increase, but not substantial there. You put those together, you get better fixed cost absorption against that, and then you'll see modest increases and margin against that sequentially. You marry that to revival working in other cost outs there and that very comfortably gets you to the range of our guidance. Patrick Donnelly: Okay. That's helpful. And then maybe just on the BMP side, helpful comments there. Can you just talk about what you're hearing from customers? Obviously, some mixed data points out there. Are there certain segments you're seeing a little more strength? And then again, I guess, the visibility into that recovery and confidence level of that recovery as we work our way into the second half and beyond just with the market positioning there. Emmanuel Ligner: Yes. Patrick, I think there's not much change in terms of market dynamics versus what we shared in our last call 90 days ago, biopharma market is healthy, in particular, in bioproduction. We see that in our order book. This is also particularly in process chemicals for Q1 in terms of revenue but also in order, as I just talked about. We also see a strong funnel for us, again, we have pushed commercial team to have a better visibility on the opportunity. So we are looking at a strong funnel. Around academy and government, nothing really changed. The market is pretty stable. There's maybe a lower level of activity than what we will prefer, and we continue to assume that customers are a bit reluctant to spend money in that part. NHI funding is stabilizing, capitalizing incremental demand that will represent upside potentially, again, if the customer decided to spend their budget. Bottom line is that the end market we exactly as we were expecting it. All right. And I think there's no assumption that there's major change during the year. I just want to maybe add one comment. We shared in the past that despite the difficulty that we had we never let down the customers, in particular in bioprocessing. And I think we can really say that [indiscernible] I meet customers there is strong feedback about the service level and the engagement that we have. And this is again reflected in our Q1 order book and the book-to-bill, which is 1.1x. Patrick Donnelly: Okay. And Brent, just to close the loop on 2Q, is there a specific organic number you can give? R. Jones: We're -- you're probably talking about a decline of 500 basis points there for the quarter on top line. Operator: The next question comes from Vijay Kumar with Evercore ISI. Vijay Kumar: Congrats on a good execution here. Brent, wishing you the best as you transition here. Maybe Emmanuel, I heard the term confidence in the business bottoming error. It sounded very constructive. And when you think about VWR bottoming out in Q1, what gives you the confidence that VWR bottomed out? And Brent, if VWR has bottomed out in Q1, why is 2Q organic minus 5% when you guys just did minus 4% in Q1? R. Jones: Do you want to -- the we're talking about at the firm level there, Vijay. So you're going to see more decrementals in BMP taking the firm rate down to minus 5% there. So you'll see a sequential improvement in VWR and then going backwards by 500 basis points or more in BMP. Emmanuel Ligner: Yes. I was going to add that around VWR. I think we had a strong reset of VWR last year. We shared with you that we've lost market share. Q1 was really the tail of those market share loss. We have really stabilized the situation with VWR. And we also looked at the order trend, okay? We look at the contract conversion, the new contract we win, we measure the engagement of our commercial team. Everything that we are doing on VWR, in particular, around the e-commerce channel has been executed phenomenally well. We're super happy with that, with strengthening the [indiscernible]. And I think this is why we're expecting stabilization really of Q2 and then onwards positive growth. Vijay Kumar: Understood. No, that's helpful. Maybe one follow-up Emmanuel for you. We're starting the first half, somewhere down mid-single rate minus 4% to minus 5%. What improves in back half, right? Is it just comps getting easier in the back half? Or is the business turning? Is there a bridge from first half to second half, how we get to positive growth in the back half? Emmanuel Ligner: Sure. I think this is what I -- what we said in our opening comments, all right? So bottom for VWR Q2 bottom for BMP, stabilization of VWR. And then we have the order book that we just talked about, which is really on crashing on the BMP side. And I think basically, the confidence about the impact that revival has on the commercial intensity on the operation excellence and also on the fact that we are bringing all those talents, which some of them are already having an impact and there are many more coming. So I think this is a combination of all of this that give us confidence that second half will be back to growth. And of course, [indiscernible] as well in terms of VWR in particular. R. Jones: And Vijay, coming off -- taking the comp piece aside, not a dramatic sequential increase that we have baked in the plan, certainly, Q1 to Q2, and then we aren't getting more specific on the back half, but broadly beyond that. And just to be super clear into Q2 you'd say about minus 5% at an enterprise level, improvement in VWR coming up sequentially coming off a negative 5% in Q1. And then going backwards, about 500 basis points more in BMP, you can put that math together and gives you a clean picture for that, and that does not require a significant sequential ramp for the company in Q2. Operator: Our next question comes from Catherine Schulte with Baird. Catherine Ramsey: Maybe as you look across your manufacturing and logistics footprint, I guess, what portion of facilities would you say are in good shape today versus still needing some investment? I think you mentioned you've greenlighted projects. What kind of investment do those projects entail? And what's the time line to complete those? Emmanuel Ligner: Yes. Thanks, Catherine. Look, I think I visited probably all of them. I think there's maybe a few factory where I have not been like India, which I'm planning to go by the end of May and maybe 1 or 2 in the U.S. So I don't have yet the complete picture of all our sites. But look, we have excellent sites. I was recently in Poland, and Briar in France and [ Luban ] in Belgium, I think, generally speaking, the -- look, in terms of projects, there's always projects to happen in every site, right? There's not one site that consume all our CapEx or not. Every site as their project, we encourage every leader to look at to apply lean and kaizen on the site to make sure that we have productivity, okay? I think Mary is driving a huge improvement on that side where we are measuring the productivity by site. And therefore, every site leaders are encouraged with the help of our internal lean team to come back with projects that are going to create productivity, and we just shared one of them. So those projects are very different. We did 12 in Q1, but I think we will have more coming on into the rest of the year. And I think this is where we are on curage as the team is responding very well in there. Catherine Ramsey: Okay. Great. And then can you just walk through how the BMP idiosyncratic order pattern comp base throughout the year? I think you said they were a mid-single-digit headwind in 1Q will be higher in 2Q. But how does that look in the back half? And does BMP get back to positive growth at some point in the back half of the year? R. Jones: Yes. I mean the idiosyncratic gets a little better in the back half of the year. If you recall, the primary driver on the back half is going to be headwinds in electronic materials, and I would just continue to think about sequential improvement here. And that's really the theme we're driving. We're really trying to talk through here is sequential stability than modest growth against that. Emmanuel Ligner: Yes. I think we shared in the past call that new sale, serum and electronics had actually different timing in the past. And so new steel serum giving a headwind first half, electronic material giving headwind in the second half. And I think this is important for us to continue to work with the supply chain team, but also with our customers so that we come back to a normalization of the customer ordering pattern and, therefore, shipment across the year. Operator: Our next question comes from Casey Woodring with JPMorgan. Casey Woodring: Maybe to start, can you walk through the price versus volume performance in the quarter? You said pricing was positive in BMP. So assuming that was down in VWR. So some more color on pricing in the quarter and updated pricing expectations for the year would be helpful. And we'll also be curious to hear your updated thoughts around gross margins and where those could land on the year, just given some of your comments around freight costs and such. R. Jones: Well, so Casey, broadly in the quarter, and let's talk about this on the gross margin side. And I think the right way to think about it is sequentially. And we talked about -- we talked on the last call about taking the 31.5% gross margin -- adjusted gross margin is a jumping off point to think about to think about this year. And on a total company basis, you really had the decrementals on volume offset by pricing actions that came from the beginning of the year. And then you have other puts and takes with with freight and et cetera, there. We saw somewhat better performance there. We like that. We believe that will continue to grind up during the year. on a full year-over-year basis, price cost spread was negative. Again, that's due to the VWR margin reset we saw beginning in the second half of of last year, but we like to set up for that. We like the execution, and then we believe you'll see a grinding up certainly into Q2. And then we're not being more specific about the back half of the year. But certainly, our guide is predicated on that gross margin improvement. Casey Woodring: Understood. And then as a follow-up, can you just talk briefly about free cash flow performance in the quarter. You did $25 million here in 1Q, but reaffirmed the $500 million to $550 million guide. So just curious if the free cash in the first quarter was in line with your expectations. And I guess the guide does imply a pretty big step-up moving forward. So maybe just walk through how you plan on getting there, the puts and takes? And any sense for just phasing and how back-end loaded that range is? R. Jones: Yes. No, certainly, Casey. So we noted that it was consistent with our expectations. Our guide is before restructuring expenses. So then it was around $40 million when you exclude restructuring expenses, we cited the significant prebate. If we had not had the significant prepay in the quarter, we would have looked a lot more like last year, and then we would expect a similar sort of ramp throughout the year. there weren't really any other significant moving pieces. If you look at the cash flow statement, there weren't working capital swings or otherwise, it drove it different way. So really, the story in the quarter on the relative was the prebate as well as on the absolute -- on the year-over-year lower earnings. And again, that will -- it's not unusual for Q1 to be lower on a seasonal basis, and then you'll see strong continued sequential improvement, which you've seen from us. Operator: The next question comes from Brandon Couillard with Wells Fargo. Brandon Couillard: Emmanuel, on the VWR business, you talked about some market softness in Europe would that region deteriorate sequentially? Or is that just a year-over-year comment? And then the 50 basis points of U.S. weather impact in the U.S. in the quarter. I guess I would have thought you would have made up those orders at some point in the quarter. Did those get pushed out into 2Q? How do I think about the impact of that? Or they just lost revenue in general? Emmanuel Ligner: Just on the weather, I think what we were saying is it did impact. But fortunately, the team works very well and finished to deliver what we were expected. So VWR in Q1 was really spot on in terms of our expectations. So again, another confidence about the team capable of being flexible and really make it works. So that's the comment. On Europe, I think there is some softness in particular in the industry in Germany and in a couple of areas like this. Also, I think remember that in Europe, we are very proud of being the largest distributor there. And so it's the places where the market is when you are the #1 always impact you a bit more than anybody else. I think there is Look, it's an area where we didn't have a leader for a long time there. I think we have [ Christophe ] now, which is really taking care of that. We did some reorganization and the team is reverted right now. And so that's where it's -- we have confidence in the second half in Europe as well. Brandon Couillard: Got you. And then maybe Steve or Brent, on the inflationary impact, the $10 million to $20 million, nice to see you're able to absorb that in the guidance for the year. Two questions. Do your contracts generally allow for freight-related surcharges to be passed through? And number two, to what extent have you kind of, I guess, stress tested those assumptions? Are there other known unknowns that could push you above that range as you look out the next few months that you've heard about? Unknown Executive: Brandon, let me start just a quick comment on the contract and then I'll let Brent and Steve answer for the rest. We tested that during COVID and post-COVID inflation. I don't know if you remember. So we have a tool in place for surcharge it's working well in some area, in geographical area -- other geographical area, it's a bit more difficult. But we are looking at the success story that we had post-COVID when we had huge inflation, and we are just putting a team in place to make sure that we reproduce that and not only one geography, but across the entire territory. So the answer is, yes, maybe not every contract but a huge majority [Technical Difficulty] potential headwind we see in the year related to the Middle East conflict that we're carefully watching that situation and estimating the impact that it could have on our operating income. And like Emmanuel said, we are monitoring weekly and looking for every opportunity to mitigate that impact on our results, the best we can. R. Jones: Brandon, I'd just add, you coined a phrase known unknowns there. I suspect -- I don't know if we can never know an unknown. We certainly thought very deeply about this. So we think we've identified that appropriately. Operator: The next question comes from Matt Larew with William Blair. Matthew Larew: I wanted to ask about the bioprocess portfolio. You referenced BMP as a category in down slightly in and then improving in the back half. Many of the bioprocessing peers, I think, at this point are closer to normalized growth in the high single digits. So Emmanuel, just curious if you think on a on a long-term basis as is now a chance to really review the business if this is a portfolio that you think can grow kind of at that market rates and maybe how long you think it will take to get back there? Emmanuel Ligner: Yes. No doubt. Look, the BMP negative growth into Q2 that we are anticipated. And for that segment to be at the bottom is mostly due to what we talk about the seasonality and the speed static purchasing that we've seen, in particular into serum and new sale last year, all right? So it's a really what is the core of that segment, which is processed chemical. We've seen double-digit in process chemicals in Q1 and in revenue, but also in order, a positive book-to-bill. We think that the market is 6%, 7%, like our peers looked at it, and we are really pushing the team to make sure that we are growing at market or even above market for the rest of the year. Again, the focus that we've done on Revival around commercial intensity as well as operation, give us confidence that we'll go back in the second half of the year to grow on both segments. And we're getting -- every day, we're getting more optimistic about the business. Matthew Larew: That's great. And then Emmanuel, you joined last July. And so then there almost a year, you referenced the 25% of kind of top leaders changing the number of folks that you've brought in from other companies. In response to Catherine's question, you've been out to most of the facilities. I guess where would you assess in terms of the structural kind of personnel changes that you would like to make the -- any kind of accidents you wanted to implement and get going? Where would you say you're at in terms of getting that started and really ready for the company to jump off versus additional structural changes that you think need to be made to position the company? Emmanuel Ligner: And this is a very good question. Let me first because I like to be precise. I joined mid-August exactly. So it's not yet a year, right? It may be more time to celebrate my anniversary. But I'm super the about, first of all, the reaction of the team internally, all right? We have some really good talent internally. There's absolutely no doubt. And what we are trying to do is just buying this internal talent with additional external talent. Some of the roles that we've shared today and that are in that early slide, a role that we have created, that we didn't have in the past, okay? And so I think where I am today, well, look at need a strong right-hand person and the CFO search is on its way, someone that can really be a partner to really continue to push and execute revival. But I will say, generally speaking, at my anniversary. So in a couple of more months, I think we will be almost there. We will announce soon some additional executive member that we should be able to position a couple of weeks to share with you around [indiscernible] and CIO, and I think we will be there. Nevertheless, let me just say one more thing. Talent is always something which is very dynamic as well, okay? And what we are trying to do is to make sure that we do not lose the talent that we have as well. But this is always something very dynamic. And I think we are constantly making sure that we are motivating our talent. And one of the things that we're doing in revival around simplification is also about changing the delegation of authority to make sure that we empower the right people to make the right decision at the right place, at the place of impact as close as possible to the business. And I think, again, this is something that the team is reacting very quickly and very nicely. And I think the first quarter, we're pretty happy with our results, and we are very optimistic about the rest of the year. Operator: The next question comes from Michael Ryskin with Bank of America. Michael Ryskin: Great. I've got a couple of minor ones I'm going to throw in. First, you alluded to prebates a number of times. Just wondering if you could expand on that, just sort of the magnitude of it in the quarter, was that unusual for 1Q? Just sort of the impact that had on numbers is how to think about that going forward? R. Jones: Yes, Michael, it's Brent. So prebates are associated with enterprise contracts with large customers. We started talking about that in Q2 or Q3 of last year. We had a meaningful impact from payments due to that in Q4 of last year, that had very significant. We're not specifically quantifying it, but it had a very significant impact on the cash flow let's also be clear. It was anticipated. It was expected in our guidance as expected and how our cadence was going to get. Emmanuel Ligner: Michael, I will also look at it in a sense that if you do not renew and do not win contract, you don't have prebate. So we'll look at it as well as a positive. Michael Ryskin: Okay. Okay. And then on the VWR business, I hear your comments about 1Q. You expect that to be the organic low point, and you talked about some improvement in 2Q and beyond. You've got easier comps in the second half. But still, you did post a negative 5% organic trend on a negative 3% comp. So could you just talk about share dynamics, share gains, share losses, maybe touching on the prebates and the enterprise customers there? Just confidence that, that's really stabilized and is going to be less and less of an issue going forward? Emmanuel Ligner: So we talked about last year, we had some share loss. I think I explained as well that you don't lose share at a one-off, all right? It's a headwind that gone month after month, it takes time for our competitors to convert the loss that -- the win that they had, which is more or less on paper at the very beginning. And this is where we are. We are, first of all, on a seasonal low quarter. We are at the tail of those losses. And we talked also about the fact that last year, we renewed contract, we renew contract with opportunity to grow license to go hand. And this is what we are doing. We're happy about what's going on right now. And so we have that tangible point, which is stabilization, stabilization of our commercial activity we win contracts, we renew contracts. We lost some contracts. We lost some share within a contract. The customer gave us a certain share of wallet. There's a huge dynamic here. But what I can tell you is we are stabilizing. And that's the most important thing. It's a stabilization. And as we are moving into the second half of the year, we have an easy comp. And that is because we are stabilizing because we are taking the action that we are taking in particular in e-commerce that we are confident about the fact that Q1 is the bottom. Michael Ryskin: Okay. Okay. If I could squeeze in one small follow-up. To Patrick's question, I think you pushed you on 2Q organic and margins. I want to make sure I understand the margin cadence properly. It sounds like you're pointing to some gradual improvement through the year, including on the gross margin on just looking at prior seasonality that seems to go against that. Is there anything unusual in gross margin that I'm missing for this year that would explain that? R. Jones: Yes, Michael, I think we're coming up sort of the rebate for the company. We have significant revival productivity initiatives. There's always the noise of mix within that. And we're also not pointing to heroic improvement in that, just the kind of classic revival productivity and other things along with along with just better top line to better absorption against it. Operator: The next question comes from Dan Arias with Stifel. Daniel Arias: Brent, just curious how much of the plastic ware portfolio within VWR is yours versus OEM? I ask as I'm just sort of thinking about oil sensitivity and resident put cost, trying to understand how much you have control when it comes to managing inflation just versus sort of being at the mercy of whatever the OEM provider decides to do on price, et cetera? Emmanuel Ligner: Dan, Emmanuel here. We have a huge portfolio, and I don't have the data. I don't think -- I'm looking at Brent right now. I don't think we have the data in front of us. So I apologize, this is something that we can follow up. What I can just reinsure is we have also a new sourcing leaders in in VWR and Emilia is really leading that. So Emilia and Keith are really working hand to hand in the task force to make sure that we are controlling and making sure that we are negotiating best deal we can and passing through the increase we manage to see. Daniel Arias: Okay. Fair enough. Maybe just sort of looking ahead a little bit and thinking about 2027, which I know is a long ways away, but are you -- does the operational improvement that you feel like you have confidence in right now? Does that give you confidence that EBITDA margins will be up next year? Emmanuel Ligner: Let me answer in 2 parts. First of all, let me echo comments from over already it is April '26. It's a bit premature to talk about '27. And I just want to reiterate what I said in the past. I take my comments very seriously. And for me, it is just too early to put a detailed take in the ground. However, and saying said that, I'd like to make a few more observations on the future. look, today, we are pleased with our Q1. We are looking into a second half of the year, which is going to be positive, and we are optimistic about that. Revival is having an impact, and I'm confident that Revival for the rest of the year will have a greater impact. And so we feel that we will exit 2026. And by the end of the year, I think as well that we will have more capital deployment flexibility a higher level of confidence across the organization and revival is going to accelerate to have an impact on the entire organization around commercial, team around operational, team around the rest of the support functions. And so all what I see today over the last 9 months almost, give me confidence, and I am optimistic that 2027 will be a growth year. Chris Fidyk: Operator, we have time for one more question, please. Operator: Our final question today comes from the line of Dan Brennan with TD Cohen. Daniel Brennan: Great. Maybe just on the distribution business. Could you just zoom out and talk to what you're seeing in kind of the broader market? There's a lot of uncertainty, what's happening with pharma spending certainly in the U.S. academic government trends. I'm just wondering versus what you're delivering, kind of how is the broader market doing? And then related to that, like are you guys assuming positive price in the back half of the year? R. Jones: Do you want to answer the price for the back of the year? I'm sorry, Dan, we have very modest price baked into our plan here. Emmanuel Ligner: And then I think from an overall market -- yes, sorry, from an overall market, I would say what I just said 3 months ago, I think we are where we are academic and government stable, maybe at a low level. Education is a question mark. Education segment is a question mark. There's pocket in Europe, as we discussed about that include industrial that are really struggled given the macroeconomic environment. There are geography differences. And again, we are in so many different segments, including mining and pharma. Look, we are thinking that from us, and that's very important, we are stabilizing. The team is motivated. We are implementing the plan that we have, in particular in digital. We're super happy to have our new Chief Digital Officer, [ Jim Finn ] and that will really help us to think that the market is probably at a low single digit, and we will be back to growth in second half. I think this is where we are today. And of course, we will continue to monitor the macro environment on this. Daniel Brennan: Maybe just a final one. I know you called out that material headwind in Q2 from the BMP across those different businesses. Is there any more sounds like it's idiosyncratic very company-specific, but you've got -- it's pretty big. So could you provide any more color on that, like the [indiscernible]? And then it sounds like Brent that current materials is a headwind in the back half of the year. Sorry, if I missed in prior calls, you got to discuss those. But any additional color you can provide on those would be helpful. R. Jones: Well, look, Dan, I think we've talked about it broadly where it comes as a headwind. But in in the first half of last year due to some timing, both customer orders and our fulfillment, you saw very, very strong performance in new sale. Now that also has very strong margin contribution. That becomes -- that's a headwind right now. You also saw a very strong performance in serum. Then in the back half of the year, we saw exceptional performance in the EM business particularly in Q3. So new sale we talked about discretely, but for the research and specialty chemicals piece of it, that EM and serum just provides a headwind in the front half in the back half to just make the segment comps more difficult. So that's why you see us calling out specifically how we're doing process chemicals and other pieces there. So they're unburdened by those comp pieces, and I continue to point you all to the sequential performance we have in these through the year, moving away from the pieces on the comps. Emmanuel Ligner: All right. Thank you, Steve. Thank you, Brent. Thank you, everybody, on the call to joining us today. We moved the company for 1 in the first quarter, and I'm encouraged by the momentum and positive energy across the organization, revival is having an impact. Avantor is turning a corner financially, which gives me confidence that we will return to positive growth in the second half of the year. I look forward to updating you again next quarter. And until then, be well, everyone. Thank you. Operator: Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.
Operator: Welcome to the Stanley Black & Decker First Quarter Earnings Call. My name is Shannen, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to the Vice President of Investor Relations, Michael Wherley. Mr. Wherley, you may begin. Michael Wherley: Good morning, everyone, and thanks for joining us for our first quarter earnings call. With us today are Chris Nelson, President and CEO; and Patrick Hallinan, Executive Vice President, CFO and Chief Administrative Officer. Our earnings release, which was issued earlier this morning, and a supplemental presentation, which we will refer to, are available on the IR section of our website. A replay of today's webcast will also be available beginning around 11:00 a.m. Eastern Time. This morning, Chris and Pat will review our first quarter results, along with our updated outlook for 2026, followed by a Q&A session. During today's call, we will be making some forward-looking statements based on our current views. Such statements are based on assumptions of future events that may not prove to be accurate, and as such, they involve risk and uncertainty. It's therefore possible that actual results may materially differ from any forward-looking statements that we might make today. We direct you to the cautionary statements in the 8-K that we filed with our press release and in our most recent '34 Act filings. Additionally, we may also refer to non-GAAP financial measures during the call. For applicable reconciliations to the related GAAP financial measures and additional information, please refer to the appendix of the supplemental presentation and the corresponding press release, which are available on our website. I will now turn the call over to our President and CEO, Chris Nelson. Christopher Nelson: Thank you, Michael, and thank you all for joining us today. I am pleased to report that Stanley Black & Decker delivered a solid start to the year, outperforming our expectations on the top and bottom lines in the first quarter as we demonstrated continued progress on our strategic priorities. We are confident in our strategy and in the team's ability to continue to execute and deliver results. For the first quarter, revenue was up 3% overall and flat organically. This was ahead of our expectations, driven primarily by a well-executed outdoor products preseason. Our adjusted gross margin rate of 30.2% was down 20 basis points year-over-year, essentially unchanged. Adjusted EBITDA margin of 9.2% was down by 50 basis points year-over-year, slightly ahead of our planning assumptions for the period. Adjusted earnings per share were $0.80, $0.20 ahead of the high end of our first quarter guidance range of $0.55 to $0.60. Pat will unpack this further later in the call. Additionally, on April 6, we announced the successful completion of the previously disclosed agreement to sell our Aerospace Fasteners business. This portfolio change is consistent with our strategy to focus on our core business and commitment to enhancing shareholder value. The vast majority of the approximately $1.6 billion of net proceeds have already been applied towards debt reduction. We are now positioned with a stronger balance sheet and have unlocked the ability to deploy capital to accelerate shareholder value creation. We expect our capital allocation strategy to be biased towards share repurchases, which the Board has authorized. Turning to our first quarter operating performance by segment. I'll start with Tools & Outdoor. First quarter revenue was approximately $3.3 billion, up 2% year-over-year. Organic revenue was down 1% as a 4% benefit from targeted pricing actions was more than offset by 5% of volume pressure. Currency was a 3% benefit in the quarter. As we discussed in February, our base case assumption was that top line volatility, especially within the North American retail channel, would persist through at least the first quarter. Consistent with our expectations, competitors continued to take price and we honed our approach to promotions for select products. Also, as expected, our results this quarter reflected a decrease in volume, primarily driven by lower retail activity in North America. This was partially offset by a strong initial sell-in for outdoor products as we approach the peak selling season. International growth and prioritized investment markets such as Eastern Europe, United Kingdom and Latin America was an encouraging outcome. Additionally, increased sales generated by professional end user demand in the U.S. commercial and industrial channel indicates that our growth investments are building momentum in the market. Tools & Outdoor first quarter adjusted segment margin was 8.7%, which was consistent with our plan. Now for additional context on the top line performance by product line in first quarter. Power tools organic revenue declined 2%, and hand tools, accessory and storage organic revenue declined 3%, which were both driven by factors consistent with the broader segment performance. Outdoor organic revenue increased 1%, driven by encouraging preseason sales for spring 2026, particularly for ride-on and zero-turn mower offerings. While we are still in the early stages of the outdoor season, our performance thus far reflects strong execution by our team, including effective order fulfillment. Now Tools & Outdoor performance by region. In North America, organic revenue declined 2%, reflecting trends we discussed for the overall segment. The U.S. commercial and industrial channel delivered high single-digit organic growth, demonstrating a strong return on our targeted investments in brand activation for the professional end user. I'll talk more about this in a moment. Point-of-sale performance in the quarter was aligned with our expectations and broadly consistent with reported home improvement consumer credit card data. In Europe, organic revenue was up 1%. Growth in prioritized investment markets, including the United Kingdom and Eastern Europe, was partially offset by softer market conditions in other parts of the region. The rest of world organic revenue was flat, with double-digit growth in Latin America, offset by pockets of market softness in Asia and the Middle East. Turning now to Engineered Fastening. First quarter revenue grew 10% on a reported basis and 7% organically. Revenue growth was comprised of a 6% volume increase, 1% higher pricing and a 3% currency tailwind. The Aerospace business continued its strong performance, achieving 31% organic growth in the quarter. The automotive business delivered 4% organic growth, outpacing the market, driven by strong North American demand and strength in global fastener systems for auto OEMs. General industrial fasteners organic revenue declined low single digits. Adjusted segment margin for Engineered Fastening was 12% in the quarter. Year-over-year expansion of 190 basis points was primarily due to improved profitability in Aerospace and favorable automotive volume and mix. Overall, through disciplined execution, both the Tools & Outdoor and Engineered Fastening segments delivered revenue on a reported and organic basis that was better than expected despite the challenging operating environment. Segment margin rates were also in line with expectations this quarter through disciplined execution, operational cost improvements and targeted refinements to promotional strategies. We believe the results are evidence of the momentum we're building. We have conviction in our strategy and are confident that we are taking the actions required to ensure sustainable growth and shareholder value creation into the future. Thank you to our team for maintaining their customer-centric approach and for advancing our vision of building a world-class branded industrial company. Our ambition is anchored by 3 core strategic imperatives: purposeful brand activation, operational excellence and accelerated innovation. I would like to share a few updates regarding how our efforts are taking root. Starting with DEWALT. You've heard us talk many times about safety as a core end user priority and value proposition of the products we deliver. Our Perform & Protect lineup is designed to provide product features to defend against dust inhalation, loss of torque control and tool vibration without sacrificing the performance that professional end users demand. DEWALT has over 200 Perform & Protect solutions that are attracting professional end users and converting them into users of the DEWALT platform. These types of end user oriented solutions, combined with our ongoing investments to expand our field service and sales teams contributed to the strong commercial and industrial performance in the quarter, including professional contractors fully converting from competitor offerings to DEWALT cordless solutions and lead construction contractors outfitting large new project job sites with DEWALT. In addition, last quarter, we indicated that the STANLEY brand was positioned to return to growth in 2026. I'm pleased to share that our targeted investments are supporting new listings, largely driven by the initial phase of our product refresh and new product introductions. We are seeing green shoots and are on pace to return to growth with the STANLEY brand by midyear. Our expanded field team and trade specialists serving the professional end user are driving meaningful traction with our global channel partners, building demand as we grow together. I will now pass the call to Pat to discuss progress on a few key performance metrics and to outline our 2026 guidance. Patrick Hallinan: Thank you, Chris, and good morning to everyone joining us today. Before we jump into the guidance, let me start by providing a bit more detail on our adjusted EPS outperformance in the first quarter, which, as Chris noted, was $0.20 above the high end of our guidance range from February. Above-the-line operating outperformance made up about half of the outperformance, driven by Outdoor. The remainder of the outperformance came from below-the-line items, most of which didn't change our full year view on those items materially. For example, our forecasted first quarter tax rate was 30%, and that landed at 26% due to the timing of a discrete tax item. But we have not changed our view on the full year tax rate of 19%. Now let me walk you through our updated guidance and other assumptions for 2026. There are a few key updates embedded in this guidance you should be aware of. First, the CAM deal closed on the early side of the anticipated window. Practically, that resulted in us removing CAM's expected second quarter contribution from our guidance. that 1 quarter adjustment lowers our expected Engineered Fastening segment pretax profit by about $15 million, but it also lowers second quarter interest expense by a similar amount, meaning it has essentially no impact on second quarter or full year adjusted EPS guidance. Second, there have been numerous tariff policy changes since our last earnings call, which prompted new assessments and assumptions. We expect that all-in, these tariff policy changes and our updated tariff assumptions equate to net tailwind for us this year on a gross basis compared to our assumptions at the beginning of the year. In the near term, we have a temporary period of lower tariffs since the replacement Section 122 tariffs are lower than the former IEEPA tariffs. Our base case assumption is that new Section 301 tariffs will be introduced at the same level as the old IEEPA tariffs, which means our underlying tariff costs would be virtually the same by August as they were prior to the Supreme Court ruling in February. This is our current expectation, but that is subject to change as policy is finalized, and we will update our assumptions as appropriate. Third, since the start of the conflict in the Middle East, we have seen inflationary cost pressures in resins and freight. Last, we have also seen meaningful inflation in recent months in battery metals and tungsten, which is applied to the tips of our sawblades and drill bits for increased durability and heat resistance. We believe the combined impact from these inflationary pressures roughly offsets the benefit from the tariff tailwind in the year. Moving on to our actual guidance metrics. For 2026, we expect adjusted earnings per share to be in the range of $4.90 to $5.70, representing growth of 13% at the midpoint and remaining consistent with our original adjusted earnings guidance. We now anticipate total company revenue will be about flat compared to the last year, which is slightly lower than prior guidance because of the removal of CAM from the second quarter expectations. We still expect organic revenue to grow by a low single-digit percentage year-over-year. This outlook reflects on our focus in pivoting to growth and our confidence in seizing the share opportunities across our key markets. We continue to expect 50 to 100 basis points of full year benefit from foreign exchange, which should predominantly land in the first half. Moving to gross margin expectations. We anticipate adjusted gross margins will expand by approximately 150 basis points year-over-year, consistent with prior guidance. This is supported by top line expansion, price, ongoing tariff mitigation efforts and continuous operational improvement. We believe we are firmly on track to meet this target, and I will talk more about it on the next slide. We plan to continue growth investments in 2026 to further advance our robust innovation pipeline and fuel market activation, with the goal of enhancing brand health and accelerating organic growth. We expect SG&A as a percentage of sales to remain around 22%. We will continue to manage SG&A thoughtfully, allocating capital to strategic investments that position the business for long-term growth. Free cash flow is expected to be in the range of $500 million to $700 million, including projected taxes and fees associated with the CAM divestiture. Excluding such payments, free cash flow is expected to be in the range of $700 million to $900 million, consistent with our original guidance. Our free cash flow performance is expected to be accomplished through a disciplined and efficient approach to working capital management, progressing inventory towards prepandemic norms, while remaining attentive to our ongoing tariff mitigation and footprint optimization initiatives. We were pleased to deliver progress on inventory reduction in the first quarter. Looking at our segments, we are planning for organic revenue growth and segment margin expansion in both segments. Tools & Outdoor is still expected to deliver low single-digit organic growth in 2026, led by market share gains in what we anticipate will be a roughly flat market. Organic revenue in the second quarter is expected to be up in a low single-digit range as our recent commercial efforts continue to gain traction and as we start lapping the promotional disruption that started in the second quarter last year. Throughout the rest of 2026, we also expect to see sales trends improve from our new product launches and commercial initiatives, with a focus on outperforming the market. Adjusted segment margin is expected to improve year-over-year, driven primarily by sustained pricing actions, tariff mitigation, operational excellence and thoughtful SG&A management. Engineered Fastening is expected to grow low-single to mid-single digits organically, which is slightly lower than our prior guidance, reflecting just 1 quarter of contribution from CAM rather than the 2 in our original guidance. Adjusted segment margin is expected to improve year-over-year, primarily due to continuous operating improvement and volume leverage. Turning to other 2026 assumptions. Our GAAP earnings guidance of $4.15 to $5.35 includes pretax non-GAAP adjustments ranging from $10 million to $65 million. This GAAP guidance is higher than prior guidance due to an expected $260 million to $280 million gain on the sale of our CAM business, which is largely offsetting charges that are primarily related to footprint actions. Our full year interest expense is now expected to be about $270 million, which accounts for 3 quarters without CAM and the resulting lower debt profile as well as lower interest in the first quarter. Now for second quarter guidance. We anticipate net sales to be around $3.9 billion, down slightly year-over-year due to the sale of CAM, but up by a low single-digit percentage on an organic basis. Adjusted earnings per share are expected to be approximately $1.15 to $1.25. In the second quarter, the benefits of pricing, tariff mitigation and productivity initiatives are expected to deliver an approximate 300 basis points year-over-year improvement on adjusted gross margin, offsetting the continued impact of volume deleverage from the second half of 2025. Additionally, our adjusted EPS for the quarter assumes a planned tax rate of approximately 20%. One additional comment to make on tariffs has to do with 232 tariffs, which were altered by a policy change on April 6. The way 232 tariff policies are applied is complex, and broad industry headlines are not always good barometers of our profit-and-loss impact. Although there was much speculation in the market about our outsized exposure to these higher 232 rates, we assess the incremental headwind to be just $15 million on an annualized basis and less than $10 million for 2026. But recall, the net of all the 2026 tariff changes, inclusive of 232 tariff changes, and our updated assumptions for the rest of the year, indicate that tariffs are going to provide a tailwind relative to our prior assumptions and will be offset by inflationary impacts caused by the war, battery metals and tungsten. Turning now to Slide 8, let's take a step back and look at our expected implied first half and second half adjusted gross margin performance on a year-over-year basis in accordance with our full year and second quarter guidance. We expect meaningful progress for each half of this year, with roughly 150 basis points of implied improvement in the first half and roughly 200 basis points of implied improvement in the second half. In the first quarter, we were essentially flat on AGM, down 20 basis points year-over-year due to the timing of the tariff cost realization and volume deleverage offsets we had anticipated and called out in February. As a reminder, we saw peak tariff expense and volume deleverage in the second half of 2025. The impact of both these elements rolls off our balance sheet and into our first half 2026 income statement. We expect tariff mitigation will make a bigger contribution to margin improvement as the year plays out as we continue to make progress on USMCA compliance and shifting production for our U.S. tools business from China to North America. Looking ahead, we remain fully committed to achieving adjusted gross margins of 35-plus percent, a long-standing objective that continues to guide our efforts and priorities. We anticipate reaching this milestone by the fourth quarter of 2026, and we continue to target 35% to 37% adjusted gross margin by the end of 2028, as we stated on our last earnings call. The other important topic on this slide I want to cover is the debt reduction that resulted from our closing the CAM divestiture to Howmet Aerospace for $1.8 billion. This is not reflected in our first quarter financials because the deal closed on April 6, after the end of the first quarter. However, this has dramatically improved our intra-quarter balance sheet and also provides us with a clear opportunity for a more flexible capital allocation approach. Net proceeds from the CAM transaction were approximately $1.57 billion, net of projected taxes and fees. We have used the vast majority of these proceeds to reduce debt in the second quarter. We said we would target 2.5x net debt to adjusted EBITDA. The closing of CAM and our EBITDA growth focus will deliver this result. The only reason we aren't there today is due to normal seasonality of operational cash flows. But we are firmly on track to be at or around 2.5x by year-end. Achieving this critical financial milestone provides us with greater capital allocation flexibility. We are now well positioned to respond to market dynamics, invest in growth and enhance shareholder value creation. We remain committed to disciplined capital allocation and accelerating value creation for our shareholders, including funding organic growth, returning excess capital to shareholders efficiently, and if and when appropriate, considering bolt-on M&A, all the while we strive to maintain an investment-grade credit rating. In the near term, we are firmly focused on accelerating organic growth and using excess cash to opportunistically repurchase our shares. The recent authorization from our Board of Directors for $500 million in share repurchases provides us with the flexibility to do so. In summary, 2026 is set to be another important year for our company. With a strong foundation set, a sharpened portfolio, disciplined cost and capital allocation and a relentless focus on our customers, we are well positioned to deliver growth and create long-term value for our shareholders. Thank you, and I will now turn the call back to Chris. Christopher Nelson: Thank you, Pat. As you heard this morning, our success will be determined by how effectively we execute our strategy, which is firmly anchored by our 3 strategic imperatives: activating our brands with purpose, driving operational excellence and accelerating innovation. As Pat outlined, we are focused on continuing to proactively manage factors within our control to effectively navigate evolving market conditions. We remain committed to driving towards our near-term targets and long-term goals. As we look ahead, I am energized by the opportunities that lie before us and I'm confident in our strategy and the team that is executing it. We are building on our hard-earned momentum to serve our end users, and we are now positioned to accelerate shareholder value creation. We are now ready for Q&A, Michael. Michael Wherley: Thanks, Chris. Operator, we can now start the Q&A. Operator: [Operator Instructions] Our first question comes from the line of Nigel Coe from Wolfe Research. Nigel Coe: I'll try and keep the first one simple. I wondered, can you maybe just unpack for us the improvement in gross margin from first half and second half, about 4 points. I'm guessing there's a bit of CAM benefits, you mentioned tariffs -- sorry, USMCA compliance. I think there's some productivity. Maybe just help us unpack that 4-point improvement. Patrick Hallinan: Yes. Nigel, great question. It's a long-term focus for us. So we have every intent on hitting it. And the good news when we talk about the third quarter in particular is we could see effectively that gross margin percentage already on our balance sheet. And from here, the only things that could really change that is if sales change meaningfully down or there was some very big new spike in inflation. So I mean, we can see the 34-and-a-fraction percentage gross margin for the third quarter already in our balance sheet. And when you think of that stepping up from the first half to the back half, you're talking about really 3 big factors that go beyond normal seasonality of outdoor or the CAM issue that you mentioned, because these are really the ones that are going to sustain it and drive it long term, which is it's about 40% of the delta is net productivity benefits from our ongoing continuous improvement initiatives, another roughly similar amount from adjusting our fixed cost structure to the current volume environment that became apparent in the back half of last year after tariff pricing. And then the final portion, so about 20% of the delta, is just the ongoing tariff mitigation efforts. So 3 levers of continuous improvement, adjusting to the current volume environment and then the ongoing tariff mitigation drives us there. And we have every confidence we'd get there. And sustaining it will be continuing to keep our cost structure attuned to the volume environment and dealing with inflation as it plays out the balance of the year on however the war unfolds and however kind of battery metal situation unfolds. Nigel Coe: Okay. And just a quick follow-up on the tariffs. You made it very clear that the temporary benefit from IEEPA is offset by raw material inflation. But I'm just wondering if the -- the IEEPA benefit seems like it could be quite material. So I'm just wondering if it does create some temporary benefits in the P&L during the year, then washes out, so is that washed in pretty much every quarter? Christopher Nelson: Nigel, this is Chris. I'd say that if you look at the benefit that we see right now, it's -- we think about it, as Pat outlined in the comments, as being a temporary benefit because we do expect the 301 to be reinstated at similar levels to IEEPA. And the assumptions that we have in for that intervening period, while all in with all the changes that were mentioned, are a net tailwind, they do offset some of the inflation that we're seeing right now not only in battery metals, but what we're experiencing due to higher -- some higher input costs that we'd say are driven by the conflict in the Middle East. So net-net, there is a bit of a tailwind, but the base assumption is that we are going to see a tariff environment that is roughly equivalent to what we left in IEEPA as when the 301s are put in. Operator: Our next question comes from the line of Julian Mitchell from Barclays. Julian Mitchell: Just wanted to home in a little bit more on the Tools & Outdoor volume environment. The outdoor pickup, I suppose, is encouraging. Just wondered kind of what you thought underpin that and how you're expecting the T&O volumes to play out over the balance of the year given there's some market share efforts but also maybe a slightly more muted consumer demand backdrop in total? Christopher Nelson: Yes. This is Chris, Julian. I'll start with outdoor and say that I'm very proud of the team and encouraged by the way that they were able to execute in our -- what we would consider to be our preseason time frame. And the ability to fulfill orders, I think, positions us to be able to have a nice selling season. It remains yet to be seen which direction that selling season is going to be, but we think we're well positioned to be in a good position for whatever that selling season looks like. So we could experience some upside if we see increased sell-through. Overall, in the Tools & Outdoor environment, what I would say, and I'll say that really we haven't seen any material changes to what we would say underlying demand to look like. We did -- last call, we talked about the fact that we expected to see an inflection in Q2, partially due to the previous year comps where we -- where as you understand, we had disruption in normal promotional volumes and timing. So those coming on this year is going to be a net tailwind as we think about volume relative to last year, as well as the fact that when we talked about what we're going to do to hone some of our promotional strategies in those periods versus what we had in Q4, we expect those tailwinds to be kicking in in the second quarter. And we're excited to see that they are on pace for performing as we would have expected them to. But the underlying demand, as we came into the year, we thought about it being relatively flattish, and we still see it as being relatively flattish. But we feel good to be positioned from a relative basis year-over-year to be able to see the growth in quarters 2 and 3 that we had outlined as a part of our plan. Julian Mitchell: That's great. And then just when we're thinking about price and cost movements, as you said, there's a lot sort of moving around in terms of costs within the year because of tariffs and your own price initiatives. I suppose, any more color you could kind of give us on how you're thinking about that price net of cost delta in that gross margin guidance that you laid out on Slide 8, as we go through the year? And how is the sort of elasticity on price to volume playing out year-to-date? Patrick Hallinan: Yes, Julian, I would say we haven't really changed our viewpoint materially for the year on price. I mean as we've said on many calls in the past, we can have deltas of up to 100 percentage points, or 100 basis points rather, in any given quarter on how promo mix dominates or not volume, and that can cause a 100 basis point swing in our reported pricing in a given quarter. But in terms of the price we plan to execute and the adjustment to promotions or select targeted opening price point, hasn't changed in any material fashion from the start of the year. And I just would remind you, in this environment, most of the price we took -- we obviously took last year to dollar-for-dollar offset estimated tariff costs. And then we would reclaim our margin relative to those tariff costs by tariff mitigation and that is still very much our game plan. So the structure of everything stays the same for this year. As you heard, we have some tariff tailwinds, largely from 122s being lower than IEEPA's, and then we have some inflation from battery metals, tungsten and oil derivatives from the war. And those roughly offset in the year. Obviously, those things can change on us during this year because there's more trade talks going on this year and there's obviously still to see how the war plays out. And if and as those inflationary factors become more apparent in the back half or the middle of the year, we'll decide what that means for pricing in the latter part of the year or to set up 2027. But right now, if you asked us, our 2026 price plan is consistent with our opening guidance and everything is playing out in accordance with that, and any inflationary factors from this year that affect the go-forward, we'll deal with in the back half of the year or the early part of '27? Operator: Our next question comes from the line of Tim Wojs from Baird. Timothy Wojs: Thanks for all the details. Maybe just to start out, Chris, you mentioned -- I think you guys kind of went through the wall a little bit more with price than some of your competitors. And now some of those competitors seem to be kind of implementing more price as we're kind of coming through into 2026. And I'm just kind of curious if you're starting to see any sort of shift on the ground in terms of how that's impacting just kind of your relative POS performance in those various categories. Christopher Nelson: Yes. So as we talked about last call, we were seeing and we're expecting to see more competitive price movement in Q1, and we did, in fact, see that. So I'd say that, combined with the actions that we had taken as we did the view of what we needed to surgically adjust in our promotional and kind of some of our pricing on more of our elastic items, we have seen what I'd say to be, for lack of a better term, more of an even playing field on pricing as the competitive dynamic has played out. In addition to that, as we have adjusted our pricing and promotions coming into the year, as you might imagine, we're tracking it SKU by SKU to understand the impact and is it in line with what we anticipated and what we modeled out. And to date, it has performed in that manner. So we're encouraged by what we're seeing going into Q2. Now I will say that the majority of those promotional repositionings do come in in Q2. So we're keeping a close eye on that. And once again, we are going to see more promotional activity versus last year in that area. But right now, we are seeing it react as we anticipated. And once again, to reiterate what Pat was talking about, that that would be -- that we're confident in being along the lines of where our guidance was on price with the understanding that it could vary a little bit quarter-to-quarter based upon promotional uptake. Timothy Wojs: Okay. Great. No, that's really helpful. And then just I had a follow-up just on CRAFTSMAN. I think there's plans to do a bigger relaunch of that product later this year. I was just kind of curious about the timing and kind of if that could have a more material impact on sales and margins. Christopher Nelson: Yes, it's a great question here. So the way we have kind of scripted out has been that, obviously, going back several years, we started really putting investments and dollars behind the brand health and the go-to-market and sell-through in the DEWALT brand. And we continue to see and are very encouraged by what we're seeing there, particularly in the professional channels, as I think we referenced that we've seen -- and where we saw last quarter high single-digit sales in our professional North America construction and industrial channel, which is very encouraging. Next from there, what we have, and we highlighted this a little bit in the prepared remarks, is that we have been working over the past couple of years to also refresh the lineup in the STANLEY brand, which we have started by launching our measuring and layout SKUs. And we'll continue to see this year more on the V20 platform coming out in the STANLEY brand. So we're in a position, we're encouraged by what we're seeing there as well as the dedicated selling resources we put in place in Europe, that we're in a place where we expect to, as scheduled, inflect into growth by mid-year. CRAFTSMAN is the one that we were spending a lot of time repositioning the cost on it from a platform perspective. And we've been now launching -- we have one of our largest-ever launch -- NPD launch cycles this year for the CRAFTSMAN brand since we've owned it. And we expect by year-end to have a lot of that in market and see the benefit in -- by the end of the year going into 2027 as we move into growth on the CRAFTSMAN brand. So yes, you I guess I answered more than you asked, but that's how we've been thinking about it for our core brands and that we should see that CRAFTSMAN momentum by year-end and certainly going into 2027. Operator: Our next question comes from the line of Sam Reid from Wells Fargo. Richard Reid: I just wanted to maybe drill a little bit deeper on the status of your USMCA tariff initiatives, and then also maybe just talk through kind of the status of the China tariff mitigation as well? Christopher Nelson: I'll take that one, I guess. So if I think of USMCA, we had talked about how we wanted to make sure that we were getting towards or exceeding the industrial averages for what USMCA qualifications look like. As we had talked about at the beginning of this, I guess, early last year, we were well below average with roughly 1/3 of our products USMCA qualified. We've been making tremendous progress there and are a little bit ahead of pace on those activities. And we will certainly expect to be at or exceeding that average in the not-too-distant future. So we're on pace to a little ahead on the USMCA front. And then just to reiterate, we had stated that we intend to be less than 5% of our sales in the U.S. coming from China-sourced product by the end of the year, and we are as well on pace for that. And we -- even with all the changes that we've seen and modifications in tariff policy with IEEPA, 122s, et cetera, we have continued on the same path of the strategy that we had initially laid out, which was to, first and foremost, take care of our customers, making sure that we have availability, and then to make sure that we are able to, through operational moves and leveraging our global footprint, continue to mitigate the cost of those tariffs to ensure that we are driving towards a margin position that allows us to continue to invest in the innovation and brand health that we need to be successful. And we've been -- I give great kudos to the team for the way that they have been working tirelessly to ensure that those projects move on pace or ahead of pace that we expected. So we feel good about where we are there. Operator: Our next question comes from the line of Jonathan Matuszewski from Jefferies. Andres Padilla: This is Andres on for Jonathan. First, you called out stronger outdoor sell-in ahead of the spring season and higher conversion in the pro channel. Can you expand on what's driving those trends and the sustainability of outdoor demand from here? Christopher Nelson: Well, I think that from an outdoor perspective, we have a channel where people are optimistic about seeing good season. Inventories were at a level where people were making sure -- we're in a position to want to be in a good position to have the proper inventory for when the selling season came. And our team was able to produce and execute and fulfill those orders in a timely fashion. We're at the very, very beginning of the key outdoor season, so we'll see how it plays out. But we are in a position to take advantage of any upside that the market may offer. And I think that's the best thing we could hope for at this point. So once again, congratulations to the outdoor team and what they've been able to accomplish. Now what we've been able to see in the growth in the professional channels, both in the U.S. and in rest of world, and we referenced, and I did earlier, the high single-digit growth in the U.S. commercial and industrial channel, that's really been driven by a multiyear strategy for us to invest in the workflows that we need, with the products that we need for those key trades that we're focused on. And we've been -- we continue to round out that product offering. And I referenced a lot of what we're seeing with the momentum in our Perform & Protect product line in the DEWALT brand. And then we continue to invest in our go-to-market and our service and sales force around the world. And I think that the combination of those 2 things as well as the activity level that we see in the professional channels bode well for us to be able to continue to grow, we believe, above market rates with -- in those professional segments and particularly with the DEWALT brand. Operator: Our next question comes from the line of Joe Ritchie from Goldman Sachs. Aanvi Patodia: This is Aanvi on for Joe. I wanted to spend 1 minute on like the CAM divestiture. Recognize there's been some shift in the guide because of the timing on the close. So if I understand it right, it's $15 million as a net impact for the year. Can you help me understand what -- you said that it would not have a significant impact on Q2. So just any puts and takes around the interest offset as well as the profit for the second quarter and the year? Patrick Hallinan: Yes. When we gave initial guidance for the year, obviously, we had the uncertainty of the specific timing of the CAM transaction. And so we indicated at the start of the year that every quarter that CAM is in our results, it's roughly $110 million to $120 million of net sales and roughly $10 million to $20 million of pretax profit. And the year played out very much in line with that. So taking CAM out of the second quarter for virtually all but a day of the second quarter resulted in roughly $110 million net sales reduction and roughly a $15 million pretax operating profit reduction. But as we indicated in the call, there is a reduction in second quarter interest expense that's roughly equivalent to that. And so those things, the loss of contribution relative to the loss of interest expense, roughly offset each other on a pretax basis, and that leaves the quarter and the year unaffected. Obviously, the CAM transaction provides net proceeds of just below $1.6 billion, which we use towards debt paydown in the quarter. And so you'll see, all else equal, our leverage being down by that amount in the second quarter. Also some working capital will come out. CAM was a pretty working capital intensive business, but that was expected in our year-end results anyway. And so those are really the big puts and takes. There's kind of no other big puts and takes on that. And what was uncertain at the beginning of the year is, would that happen inside of '26, and when. And obviously, we know the answer to that now. Aanvi Patodia: Got it. That's helpful. And just as a follow-on, since you've been talking about the impact from CAM as well as the [ OPG gas walk ] together. If you could like provide some color on what -- why this change [ is instated ], what it really means? And I know you've quantified it as well, but anything we should keep in mind for the quarter, in particular? Patrick Hallinan: Yes. Well, you're referring to for select gas walk-behind product in outdoor. We transitioned to a full manufacturer on our own model to certain products being licensed, and that's how we provide those to our channel partners to have a full rounded-out product offering. That really occurs the back 1/3 of this year. So it has very little to do with this spring summer selling season. It has more to do with kind of the end of that season and how the early parts of '27 play out. And as we recall, that's really a change on the top line of a couple of hundred million dollars that net-net is accretive on the bottom line. And that's a project plan that's ongoing and is tracking as we expect at this point. So there's no real big changes to that. And we called out that along with CAM at the beginning of the year just because they were things that we anticipated would really change our reported versus our organic sales in the third and fourth quarter of this year. And that's the only reason we talked about them together, is the impact they had on reported versus organic sales for the back half of the year. Operator: Our next question comes from the line of Brett Linzey from Mizuho. Brett Linzey: My question is just regarding the pro and the tradesmen replacement cycle on battery platforms. I've always thought about that as really a 5 to 6-year churn, but curious what you see as a life cycle there. And then how are you seeing the next pro replacement cycle setting up for some of those pandemic units starting to churn? And then anything from an innovation standpoint that's maybe activating some of that demand and what the milestones might look like internally there? Christopher Nelson: Yes. It's a good question. I would say, honestly, we think about the replacement cycle as being a little bit more applicable in more of the DIY segment in being that kind of time frame that you're talking about. Because the reality is that the professionals, they have such a high intensity of use and that it's usually accelerated and not as applicable for that time frame, as well as the fact that often they are going to kind of tool up all-in for a new job site as they go job site to job sites. So what we have seen is that the strength that we see in certain areas in the commercial and industrial world, specifically with data centers, we see great demand there on our battery platforms to support the growth going forward. Now as it pertains to what we see in the DIY, we think that that is kind of behind us from a -- what could have been seen as a pull-ahead of volume that needed to needed to shake out over time. I think that's behind us. And what we're seeing from the DIY world is more of an overall effect of the depressed consumer and lower-than-average kind of project and renovation and repair work going on. As far as what we see for the products that we have been making sure that we drive in order to continue to build out that battery platform, there's really a couple of things that we've been doing, is, one, working with each one of our core battery platforms at the 20-volt XR level, FLEXVOLT, and then launching POWERSHIFT so that we have then 3 core platforms that we can build around in the professional segment. And then making sure that we are really building out all of the tools that each key trade could need and would want to optimize and make them more efficient and safer as a part of their workflow. So we've been making sure that we not only drive and optimize those 3 core platforms, but then also the tools around them to ensure that we take advantage of what we see as a really strong installed base for our professional batteries and tools around the globe. Operator: [Operator Instructions] Our next question comes from the line of Chris Snyder from Morgan Stanley. Christopher Snyder: I wanted to ask about the competitive environment. It sounds like some of the competitors took price action in Q1. But I guess, do you see any changes in the competitive environment as we look into the back half of the year? And the reason I ask is because it seems like while you guys are seeing a tailwind or a tariff offset from the move from IEEPA to 122, I would imagine a lot of the Asian competitors in the market are seeing even a more significant tariff offset on that rollback. So just wondering, what does that mean to you guys around potential price competition in the back half of the year? Christopher Nelson: I think there's a couple of things in there. Once again, our calculus and baseline would say that we think that the 301s are going to largely replace IEEPA. So in the back half of the year, we're not anticipating there being a significant change in the environment, as one. So I think that that would be kind of more of a steady type of environment as a result. So that's kind of anything that would happen in the near term would be temporary in nature. And as we look at the combination of our strategies and how it stacks up versus our competitors and what we have for our global footprint and how we're driving towards really high percentages of USMCA qualified product, which have a much lower tariff exposure, we believe that we are at parity to probably mildly advantaged as we think about going forward in that environment as well. So what you did reference, which I think is important to note, is we have seen the pricing environment play out more in line with what we thought it would. And we did see those moves in Q1 in the competitive set that I think is important as we move into Q2 and the strategies that we said that we're going to be following to make sure that we see the opportunity for us to pivot towards growth in Q2 and Q3. Operator: Our final question comes from the line of Rob Wertheimer with Melius Research. Robert Wertheimer: It seems like the overall consumer trend is stability in the world feels a little bit more unstable. So I wonder if you could comment on trends through April for Europe and the U.S., just to see if that has continued. Christopher Nelson: Yes, Rob, we -- obviously, we can't start talking about the end of Q2 as we just wrapped up Q1. But I would say what we've experienced through the end of the first quarter, is consistent with the back half of last year, which, as you hint, in a really challenging global macro backdrop, I would say the pro and the consumer hanging in better than one might expect. Obviously, there's been softness in the back half of last year as tariff pricing went into effect and volumes adjusted to that pricing around a 1:1 elasticity, and that continued into the back half -- or the front half of this year. And our outlook anticipates that while the buyers will continue to be challenged, they kind of hang in there where they've been the last 3 quarters. And that's what our outlook is based upon. We'll see as the war plays out if that changes. And if it changes, we'll adjust to the upside any production that we need to produce if the consumer heals up a bit. And if the consumer ticks down a bit, we'll be mindful of managing our total cost structure while preserving the long-term investments we want to grow the business and pivot towards growth. But I would say your characterization is where our guidance is, which is, in a challenging world, kind of buyers being relatively steady where they've been in the last 3 or so quarters. Michael Wherley: That is all the time that we have for Q&A. We'd like to thank everyone again for their time and participation on today's call. If you have any further questions, please reach out to me directly. Have a good day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Woodward, Inc. Second Quarter Fiscal Year 2026 Earnings Call. At this time I would like to inform you that this call is being recorded for rebroadcast. [Operator Instructions] Joining us today from the company are Chip Blankenship, Chairman and Chief Executive Officer; Bill Lacy, Chief Financial Officer; and Dan Provaznik, Director of Investor Relations. I would now like to turn the call over to Dan Provaznik. Daniel Provaznik: Thank you, operator. We'd like to welcome all of you to Woodward's Second Quarter Fiscal Year 2026 Earnings Call. In today's call, Chip will comment on our strategies and related markets, Bill will then discuss our financial results as outlined in our earnings release. At the end of our presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have included some presentation materials to go along with today's call that are also accessible on our website, and a webcast of this call will be available on our website for 1 year. All references to years in this call are references to the company's fiscal year, unless otherwise stated. I would like to highlight our cautionary statement as shown on Slide 2 of the presentation materials. As always, elements of this presentation are forward looking, including our guidance and are based on our current outlook and assumptions for the global economy and our businesses more specifically. These elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings with the SEC. These statements are made as of today, and we do not intend to update them except as required by law. In addition, we are providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release. We believe this additional financial information will help in understanding our results. Now I'll turn the call over to Chip. Charles Blankenship: Thank you, Dan, and good afternoon to all who are joining our Second Quarter 2026 Earnings Call. I'm pleased to report that Woodward delivered an exceptionally strong second quarter. Our team continues to execute with focus and discipline to meet ongoing robust demand across both our Aerospace and Industrial segments. Before we get into the results, I want to take a moment to acknowledge the complex global environment we're operating in. I'd like to thank our Woodward security professionals, our leaders and members in the region for their vigilance in keeping our team members operating in the Middle East, safe. I also greatly appreciate our customers in the region for their collaboration on safety and coordination as we adjust projects that are underway there. While the safety of our team is our first priority, we're also closely monitoring broader geopolitical developments and how those might impact defense spending or airline traffic. If those impacts do occur, we expect them to be felt in fiscal 2027. Let me turn to a few financial highlights for the quarter. The second quarter marked a significant milestone for Woodward as we surpassed $1 billion in quarterly sales for the first time in our history. Sales increased 23% year-over-year reaching all-time highs in both Aerospace and Industrial. We also delivered margin expansion, including record quarterly adjusted earnings per share, up 34% from the prior year. These results reflect the strength of our end markets, the benefits of our strategic focus and the steady progress we're making in our operations. Our members' tremendous efforts and dedication to continuous improvement, not only enabled us to deliver another quarter of outperformance, but also positioned us well for the second half of the year. While we are monitoring uncertainties in the geopolitical environment, we're raising our full year sales and earnings guidance based on our second quarter results and confidence in the remainder of 2026. Turning to our markets. Here's a breakdown of what's driving the robust demand in Aerospace and Industrial and what it means to Woodward. In Aerospace, commercial aircraft build rate increases are coupled with overlapping maintenance cycles of legacy and current generation fleets. In Industrial, we see power generation demand expressed in both power gen and oil and gas end markets. These market drivers create durable growth opportunities for Woodward. Our challenge in this environment is to continue to expand our capacity and that of our supply chain in ways that are well managed and resilient. We are doing the right work to achieve these outcomes. At times, however, we've seen demand outstrip our activities like dual sourcing projects or our additional test and procurement, installation and calibration, which are 2 real examples of what constrained output for us last quarter. In Aerospace, we saw expected growth in both commercial and defense OEM along with continued strength in commercial services. Legacy services activity remains solid, and we're seeing steady increases in volume for our control systems on LEAP and GTF engines. Shop inputs remained steady and we haven't seen any decreases as a result of airlines recently announced capacity and utilization reductions. In Industrial, momentum continued across all our major markets, including oil and gas, transportation and power generation. Our ability to deliver on this robust demand reflects strong execution across the company. Moreover, our team is managing order growth, while simultaneously undertaking numerous critical projects to optimize our portfolio, strengthen our competitiveness and position Woodward for long-term growth. We remain focused on our value drivers: growth; operational excellence; and innovation. Our profitable growth pillar contains both organic and inorganic lines of effort along with selective divestitures and investments in capability, efficiency and capacity. These projects are changing the game in how we operate. They're also allowing us to focus on areas with the greatest potential to strengthen value creation. Our recent announcements reflect purposeful portfolio management decisions that our team has been working to activate over the last 1 to 2 years. In March, we closed the acquisition of Valve Research & Manufacturing, adding the premier designer and manufacturer of solenoids to the Woodward portfolio of control systems. These are critical enabling technologies for current and future aircraft with next-generation single-aisle platforms clearly in our sites. We also see opportunities related to Industrial Gas Turbine control systems, integration is progressing well as we welcome our new team members in Southeastern Florida. We also announced the sale of our Niles-based pilot controls product line to Ontic, a mutually beneficial transaction that will enable us to refocus resources. In addition, we communicated the relocation of servo valve production lines from our facility in Santa Clarita to Rockford. Rockford is our world-class servo technology design and manufacturing center where we intend to achieve the necessary quality and delivery improvements required for our customers and shareholders. In Industrial, our actions to wind down the China On-Highway product line remain on track and last-time buy volumes are reflected in our second quarter results. All of these actions streamline and strengthen our portfolio and sharpen our focus on our most attractive near- and long-term growth opportunities. These decisions allow us to serve customers better on our current book of business. And by trimming product lines that don't have a path for us to be best-in-class and by moving work to where we can be more effective and efficient, we can focus on partnering with our customers to tackle their biggest challenges with their next generation of products. Our 2 biggest construction projects, Spartanburg and Glatten are both on track. Our new facility in Spartanburg, which will be the location for Airbus A350 spoiler actuation systems is on schedule. Walls are erected and floors are being poured as we speak. We are on target to be operational in 2027 and begin deliveries the following year. Our Glatten expansion to deliver more diesel fuel injectors for data center backup power is almost complete. We have moved over 100 machines within the new hall and legacy areas to perfect flow. Our teams have demonstrated the major achievement of small batch flow and customers will see substantial capacity increases with reduced lead times. This will translate into cost productivity and better inventory turns. While I've been vocal with many analysts and investors that Woodward has the facilities and capacity to support the ongoing power generation demand and data center accelerator to that demand growth, multiple customers have recently shared potential increases to their forecasts. We are working with our customers to evaluate the opportunities and capacity options. Shifting to growth in Aero MRO, the volume on LEAP and GTF is growing quickly. We continue to increase capacity at our Rockford and Prestwick sites with Kaizen activities focused on flow and turn time. We have added test and capacity at Rockford, and we are progressing with the expansion plans for Prestwick. As we've indicated in prior earnings calls, we have a strategy to perform repair and overhaul service in-house as well as through license providers that will deliver to OEM standards. This approach allows us to optimize our capital and internal resources and support our airline customers in the way they prefer to contract for maintenance and repair. It is a well-respected open maintenance model that we have refined to suit Woodward's strategy on LEAP controls components. Last week, we announced new partnerships at MRO Americas, including new licensed repair service facility agreements with Lufthansa Technik and Air France KLM as well as a new distribution agreement with AAR. We are thrilled to be partnering with industry leaders in MRO and material support. These partnerships expand our global service network, increase capacity and give airlines flexibility in how they contract for service. Moving to our operational excellence pillar. Investments in automation continue as we execute projects as simple as increasing the closed door machining time as a total percent of the job and as complex as full assembly and test automation with vision systems and integrated inspection. We're also introducing repeat automation projects to additional sites, leveraging the automation lab in our Rock Cut facility. This lab was recently recognized by the Manufacturing Leadership Council as leading the way in manufacturing excellence. I see firsthand the results of continuous improvement nearly every day. I was recently visiting the industrial SOGAV value stream in our Fort Collins site and was impressed with an automated cell that allows one operator to manage 3 machines and turn a production bottleneck and staffing challenge into a high-speed machining cell that can outrun our current demand forecast. We need both capacity and productivity to achieve our goals in the long term. To us, it's equally exciting to create value for customers and for shareholders. As indicated by the list of projects I described above, our team is managing a high level of activity across the company, while at the same time, improving delivery to our customers and our financial results. We continue to invest in our people and our talent pipeline to make sure we have the engineering, manufacturing, business support and leadership needed to enable our growth trajectory. For example, we recently launched a rotational program to develop the next generation of Woodward leaders with the first cohort starting in June, yet another step to build a high-performing organization designed for the future. Turning to innovation. Innovation has always been and will continue to be a major competitive differentiator for Woodward. As I said last quarter, we're turning from pure technology development to more technology demonstration activities with our Aerospace customers. We have entered into collaborative agreements with many of our current customers to work together on trade studies and demonstration programs. This is an exciting time to be an innovator with a track record of industrialization. We will speak more about this trend at Investor Day late this calendar year, but you will see Aerospace R&D expenses beginning to tick up this year and more so in the years that follow as future aircraft timelines firm up. In Industrial, one focus is on a new actuation platform to provide precise fuel and error control on reciprocating engines that will deliver more customer value and is designed for a more efficient automated production system. It is more compact in size and produces a broader torque range than prior models, which allows us to simplify the product portfolio and use this platform in many applications. The product will enter service in 2027. Our priorities remain clear as we head into the second half of the year, meet OEM demand growth, deliver world-class service across our installed base, including legacy Aerospace, LEAP, GTF and Industrial Gas Turbine Systems and demonstrate customer value on key technologies to position Woodward for increased content on next-generation single-aisle aircraft. We are entering the second half of the year from a position of strength, and we'll continue to invest with discipline and focus to deliver long-term shareholder value. With that, I'll turn it over to Bill to take you through the financials in more detail. Over to you, Bill. William Lacey: Thank you, Chip, and good evening, everyone. As Chip mentioned, Q2 was a strong quarter. Quarterly net sales exceeded $1 billion for the first time in Woodward's history coming in at $1.1 billion in the second quarter of 2026, an increase of 23%. The significant growth reflects strong demand and increased output in both Aerospace and Industrial. We achieved earnings per share in the second quarter of 2026 of $2.19 compared to $1.78. Adjusted earnings per share were $2.27 compared to $1.69. We generated $38 million of free cash flow in the second quarter. At the segment level, Aerospace segment sales for the second quarter of 2026, were $703 million, an increase of 25%. The strong growth was primarily driven by Commercial Aerospace. Commercial Services increased 36%, reflecting higher repair volume to support the continued high utilization of legacy aircraft as well as increased LEAP and GTF activity. In addition, spare LRU sales growth was strong in the quarter, with volume consistent with the previous 2 quarters. Commercial OEM sales were up 30% and we believe destocking is largely behind us as their output is now more aligned with current airframers build rate. Defense OEM sales grew 9%, primarily due to increased JDAM pricing that took effect in the fourth quarter of 2025, and Defense Services grew 8%. Second quarter Aerospace segment earnings were $158 million or 22.5% of segment sales compared to $125 million or 22.2% of segment sales. While the strength in Commercial Services, higher commercial OEM volumes and solid price realization drove meaningful margin expansion, this was largely offset by planned strategic investments to support future growth and inflationary pressures. This reduced the Aerospace flow-through in the quarter, resulting in a net margin increase of 30 basis points. These strategic investments included enhancements to our manufacturing capabilities to deliver the content on current platforms, incremental R&D tied to early-stage efforts to compete for the next single-aisle aircraft platform and an enterprise-wide ERP upgrade. While these initiatives are impacting margins, they are critical to positioning the company for sustained long-term growth, and we expect these investments to continue. The flow-through in the full year 2026 Aerospace guide is expected to be at a targeted rate of approximately 30% to 35%. Turning to Industrial. Industrial segment sales for the second quarter were $387 million, an increase of 20%. Core Industrial sales, which exclude the impact of China On-Highway, increased 19% in the quarter, driven by higher volume, price and favorable foreign currency impacts. Marine Transportation sales were strong, increasing 34%, reflecting higher shipyard output and services activity. Oil and gas sales grew 18%, driven by higher volume, primarily related to greater midstream and downstream gas investment. Power Generation sales increased 7%. Excluding the impact of the prior year combustion business divestiture, Power Generation sales grew in the high teens on a percentage basis. This was driven by increasing data center demand for both base and backup power generation. Outside of our core Industrial business, China On-Highway sales were $29 million in the quarter. We expect approximately $30 million of sales in the third quarter and minimal sales in the fourth quarter. Industrial segment earnings for the second quarter of 2026 were $66 million or 17% of segment sales compared to $46 million or 14.3% of segment sales. Within our core Industrial business, margins were approximately flat at 14.7% of Core industrial sales, as strong price realization and higher sales volume were partially offset by inflation. In addition, margins were negatively impacted in the quarter due to a reserve for a product performance claim. Excluding the reserve, Core Industrial margins would have been in line with Q1. The China On-Highway business added an additional 230 basis points of margin growth in the quarter. Nonsegment expenses were $45 million for the second quarter of 2026 compared to $27 million. Adjusted nonsegment expenses in the second quarter of 2026 were $38 million compared to $34 million. At the consolidated Woodward level, net cash provided by operating activities for the first half of 2026 was $205 million compared to $112 million, largely driven by higher earnings. Capital expenditures totaled $97 million for the first half of 2026. We continue to expect a meaningful increase in capital expenditures over the next 2 quarters consistent with our guidance for the full year. As Chip mentioned, construction of the Spartanburg facility to support future A350 production is progressing as planned. We remain on track to finish the building over the next few quarters and are beginning to purchase production equipment with the site expected to become operational in 2027. In addition, we continue to make strategic investments to support growth related to current platforms, including automation, preparing for increased LEAP and GTF service activity, our ERP upgrade and product line moves. We generated $109 million of free cash flow in the first half of 2026 compared to $60 million, driven primarily by higher earnings, partially offset by higher capital expenditures. As of March 31, 2026, debt leverage was 1.4x EBITDA. We continue to allocate capital according to our priorities, supporting organic growth, selectively pursuing strategic M&A opportunities and returning capital to shareholders through dividends and share repurchases. Regarding strategic M&A, we recently completed the acquisition of Valve Research & Manufacturing. Consistent with our strategy of pursuing targeted, high return opportunities that enhance our capabilities and improve our position to compete for the next single-aisle aircraft. In addition, in line with our portfolio optimization efforts, we recently announced the divestiture of our pilot controls product line, which we expect to close by the end of the year. We are building a stronger, more focused Woodward as we invest in high-growth opportunities and expand in the right areas to position Woodward to create additional value for shareholders. In the first half of 2026, we returned over $355 million to stockholders through share repurchases and $36 million in dividends. Our strong balance sheet provides flexibility to move decisively as compelling opportunities emerge. Lastly, our fiscal 2026 guidance still assumes the return of between $650 million and $700 million through dividends and share repurchases. Turning to our 2026 guidance. Based on our strong second quarter performance and confidence in the second half outlook, we are raising our 2026 sales and earnings guidance. For 2026, we now expect the following: Aerospace sales growth between 21% and 24% with margins increasing to be between 23% and 23.5%; Industrial sales growth between 18% and 20%, with margins increasing to be between 18% and 18.5%. We now expect total Woodward sales growth between 20% and 23%, and adjusted EPS between $9.15 and $9.45. Free cash flow is still expected to be between $300 million and $350 million, and capital expenditures are still expected to be approximately $290 million. We expect to continue to maintain higher levels of inventory than previously anticipated as we prioritize to meet customer demand, while we strive for better alignment for the end-to-end supply chain. We have a number of inventory initiatives underway, which should drive improved free cash flow generation in 2027. We now expect our average diluted shares outstanding to be approximately 61.5 million Adjusted effective tax rate guidance is unchanged. This concludes our prepared remarks on the business and results for the second quarter of fiscal year 2026. Operator, we are now ready to open the call to questions. Operator: [Operator Instructions] And our first question comes from the line of Scott Mikus with Melius Research. Scott Mikus: On a sequential basis, your commercial aftermarket sales were up 12%. In the opening remarks, I think it was mentioned that the LRU volumes were roughly consistent with the prior 2 quarters. Since the quarter has ended, have you seen a drop-off in orders for spare LRUs. And are you concerned that if there is a broader slowdown in the aftermarket the amount of LRUs in the field could result in destocking pressures in the back half of this year or early in '27? William Lacey: Yes, Scott. Let me jump on the front part of that. And then Chip, maybe the second part. But as we head into third quarter, and as we've mentioned, these orders for these spare LRUs are rather short cycle, so we don't have a ton of visibility. But we're comfortable that sequentially, Q3 spare LRUs are in line with what we've seen in the first 2 quarters. And again, from a financial forecasting standpoint, tough to say what Q4 looks like currently. But Chip, I don't know if you want to... Charles Blankenship: Yes, we've certainly seen some airline signaling that they're removing a little bit of capacity. They're parking some planes. But none of the parking activity exceeds any of the forecasts that were already in play. And we haven't seen any drop-off in inputs to our shop for -- from LRUs for repair. And we haven't seen any slowdown in the order rate for spare LRUs. And so there's always assumptions in the forecast, but we haven't seen any indications in our direct connections with customers to indicate that we're going to see a slowdown inside our fiscal year. That being said though, we are obviously monitoring the situation at the higher level, geopolitical and macroeconomic. And as far as what that means for FY '27, we'll all have to ride a little further along to see where that goes. Scott Mikus: Okay. And then a lot of energy infrastructure in the Middle East has been damaged in the ongoing conflict and it will need to be rebuilt. Just curious how you're thinking about that opportunity for your Industrial business are you receiving RFPs from your customers to support that reconstruction, fully understanding that, that probably won't hit the P&L for next year, though? Charles Blankenship: I think we're a little bit further down in the supply chain to be seeing initial outreach on that for anything except service activity. So we have some ongoing projects, and a number of them are back up and running as far as service for our customers, be it on the valve type equipment or on the control -- electronic control systems for gas turbines and power plants. So that activity is ongoing. Some of the things that need to be rebuilt as the customers and operators reach out to EPC type companies that will flow down to us and we haven't seen anything along those lines yet. But there'll probably be some opportunity. Operator: And our next question comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: We could focus on margins for both Aerospace and Industrial. So first on Aerospace, just first half margins just under 23% with fiscal Q2 at 22.5%, yet you raised the full year to 23.5% at the high end. Can you just talk about what drives that second half margin expansion? What are the puts and takes? Charles Blankenship: Yes, I'll just let Bill start there, and I'll jump in at the end. William Lacey: Yes. So Sheila, we do continue to see good growth in -- on the services side of the business. And obviously, that helps our margin rates, while we continue to see the volume growth, which creates leverage. And then as we've been talking about Sheila, we've been investing and working hard on our lean activity and that work is paying off as we see the shipments increase. So those are some of the key things we continue to have good pricing in Aero and are managing our inflation well. So our -- so we're seeing that positive flow through to our bottom line as well. Sheila Kahyaoglu: Okay. And then maybe on Industrial core margins, they stepped down almost 300 bps. William Lacey: Yes. Sorry, Sheila, good you asked that. Sorry, in Q2, we did have a reserve that we put up and that impacted Q2 margins for Core Industrial. If you back that out, the margin rates are on the bottom line with what we saw in Q1, and we expect the second half to be more aligned to that -- what we saw in Q1. And operationally, what we saw in Q2, we expect that to continue in the second half. Sheila Kahyaoglu: Yes. Maybe just -- sorry, can you expand on what that product reserve was? What drove that? How big was it? Charles Blankenship: Yes. So it's simply a matter of a long-standing product development program with the results that we see a little bit differently than our customer sees it. And that's about all we'll able to share at this time, it's a matter that's being undertaken to the legal process. So we're not going to comment much more on it. Operator: And our next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: Chip, everyone is trying to figure out what's going to happen with Aerospace aftermarket. I guess as you described not really seeing much yet. I'd be curious to just hear given your experience in the market over a long time, like why do you think you haven't seen anything yet? Why do you think the airlines are not responding that much yet? And when you talk about the possibility of there eventually being a response and seeing that in your fiscal '27? If it were to happen, what would make it happen? What's the threshold? Is it a higher fuel price? Is it the duration of fuel price, just what are your customers telling you? And then is there any way to frame or think about Woodward relative to the market because you have so much more content on newer products versus older product, if capacity is trimmed or things are retired out of the back end of the fleet, is it safe to assume you see much less of that than the average player in the space? Charles Blankenship: Okay, Noah, I may ask you for a repeat of the second half of the questioning, but I'll jump on the first half. I think you used the word duration, and I think that's the main question that is unanswered at this time in terms of what happens to fuel prices. My experience in situations like this is the reason things haven't happened very quickly from a negative standpoint is that there's still a strong traffic demand out there. And then the airlines that have decided to try to pass along price to the airline customer that has not resulted in destruction of demand. And so I think everyone is kind of a little bit walking on egg shells, trying to see how much of this cost impact that airlines are seeing from oil prices can be passed on from passengers about reducing load factors on flights. They've taken some very smart decisions to take out some lower load factor mid-day, mid-week city payers, I think, and put some higher fuel-burning aircraft to the site. So all those are sort of prudent actions to take a look and see what's going to happen next from a traffic standpoint. Demand is still strong. So I think people are continuing as they were with their maintenance programs. And if the duration and the price of fuel continues to climb, then load factor breakeven points between city payers is going to cause more planes to be parked and maybe there'll be some destruction of demand if prices go up too much. So none of those if statements that I said have happened yet. So I think it's business as usual, a little bit on the maintenance side. Some of our peers are -- may seem like they're being a little more cautious with their quarterly results announcements. But if I remind everybody, we're halfway through our year. So we've got a little bit more in the rearview mirror already accomplished on the books. We've got a little less in front of us to ride on this duration question than our peers do. So hopefully, that sorts that out. Second question, I think you asked was about what's specific for Woodward having higher content on the current generation of narrow-body, the higher technology fleet with better fuel consumption performance. I think from our standpoint, legacy narrow-body repair business continues to grow much to my -- a little bit of a surprise, and we didn't forecast it growing quite as much year-over-year or quarter-to-quarter as it did in Q2. So things are still looking good on legacy utilization front. But if we come to an oil shock that's even more and longer duration than we see right now. If the newer technology fleet gets utilized much more than the older technology fleet for Woodward, it happens to be good math. It's not good for the whole industry. We don't wish that on the industry. But if that does happen, we have a little bit of a hedge there because we have a faster growing, higher content position on that fleet. Noah Poponak: Okay. That is super helpful. I appreciate all that. And then just a follow-up on the Aerospace margin. Would it be possible to quantify the incremental investments you made in the quarter, just so we can all sort of keep tracking the underlying trend you've been experiencing there? And then on the pricing front, you guys have been providing kind of total company and then directional within the aftermarket pricing any update you could provide on what happened there in the quarter? William Lacey: On the first piece, Noah, I -- what I'll say is we're focused on making sure that we've got the systems, the processes, in place for us to continue to execute on our key imperatives. We are going to be diligent and thoughtful about how we increase that investment, not getting too ahead of the volume growth, but not being so far back that we can't execute on it. And so as you can see, there's still margin expansion that we're looking for in the results based off of our guide. And so I think we're being responsible and reasonable with how we are increasing the spend as it relates to those strategic projects. Charles Blankenship: Yes. And I'll just jump in and say that Bill had alluded to this in some of his remarks, but we have increased our R&D spend a little bit in Aerospace. Much of that is aimed at the preparation, the technology demonstration projects. We're working with our customers. We've invested in manufacturing engineering to accelerate our automation journey, which also feeds how we will industrialize for the next single-aisle aircraft components that we win. And as well, we've been building that plant in South Carolina and we are starting to staff up there some of our very key positions like plant leader and value stream leaders and some advanced manufacturing engineers. And so some of these our longer-term investments, some of the automation investments will provide returns sooner. But some of the staffing up that we're doing and the R&D expenses are really aimed towards the next generation. William Lacey: And then Noah, I think you had a question on price, if that's right. And the price in the quarter was around 6.5%, 7% and that's roughly what we projected to be for the total year. Aero being a little bit stronger on the price side than Industrial. Operator: And our next question comes from the line of Gavin Parsons with UBS. Gavin Parsons: What drove the Aero revenue guidance raise kind of between the subsegments? And then within aftermarket, how much of that is kind of the spares provisioning drop in versus repair and overhaul work? Charles Blankenship: Without getting quantitative about it, I'd say that the commercial services is really the largest piece of the increased revenue gain. We had forecast the OEM to be growing substantially and maybe hedge it back a little bit in terms of how we were thinking about it based on what the aircraft and engine OEMs would actually come through with orders for and sort of meter us to. But it's been a little bit more on the demand side from the OEM. So it's driven a little bit of the gain and the forecast guide, but Commercial Services kind of looking in the rearview mirror and thinking that, that will sustain at least through 3Q, as Bill said, with the higher LRU orders. But the repair is strong across the board in commercial services, wide-body, legacy narrow-body, regional and the LEAP, GTF, all contributing to revenue and earnings growth. William Lacey: And Gavin, just to expand on that again. Obviously, the raise and guide was partly recognized in the strong Q2 performance, but also second half performance. Commercial OEM, defense OEM on the Industrial side, most of that OEM, and we see, especially in the fourth quarter, OEM being growing nicely, and that's a big part of the raise for the second half. And obviously, that will -- that has a different kind of flow-through pattern than the services that we saw in the second quarter and in the first quarter. Gavin Parsons: Okay. That's very helpful. And then, Chip, you pointed out that airlines are maybe sidelining some of the least fuel-efficient aircraft. I think over the long run, you guys have talked about flight hours as being the key metric driving your aftermarket growth. But if it's those older, less fuel-efficient aircraft being sidelined, is the risk going forward more about accelerated permanent retirements, delayed shop visits or maybe cut shop visit scope? Charles Blankenship: Just to clarify, are you talking about for the legacy fleet or in general? Gavin Parsons: In general, is the risk more about shop visits or retirements and less about flight hours? Charles Blankenship: Yes. I think for the legacy retirement -- for the legacy fleet, certainly, the risk is about retirement and part out and not getting another shop visit on our LRU, whether it's a V2500 fuel control or CFM56-5 HMU. And so that risk though, is like the end-of-life risk for the oldest part of that fleet. They still pick a number of 40% of airplanes with engines and LRUs that only seen one shop visit and are quite capable assets. The airlines are going to continue to fly. So flight hours is still going to correlate with how that equipment comes off and comes in for shop visits with us. And -- but the sort of end of life for the oldest A320s from our -- CEOs -- from our standpoint, that's going to happen based on a combination of traffic demand, price of fuel and OEM delivery rates, and we'll monitor that closely. Operator: And our next question comes from the line of Pete Skibitski with Alembic Global. Peter Skibitski: Great quarter. Yes. I just want to circle back to Sheila's question on Industrial margin. I just want to think about the right way to think about it going forward. If we exclude the provision in the second quarter, it sounds like you're maybe a tad over 17% on Core Industrial margin in the first half. And with the new guide, you get a little bit of a boost in the third quarter from China On-Highway, but then nothing in the fourth quarter, but it seems like you'd still be exiting around 18% or so in the fourth quarter. So it just seems like a lot of nice momentum in core industrial margin year-over-year. And so is the right way to think about it, the 18%, 18.5% is a reasonable range to think about for 2027 or maybe 17.5% in the low end? Or is there any logic wrong there? William Lacey: Yes. We're -- just I'm real happy about 2026, Pete, and where that is. And I think how you laid it out is right. We continue to work hard on all our margin and productivity margin expansion and operational excellence initiatives. And we'll be talking to you real soon about how that all comes to play. But I think if Randy was here, he says he's not -- he would say he's not planning on giving up any ground, but we'll see how it all comes out in the mix as we start talking about '27. Peter Skibitski: Okay. Fair enough. Just one follow-up. On the pilot controls product line sale, is it fair to conclude that this product line has less aftermarket than the engine portion of aerospace. And so I'm just wondering if the divestiture is sort of margin accretive for you in Aerospace? And how much revenue is involved in that product line? Charles Blankenship: Well, I don't think we'll share the revenue specifics there, but it's not super significant. It is accretive to carve that out for us. That's one of the criteria we would use to examine a divestiture opportunity. A while back in our strategic review process, we just identified this as an area where we would have to put a lot more resources into this to become a leader in the industry in this area. Where we are a leader is in some of the enabling technology components and subsystems that go into pilot controls like throttle quadrants. So some of the precise motor controls and motors themselves as well as sensors and the LVDTs and hall effect sensors and things like that, things that we can bring to the party, and we will remain a supplier of those components to the company that we sold the main business line too. So we'll retrench into the places where we're the most competitive and have the most value add for customers and pass that along. Now it does have a good amount of service business to it, which made it kind of an attractive product line to sell for the buyer. So -- but still, from our standpoint, it was -- it's accretive to let it go. Peter Skibitski: Okay. So Niles will remain open. There are more production there than the pilot controls, that's right? Charles Blankenship: Yes. This was a relatively small value stream in the Niles facility. Operator: And our next question comes from the line of David Strauss with Wells Fargo. David Strauss: Chip, I think if I caught it correctly in your prepared remarks, you talked about additional step up in interest from your IGT customers and the potential that you might be looking at some sort of capacity expansion to be able to handle that interest. Did I get that right? And maybe if you could expand on that? Charles Blankenship: Yes, not just our IGT customers. So gas turbine, reciprocating engines, diesel-powered, natural gas-powered backup prime power applications. So it's like across the board, multiple OEMs in each of those categories over the last really a month or so have come to us and said, we want some capacity studies for these kinds of forecast between now and 2030 plus. And so we've been sort of digesting those requests. And it's not one customer. It's not one technology, but it's largely driven by data center caused power generation demand. And so we're looking to respond to these customers. But the reason I wanted to lay that out and what may seem like an early way in this earnings call is that as I've been meeting with investors and analysts, I've really kind of been firm that based on everything I see from our customers, we have the footprint, and we have the ability through Kaizen and other continuous improvement, elimination of waste, lead time reductions, things like that, we could make our way to solve for the capacity that's needed. But this new later breaking information says that maybe we need to consider capacity increases. David Strauss: Okay. I guess we'll check back in on that later, where you come out. If I missed it, I apologize. Did you talk about where LEAP, GTF aftermarket revenue volumes, however you quantify, are relative to legacy at this point and where -- if the crossover point has changed? Charles Blankenship: Yes. So I didn't mention it in the prepared remarks, but thanks for the question because it's one that we talk about quite a bit. What's really interesting to me and our team is that as we grow LEAP in a substantial way, the legacy narrow-body fleet continues to provide inputs to our shop, and we're like, okay, it's kind of growing at a good clip still for the legacy fuel control units, especially. I'm not changing the forecast right now. We said sort of end of '26, sometime in '27. We still think that's a reasonable assumption. The things that could change -- pull that in, the fuel price shock that we talked about could reduce the rate of input for the legacy. And that would be like a not so interesting way to have the crossover be pulled in. We like it to go further to the right. The other thing I would say, just to give a little bit more color to what we're talking about is that right now, this quarter and even last quarter, the total amount of service revenue is about the same for LEAP, GTF compared to the legacy narrow-body, if you include the spare LRU items. So from a repair standpoint is the crossover that we keep talking about looking for is a few quarters out in the future. But I just wanted to share that we're already kind of in the very similar numbers from LEAP, GTF compared to V2500 and CFM-5, if you include all the different kinds of service products that we offer. David Strauss: That's great. You predicted my next question or follow-up question. Operator: And our next question comes from the line of Ken Herbert with RBC Capital Markets. Kenneth Herbert: I just wanted to maybe follow up on the free cash flow guide. It didn't change with the sales and EBIT increases. Is that just reflecting as you continue to talk about higher working capital spend or working capital as a percent of sales? Is that the right way to think about it? Or is there anything else impacting on the free cash flow side? William Lacey: No, Ken, I think that is the right way to think about it. Simply stated. Kenneth Herbert: Okay. Okay. That's helpful. And I wanted to follow up on the announcements with LHT and Air France KLM. How quickly will those scale as sort of third-party MRO providers? And should we expect maybe a movement of -- a block movement of spare parts or inventory at some point in the next few quarters as they ramp or maybe as part of these agreements? Charles Blankenship: Yes. So the rate-limiting step for any of our licensed service providers is going to be getting test stands in procured, installed and calibrated. So that's 9 to 12-plus months away depending on where each of the folks are in the procurement cycle of that. So it's definitely not a 2026 kind of thing, and we'll give some color to how we expect the standing up of these partner providers to affect our Service business is along with our Investor Day information late in the calendar year. Operator: And our next question comes from the line of Christopher Glynn with Oppenheimer. Christopher Glynn: So I was curious if you've -- curious, have you guys evolved any like different angles on visibility to the China LRU markets? Charles Blankenship: As far as new angles, I would just like the easy answer is no on that. But what I would say is that we're starting to see just like more across the board as expected, based on airplane deliveries, customers ordering spare LRUs to provision for their fleet uninterrupted operations and the maintenance cycles that are coming. So I think we can kind of take the China moniker off the table for now, and they're ordering kind of like you'd expect them to order based on how many planes they have. Christopher Glynn: Okay. So maybe a little bit of a tempest in the teapot discussion for the past couple of quarters, sounds like. And then curious on the L'Orange model, don't recall like really discussing if they have much military in there. I suspect they do. I don't think your guided missile destroyer program was L'Orange, but rather your Power Gen business. But I just wanted to check in on that the military business pipeline overall for industrial and as it resides or doesn't within L'Orange? Charles Blankenship: Yes. So I would consider L'Orange to be 99-point something commercial as far as I know, I don't want to say 100% here, but it's just -- it's not something we think about or consider for what our diesel fuel system business contributes to. As far as the destroyer DDG class that are powered by gas turbines, both for propulsion as well as for onboard Power Gen, that's really the business that we participate in. It's the electronic control systems for controlling the power from the gas turbine as well as controlling the propulsion systems. Operator: And our next question comes from the line of Louis Raffetto with Wolfe Research. Louis Raffetto: Maybe, Bill, just on the China On-Highway. I know you said $30 million of sales in 3Q. Should we expect to see similar levels of profitability that we saw in the last 2 quarters? William Lacey: For Q3, that's correct. Obviously, there is going to be a restructuring charge that flows through. So operationally, Louis, correct, but I do want to make sure I highlight that there is going to be a restructuring cost that comes off. That will be separate as we go through the quarter. Louis Raffetto: Okay. Great. And then, Chip, maybe just to come back to what you just mentioned about the LRUs. So obviously, as we get to your fiscal fourth quarter, you're going to be coming up on a tough comp. But what I'm trying to understand, based on what you just said is are the LRU sales that you saw this quarter? Are they not China? And it's -- you're kind of saying don't think of this as a separate bucket anymore and everything is kind of one big bucket nowadays? Or is there still sort of a China bucket out there that we need to be mindful of? Charles Blankenship: I'm saying the former, which is there's really not a China bucket anymore. That was when we had our first step-up in LRU -- unforecasted LRU sales within a quarter, that was due to a little bit of a surprise order stream starting from China. That lasted a couple of quarters. And then as I kind of was alluding to, the rest of the orders inside the quarter are more spread out to European and U.S. and Latin America and in every other airline that's ordering aircraft and provisioning to support their fleet. So I would put the China bucket behind us for now and kind of how we see the rest of the year shaping up. We -- as Bill said, we have -- we largely have the LRU orders in hand for 3Q. We have good visibility to 3Q, and it is a good mix of customers. So less risk of being a nonrepeat kind of thing. But our visibility into 4Q is what we would normally see at this point, not fully clear in terms of who's going to order and how much it's going to be. But we have enough confidence in all the different levers of our OE and Service businesses in both segments to say we're confident in what we've put up for our guide. Operator: And our final question comes from the line of Gautam Khanna with TD Cowen. Gautam Khanna: I was curious, just, could you quantify what the guidance revision was for just China OH relative to the prior outlook? William Lacey: What the guidance revision was for... Charles Blankenship: We really didn't take that. William Lacey: Yes. Yes, Gautam. Not much. I mean I think the guide, the upper end to the lower end considered what we're seeing in there for China OH. So I think at the beginning of the year, we said it was going to be around $60 million, and where we've ended up with what we've had and the last time buy, it will probably be somewhere around $90 million in total. So that was sort of within the range of our guide. And so we -- so anyway, that's how we handled it. Gautam Khanna: Okay. And in terms of profit variance, when you had the $60 million, what was the expected profit? And then if it's $90 million what's the new expected profit? William Lacey: Yes. So we talked a bit about at certain levels, it starts to go beyond breakeven and then it flows through quickly through that point. We are at that point, and so that's what sort of generated. I think in the comments, we said it was worth about 230 basis points this quarter to the overall industrial earnings increase. Gautam Khanna: Okay. I was just curious what the revision is related to that. We can take it offline. Charles Blankenship: Yes, I would just emphasize, Gautam, that the China OH wasn't really driving the revision to guidance. It's more the success we've had in the first half with commercial Aero services and continued strong OE in both segments. Gautam Khanna: Yes. No, I got you. That's clear too. The -- to Pete's earlier question on industrial underlying margins kind of over time, how far along are you guys in that process of kind of looking at which SKUs to stock, which ones to retire kind of the operational turnaround within the Industrial business. How far along are you in that journey? And do you have any ballpark sense for where margins ultimately can get to in that segment? Charles Blankenship: Yes. So far, I've always answered that question saying we're in the early innings. But I feel, honestly, like we're in the middle innings in the industrial portfolio rationalization, turnaround, I use the word turnaround. I've not really use that, but I think it's an apt description. That team is just really pulled together and made some difficult decisions. You see the China On-Highway exit that we're doing, that was a difficult call. Some of the product lines we've exited were difficult calls around small engine and other things like that. But what we're doing now and what you can see now is that we are more -- introducing a more standard disciplined product management approach to the business. And so I talked about this actuator in my prepared remarks that is going to enter into service in 2027 that's now in the test phase, and we're industrializing that's going to replace a pretty complicated portfolio of actuation for reciprocating engines. So it's not like we looked at the portfolio and said, we don't want to be in that business anymore. We said there's a better way to serve customers here that's going to be more efficient in our factory. It's going to be more resilient in the supply chain and then we're going to -- and the customers are going to get more value from a broader torque range and lower form factor. And so that's the kind of work that's going on in Industrial right now. So that's why I think it's the middle innings because we've kind of evolved from -- these are the things we want to stop and these are the things we want to keep doing. And now we're just refining the approach within the places we want to compete. William Lacey: And Chip, if I can add to that, Gautam, as you're talking about where can it go? As Chip has spoken about previously is we're focused heavily on recouping our service franchise there. And we've got to see -- we have a plan. We got to see what's the art of the possible is and how we can get there. But I think that will -- if we're in the middle innings, we've got half game to call on the productivity, the other piece of margin expansion will be how we can grow that service franchise. And I think we can talk more about that when we get to Investor Day and what's the art of the possible for industrial margin rates. Operator: And Mr. Blankenship , there are no further questions at this time. I will now turn the conference back to you. Charles Blankenship: Thank you. I'd just like to thank everybody for joining our 2Q call and look forward to talking to you again soon. Operator: And ladies and gentlemen, that concludes our conference call today. A rebroadcast will be available at the company's website, www.woodward.com for 1 year. We thank you for your participation in today's conference call. You may now disconnect.
Operator: Good afternoon, and welcome to the MGM Resorts International First Quarter 2026 Earnings Conference Call. Joining the call from the company today are Bill Hornbuckle, Chief Executive Officer and President; Ayesha Molino, Chief Operating Officer; Jonathan Halkyard, Chief Financial Officer; Gary Fritz, Chief Officer and President of MGM Digital; Kenneth Feng, Chief Executive Officer of MGM China Holdings; and Howard Wang, Vice President, Investor Relations. [Operator Instructions] Please note, this conference is being recorded. Now I'd like to turn the conference over to Howard Wang. Howard Wang: Thanks, Rocco. Welcome to the MGM Resorts International First Quarter 2026 Earnings Call. This call is being broadcast live on the Internet at investors.mgmresorts.com, and we have also furnished our press release on Form 8-K to the SEC. On this call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws. Actual results may differ materially from those contemplated in these statements. Additional information concerning factors that could cause actual results to differ from these forward-looking statements is contained in today's press release and in our periodic filings with the SEC. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise. During the call, we'll also discuss non-GAAP financial measures when talking about our performance. You can find the reconciliation to GAAP financial measures in our press release and investor presentation, which are available on our website. Finally, this presentation is being recorded. I'll now turn it over to Bill Hornbuckle. William Hornbuckle: Thank you, Howard, and thanks again to all of our employees. Their continued dedication and execution drove another gold plus NPS record-breaking quarter, reinforcing the strength and sustainability of our business and our ability to deliver unique and lasting experiences that people find incredibly exciting. MGM Resorts once again delivered consolidated growth in the first quarter, driven by strength in digital and China. Net revenue for Las Vegas in Q1 grew on a year-over-year basis for the first time in over a year despite an exceptionally strong leisure comparative. We achieved this with solid group and convention business in the first quarter, and we expect this to carry into the second quarter. The first quarter is simply our seasonally strong group and convention quarter of the year, and we experienced robust business related to both citywide conventions like CES and ConAg as well as in-house programs at Mandalay and MGM Grand. We achieved record 1Q convention ADRs and catering and banquet revenue and drove increased production from our strategic relationship with Marriott. Importantly, we expect this momentum to continue in the second quarter with convention room night mix to up 2 percentage points year-over-year to 20%. As the city evolves, we are making sure we are leaders in innovation. The MGM Gaming streaming lounge, which opened at Park MGM and received all regulatory approvals during the quarter is another exciting step. We developed a premium creator environment where gaming stores can come to life with plans to integrate celebrities into both the content and the broader guest experience. Another theme in our Las Vegas business has been our value. MGM has always offered opportunities for our guests seeking value experiences. This quarter, we challenged ourselves to have been more creative and launch an all-inclusive experience at bundles hotel, dining, entertainment and all parking and resort fees. Guests can now choose to stay at Luxor or Excalibur with access to a wide range of dining options across 5 MGM properties. The feedback we're getting from guests is very positive and roughly 1/3 of the bookings are from first-time Las Vegas visitors. The program enhances our ability to convey our value props in innovative ways that resonate with our guests. Ultimately, Las Vegas' true value lies in delivering iconic one-of-a-kind experiences. We look forward to welcoming the Super Bowl back at Allegiant Stadium in 2029, particularly given our proximity to the venue, which drove outsized benefits during the '24 Super Bowl. In the near term, Allegiant will host a College Football Playoff National Championship in 2027 and the Final 4 in 2028. That same year, the Ace are set to begin their inaugural season in Las Vegas. During the quarter, Las Vegas has also been named a Target City for the NBA expansion team, and we are actively engaged in discussions with the league and respective team owners. If successful, no U.S. City will have assembled all 4 major professional sports leagues faster than Las Vegas. The ability to attract professional sports franchises and tentpole events exemplifies Las Vegas structural resilience. The city consistently advances through challenging operating environments by evolving alongside customer demand. Today's consumers are decisively gravitating towards live events and experiential travel in Las Vegas and MGM is capturing that momentum. Las Vegas's ability to adapt its mix, its pricing and entertainment continues to differentiate the market and reinforce its resilience through economic cycles. Our regional operations have maintained steady market share, strong casino volumes reported solid results for the quarter, reflecting the premium positioning of these properties and their ability to drive consistent, reliable performance. At MGM China, we grew net revenues by 9%, while segment adjusted EBITDA was impacted by our new brand fee. Jonathan will remind you of those details in his section. Our market share for the quarter was 15.4%. And while February was negatively impacted by hold, we concluded the quarter in the month of March with a share of 17.3%, which has held steady into April. We continue to invest in our competitive advantages in premium mass to support future growth and the suite conversion and renovated premium gaming areas at MGM Cotai were recently completed ahead of the upcoming Golden Week holiday. The next capital projects will involve renovating the suite product in Macau if we want to ensure our offerings stay fresh and ahead of market growth. While we will continue with targeted capital spending, we believe our operating expenses are appropriately sized and scaled to match our growth profile and our margins are sustainable. At BetMGM North America venture, Adam and Gary reported first quarter results a few weeks ago. We continue to prioritize the iGaming segment where underlying fundamentals are healthy and growing, and we are approaching $2 billion in annual revenue from operators. We are moderating spend in sports to focus on returns, while our online sports business also continues to grow, and we remain focused on driving profitable growth and margin. Our core strengths remain unchanged: iGaming, multiproduct states, our omnichannel presence in Nevada and our focus on premium mass sports players. We remain disciplined and focused on executing our strategy in areas where we have a competitive advantage. MGM Digital reported another quarter of double-digit revenue growth as it continues to make progress towards profitability. Sweden and the U.K. continue to drive our LeoVegas B2C business, where the top line grew over 30%. These are also the next 2 stops to our sportsbook integration, further validation of our acquisition of Tipico's U.S. sportsbook technology. We're continuing to invest in Brazil and plan to leverage our global marketing assets and in-house sportsbook capabilities on the significant World Cup opportunity a little later this year. And in Japan, over 40% of the foundation piles have been installed or completed. The first concrete floor has been poured, and the first structural steel has been erected. I recently visited and approved our markup rooms, which I found exceptional, and we are opportunistic as ever, keeping in mind we expect to be the sole licensing and operator in Japan upon opening. The population and visitation metrics are massive, as we've discussed, Japan has over 120 million residents and hosts over 40 million international visitors annually. MGM Osaka remains on time and on budget for 2030 opening. For the first quarter of '26 complete, our optimism across all various business segments continues to hold firm, especially in Las Vegas. We remain on track for growth this year. With that, I'll now hand it over to Jonathan to provide additional details on our performance this quarter. Jonathan Halkyard: Thanks, Bill, and I'll certainly join you in thanking all of our employees for their continued hard work and dedication this quarter. We really value our daily contributions and appreciate everything you support our company and our guests. In Las Vegas, as Bill mentioned, we were able to grow net revenues despite the strong leisure comparison in the prior year. Segment adjusted EBITDA decreased by $62 million which can be explained by just 2 items: an increase in self-insurance expense of $30 million -- of $37 million and a decrease in business interruption proceeds of $31 million versus last year. Now that we're into the second quarter, comparisons in our leisure offerings should become more normalized, especially towards the latter part of the period. We're encouraged by the incremental momentum driven by our all-inclusive program as well as the convention strength we have on the books. Our regional operation proved resilient in the first quarter, exhibiting top line growth of 2%. And similar to the Las Vegas story, segment adjusted EBITDA decreased by $20 million, in part due to an increase in self-insurance expense of $9 million and a decrease in business interruption proceeds of $10 million versus last year. Borgata and National Harbor also faced some weather-related disruptions, but we ended March on a very solid footing, and those trends continued into April. We closed on the sale of the Northfield Park operations earlier this month. So just a reminder for your models, Northfield Park will no longer be in our regional operations going forward. As usual, though, we'll provide same-store results for easy comparison. Before diving further into our other business segments, I do want to briefly address this external factor that continues to pressure operating costs across our industry and drove a meaningful portion of the increase in our self-insurance expenses this quarter, and that's the growing prevalence of frivolous litigation often backed by large pools of capital, including private equity. As we noted earlier, we were negatively impacted by $37 million in Las Vegas and $9 million across our regional operations this quarter. While we support a fair and balanced legal system, claims that lack merit, they divert capital management attention and resources away from investments to benefit employees, guests and our communities. We're focused on what we can control, which is enforcing high standards and process and the other operational elements of our business with the utmost care. Now let's move on to MGM China, which exhibited solid performance in the first quarter. The decrease in segment adjusted EBITDAR of $13 million was primarily driven by the new branding agreement through which we received $23 million more in fees than in the prior year period. As a reminder, the brand fee increased from 1.75% to 3.5% of revenue starting this year. While this impacts segment adjusted EBITDAR, it results in higher cash flow for MGM Resorts. Moving to digital. Our BetMGM North America ventures at first quarter results reflected continued successful execution of refined player management strategy, delivering 6% growth in net revenue from operations and 11% growth in adjusted EBITDA. This was also the first quarter where we earned branding fees from BetMGM, which amounted to about $1.5 million. Separately, no quarterly distributions were made in the first quarter given the seasonality of cash outlays, which included marketing investments around NFL postseason and March Madness as well as accrued annual compensation payouts. MGM Digital drove growth in net revenues of 43% in the first quarter and reported segment adjusted EBITDA losses of $26 million. We are continuing to migrate our sports books to our in-house platform such as BetMGM Sweden, and are investing in the opportunities presented by the upcoming World Cup in both Europe and Brazil. Specific to Brazil, we continue to have confidence in the total addressable market. and we may drive investment beyond our original guidance, reflecting regulatory and tax developments as well as competitive intensity as we pursue our long-term share objectives, and we'll keep you posted as the year progresses. In Japan, we are expecting our funding for the year to be approximately $200 million to $225 million after investing approximately $140 million in the first quarter. Much of it will be addressed with proceeds from the yen-denominated credit facility we closed last October. So in essence, it's prefunded for this year. For the quarter, we bought back about 2.5 million shares for $90 million. Over the last 5 years, we've decreased our share count by almost 50%. As a reminder, and I can't help myself -- we sold Northfield Park for a 6.6x trailing EBITDA. That's a multiple significantly higher than what is implied by our current share price. With the transaction now closed and the proceeds received, we have increased flexibility to redeploy capital, including reaccelerating share repurchases at our current valuation levels. I'll turn it back to Bill. William Hornbuckle: Thanks, Jonathan. Before we go to questions, maybe I'd like to reiterate just a couple of things that were said. Obviously, our diversification strategy is proving successful. Consolidated revenues, again, should grow over 4% and Vegas for the first time in 6 quarters also showed growth at the top line. And as I think about the balance of the year, our group and convention business looks strong. Obviously, we have the benefit now of the MGM rooms for the entire year. We have easier leisure comparatives coming up. And the high end continues to demonstrate itself not only in gaming, but in non-gaming spend event-driven to be sure and live entertainment to be sure it absolutely shows up and shows up often. And regionally, despite headwinds and the ones that were mentioned in the overall economy, we've seen a solid performance, and we expect to continue to see through the balance of the summer. MGM Macau continues to hold on to a major market share. We're very proud of what's been created and what they're doing there. And we do believe costs and our margins are sustainable now throughout here. And Japan is off to a great start, albeit early, but we're excited by our progress. We're excited about the design and ultimately, the market that it will provide. And then BetMGM continues to track itself along and you've seen additional and tremendous growth in overall digital business for rest of world. So with that, Howard, I will turn it open to questions. Operator: [Operator Instructions] Today's first question comes from Dave Katz at Jefferies. David Katz: A lot of information here, and I took note of the all-inclusive offerings that you decided to introduce, I think, earlier in the quarter. Can you just talk about what kind of response you're getting to that? Is that a strategy that we could see you deploy in other properties or other areas of the portfolio? Ayesha Molino: Sure, David. This is Ayesha Molino. We've been really pleased with the response to the all-inclusive package. We've seen really steady momentum since we first deployed that and the customer response has been very good. As Bill noted in his remarks, we're also seeing a significant portion of those customers as net new customers, which we believe is a positive trend line. We're going to continue to evaluate it, understand customer response, understand some whether there are new strategies we could deploy alongside it and whether it needs to be scaled or should be scaled to other properties. So it's going to be -- we're going to continue to watch, continue to refine over time, but we have been pleased with the reaction to date. David Katz: Understood. And if I can just as my follow-up, talk briefly about Macau. Having been over there, the operations and the commentary seem relatively stable. But it's always been a market that tends to have surprises around every corner now and again. How are you looking out at the rest of the year in general terms or qualitative terms? And how do you feel about sort of how that market rolls through the rest of this year? And that's it for me. William Hornbuckle: Thanks, David. I'll kick it off and then Kenny turn it over to you. Look, I think we feel really good about the balance of the year. we brought on many things last year in terms of capital enhancements and just the overall product, and we're excited by that. We've got some more to go. So we're adding some more suites, which will be beneficial. I think everybody understands we're still undersuited, and that will be beneficial. It's always difficult to say Macau is stable, but I feel good about it. I feel very good about our market position and what we're doing and how we're doing it. And so Kenny, I don't know if you want to add some more color there. Xiaofeng Feng: Thank you, Bill. This is Kenny from Macau. As we all know, McCall has always been competitive from day 1. Macau market is a premium one. It's not simply about supply. It's not like a purely like a quantity play. It's more about quality. So it's about understanding to serve the purpose of the target guests. Here at MGM China, first, we are very focusing on the products and services. We want to make sure they are meaningful, effective and targeted to the premium customers. As Bill just mentioned, we opened like 63 at MGM Cotai side. You never source such products in Greater China area. They are unique. They are different. They are refreshing. They are cozy. And we opened like a yearly for a week, our customers they love it. And also, we just opened like 40,000 square feet of like premium gaming space at Cotai area, we have about like 40 tables or 15 private rooms. This is also new the design, the construction of services there. I can see a lot of customers that are better playing even right now. Secondly, it's the products, and we will continue to refresh our products. Like, for example, we are in the designing stage, about 100 suites at the Macau, MGM Macau side. and also some kind of gaming spaces, F&B outlets. We want to spend money wisely to really to reflect the purpose to serve the purpose of the customers, why they are in Macau. It's not a typical like hospitality products or resort products. they are serving their targeted premium guests, premium customers. Secondly, I want to see like the MGM has developed a pretty unique corporate culture here that encourage from the senior management from myself to all other senior management members for team members to react fast effectively to make changes in making changes in developing products and services which evolving with fast-changing customer tastes. So actually, reinvestment CapEx, products, services, they are owning one package. It is a package about how we take care of customers, I think that's the key for us to continue to grow for the rest of this year and next year. Operator: And our next question today comes from Dan Politzer with JPMorgan. Daniel Politzer: Bill or Jonathan whoever wants to take it. I was hoping to talk a little bit about the strip and health of the customer base there. It seems like you're talking about this evolving health. Can you maybe talk about the first quarter kind of progressed and how you kind of saw that resonate in your customer base? And then expectations for how the second quarter should evolve given your competitor last night had some comments on April? William Hornbuckle: Yes. I'll start it and Jonathan could kick it off. Look, we had -- interestingly, in the quarter, we had an amazing January last year. So we had a tough kickoff in mostly in gaming. But as the quarter progressed, and obviously, I think you heard yesterday, you heard from us, ConAg was tremendous. And so as the quarter progressed, each month got successively better. March being obviously for us, the best month yet. The market has changed. Consumer has changed -- obviously, we're focused on -- luckily for us, we have a lot of luxury product and brand brands that can cater to that, and it's going to continue. Despite many headwinds, whether they be air, gas, et cetera, we have yet to see a slowdown. That doesn't mean over summer, that can't happen because booking cycles still remains short. But we feel resilient about it. We feel good about it. We get air care, air traffic coming into the community. Half of the traffic that was lost when -- who is it that went bankrupt? Spirit went bankrupt, has been picked up. We see a couple of additional international flights coming into the market. That's a little early to tell what gas will mean to all of it. But to date, we feel good about it. Our April is fine. We just had a very successful Baccarat Tournament come through here last weekend. May will be a good month. And so we like the second quarter, but it's early. It's just the end of April. And so time to tell on these short-term bookings and where leisure will ultimately go. Daniel Politzer: Got it. And then just on that self-insurance, $37 million, I think that you guys had a $13 million charge last year, maybe in the third quarter. this. So is this something just to think about more commonly that this could be impacting results and bearing in mind it does sound onetime in nature? Just any better clarity or a way to think about that going forward? Jonathan Halkyard: Sure, Dan. It's Jonathan. I mean we certainly hope not. This is something that we at historically once a year. We, of course, we expense amount every month, but we do a bit of a true-up once a year after that experience, and you remember it correctly, we decided to do it twice this year. And the impact of that examination is this additional accrual that we took across our businesses and the first quarter. So we -- of course, we expect that, that's adequate now. But on the other hand, it has been an increase in cost in our business. It's the reason I wanted to call it out. Clearly, but for that charge, our results this quarter would have been. I think we'd all agree we've been much better on an operating basis, but we certainly hope that, that's not going to be anything that recurs and in fact, it is an unusual onetime item. Operator: And our next question is from Steve Wieczynski with Stifel. Steven Wieczynski: So Bill, I want to stay with Vegas here for a little bit. Obviously, you noted you feel better about that value customer. It seems like the customer base is now somewhat stable. So I guess the question is based on what you're seeing right now from a forward demand perspective, coupled with that healthy group and convention business, do you think it's going to be possible to grow Vegas EBITDA this year? I mean, you obviously kind of talked about the second quarter and you feel pretty good there. But the first quarter obviously didn't put you guys off to the best start. William Hornbuckle: Yes. Thanks, Steve, for the question. Look, the one comment you did make, I want to be clear about the leisure customer at the lower end of sets -- for us, obviously, it's Luxor or Excalibur. Midweek is still a challenge. Now the good news is it's like those 2 properties represent about 6% of our overall EBITDA. On the weekends, we are fine, the balance of the portfolio is performing from fine to good. And to answer the core question, we do see growth through the balance of the year. it's going to be tempered modestly, and it's got to be tempered with -- it's a crazy world out there right now. But based on what we see, particularly in advanced bookings, et cetera, we still remain optimistic that we will have growth by year-end. Steven Wieczynski: Okay. Got you. And then second question, we heard last night from Caesars, and obviously, you probably listened to that call that they've been starting to work a little bit more aggressively with the LVCVA to help kind of find and identify bigger events or corporations to bring into the Vegas market. And wondering if you could maybe expand on that a little bit more? And maybe help us understand if you're involved in that process and potentially and then what the potential upside could eventually be there? William Hornbuckle: Well, it's 40,000 feet. Yes, we're involved. Gary Fritz, who's sitting next to me is on the board. So we have been and we'll continue to be active Look, I think you know this about our business. Remembering we have over 4 million square feet of our own convention group space. We're big into tech. That sector continues to grow and it's looking exciting. We've got some really good groups lined up for the summer. We've got Google coming back and a few other, Cisco is coming in with a massive group this summer. So the question becomes because ConAg rotates, are there other groups in the world like ConAg, and the answer is yes, there are. And yes, we have been cooperative and will go on with them from time to time field trips to go pursue some of this stuff. I think you heard yesterday, it is true that some of it is "political" in that these groups mean a lot for each one of these communities that they're currently in, whether it's San Francisco or Dallas, you picked the community. And so they're not as easy just to pick up value proposition. There's generally more to it than that. But no, we are active. Now we completely agree with the sentiment that was laid out yesterday, and we'll continue to pursue it. Operator: Our next question today comes from Brandt Montour with Barclays. Brandt Montour: So I wanted to key off of that question earlier on about the all-inclusive effort and encouraging commentary around first-time visitors to Las Vegas. You guys obviously have a decade of data in terms of first-time visitors to Las Vegas. Maybe you could kind of open the hood and share some metrics on sort of what a typical first-time Vegas visitor kind of behaves like what the retention is like for a second trip, what you kind of can assume for flow-through and profitability for that guest versus the corporate average? William Hornbuckle: Brandt, I think the core thing to remember about first-time visitors is I can remember in Las Vegas where visitor profile would indicate that 20% of the visitors were first time. And I think over recent years, that number has been in the mid- to low teens, it drops below -- it dropped to 8% or 9% last year. I think all of the noise around Canada, which were as a place -- many of them came from is real. Our general Canadian business is down 30% to 40%. Obviously, we hope to improve that. We've had a couple of missions up into Canada a convention center and ourselves to help that. I think we have one plan later this summer that I'm actually going on. In terms of behavior, international has always been a big play there. Mexico opened up a few years ago meaningfully with air traffic. And it's interesting. The majority of first-time visitors actually many of them come through conventions and they come because they have to, they're told to. And then they learn about this place and they go, this looks interesting and fun. I want to come back. so they come back with family, friends, et cetera. And so I think the only real differentiator for now is that internationally is hurting that number to see it grow again through this package has been great because it's important, obviously, for the future growth of Las Vegas as we continue down the road here. I don't know, Ayesha, if you want to add anything. Ayesha Molino: I mean in terms of customer behavior, we're certainly seeing the customers they are engaging in all aspects of the business. And so we please see that response. And generally, I think in terms of what we're seeing from a flow-through perspective, we're happy with the results. And so no concerns there either. Brandt Montour: Great. Second question would be a follow-up on Macau. Looking at the first quarter, obviously, we're in a new structure with the management fee change and those margins, obviously, on that basis were below what you've talked about on this call in the past. Under the new structure and sort of considering the comment you made about March's exit rate for market share being a little bit better than in the first quarter. How should we kind of think about target margins for that segment under this new structure? Jonathan Halkyard: Yes. It's Jonathan. I'd certainly invite Kenny to comment as well. But even with this new structure, I mean the property, first of all, before the branding fee, we expect to be able to continue in the mid- to even high 20s in terms of its property level margin. And then reducing their EBITDA by the amount of the new fee would get you to the new going-forward margin. But I think we feel that safely in the mid-20s. Operator: And our next question today comes from John Decree of CBRE. John DeCree: I wanted to ask question or 2 about the digital business. Revenue growth in the quarter was really strong, a little bit more than we thought. I mean is that a comparison to the heavy marketing in Brazil last year? Was there something else in terms of revenue uplift? And then just my follow-up in there, how do we think about the kind of time line to profitability in that MGM digital business from here? Gary Fritz: It's Gary. Thanks for the question. The real growth engine on the top line, the digital business has actually been the Leo Vegas, the consumer business. So most of that concentrated in Europe with particular emphasis markets in the U.K. and Sweden. We've also had a lot of success launching the business in the Netherlands and expanding it there. Brazil helps, obviously, because it comps against very little revenue. But the core LeoVegas business and consumer business as I believe noted in the prepared remarks, is growing north of 30% year-over-year. So it's not all down to Brazil. In terms of the path to profitability, I believe we've indicated in the past that we would see the loss this year for the digital segment having relative to last year. We might see a little bit more investment this year than that, given some of the regulatory changes and tax changes in Brazil. but we're definitely anticipating the loss to materially narrow vis-a-vis last year, which then sets us up into '27 for close to a breakeven year, if not 100% getting there. Operator: Our next question today comes from Shaun Kelley at Bank of America. Shaun Kelley: For whoever wants to take it, Bill, I think you mentioned a bit earlier that you were still seeing a bit of midweek softness. But just wondering, you had called out a pretty large dynamic between your high and low properties. And I was just wondering if you could kind of update us on the trend line you're seeing there right now. Obviously, inclusive side or offer should help maybe narrow that gap as we get towards the summer. But in terms of what you're seeing right now and just trying to put into context the RevPAR performance for the company sort of relative to some of the market numbers we saw out there, which I think would have bridged a bit higher? William Hornbuckle: Yes. Shaun, thanks for the question. Ayesha should probably best suited to start this off, so go ahead. Ayesha Molino: Yes. Sure, John. With regard to the RevPAR question, I think that we look at it as in a couple of different ways. Overall, we think the fundamentals of the business are healthy from a RevPAR perspective. And from an ADR perspective as well as an occupancy perspective, particularly among the luxury portfolio, we're seeing real stability and growth in some segments, and all of that's been positive and all indications forward-looking remain good there as well. In terms of the lower end of the portfolio, I mean we discussed this in the last quarter as well. We had seen some softness really starting, as you know, in the second quarter -- towards the second quarter of last year, and that's been pretty consistent. We have been deploying strategies against it. As you know, with the all-inclusive as well as with overall cost control there, and I think that's been productive. We're continuing to watch closely as the summer unfolds in terms of what happens with that customer. But as Bill noted, we feel pretty good about the weekend in terms of the midweek. We're hoping to continue to see more stability as the year progresses. And certainly, I think there are pockets where we have evidence of that, whether that's convention group business continuing to stabilize, including those properties midweek. And then also with some of the programming in the South Strip Allegiant, we're seeing positive reaction that's positively impacting those properties as well. William Hornbuckle: Shaun, and remembering MGM, we've got about 54,000 more room nights in the bucket this year because obviously, they were offline. So just as clear math, that's going to, yes. . Shaun Kelley: Yes, fair point on that. And then as a follow-up, but probably a good segue off Allegiant, Bill you mentioned in the prepared remarks a little bit about the NBA, which is a pretty exciting development. It may be too early to speculate, but I think you have a lot of vested interest in making sure that, that ended up at one of your venues, particularly or potentially something like. So can you just talk to us about the strategy there for the city and MGM element to the extent you have a hand in possibly where either a purpose-built stadium ends up or if one of the venues that exist right now could be used for that? William Hornbuckle: Yes, Shaun, I appreciate the question. Fun question. I will start by saying I'm already under 3 NDAs. So the good news is the NBA has clearly earmarked Las Vegas and Seattle. We have had huge interest and obviously, whether T-Mobile becomes -- and Las Vegas becomes the ultimate side or not time to tell. Obviously, it will be up to the Board of Governors sometime next year. That said, we're excited by it, how could we not be. We've all seen the success in what it means to Las Vegas with the sports teams come. T-Mobile is part of that conversation, whether it's short-term or long-term, all roads lead to it for now because the league has expressed interest to host a team as early as 2028. And so we're intimately involved in many of those conversations. And I hope, I believe if the answer is -- well, yes, or no. I think we'll know hopefully by this time next year. A process is beginning to start. We've been asked how we would position T-Mobile for any and all bidders, and we're beginning to do that with our partner at AEG and Bill Foley. But we're open to all comers and there has been extensive interest in Las Vegas. And so it's exciting. It's very exciting, actually. Operator: And our next question today comes from Barry Jonas at Truist. Barry Jonas: I'm wondering if the current Iran conflict has impacted your UAE nongaming project and its time line? And then I guess do you believe there's still a chance you could get gaming there or in Abu Dhabi? William Hornbuckle: Barry, let me hand -- it hasn't impacted the ultimate timing, i.e., construction. For now, a China state who is building the project continues, and the project remains on schedule. We have not heard yet nor do I think we will, given the environment for a while whether gaming will be prevented or not, reminding the balance of the group crew who may not be as familiar with that project. They're allowing us to hold 0.25 million square feet of space for a potential casino on one of the podium floors there. And so it could be very exciting. For us, that is our key focus, not Abu Dhabi, to answer that part of the question. Right now, their business is struggling. The tourism business in that particular neck of the world is down to like or take. I'd say occupancies are down to that level. So it will take some recovery time no matter what happens here over the next couple of months. But long term, we remain very excited. The project is fascinating and fabulous. And so we're going to be all over to continue to push both the agenda, the initiative and the opening. Barry Jonas: Great. And then just thinking on international development for Japan, I guess they've reopened the process for additional licenses in the country. Curious how you think that potentially impacts your 2030 project? And then I guess as a follow-up with Iran, any impact to construction costs that you're seeing? William Hornbuckle: And on the second question, no, not yet, although like everybody in the world with respect to cost of inflation and cost of goods, a lot of it -- a lot of our concrete and steel has been contracted. So that's the good news. But there's obviously a long way to go. We still have 4 years to go there. What was the first part of the question? First part of the question? Barry Jonas: Just about additional licenses now, the reopening. William Hornbuckle: Japan, I'm sorry. Yes. They have started the process. They put some dates on I think it runs through next spring. Time to tell, given the scale and scope and what we all went through, there's only 2 or 3 markets that could actually accommodate something that I think that would make sense and be successful, whether there's the political will at the end of the day to do that or not time to tell. We've all witnessed first time around that there was not. And then knowing Japan as well as we do, I'll remind everybody, we're in our 17th year of this. So I think it would impact us too quickly no matter what happens. And frankly, if they were able to get better terms and/or conditions that would only work to our betterment. And with 120 million people to share, I'm not overly concerned to the contrary. Operator: And our next question comes from Stephen Grambling at Morgan Stanley. Stephen Grambling: Can you hear me? William Hornbuckle: Absolutely, Stephen. . Stephen Grambling: So Jonathan, you mentioned the multiple for Northfield versus the current trading was higher than where the base line is. I guess does that make you reconsider monetizing other assets as a way to surface value? Are there things that you see out there that could ultimately end up being sold or rethought as a way again of surfacing value? Jonathan Halkyard: It really has is a way of hopefully monetizing the price of our shares. We have -- although it's been for a few years now, I would say we've been fairly active in doing just that, starting with the sale of the Mirage at a nice double-digit multiple the sale of our Gold Strike property in Tunica at the same double-digit multiple. And now North Park. I mean, a slot-only facility with no hotel and while performing nicely, I mean, a pretty good multiple and well in excess of what our enterprise trades at. We're guided in our dispositions more by our strategies and market positions than we are necessarily by the by the level at which these properties could be sold, and that was the case with all 3 of those transactions that I mentioned they're all done really for strategic reasons. I just think they do. These valuations just highlight what we think is a real disconnect with the enterprise valuation. So in short, no, it doesn't really cause us to say, hey, what other properties might we be able to sell because that's usually informed by a strategic approach. Stephen Grambling: Fair enough. And then an unrelated question just on Macau. It looked like the mass market hold was better than kind of the historical trend. Is there something structurally changing there as we think about either the player type or the bet types or even the technology being implemented that could make that sustainable? William Hornbuckle: Well, I'll make one comment and let Kenny comment. There's a lot of prop bets now. I mean, I think some back tables have made prop bets. And so that has changed the game, the nature of the game and frankly, the odds of the game. Ken, I don't know if you want to comment a little further? Xiaofeng Feng: Yes. Thanks, Bill. We are seeing like increasing adoption of some side bets on gaming floors. As you know, like a side bet in general, carry a house advantage higher than the traditional games. We are rolling out some more side bets literally this week at MGM following some recent approval by the ICG. But the history of side being in Macau is still relatively short. These games only got popular after pandemic. Along with volatility in a premium dream market, we do not think it is the right time to adjust the mass -- the theoretical mass hold we will keep monitoring the adoption of the games, the player and the GGR trends, et cetera. Operator: And our next question today comes from Chad Beynon with Macquarie. Chad Beynon: Wondering if you can talk about the international business in the first quarter in Las Vegas, either around Chinese New Year or Super Bowl as those comps have been fairly easy over the past couple of years. We're not anywhere near back to where the peaks were. But wondering if you're starting to see some nice improvement there that could carry forward throughout '26? William Hornbuckle: Chad, thanks for the question. Look, I would say, yes, to a limited degree. I mean, obviously, the very nature of what's happened with our core Far East business in China and restriction of capital leaving that marketplace has not been eradicated, I guess, or change back to where it was. We do see Mexico more often than ever. I mentioned earlier in my comments, a tremendous backroom at this -- last weekend, this April. And so we -- and it was, as always, full of international land players. The good news is despite the overall traffic decline international, as I was mentioning earlier, mostly driven by Canada. When it comes to rated play and particularly premium-rated play, it's very healthy, and that hasn't changed. And so -- and I don't think there's anything out there other than an outright or that would change that anytime soon. Chad Beynon: Okay. And then on the LeoVegas or the digital business, there's been some contraction in public multiples on affiliate companies and sports data companies and even so on the B2C given regulatory change. What's your appetite in terms of improving or growing the ecosystem from a tech standpoint to just grow that business at a time when multiples might be attractive? Gary Fritz: Yes. Listen, I think we feel confident about the assets that we have under the hood right now. We were very deliberate in assembling the portfolio of assets that we did. We didn't buy sort of the most obvious shiny new thing. We were very deliberate turned over a lot of rocks and assembled the portfolio that we did. I think we've mentioned before, we feel we're largely fully deployed in terms of capital commitment to the International and MGM Digital business. can never say never, but I don't see any glaring holes in our portfolio at the moment. So it would take something extraordinary probably to see us deploy additional capital. Operator: And our final question today comes from Ben Chaiken at Mizuho. Benjamin Chaiken: I've got one kind of 2-parter. If I recall, maybe clarify, I think there was a small fine in the prior year 1Q. I don't know if that sticks out or if it kind of just gets caught in the wash -- and then maybe you could help us think about 2Q last year in the correct base. In Las Vegas, you reported around $710 million, $711 million, but I think you flagged $60 million of headwinds, $20 million from grand, $20 million from some event spend and $20 million from hold, I believe, I guess if you think about the business today, do those 3 buckets still kind of make sense to you? Or have things changed? Jonathan Halkyard: You're correct. There was a small fine in the first quarter of 2025 that we incurred that affected our results there. And so that's one of those things we have those types of not fines, but we have those types of relatively small impacts one way or another in our results pretty much every quarter. Second quarter last year, you're correct that we are underway with the renovation at the MGM Grand during the quarter that affected us for pretty much all of the year. We did have, I think, kind of a negative impact on hold during the second quarter last year. That was roughly $20 million. And so I guess those are probably the 2 things that I would call out that when I look at this quarter, we certainly have the benefit of the MGM Grand in those rooms back. And then you never know how old is going to go. But last year, in the second quarter, we were impacted negatively by hold. Benjamin Chaiken: And then, I guess, the event, the $20 million event, is that just kind of like maybe forget that one? Or how are you thinking about it now? Jonathan Halkyard: Well not forget about it, but that was a VIP event that we had. And part of that was also reflected in the hold results that we had during the quarter. But again, we do VIP marketing events in our business, whether it's Chinese New Year, we just had actually the same VIP marketing event this past weekend, which is it's costly, but we think it's really important for our customers and for that segment of the business. So that particular event we've had last year and we had again this year in the quarter. William Hornbuckle: And did well. And did well with it. Operator: Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Bill Hornbuckle for any closing remarks. William Hornbuckle: Thank you, operator, and thank you all for listening in. I hope there's nothing we've shown that we're resilient that this market is resilient, that people -- and this weekend is another good example. I think we have Morgan Wallen here at Allegiant. People are still excited by what we do. And despite all the noise in the world, and we all know there's a lot, we're pleased where we are and we're excited for the future. So thank you all. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Afternoon. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to Meta Platforms, Inc.'s First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. We ask that you limit yourself to one question. And this call will be recorded. Thank you very much. Kenneth J. Dorell, Managing Director of Investor Relations, you may begin. Kenneth J. Dorell: Thank you. Good afternoon, and welcome to Meta Platforms, Inc.'s First Quarter 2026 Earnings Conference Call. Joining me today to discuss our results are Mark Elliot Zuckerberg, CEO, and Susan Li, CFO. Our remarks today will include forward-looking statements which are based on assumptions as of today. Actual results may differ materially as a result of various factors, including those set forth in today's earnings press release and in our annual report on Form 10-Ks filed with the SEC. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release and an accompanying investor presentation are available on our website at investor.appmeta.com. And now I would like to turn the call over to Mark. Mark Elliot Zuckerberg: Alright. Hey, everyone. Thanks for joining today. We had a strong quarter for our community, our business, and our progress towards AI. More than 3.5 billion people use at least one of our apps every day. We saw a small decrease in total family dailies due to Internet outages in Iran and blocks in Russia, but otherwise, trends across our apps are strong. Daily and monthly actives on Instagram and Facebook continue to grow, with video driving all-time-high engagement across both apps. WhatsApp continues to see strong momentum too, including in the US, and Threads continues on its trajectory to be the leading app in its category. Our biggest milestone so far this year has been the release of our Muse family of models—our first model, Muse Spark, along with a significantly upgraded new version of Meta AI. This was the first release from Meta Superintelligence Labs, and it shows that our work is on track to build a leading lab. Over the past ten months, we have built the strongest research team in the industry and established the scientific and technical foundations to scale very advanced models. Spark is just one step on that scaling ladder, and we are already training even more advanced models. But Spark has already made Meta AI a world-class assistant that leads in several areas related to our vision of personal superintelligence, including visual understanding, health, shopping, social content, local, creating games, and more. We are hearing very positive feedback on it so far. We have seen large increases in Meta AI use since releasing the updates, and the Meta AI app has consistently been near the top of the app stores as well. Now that we have a strong model, we can develop more novel products as well. Since I first wrote about our vision for personal superintelligence last year, we have been focused on delivering personal and business agents to billions of people around the world. Our goal is not just to deliver Meta AI as an assistant, but to deliver agents that can understand your goals and then work day and night to help you achieve them. My view of AI is very different from many others in the industry. I hear a lot of people out there talk about how AI is going to replace people. Instead, I think that AI is going to amplify people's ability to do what they want, whether that is to improve your health, your learning, your relationships, your ability to achieve your personal career goals, and more. My view is that human progress has always been driven by people pursuing their individual aspirations, and I believe that this will continue to be true in the future. People will be more important in the future, not less. Meta Platforms, Inc. believes in empowering individuals. Those are the kinds of products that we are going to build, and I believe that they are going to be some of the most important and valuable products of all time. We are building a personal agent focused on helping people achieve the diverse goals in their lives. We are also building a business agent focused on helping entrepreneurs and businesses across the world use our tools and others to grow their efforts, reach new customers, and serve existing customers better. These agents will work together to form an ecosystem. And whether you use our personal or business agents to achieve your goals, I believe that the future will see a massive increase in entrepreneurship from people creating new things that they have always wanted to exist but previously did not have the tools to bring into the world. We are already testing an early version of business AIs and weekly conversations have grown 10 times since the start of this year. We are also working on using Spark and our upcoming models to improve our recommendation systems and core business in Facebook, Instagram, and ads. Right now, our apps primarily help people accomplish three important goals: connecting with people, learning about the world, and entertainment. But we have always wanted our apps to understand more of people's goals so we can help their lives in all the ways that they want. These new AI models will let us understand this in more detail. So instead of just looking at statistical patterns of what types of people engage with what content, for the first time in Meta Platforms, Inc.'s history, we are going to be able to develop a first-principles understanding of what you care about and what each piece of content in our system is about so that we can show you more useful things for what you are trying to accomplish. We will also be able to create personalized content specifically for people to help you achieve your goals as well. Since our recommendation systems are operating at such large scale, we will phase in this new research and technology over time. But the trend over the last few years seems clear that we are seeing an increasing amount that we can improve engagement for people and value for advertisers. This encourages us to continue investing heavily in what we expect will provide increasing value over the coming years as well. On that note, we are increasing our infrastructure CapEx forecast for this year. Most of that is due to higher component costs, particularly memory pricing. But every sign that we are seeing in our own work and across the industry gives us confidence in this investment. That said, we are very focused on increasing the efficiency of our investments, and as part of that, we are rolling out more than one gigawatt of our own custom silicon that we are developing with Broadcom as well as a significant amount of AMD chips to complement the new NVIDIA systems that we are rolling out as well. One of the primary goals of our Meta compute initiative is to lead the industry in efficiency of building compute, and we expect that will be a strategic advantage over time. Talking about building physical goods at scale, our AI glasses continue to perform well with the number of people using them daily tripling year over year. This continues to be one of the fastest growing categories of consumer electronics ever. We released Ray-Ban MetaOptics this quarter designed for all-day wear rather than primarily as sunglasses. And building on our release of Oakley last year, we have some exciting new partnerships and styles that I think are going to have the potential to reach even more people coming later this year. All of our glasses are designed to easily update to use our newest AI models and features. I am also really excited to see the glasses evolve from being able to answer questions to being able to be a personal agent that is with you all day long, helping you remember things and achieve your goals. Beyond glasses, I am excited for more of our metaverse efforts to be powered by the AI models we are training as well. We remain the biggest investors in the VR space across the industry, but we are focused on making our VR business sustainable as we invest more in other areas like AI and glasses. Before wrapping, I want to talk for a moment about how AI is transforming our work. We are seeing more and more examples where one or two people are building something in a week that would have previously taken dozens of people months. And I want to make sure that Meta Platforms, Inc. is the best place in the world for these types of people to come and make an impact. We are building the next evolution of our company around these people. And there is a lot that we can do to enable this: building the best infrastructure for creating and delivering products at scale, streamlining our teams so they are not bigger than they need to be, recognizing and rewarding the people who are having outsized impacts, and setting ourselves up to try many more ideas and take on many new projects in the future. Of course, we will continue pushing to increase our efficiency as well, but overall, I think the future is about building many more higher quality products than we have ever built before. Alright. That is what I wanted to cover today. We are living through a historic technological transformation. We are among the few companies positioned to shape the future, and we are on track to do that. I am looking forward to delivering personal superintelligence to billions of people, and as always, I am grateful for the hard work of our teams and to all of you for being on this journey with us. Susan Li: Thanks, Mark, and good afternoon, everyone. All comparisons are on a year-over-year basis unless otherwise noted. We estimate 3.5 billion people used at least one of our family of apps on a daily basis in March, which declined slightly from December due to Internet disruptions in Iran and a restriction on access to WhatsApp in Russia. Absent these impacts, growth in family daily active people would have been positive quarter over quarter. Q1 total family of apps revenue was $55.9 billion, up 33% year over year. Q1 family of apps ad revenue was $55.0 billion, up 33%, or 29% on a constant currency basis. In Q1, the total number of ad impressions served across our services increased 19%. Impression growth was healthy across all regions driven primarily by growth in engagement and users, as well as ad load optimizations. The global average price per ad increased 12% year over year in Q1 with broad-based growth as we benefited from ad performance improvements, better macro conditions versus Q1 of last year, and currency tailwinds in international regions. This was partially offset by strong impression growth including from lower-monetizing regions. Family of apps other revenue was $885 million, up 74%, driven primarily by WhatsApp paid messaging and subscriptions revenue. Within our Reality Labs segment, Q1 revenue was $402 million, down 2% year over year due to lower Quest headset sales, which were partially offset by continued strong growth in AI glasses revenue. Moving now to our consolidated results. Q1 total revenue was $56.3 billion, up 33%, or 29% on a constant currency basis. Q1 total expenses were $33.4 billion, up 35% compared to last year. Year-over-year growth was driven mainly by infrastructure costs and employee compensation. The growth in infrastructure costs was due to higher depreciation, data center operating costs, and third-party cloud spend. The growth in employee compensation was driven by technical hires we have added over the past year, particularly AI talent. We ended Q1 with over 77.9 thousand employees, down 1% from Q4 as the impact of headcount optimization efforts in certain functions was partially offset by hiring in priority areas of monetization and infrastructure. First quarter operating income was $22.9 billion, representing a 41% operating margin. Q1 interest and other income was negative $1.1 billion driven by unrealized losses on our equity investments. Our tax rate for the quarter was negative 23%, which was favorably impacted by a tax benefit of $8.03 billion. This benefit partially relieves the $15.93 billion non-cash tax charge we recorded in 2025, which reflects updated guidance from the US Treasury issued in February 2026 regarding the tax treatment of previously capitalized R&D expenditures in the United States. Absent the tax benefit, our Q1 tax rate would have been 14%. Net income was $26.8 billion or $10.44 per share. Absent the tax benefit, our net income and EPS would have been $18.7 billion and $7.31 respectively. Capital expenditures, including principal payments on finance leases, were $19.8 billion, driven by investments in servers, data centers, and network infrastructure. Free cash flow was $12.4 billion. We ended the quarter with $81.2 billion in cash and marketable securities and $58.7 billion in debt. Turning now to the business performance. There are two primary factors that drive our revenue performance: our ability to deliver engaging experiences for our community, and our effectiveness at monetizing that engagement over time. On the first, we are continuing to see significant gains from our content recommendation initiatives. On Instagram, the ranking improvements that we made in Q1 drove a 10% lift in Reels time spent. On Facebook, total video time increased more than 8% globally in Q1, the largest quarter-over-quarter gain in four years. Within the US and Canada, ranking improvements we made drove a 9% increase in video watch time on Facebook in Q1. These gains are benefiting from advances we are making across the full stack. Starting with data, we doubled the length of user interaction sequences we use for training on Instagram in Q1 and increased the richness of how each user interaction is described, enabling our systems to develop a deeper understanding of user interests. Within our models, we have significantly increased the speed with which our ranking models index new posts, which is enabling us to recommend them sooner after they are published. We are also applying more advanced content understanding techniques, which is enabling us to quickly identify posts that may be interesting to someone even if they have not engaged with a lot of similar content. These and other improvements have enabled us to increase the diversity and recency of recommended content, with same-day posts now representing more than 30% of recommended Reels on both Instagram and Facebook, more than double the levels one year ago. We are also using AI to unlock more inventory by auto-translating and dubbing videos into a viewer's local language, enabling us to recommend a more diverse set of content. Over half a billion users on each of Facebook and Instagram are now watching AI-translated videos weekly. Looking forward, we are making several investments we expect will deliver more valuable recommendations. This year, we will continue scaling up our models in several dimensions, including their size and complexity, while incorporating LLMs to deepen content understanding across our platform. This will enable us to better match people to a wider variety of content aligned to their interests. At the same time, we are executing on our longer-term efforts to develop the next generation of our recommendation systems. This includes building foundation models that power organic content and ads recommendations as well as developing LLM-based recommender systems. Our focus this year is validating the model architectures and techniques in these domains before we scale them out in future years. Aside from our recommendation work, we are focused on deploying the models from Meta Superintelligence Labs to enable a new set of product experiences. We are seeing encouraging results within Meta AI since we began powering responses with the first model from MSL, MuSpark. In tests we ran leading up to the launch, we saw meaningful engagement gains that accelerated week over week with each new iteration of the model. We are seeing similar gains within Meta AI following the broad rollout of our new model with double-digit percent increases in Meta AI sessions per user. MuSpark is now powering Meta AI in direct chat threads across our family of apps, as well as the standalone Meta AI app and website, giving billions of people globally access to our latest model. Overall, we are very encouraged by the momentum within our research and product roadmap and look forward to sharing more detail on what we are building over the course of the year. Turning to the second driver of our revenue performance, increasing monetization efficiency. The first part of this work is optimizing the level of ads within organic engagement. Here, we continue to enhance our systems to show ads at the optimal time and location. In Q1, we also expanded availability of ads on our newer surfaces, including bringing ads on Threads to people in more markets. On WhatsApp, we are making good progress with the rollout of ads in Status, with hundreds of millions of people now viewing them daily. Moving to the second part of increasing monetization efficiency, improving performance for the businesses who use our services. To do so, we are deploying AI more deeply across each layer of our systems and tools. Within our ad systems, we are delivering performance gains as we deploy more complex and predictive models. In Q1, enhancements we made to Lattice’s modeling and learning techniques along with advances in our GEM model architecture drove a more than 6% increase in conversion rate for landing page view ads. In addition, we have been investing in more performant inference models for when we are serving ads. In the second half of last year, we began rolling out our new adaptive ranking model, which is an LLM-scale ads recommender model that we use for inference. This model improves our inference ROI by routing requests to more compute-intensive inference models when it determines there is a higher probability of conversion. In Q1, we expanded coverage of our adaptive ranking model to off-site conversions, which drove a 1.6% increase in conversion rates across the major surfaces on Facebook and Instagram. We are also leveraging AI to make it easier for businesses to manage their customers, develop ad creative, and engage with customers. The Meta AI business assistant has now been fully rolled out to all eligible advertisers on supported Meta buying services, providing personalized recommendations to advertisers, resolving account issues, and surfacing campaign insights to help optimize results. Performance has been strong since we began testing the assistant in Q4, with common account issues being resolved at a 20% higher rate. This week, we are also introducing Meta Ads AI Connectors in open beta, providing advertisers the ability to connect their Meta ad account directly to an AI agent. We have always supported advertisers both on our platform and through tools like the Marketing API, and now we are extending that to AI so businesses and agencies can analyze and optimize campaigns with the tools they are already using. Usage of our ad creative tools is also scaling, with more than 8 million advertisers using at least one of our GenAI ad creative tools and particularly strong adoption among small and medium-sized businesses. These tools are benefiting performance as well, with advertisers using our video generation feature seeing more than 3% higher conversion rates in tests. We are also seeing good traction in using AI to facilitate customer engagement. In Q1, we expanded business AIs on WhatsApp to SMBs across Latin America and Indonesia as well as on Messenger in Asia Pacific. We now have more than 10 million conversations each week being facilitated through business AIs, up from 1 million at the start of the year. We will further expand access to more countries this quarter while adding more capabilities to the AIs. We also continue to invest in the value optimization suite, which helps advertisers maximize their return on ad spend by prioritizing the highest-value conversions rather than optimizing solely for the most conversions at the lowest cost. Adoption by businesses has been strong following performance improvements we have made over the past year, with the annual revenue run rate of our value optimization suite now over $20 billion, more than doubling year over year. Last, I want to touch on our commerce efforts. People discover products on our platforms through ads and organic posts, with brands increasingly turning to creators to promote their products. This is contributing to rapid growth in our partnership ads product, with its revenue run rate more than doubling year over year in Q1 to $10 billion. To support the product discovery and purchasing happening through creators, we are expanding our solutions beyond ads. Last month, we rolled out our affiliate partnerships offering on Facebook to more test partners so creators can tag products from participating retailers on their posts and earn a commission when someone makes a purchase. We have also started testing similar experiences on Instagram. We see a real opportunity to help people more easily discover and buy products within our services, particularly as we incorporate AI deeply across our platforms. Next, I would like to discuss our approach to capital allocation. Compute is becoming increasingly important as a driver of the quality of services we can provide, including powering more capable models and delivering innovative new products. It is also becoming more critical to how we work at Meta Platforms, Inc., as we are entering a world where employees are managing agents to help them generate new ideas, run experiments, execute tasks, and build products. We are investing aggressively to meet our infrastructure needs and ensure we maximize our strategic flexibility over the coming years. This includes substantially expanding our own data center footprint and striking deals throughout the supply chain to secure necessary components for future capacity. We are also signing cloud deals that will come online over the course of this year through 2027, allowing us to scale more quickly. These multiyear cloud deals and our infrastructure purchase agreements drove a $107 billion step up in our contractual commitments this quarter. Our investments will support our training needs for future models and, most importantly, provide us the inference capacity necessary to deliver personal and business agents to billions of people around the world, along with several other AI product experiences we are developing. As we grow our infrastructure spend, we remain committed to operating efficiently, and we recently shared internally that we plan to reduce the size of our employee base in May. We believe a leaner operating model will allow us to move more quickly while also helping to offset the substantial investments we are making. Moving to our financial outlook. We expect second quarter 2026 total revenue to be in the range of $58 to $61 billion. Our guidance assumes foreign currency is an approximately 2% tailwind to year-over-year total revenue growth based on current exchange rates. Turning to the expense and CapEx outlooks. We expect full year 2026 total expenses to be in the range of $162 to $169 billion, unchanged from our prior outlook. We continue to expect to deliver operating income this year that is above 2025 operating income. We anticipate 2026 capital expenditures, including principal payments on finance leases, to be in the range of $125 to $145 billion, increased from our prior range of $120 to $135 billion. This reflects our expectations for higher component pricing this year and, to a lesser extent, additional data center costs to support future-year capacity. Absent any changes to our tax landscape, we expect our tax rate for the remaining quarters of 2026 to be between 13%–16%. Finally, we continue to monitor active legal and regulatory matters, including headwinds in the EU and the US that could significantly impact our business and financial results. For example, we continue to see scrutiny on youth-related issues and have additional trials scheduled for this year in the US, which may ultimately result in a material loss. In closing, Q1 was a solid start to the year, with strong execution across our core ads and engagement initiatives. We are also making exciting progress on our AI research and product efforts and expect to build that momentum over the course of this year. With that, Krista, let us open up the call for questions. Operator: Thank you. We will now open the lines for a question and answer session. Please limit yourself to one question. Please pick up your handset before asking your question to ensure clarity. If you are streaming today's call, please mute your computer speakers. And your first question comes from Brian Thomas Nowak with Morgan Stanley. Please go ahead. Brian Thomas Nowak: Thanks for taking my question. Mark, I wanted to ask you just about the level of investment you are making and the signposts you are watching to ensure you are going to generate ROIC on all these investments behind Muse and the other products. So if you could just let us know some of the key factors you are watching over the next 12 to 24 months—whether it is Meta AI, Muse advances, core algorithm—what are you watching most to make sure that you are on the right path to generating healthy ROIC on all this CapEx and infrastructure spend? Mark Elliot Zuckerberg: That is a very technical question. Basically, the things that we are watching are to make sure that we are on track building leading models and leading product. The formula for our company has always been: build experiences that can get to billions of people and focus on monetizing them once you get to scale. I think that we are seeing a little bit of that here where we invest in advance to build leading models, then we convert that into leading products. And then we think that these are going to be some of the most important products that get built over the next decade. So just like anything else that we have done over time, the basic milestones that I look at are around: first, technically, are we delivering the quality to enable a great product? Second, when you have the product, how is it scaling? And third, you look at the monetization, and then you drive up the efficiency of it towards increasing profitability. I do not think we have a very precise plan for exactly how each product is going to scale month over month or anything like that. But I think we have a sense of the shape of where these things need to be. And if you look at the usage of these and the quality of the product, and the quality of the models that are out there and the use that other frontier models are getting and the trajectory of that, I am quite comfortable that the lab that we are building is on track to be a leading lab in the world. I think Muse Spark was a very high-quality model. It powers Meta AI, which I think is now a world-class assistant. We have an ability to be able to grow that and have a large amount of engagement. And over the coming quarters, we are just going to be tracking how our next set of training runs go, how our products scale, how excited we are about the products. Right now, we are very excited. And then we will also ramp up monetization over that period of time as well. So those are the set of things that I look at. I think for the more specific financial questions, I think Susan can jump in if there is anything more to add. Operator: Your next question comes from the line of Mark Elliott Shmulik with Bernstein. Please go ahead. Mark Elliott Shmulik: Yes. Thanks for taking the questions. Mark, now that we have got Muse Spark out there launched, how are you thinking about the teams’ focus divided between further model training runs and pushing further in that personal superintelligence goal versus product launches and shipping more products out the door? And Susan, as a follow-up to Brian’s question, I know it is too early to discuss 2027 CapEx, but we have had peers mention a potential significant step up. Any way to think about dimensionalizing how we think about some of the returns or traction this year and how it might affect 2027 spend? Thanks. Mark Elliot Zuckerberg: I think the roadmap from the team has been pretty consistent. We have the research team, which is focused on scaling increasingly intelligent models with capabilities for the specific things that we are focused on, which are business and personal agents. We just released our first model, and I talked about in my comments how we are climbing the scaling ladder towards greater capabilities and scale for the models. That work continues. We have our next set of more advanced models in training now, and that work will just continue. That is a loop. I do not think we are going to be done with that anytime soon. We are going to have teams that are consistently focused on training more intelligent and more capable models in the ways that we want. Then we have our product team, and that team is now really unlocked to be able to build things on top of our models because we now have very strong models. Before this, we had been prototyping a bunch of things using other different models, whether it was our previous older models or using the APIs from other companies. And now we are unlocked to be able to go build things and get them to scale on top of our own models. I think you will see that over some period of time. I tried in my opening remarks to give a bit of a sense of where we are going, but I think that more of the details of that will become clear over the coming months. And these are both loops that we will iterate on. We will keep iterating on the intelligence. We will keep working on building new products and scaling the products. And then as we get to product-market fit, we are also going to increasingly focus on building the business around them and decreasing the costs. This is how we have done everything over the last twenty years of running the company, and that is basically the plan. Susan Li: Mark, on your second question, we are not providing a specific outlook for 2027 CapEx, and we are frankly undergoing a very dynamic planning process ourselves as we are working through what our capacity needs will be over the coming years. Our experience so far has been that we have continued to underestimate our compute needs even as we have been ramping capacity significantly, as the advances in AI have continued and our teams continue to identify compelling new projects and initiatives—and now, too, there are very compelling internal use cases. So our expectation is that compute will become even more central to the business going forward, and it will be critical to determining the quality of the models we develop, the types of products we can introduce, and how productive we can be as an organization. So we are going to continue building out our infrastructure with flexibility in mind. And if we end up not needing as much as we anticipate, we can choose to bring it online more slowly or reduce our spending in future years as we grow into the capacity that we are building now. Operator: Your next question comes from the line of Eric James Sheridan with Goldman Sachs. Please go ahead. Eric James Sheridan: Thanks so much for taking the question. Maybe if you can build out on one of the topics that was discussed in the prepared remarks: the opportunity set that sits in front of the company with respect to putting compute in front of both consumers and enterprise. You have long been associated with the consumer landscape, and I am curious about how you are thinking about extensions of the media engagement parts of your business model and the commerce parts of the business model to become more agentic over time. But what do you see also as the opportunity set across SMBs and enterprises where historically you maybe have not had as much product velocity? Thanks so much. Susan Li: Thanks, Eric. So I would say in the near term, the biggest focuses are some of the areas that you mentioned—deepening engagement with our existing community and user base, making ad experiences meaningfully more engaging and more valuable, and helping SMBs find and engage with customers across our platform. Those are some of the most intuitive and adjacent opportunities to the business that we have today. And then, of course, as we are able to build out more agentic capabilities—enabling agents to help people be more productive, but also agents for businesses and enabling those agents to interact with each other—we hope to build a thriving commerce ecosystem on our platform. Some of these are a little bit further out, especially in that latter category. Again, the focus is on building personal superintelligence—building a consumer agent that can work for you and help you get things done. That right now is a consumer experience that we are focused on, but we think there will be clear monetization opportunities over time. You can imagine commission structures or a premium offering. And on the business side, we are seeing a large opportunity around agents and scaling our business AI initiatives. I mentioned earlier that there are over 10 million weekly conversations between people and business AIs on our messaging platforms—up from 1 million at the start of the year—and we are going to continue expanding globally in Q2. Business AIs today are currently free for most businesses on our messaging apps, but as we make more progress, we expect that we will also work towards establishing a longer-term monetization model, and we will also consider other services that we can offer to businesses in the future, but we do not have anything more to share today. Operator: Your next question comes from the line of Youssef Squali with Truist Securities. Please go ahead. Youssef Squali: Great. Thank you very much for taking the questions. Maybe one for Mark and one for Susan. Mark, Ray-Ban and Oakley AI glasses continue to perform really well for you, but EssilorLuxottica looks like it owns more brands. What are the gating factors to see the launch of additional glasses under these other brands this year? And what would be a successful year for you as you look back at 2026, maybe in terms of units sold? And then, Susan, on that 10% RIF, how much of that is due to efficiencies from AI implementation versus just the need to stay fit? And as you look at your employee needs over time, how do you see that growing relative to your overall top-line growth? Thank you very much. Susan Li: I can go ahead and take both of those. I might answer your second question first. In terms of the optimal size of the company over time, we do not really know what the optimal size will be in the future. There is a lot of change right now with AI capabilities advancing rapidly. We are very focused on leveraging AI tools to substantially increase our productivity, and we are seeing that reflected in the accelerating output from our engineers. We are generally approaching this with a bias toward wanting to use these tools to build even more products and services than we would have before. At the same time, we are making very significant investments in infrastructure, and we are very focused on continuing to operate efficiently. So we will be continuously evaluating how we are structured to make sure we are best set up to deliver against our priorities over the coming years. On the AI glasses, we are continuing to see strong growth in AI glasses sales over the course of Q1. Demand for the expanded portfolio lineup has generally been quite strong, and we are seeing sales shift from the prior generation of Ray-Ban Metas to the latest generation, which speaks to the value of the improved features like extended battery life and higher-resolution video capture. We are pretty excited about the progress we have made with glasses. We see strong interest now in the Meta Ray-Ban displays with the Meta Neural band, so that is an encouraging sign that there is consumer appetite for display glasses, which is the next generation of how this product evolves. So this is an area that we continue to be excited about and are investing in. Operator: Your next question comes from the line of Justin Post with Bank of America. Please go ahead. Justin Post: Great. Thanks for taking my question. Mark, it took about ten months to get Muse Spark out. I think it is a pretty good pace. Help us understand what kind of unlock that is for some of the new products you are developing. And how is the product cadence going to be over the next nine months on either consumer or business/enterprise products built on top of that model? Mark Elliot Zuckerberg: The field is moving pretty quickly. I am very happy that we are, I think, the lab that has gone the fastest from standing up the lab to having a very widely accepted strong model. I take that as a significant validation of the effort—that the team is working well together, that the infrastructure is working, that the effort is on track. That is basically the main thing that we have learned over the last quarter: we started this pretty big bet, and it is on track for our plan. In terms of what exactly the cadence is going to be, it is tough for me to say both because I do not want to share competitively sensitive information and because we are more focused on quality than hitting a specific date. On the research side, this is research—we are trying novel things and do not exactly know when they are going to land. And on the product side, we care a lot about just having something I would give to my mother. There are a lot of agents out there that people are building for different things, and there are not that many that I would want to give to my mother. Getting to that quality bar is something that I care about more than hitting a specific week for launching. But with that said, we are in a zone where the teams make meaningful progress day over day. Small groups and teams can make very rapid progress. So I think we are going to see a lot of innovation. The timing of this call is good in some ways because the Muse Spark release was positive. The Meta AI first release is positive. That shows that we are on track. I am trying to paint a picture of the very high-level direction that we are going in, but the picture is going to come into focus a lot more over the subsequent quarters. Operator: Your next question comes from the line of Ross Sandler with Barclays. Please go ahead. Ross Sandler: Thanks. Mark, related to that last answer, there are a lot of new consumer applications cropping up—everything from something like OpenClaw to something a little bit more consumer-friendly that you would build for your mom, like Poe or Dreamer, which you recently acquired. How are these new ideas changing your view around the direction that core Meta AI or Dreamer or your overall agentic strategy needs to go? And second, do you think the lab will stay in this consumer lane, or do you want to go down the route that others are going down with code writing and the recursive self-improvement loop? Just thoughts on that. Thank you. Mark Elliot Zuckerberg: On OpenClaw and other agents, I think they give you a very exciting glimpse of what should be possible. They are pretty rough systems today. To set up OpenClaw, you need to install on a computer locally and then get into a terminal and configure a bunch of things that hundreds of thousands or maybe a small number of millions of people could do. But we are talking about delivering personal superintelligence for billions of people around the world. How do you make a version of that experience that is a lot more polished, dialed, and easy, that has all the infrastructure done for people already, and that just works? That is what we are focused on on the consumer side, and I am really excited about that. If you had something like that that worked quite a bit better than those systems and was easy enough that people could just get, then I think you go from something that hundreds of thousands or millions of people are going to use to something that is going to be addressable to billions of people. That has been our primary focus from day one of the lab: being able to deliver something like that as a product, and I think it is going to be very exciting. The same thing is true for businesses. There is the personal version of this, but a lot of people's goals are to create things—to create websites, products, grow their products. These are all things that good agents are going to be able to help people do, which is partially why this is so exciting. In my opening comments, I talked about how today we can handle a few goals for people. They are big goals—helping people stay connected with people they care about, learn about the world. These are big things, but not the only things people care about. One of the things that I would love for our products to be able to do is understand people's goals specifically and then be able to go work on them for them and check back in when needed. Whether those are personal goals or you are trying to create a business or do work, I think this is something literally every person in the world is going to want some version of. It also scales where the more you want to get out of it, people are going to be willing to pay a lot of money to have premium or high-compute versions of it. That is a very exciting area. What you should be waiting to see is whether we can build the version that really just works, and how effective we are at converting people who are using our products into hundreds of millions and then billions of people using this stuff, and then over time how we can effectively convert that into something that is increasingly profitable by monetizing it and getting the cost down. You asked whether we are primarily focused on consumers or recursive self-improvement. We have talked about two main goals for the team. One is this agents vision of what we are doing. The other is that self-improvement is really important because you cannot build a leading AI product if you do not have leading models. You are not going to have leading models in the future if your models cannot improve themselves. Today, the models are still able to learn from people, and then at some point, the models will have to improve themselves. That is how improvement in the models is going to happen. If we—or anyone else—do not have an ability to do that, then we are not going to be leading labs, and we are not going to produce leading products. That is table stakes that we are focused on. Does that make us a developer tools company? Not necessarily. I am not against having an API or coding tools, but it is not our primary focus. People conflate coding with self-improvement more than they should. Coding is one ingredient for the model self-improving; it is not the only thing. We are focused on all of the parts that are going to be necessary for self-improvement in service of the personal superintelligence vision that we have for people and businesses. Operator: Your next question comes from the line of Ronald Victor Josey with Citigroup. Please go ahead. Ronald Victor Josey: Great. Thanks for taking the question. Mark, a quick follow-up around personal agents and business agents: with Muse Spark now live and more models in development, do you look at the personal agent opportunity more as a short-, medium-, or long-term goal? When will we see a product—short or medium term? And then, Susan, the ranking/recommendation model improvements are very impressive given the size and scale of both Instagram and Facebook. Could you help us understand how doubling the length of these interaction sequences can drive greater usage? There is a thesis that maybe some of the ranking recommendation improvements are along the same lines, so it seems as if there is more room to go. Any help there would be helpful. Thank you. Mark Elliot Zuckerberg: I think that the agents work will have short-term versions, but there is going to be massive upside from delivering more intelligence and more capabilities in the models. You are seeing this across the industry. Each generation of models has more capabilities, can do more things, and people absorb it and are able to get more superpowers. It is the most exciting time in the industry. I think of the agents as the product vehicle for delivering that capability to people, and I think this year is going to be a key period for establishing that as the vehicle for how people are going to use this. But then the model work is going to be something that goes on for a very long time. There is a lot to do in the short, medium, and long term. Susan Li: On your second question about the ranking and recommendations improvements, there is still a lot of room to continue improving recommendations over the rest of the year, and we expect we will be able to drive additional engagement on both Facebook and Instagram. We will continue to improve our data infrastructure to allow our models to train on more data. We are adding more detail to how we describe the content that users have engaged with in the past and scaling up the complexity of our model architecture to take advantage of those larger datasets—like using even longer histories of content interactions—and that should improve the overall quality of recommendations. We are also focused on making the recommendations even more personalized and more relevant to any given user's interests. We are redesigning our content retrieval system to show more content that matches the full range of a user's interests and tailoring the diversity of topics to the broadness of someone's interests. Someone with particularly concentrated interests might see relatively more of that content, while people with a broader set of interests might see a greater range in the topics we show them. Finally, we are continuing to make improvements to our LLM-based user control features that allow users to provide more granular natural language feedback on what they want to see more of or less of in their feed. The sequence length you called out is one of many improvements we made in Q1, and there is a big roadmap of further improvements going forward. Operator: Your next question comes from the line of Douglas Till Anmuth with JPMorgan. Please go ahead. Douglas Till Anmuth: Thanks so much for taking the questions. Mark, how do you think about the step up as you go from leveraging smaller models in the ad business to Muse Spark and future large language models going forward? What are some of the key unlocks across engagement and monetization? And then on Manus, can you talk at all about the strategic importance and the role in developing agentic products for Meta Platforms, Inc., and the current status around the tech and the deal? Thanks. Susan Li: I will take that question. On Manus, we are still working through the details, so we do not have an update right now. On your first question about going from leveraging smaller models in the ads business to larger models, there is already work underway. Even in the current landscape of the ads roadmap, we are advancing the architecture to allow us to leverage the abilities of larger models. Historically, we have not used larger model architectures like GEM for inference because their size and complexity would make them too cost prohibitive. The way we drive performance from those models is by using them to transfer knowledge to smaller, more lightweight models that are used at runtime. The inference models are bound by strict latency requirements, and they need to find the right ad within milliseconds, which has historically prevented us from meaningfully scaling up their size and complexity. But in the second half of last year, we introduced a new adaptive ranking model, which enables us to leverage LLM-scale model complexity of trillion-parameter class, and we made advances in the model architecture and the system with the underlying silicon so it maintains the sub-second speed required to serve ads at scale. We also developed an approach that intelligently routes requests to more compute-intensive inference models if it determines that there is a higher probability of conversion, and that lets us drive both better performance and increased inference ROI. There is a lot of work being done there before we even incorporate more of the LLM work into our underlying ads ranking models. Operator: We have time for one more question. Kenneth Gawrelski with Wells Fargo. Your line is open. Kenneth Gawrelski: Thank you very much. Two, if I may. First, on the Muse Spark launch, you talked about two verticals: health and wellness and shopping. Can I ask you to dive a little deeper into shopping and commerce? Were there any learnings in the 2021–2022 phase where you pushed deeper into commerce on Instagram and on Facebook that you might apply? Is there an opportunity for a next-gen marketplace-type business in e-commerce? And second, Susan, based on your model improvements and the content recommendations, how much visibility do you think you have into the growth trajectory on the core business? You continue to grow basically at double the pace of the industry despite being a very large share. Could you talk about your visibility into continued outperformance? Mark Elliot Zuckerberg: I might give you a somewhat loftier answer to the shopping question. It is an interesting example of how the work we are doing is different from what others are doing. AI agents get better when you fully optimize the stack. That is why we believe we need to be a company that builds frontier models in addition to building the agents. To do that well, you need to build your infrastructure. So we are undertaking this large investment to do that top to bottom. A lot of the way to think about the investment that we are making is a bet that the individual things that people care about—and that people—are going to be more important in the future. So much of the rhetoric around AI in the industry is around a company trying to build some kind of centralized thing that does all the productive work in society. That is very different from how we see the world. Our vision for the future is one where society makes progress by individuals pursuing their own aspirations. Some people care about big, grand things like curing diseases. A lot of people care about personal things like finding the right shirt for my daughter. I think that we are going to build things that help deliver this vision for personal agents for people. Part of what is interesting and differentiated about what we are doing is that this is so different from how I hear everyone else talking about the work. Even though some of these ideas seem like they should be obvious, our approach of trying to empower individuals and building consumer things is, in the details, extremely different from what others are doing. Shopping might be one specific example that will have interesting commercial implications and that consumers will like. But I do not hear any other labs talking about how they are building an AI that is really good at shopping. The reason for that is not because shopping is the most important thing by itself but because empowering people to do the things that matter in their lives—whether that is local, understanding social context, shopping, personal health, or understanding what is going on around them visually (which is going to be really important on the glasses)—these are all elements of the personal superintelligence vision. When you are thinking about the investment in Meta Platforms, Inc. over time, you should think about it as coming down to these values around what we want AI to do in society. If what you want it to do is empower individuals and build a world where the AI is in service to individuals' goals, then that is what we are going to build, and I think it is going to be incredibly valuable. Susan Li: Gosh. I almost wish we could end on that answer, but I will answer the second question. There are two versions. One is the revenue outlook, and we gave the Q2 guide, which embeds a range of macro outcomes as well as the ongoing work to continue improving usage and engagement on our family of apps and our ability to make the ads better and more performant. The second version is more of a higher-level question about the overall trajectory of the roadmap. One of the things I will say, having been working on this for a very long time, is I am always impressed by the team’s ability to continue to advance the state of the art here. Our planning process is really fine-tuned around this. I have mentioned on a couple calls the budgeting process in which we run a very ROI-based process to make sure that we are funding all of the ads initiatives that we think will drive growth in future years. That process is quite dialed in. Our ability to measure the impact has been robust, and it has been a very important driver of our ads revenue growth, and that continues to be a process that we ran in this past budget. As far as we have line of sight, we feel good about the investment opportunities ahead of us. Kenneth J. Dorell: Great. Thank you everyone for joining us today. We look forward to speaking with you again soon. Operator: This concludes today’s conference call. Thank you for joining and you may now disconnect.
Operator: Good morning. My name is Julienne, and I will be your conference operator today. At this time, I would like to welcome everyone to the SoFi Technologies First Quarter 2026 Earnings Conference Call. [Operator Instructions] With that, you may begin your conference. Unknown Executive: Thank you, and good morning. Welcome to SoFi's First Quarter 2026 Earnings Conference Call. Joining me today to talk about our results and recent events are Anthony Noto, CEO; and Chris Lapointe, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. Unless otherwise stated, we'll be referring to adjusted results for the first quarter of 2026 versus the first quarter of 2025. Our remarks today will include forward-looking statements that are based on our current expectations and forecasts and involve risks and uncertainties. These statements include, but are not limited to, our competitive advantage and strategy, macroeconomic conditions and outlook, future products and services and future business and financial performance. Our GAAP consolidated income statement and all reconciliations can be found in today's earnings release and the subsequent 10-Q filing, which will be made available next month. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and our subsequent filings made with the SEC, including our upcoming Form 10-Q. Any forward-looking statements that we may make on this call are based on assumptions as of today. We undertake no obligation to update these statements as a result of new information or future events. And now I would like to turn the call over to Anthony. Anthony Noto: Thank you, and good morning, everyone. We've had a remarkable start to 2026. Our relentless member focus continues to drive innovation across our business, leading to our 18th consecutive quarter of the Rule of 40 with a score of [ 72% ] reflecting 41% revenue growth and 31% EBITDA margins. Notably, this was the second consecutive quarter that we have generated more than $1 billion in cash revenue. In Q1, we generated over $1 billion in cash revenue, consisting of approximately $690 million in cash revenue from net interest income and about $390 million in cash revenue from interchange fees, brokerage fees, technology and loan platform fees and loan origination fees. In fact, in both 2025 and 2024, more than 100% of our adjusted net revenue was cash revenue at $3.8 billion in cash revenue in 2025 and $2.7 billion in cash revenue in 2024. Our durable growth with an acceleration in revenue growth and strong returns and profitability is fueled by our consistent focus on innovation and brand building. Our mission remains the same. We help people reach financial independence to achieve their ambitions, helping them get to the point where they have enough money to live where they want, have the size family they want, the house they want, the career they want and retire when they want. Other financial institutions pick and choose the products they offer based on how much money they can make off of their customers. And as such, they don't deliver the holistic experience people need to make their ambitions a reality. That's why SoFi delivers the everything financial app with unquestionably the most comprehensive set of digital financial tools and resources to help our members get their money right. Our critical success factor is helping people spend less than they make and invest the rest. Savings is not enough. Saving will help you get by, but investing is critical to get ahead to achieve your dreams. In order to achieve this critical outcome, we must help our members borrow better, save better, spend better, invest better and protect better. we cannot just offer the products that are the most attractive financially. We need to be there for our members not just for the large financial decisions in their lives but are all the days in between. It's not just our opinion that SoFi's the best. We are hearing it from others as well. In March, we ranked #1 in the J.D. Power 2026 U.S. Investor Satisfaction Study for do-it-yourself investing. This award validates our approach to building our Invest product in a thoughtful member-centric way, and we're excited to now be helping a record number of members invest for a better future. Also just this month, SoFi was named the #1 U.S. Bank by Forbes in their World's Best Banks ranking, beating out institutions that have been around for decades. As part of this comprehensive survey, response were asked to rate banks on a customer service, digital services, financial advice and perhaps, most importantly, trust. Our goal is to become a household trusted brand name, so we couldn't be more proud of this recognition that we are building trust with our members. While we are pleased with these achievements, it's still day 1, and we are far from where we aspire to be. In fact, this recognition further fuels our drive, continuous iteration and learning leading to innovation is the key to our success. It powers our growth and it strengthens our returns for shareholders. Over the past 8 years, we've grown members by more than 20x from 650,000 to 14.7 million members. In Q1, we once again added a record number of new members at 1.1 million new members, increasing total members by 35% year-over-year to 14.7 million. We also added a record 1.8 million new products in Q1, increasing total products by 39% year-over-year. We now have 22.2 million products. SoFi continues to accelerate with 43% of new products opened by existing SoFi members versus 40% last quarter and 36% in Q1 of 2025. This clearly demonstrates the effectiveness of our everything financial services app strategy and our ability to build deeper multiproduct relationships with members, which in turn will drive higher lifetime value. Our strong member and product growth powered our revenue growth in the first quarter. Adjusted net revenue was ahead of expectations at $1.1 billion. This is up 41% year-over-year, an acceleration from last quarter's very strong growth rate. Our Lending segment had a particularly strong quarter, generating $629 million in adjusted net revenue. Importantly, our net interest income and origination fees in the Lending segment totaled $639 million this quarter. In total, we had our best quarter ever for loan originations at $12.2 billion, which was up nearly $1.7 billion from just last quarter and included record originations across personal, student and home loans. Of the $12.2 billion in originations, $9.2 billion was for our Lending segment and $3 billion was for our loan platform business. The development of our loan platform business over the last 18 months has allowed us to better meet the borrowing needs of more members. Our strategy for what we put in the balance sheet versus through the loan platform business remains guided by the principle that LPB loan originations reflect the incremental volume we would not otherwise originate for SoFi's balance sheet for a variety of reasons, including capital ratios, managing the overall growth of the balance sheet and their credit profile of borrowers. In addition to being able to serve more members through these two channels, they also provide greater revenue diversification. For example, Balance sheet originations provide very visible and recurring cash revenue generation through net interest income over the life of the loan. In Q1 2026, we generated $690 million in cash net interest income which provides revenue visibility further contributing to our durable performance and cash generation. But this also comes with default risk and capital usage over the same time period. LPB loans, on the other hand, paid the majority of cash upfront but free up capital instantly and remove their credit risk for SoFi. Together, financial services and our technology platform generated revenue of over $500 million an increase of 24% year-over-year and representing just under half of our total revenue. Our Financial Services segment continues to deliver impressive revenue growth, up 41% year-over-year to $429 million. The Technology Platform segment delivered net revenue of $75 million, which was negatively impacted by the loss of a previously discussed large customer. Total fee-based revenue across our business was $387 million, up 23% from the prior year. In addition to delivering durable growth, we delivered strong returns and profitability. In the first quarter, adjusted EBITDA was $340 million, up 62% year-over-year. Our adjusted EBITDA margin for the quarter was 31%. Our incremental EBITDA margin was 41% as we continue to balance reinvesting in the business to drive long-term growth and profitability. Net income in the quarter was $167 million at a margin of 15%. Earnings per share were $0.12 or $0.13 on a constant stock price basis quarter-over-quarter. Finally, our tangible book value ended the quarter at $9.2 billion, up 83% year-over-year and $7.21 per share, which is up 57% year-over-year. It is clear that our diversified business is uniquely built to deliver a winning combination of growth and returns. And we continue to invest heavily to make our existing products even better to build new products to help our members get their money right and to further strengthen our trusted brand name. These investments will power our durable compounding growth and drive strong returns as we continue to scale. Let me now spend a moment discussing our brand building efforts which are key to driving new members to SoFi, feeding our productivity loop and growth. In the first quarter, our unaided brand awareness rose to an all-time high of 10%. That's up 300 basis points from a year ago. This is a reflection of our ability to meet our members where they are with the message of financial empowerment. So far in 2026, we completed another successful season of TGL presented by SoFi which recorded significant fan engagement and momentum. We also kicked off the NBA playoffs with the SoFi Play-In tournament featuring 6 incredible win-or-go-home games that brought in nearly 20% more viewers than last year and set new records for social and digital viewing. We also expanded our talent partnerships, adding two world-class golfers to Team SoFi, Justin Thomas and Charley Hull. Justin and Charley are true winners who share our passion for helping people get their money right. Beyond our strong sports marketing efforts, we are engaging with members earlier in their lives so they can build a better future from day 1. For example, this year, we kicked off our Future Wealth Summit, a national campus tour designed to help college students navigate key financial decisions and plan for life after graduation. Students today are making some of the most important [ frontal ] decisions of their lives without the guidance they need. We're excited to bring practical education on banking, credit monitoring and investing to put them on the path to success. Turning now to product innovation, starting with crypto, which has been a key focus over the past year. We believe the crypto super cycle that is underway will completely transform financial services, enabling frictionless money movement. We are well positioned to benefit from this super cycle given our unique position as a tech company that is underpinned by the strength and stability of being a national bank. This is why we've been building a strong foundation on which we can develop and grow multiple new products and businesses and realize the benefits of crypto and blockchain across our entire ecosystem. In December, we took a big step forward on this journey with the launch of SoFiUSD. This managed the first national bank to launch its own stablecoin on a public permissionless blockchain. So SoFiUSD is at the heart of our strategy to make it faster, cheaper and safer for people around the world to move money. During Q1, we began minting SoFiUSD, the next step towards building compelling use cases for the coin. We also formed an important partnership with Mastercard to enable SoFiUSD settlement across their global payments network. This will create interoperability between digital assets and fiat currencies and eventually allow for the settlement of transactions 24 hours a day, 7 days a week versus just during business hours now. This brings me to our new big business banking offering, which was officially launched earlier this month. Today, companies operating fiat and crypto are forced to use multiple providers and are left waiting days for transactions that should take seconds. As a nationally chartered bank, we saw a tremendous opportunity to bring fiat and crypto banking to businesses on a single, integrated and fully regulated platform. Our big business banking clients can hold funds in regulated business deposit accounts with institutional-grade safeguards, move money and crypto in real time with API-driven payments and given fiat and crypto instantly through native SoFiUSD net and burn capabilities while maintaining reserves within SoFi's regulated environment. We will start with companies that are operating in crypto or crypto adjacent industries, but as more and more companies look to operate across both fiat and digital assets, SoFi will be able to support those needs at scale, including on behalf of other large banks. Turning now to an update on SoFi Plus, our premium membership. Plus is positioned to be the best of every SoFi product, all wrapped into one member experience. On April 1, we relaunched SoFi Plus with significantly enhanced benefits to bring the best of SoFi strategy to life while making a product a pay-only subscription. With the relaunch, we expanded our benefits, which now include our highest APY in deposits at 4.5% for up to $20,000, 1% matched in deposits into taxable SoFi Invest accounts, 1% match on crypto purchases, unlimited one-on-one sessions with financial planners, a boost on SoFi credit card rewards and so much more. Overall, this membership can unlock well over $1,000 in annual value for a fee of just $10 per month, less than the cost of today's lunch and we will continue to roll out product enhancements and expand our offering while also providing special member options for military members and young adults as well as through our SoFi At Work partnerships. The initial results of SoFi Plus since April 1 relaunch have been incredibly positive. We have seen strong growth in new paying subscribers and the vast majority of new Plus paying subscribers or existing SoFi members who subsequently take out an additional product after signing up for Plus. SoFi Plus is not only driving a recurring and visible cash revenue stream that is enhancing the awareness of the significant breadth of SoFi products as an everything app and in turn, driving greater cross [indiscernible] and increased lifetime value. I would encourage everyone listening to try our rewards calculator on our website to see just how much you can earn from SoFi Plus. Now to our Tech Platform segment. We entered 2026 with the most comprehensive set of capabilities we've ever offered banks, fintechs and brands. Given the breadth of our products, which extend well beyond the capabilities we acquired through Galileo and Technisys, we will be launching a new unified brand and restructured go to market later this year. Over the coming months, we will roll out the new brand, SoFi Technology Solutions. The new brand reflects the more comprehensive set of products and services that we now offer enterprise clients across a total of 4 platform businesses. First, in processing, we continue to see strong momentum with our client rollouts on our modern cloud-based processing platform. We have 13 new clients that generated revenue in the first quarter that were not generating revenue a year ago including successful implementations with fintechs and major consumer brands. We've built a healthy pipeline of additional customers and are excited to get more programs off the ground in the future. For example, in 2026, we are launching an expanded relationship with 1 of the top 3 telecommunication brands in the U.S. and a new program with a financial services firm in the short-term lending space. Our second platform, Banking Core Ledgers and Services includes our modern banking core and the many turnkey API powered solutions needed for banking-as-a-service offerings. In this business, we are about to take a major step forward. This summer, we will complete the implementation of our new core platform with SoFi Bank, our first scaled launch with a U.S. regulated bank. This will serve as a launching point to bring our new banking stack to other institutions. For SoFi Bank, our new core process platform will integrate seamlessly with our payments, fraud and card capabilities and importantly, will support ledgering for stablecoin in day one. In fact, the modern core will serve as the backbone for our planned crypto endeavors. We look forward to bringing this new banking stack to other institutions and building the next generation of our digital application platform. Our vision for our third technology platform business, Payment Hub, is to provide self-serve payment options across every type of money movement, including stablecoins that are faster, cheaper and more secure. Our API-first approach makes it easy to connect to ACH, same-day ACH, wires, FedNow, person-to-person payments and real-time payments. Partners can manage payment flows with ease, maintain compliance and offer a better customer experience. And we'll soon add SoFiUSD payment APIs to our big business banking offering. The fourth SoFi Technology Solutions platform focused is our risk and fraud platform. Within this platform, we currently offer 7 products that address transaction fraud, account identity verification and account takeovers including Galileo instant verification engine for real-time API-based account verification, our payment risk platform for transaction fraud and an identity verification service, which covers advanced compliance and sanction scenarios. These products leverage our latest models, often using over 600 data points for a single decision, and we are launching additional products in 2026 to further bolster our risk and fraud offering. Turning now to innovation within our Lending segment, which is driving record originations across all 3 loan categories. Starting with personal loans, we would support our mission of helping members reach financial independence. With the SoFi Personal Loan, members can refinance absurdly expensive credit card debt held at other institutions so they can stop paying for other people's rewards and focus on their own financial well-being. During the first quarter, we originated record personal loan volume of $8.3 billion, taking share from competition and helping even more members get their money right. We see significant opportunity to help more people refinance high interest debt, and we will continue to innovate with new product features and leverage technology to improve the member experience. For example, we're rolling out our Personal Loan Doc Coach which uses AI to validate members pay subs and other documents, streamlining the application experience and driving cost savings over time. We're also testing new credit model features that can leverage enhanced data pools. This has the potential to help us make even better decisions that potentially extend credit to more members in the future. SoFi Student Loans help more and more students finance their education while they are in school as well as supports students who have already graduated by helping them refinance their debt at a lower rate. Student Loans have been a great way to introduce the SoFi brand and what we stand for to members early in their financial journey. Over time, we'll be there as their financial needs grow, which is why the value generated by our student loan business extends well beyond the interest income we collect on the initial loans. In Q1, we had our best quarter of student loan originations ever at $2.6 billion. This is up 2.2x year-over-year but originations volume is more than just a number. In generating this volume, we helped nearly 10,000 members finance their education so they can realize their ambitions, and we helped over 10,000 members to completely pay off their student loan debt. Turning to Home Lending, which is an area I'm particularly excited about. We've been hard at work creating a fast seamless experience for our members who want to purchase a home, refinance an existing loan or draw equity. Even while the overall home lending market is stagnant, momentum has been building in this business. We set origination records for 4 straight quarters, including Q1 when we originated $1.2 billion in home loans. This is up nearly 2.4x from the first quarter of last year. Here, too, we continue to innovate. For example, last week, we announced a new equity line of credit experience, making it possible for members to access to equity in their homes through a seamless end-to-end experience on the SoFi platform. Finally, we continue to see healthy growth in our tangible book value. We recognize there has been ongoing discussion around last year's capital raises and their impact on dilution. As we previously explained, these capital raises were opportunistic with proceeds intended to be deployed across a range of opportunities. Based on our analysis, the capital raises would not be dilutive to tangible book value on a per share basis. And this has proven to be the case. Our tangible book value per share increased 57% year-over-year to $7.21, up from $4.58 per share and is up 3% quarter-over-quarter from $7.01 a share. This is nearly $340 million of an increase in absolute terms. As you can see, our financial results are being driven by continuous innovation that is providing real value to our members. We continue to focus relentlessly on driving innovation and developing products and solutions to help our members navigate all the major financial decisions in their lives and every day in between. We will continue to put our members first and help them achieve their American dream. Over time, the trust that we build with our members will lead to deeper relationships. This, in turn, will drive a higher lifetime value per member and will power our compounding growth and returns. With that, I'll turn it over to Chris. Chris Lapointe: Thank you, Anthony. We've had a solid start to the year. Our innovation in brand building is powering exceptionally strong revenue growth. In the first quarter, adjusted net revenue grew 41% to $1.1 billion. This is a further acceleration in the growth rate from the prior quarter. Importantly, we generated $1.1 billion in cash revenue in Q1 which includes approximately $690 million from net interest income and approximately $390 million from interchange fees, brokerage fees, technology and loan platform fees and loan origination fees. Cash is defined and accounted for the same universally no matter what type of company it applies to. In the first quarter, these cash revenue streams were nearly equivalent to our total reported adjusted net revenue. This is the first time we have disclosed our cash revenue as we think it's a helpful financial measure to consider given the different accounting treatments companies use. As we mentioned, it's our second consecutive quarter of more than $1 billion in cash revenue, but I would also note that 100% of our reported adjusted net revenue was cash revenue in both 2024 and 2025. This means that the scale and seasoning of the loans on our balance sheet has reached the point where the upfront noncash premiums on new originations are being balanced by pull to par and other mark-to-market impacts on the existing portfolio leaving the vast majority of our reported revenue being approximately equal to our cash revenue. We have consistently said that over the life of the loan, there is no difference between fair value accounting and cost accounting, and we are seeing that play out in our reported results. In addition to our strong revenue growth, we delivered strong profitability during the quarter. Adjusted EBITDA was $340 million, up 62% year-over-year at a margin of 31%. Net income was $167 million at a margin of 15%. Net income was up 2.3x year-over-year, and earnings per share was $0.12, which was negatively impacted by $0.01 due to a decrease in discrete tax benefits related to employee stock compensation given share price movement between Q4 2025 and Q1 2026. At a constant share price quarter-over-quarter, EPS would have been $0.13. This was our tenth consecutive profitable quarter. Turning now to our segment performance, starting with Financial Services. For the first quarter, Financial Services net revenue was $429 million up 41% year-over-year. Contribution profit was $196 million, up 32% from last year, and contribution to margin was 46%. Net interest income for this segment was $228 million, up 31% year-over-year, which was primarily driven by growth in member deposits. Noninterest income grew 55% to $201 million for the quarter. During the quarter, we continue to see healthy growth in interchange up 54% year-over-year, driven by nearly $25 billion in total annualized spend across money and credit card. We also had record brokerage fee revenue, which more than doubled over the past year. In terms of our loan platform business, one of our key differentiators at SoFi is having both a very strong balance sheet and an established loan platform business supported by a diverse set of partners that go well beyond private credit asset managers. In fact, during the quarter, we added $3.6 billion of new commitments with 3 new partners, including a leading global bank, a prominent insurance group and a top 5 global private asset management firm. Our diversified model allows us to efficiently channel loan volume based on a number of factors, including borrower demand, capital levels and credit risk with a focus on maximizing risk-adjusted returns. Each channel we utilized provides benefits to our business. For example, our balance sheet lending generates stronger revenues over the life of the loan, whereas LPB generates capital-light fee income with no retained credit risk or loss share agreements. Having this optionality will allow us to generate more a consistent growth through a variety of environments. Overall, during the first quarter, we saw exceptional demand from members, which is reflected in our record personal loan originations of $8.3 billion. Given our very strong capital ratios, we channeled nearly $5.4 billion of personal loans to our balance sheet and approximately $3 billion through our loan platform business. This deliberate decision resulted in lower LPB originations relative to the fourth quarter, although LPB originations were up 90% year-over-year. I would note that we had significant demand from LPB partners over and above what we decided to fulfill this quarter, but we did sell all demand from our contractual commitments and more. Turning to our tech platform business, where we delivered net revenue of $75 million in the first quarter reflecting the exit of a large client who fully transitioned off our platform prior to year-end. Contribution profit was $12 million at a contribution margin of 16%. Turning to our Lending segment performance, which was very strong during the quarter. In addition to record personal loan originations of $8.3 billion, we also saw record originations in student and home loans. Student loan originations were $2.6 billion, up 2.2x from the same period last year. Home loan originations were $1.2 billion, up 2.4x from the prior year. For Q1, adjusted net revenue for the segment was $629 million, up 53% from the same period last year. Contribution profit was $382 million with a 61% contribution margin. These strong results were primarily driven by growth in net interest income, which increased 39% year-over-year to $500 million and the balance of the growth came from loan origination fees, which were up 36% year-over-year in home loan sales, which were up more than 2x year-over-year. Capital markets activity was strong in the first quarter. We've sold or transferred to our loan platform business, $3.8 billion of personal and home loans. In terms of home loan sales, we closed $765 million at a blended execution of 102.1%. Additionally, we sold $89 million of late-stage delinquent personal loans in line with prior quarters. In addition to our loan sales, we executed a $919 million securitization of loans originated on behalf of our partners through the loan platform business. The transaction priced at an industry-leading cost of funds level with a weighted average spread of 86 basis points, our best execution for any securitization deal to date. To meet standard industry risk retention requirements, we contributed loans from our balance sheet that represented a 5% vertical slice across the securitizations tranches. Importantly, we do not retain any first loss or horizontal risk position. Turning to credit performance. Our credit remains strong, performing in line with our expectations and driving attractive returns across all loan types. Our personal loan borrowers have a weighted average income of $154,000 and a weighted average FICO score of 745 while our student loan borrowers have a weighted average income of $161,000 with a weighted average FICO score of 767. For personal loans, the estimated all-in net charge-off rate was flat quarter-over-quarter and down nicely from a year ago. Excluding the impact of delinquent loan sales, the estimated all-in annualized net charge-off rate was 4.4%, which was the same as last quarter and down roughly 40 basis points from the first quarter of 2025. Including the impact from the [ DQ ] sales, the net charge-off rate was 3.03%. This is up 23 basis points from the fourth quarter, but down 28 basis points for the first quarter of 2025. The sequential increase was primarily a function of us maintaining consistent [ DQ ] sales of around $90 million per quarter while our balance sheet grew at a faster pace. Beyond balance sheet, 90-day delinquency rate was 47 basis points, down 5 basis points from the last quarter. For student loans, the annualized charge-off rate was 65 basis points, down 11 basis points from the prior quarter. Beyond balance sheet, 90-day delinquency rate was just 10 basis points, down 4 basis points from the prior quarter. The data continues to support our 7% to 8% net cumulative loss assumption for personal loans, in line with our underwriting tolerance, although we continue to trend below these levels. Our recent vintages originating from Q4 2022 to Q2 2025 have net cumulative losses of 4.64% with 36% unpaid principal balance remaining. This is well below the 6.32% observed at the same point in time for the 2017 vintage, the last vintage that approached our 7% to 8% tolerance. The gap between the newer cohort curve and the 2017 cohort curve widened by 9 basis points during the quarter. In fact, this gap has widened each of the last 7 quarters since we began measurement. Additionally, looking at our Q1 2020 through Q4 2025 originations, 61% of principal has already been paid down with 6.8% in net cumulative losses. Therefore, for life of loan losses on this entire cohort of loans to reach 8%, the charge-off rate on the remaining 39% of unpaid principal would need to be approximately 10%. This would be well above past levels at similar points of seasoning, further underscoring our confidence in achieving loss rates below our 8% tolerance. Turning to our fair value marks and key assumptions. As a reminder, we mark our loans at fair value each quarter, which considers a number of factors, including the weighted average coupon, the constant default rate, the conditional prepayment rate and the discount rate comprised of benchmark rates and spreads. These markets are developed alongside a third party, which feeds our actual loan level data into their proprietary model and are reviewed by our independent auditor as detailed in our filings. At the end of the first quarter, our personal loans were marked at 105.4%, down 27 basis points from the prior quarter. This was driven by an increase in the discount rate, which was due to a higher benchmark rate as well as a modest decline in WACC and a modest increase in the default rate assumption. These changes were partially offset by a modest decrease in the prepayment rate. At the end of the first quarter, our student loans were marked at 105.2%, down 40 basis points from the prior quarter. This was driven by an increase in the discount rate due to a higher benchmark rate and was partially offset by a modest decrease in the prepayment rate. The WACC and default rate assumptions remained relatively consistent with the fourth quarter. Turning to our balance sheet. In the first quarter, total assets grew by $3 billion. This was driven by $4.1 billion of loan growth, partially offset by a reduction in cash, cash equivalents and investment securities of $940 million as a result of using some of our equity to fund loans. Total company-wide cash at quarter end was $3.8 billion. On the liability side, total deposits grew by $2.7 billion to $40.2 billion primarily driven by growth in member deposits. Our net interest margin was 5.94% for the quarter, up 22 basis points sequentially. This included a 25 basis point decrease in cost of funds, partially offset by a 2 basis point decrease in average asset yields. We continue to expect a healthy net interest margin above 5% for the foreseeable future. In terms of our regulatory capital ratios, we are very well capitalized. Our total capital ratio of 21% at quarter end is well above the regulatory minimum of 10.5% as well as our additional internal stress buffer. Tangible book value grew $4.2 billion year-over-year to $9.2 billion including the benefit from new capital raised in 2025 as well as organic growth in earnings. The tangible book value per share at quarter end is $7.21 up from $4.58 a year ago, a 57% increase. Let me finish by providing our outlook for Q2. In line with market expectations, we now expect an interest rate outlook consistent with the Fed funds futures and no rate cuts in 2026. Now for our specific guidance. For the second quarter of 2026, we expect to deliver adjusted net revenue growth of approximately 30% from Q2 '25, which would equate to roughly $1.115 billion, an adjusted EBITDA margin of approximately 30%, which would equate to roughly $330 million and an adjusted net income margin of approximately 12% to 13%, which equates to roughly $0.10 to $0.11 of EPS. As I mentioned in our call in January, each year, we have seasonal payroll taxes during the first two quarters of the year, and we are accelerating marketing expenses in the first half of 2026 in addition to our significant investments in product innovation. This increased expenditure will drive growth in the back half of 2026 and over the long term, and it is reflected in our second quarter guidance. Looking beyond Q2, we expect to see continued revenue growth and strong growth in EBITDA, net income and EPS, which will get us to our full year guidance, which remains unchanged. Overall, Q1 was a solid start to the year. We continue to have strong momentum in our business and are on track to hit our 2026 and medium-term guidance. Let's now begin the Q&A. Operator: [Operator Instructions] Our first question comes from Andrew Jeffrey from William Blair. Andrew Jeffrey: I appreciate you taking the question. Anthony, I wonder if you can put a little finer point on the decision process by which you determine how much you want to hold on your balance sheet in terms of personal loans versus the LPB. Wouldn't it behoove the company to maximize platform sales in this environment, hence, fee income? I'm just trying to understand exactly what the puts and takes are when you look at that decision every quarter. Anthony Noto: Sure. Thank you for the question. We have a lot of optionality when it comes to thinking about how to deploy our capital and how to optimize revenue and profits. Our goal, as we say each quarter is to drive durable revenue growth through innovation and branding and to deliver strong returns. And so when we think about the two options, if we're going to put loans on our balance sheet, they obviously require capital and they have credit risk. But they also have a revenue stream that lasts 2 to 3 years as it relates to personal loans. And so that generates really attractive net interest income to us. But obviously, there's a limit to how much we can put on our balance sheet based on our capital ratios and other risks that we're balancing. LPB revenue, on the other hand, doesn't require capital. We're basically producing on behalf of somebody else. And so it doesn't have retained credit risk and it has the cash flow upfront. And so we'll use those underlying factors as we think about the considerations. But what I said in the prepared remarks and what I'd say here is the loan platform volume that we do is essentially the volume that we would not otherwise do for our balance sheet based on all the factors that I just considered. So putting less on our balance sheet may be a driver, and therefore, we don't want to underwrite it, and we, therefore, do with our loan platform business. Similarly, depending on what our revenue streams are a year from now, we want more NII in that period relative to cash flow in this period. Some people will raise the question about concerns about private credit. We're not really seeing any issues in our own performance nor in the demand that we have for LPB revenue and loans from our partners. In fact, we have demand above our contractual obligations that we have on volume that we're producing. But the volume that we put through that channel is volume that we would not otherwise do in our balance sheet because of either our concerns on credit ratios or the capital ratios or credit profile or growth overall on the balance sheet. So it's a good option to have. But I wouldn't think about it as maximizing near-term revenue, it's a balance between near term and longer term revenue. Operator: Our next question comes from Dan Dolev from Mizuho. Dan Dolev: Really strong results here. Congrats. Chris, a question for you. Can you maybe give us some color on the segment level guidance? And then I have a very quick follow-up. Chris Lapointe: Yes, sure. So as I mentioned in our prepared remarks, we feel really good about our 2026 outlook. We're going to be growing 30% top line and delivering $0.50 of EPS. From a segment perspective, as we've said in the past and in any given period, some of our segments may grow faster than expected. Some may be a bit slower. But we're going to effectively allocate capital and resources to the best opportunities that we see in front of us. Given the strong start that we've had to the year, we now expect lending adjusted net revenue growth of at least 30% for the full year of 2026. We expect our tech platform net revenue to be approximately $325 million for the full year. We continue to expect our Financial Services adjusted net revenue growth of at least 40% and then we continue to expect corporate revenue to be in line with what we did in 2025. Operator: Our next question comes from Kyle Joseph from Stephens. Kyle Joseph: Two quick questions and I hate to focus on accounting rather than results, but I get a lot of questions here. Chris, just give us your thoughts, walk through your accounting on and rationale for capitalizing the market expenses and how you see that impacting EPS and EBITDA. And then just a follow-up there. Just talk about the JPMorgan facility and the difference between a loan sale versus borrowing. If you could give us some clarity on both those much appreciated. Chris Lapointe: Sure. Thanks, Kyle. So in terms of the capitalized marketing costs, at a high level, what I would say is that we sometimes partner with third parties as an efficient top-of-funnel marketing channel where we pay success-based commissions for acquiring revenue-generating money and invest members. This does not include acquisition of our lending or our credit card members. From a high-level accounting perspective, those payments are incremental, and we're only incurring them upon successful acquisition of the member so under ASC 340-40, they're accounted for as contract acquisition cost, which is very similar to capitalized software expenses that drive future revenue. As a result, we capitalize those costs and amortize them over the expected member life to better match the cost with the debit interchange and brokerage revenue that those members generate over time. What's also important is that the amortization is treated as an expense in EBITDA and net income, i.e., it lowers EBITDA and net income. So we're simply aligning the timing of the cost with the revenue that it supports. And then as it relates to the JPMorgan loan sale. Prior to September of 2024, we had a senior secured loan on the balance sheet that had no affiliation with JPMorgan. In September of that same year, we opportunistically sold the loan via a special purpose entity to JPMorgan. At the time of the sale, JPMorgan held a controlling interest in the special purpose entity and SoFi did not retain a controlling interest. At that time and what is customary with any new loan sales, we obtained an independent third-party true sale opinion as part of confirming that the transaction method requirements for sale accounting under GAAP, including legal isolation. Based on that, the loan was appropriately derecognized from our balance sheet. Anthony Noto: And just want to emphasize one important point about the marketing expenses that are amortized. They are subtracted from revenue, and therefore, they do result in a lower EBITDA is those amortized marketing costs are not excluded from EBITDA. They are expensed against revenue and lower EBITDA. Operator: Our next question comes from Devin Ryan from Citizens JMP. Devin Ryan: Another question on loan platform. Obviously, good to see a few new partners and expanded capacity this quarter. Can you just characterize the current depth of demand from third-party capital providers and where there's the most interest rate now? And also just how that evolves through the quarter just given some of the pockets of volatility. It sounds like a little change there. But ultimately, just kind of what that pipeline looks like. And then on the other side of the equation, [indiscernible] just hear about what you're seeing from customers in terms of personal loan demand and also how you're optimizing the funnel to move faster on originations or just even improve market awareness? Chris Lapointe: Sure. I'll hit on the loan platform piece, and then I'll let Anthony hit on some of the personal loans. But on the loan platform, business demand from capital partners, it remains extremely robust. We announced several partnerships last year with Blue Owl, Fortress and others, and those partnerships are going extremely well. Each of the partners is buying at their contractual level and even above that in several quarters and each of our partners who have come up on term in their existing contracts have extended their contracts. In addition to that, we recently signed up and announced 3 new partnerships totaling about $3.6 billion of commitments over the course of the next 2 years, and that comes from a large investment bank, a large asset management firm and an insurance fund. So the demand that we're seeing is pretty broad-based. It's across asset managers, it's across insurance funds and several investment banks. We couldn't be happier with the demand that we're seeing. And as Anthony mentioned, it's a great situation to be in to have the flexibility both on the balance sheet with the capital ratios that we have as well as the demand that we're seeing from capital markets participants. Anthony Noto: And then as it relates to demand, we had a record originations in personal loans [indiscernible] loan refinancing as well as in home loans, our home loans business more than doubled year-over-year, and I believe our [indiscernible] loan business also more than doubled year-over-year in originations and personal loans remains quite robust. We continue to iterate and learn and innovate on every one of our businesses. While these businesses have scaled quite meaningfully and they've been around and they're long tenured, there's still innovation that can be driven. In personal loans, we continue to find new channels of demand. It is definitely a product that is primarily being used today to refinance expensive credit card debt. And so it's real savings with real amortization of expenses that help people get to a better point financially and get to the point that they spend less than they make and invest the rest. So it's a really critical product for our members. On [indiscernible] and refinancing, we had the highest amount of originations that we've had in our history, which is quite remarkable. And it's a product that again helps people lower the cost instantly relative to their existing federal student loans or even private student loans at a higher rate, and that's a product that will definitely benefit even more so as rates go down, given the amount of savings they have today versus benchmark rates that will only improve. The savings in personal loans are dramatic. The savings in [indiscernible] loans are less attractive, and getting more attractive as rates come down. And then in home loans, we're iterating every day to try to get to an outcome that is super fast for our members. We would like to ideally, and I hesitate to say this because I don't know that we'll ever get there, but we're aspirational. We would like to ideally get to a 10-day application to close on a new home on a first lien loan. Getting to 10 days would be remarkable and would be a unique value proposition. Again, we're trying to differentiate each one of our products based on fast selection content convenience and better together. On the home loan, product is largely one but I think comes down to speed, ease of use, which can be a great benefit from AI, which is what we're using to try to drive that faster experience. So strong growth in all 3 products. Credit is performing well, a lot of capital on our balance sheet, we're taking advantage of the opportunity. Chris Lapointe: The only other thing I would add, going back to the loan platform business point and what's driving some of the demand that we're seeing from capital markets participants is just this flight to quality situation that we're seeing. We're constantly hearing from our partners that they're really pleased with the execution that they're getting on our [indiscernible] particularly with the REIT securitizations that we're doing. We just did a securitization in January that was upsized and we were able to achieve the best spread that we've ever been able to achieve on one of our securitizations. So I think that's also what's driving some of the demand that we're seeing in the market. Operator: Our next question comes from John Hecht from Jefferies. John Hecht: Thanks for the commentary, especially on the cash-based revenue. First question is you guys have very good momentum in new member additions. I think it was like 1.1 million, which was a record this quarter. Where -- like what channels are you getting these from? And are there any changing characteristics of the new members now relative to, say, a couple of years ago? Anthony Noto: The characteristics of our member acquisition are in line with where they've been historically. Each business has an individual marketing plan that benefits from different channels. The lending business has historically been one that relies on legacy channels such as direct mail, but is heavily influenced by affiliate partnerships. Our SoFi Money product is a broad-based digital strategy that we leverage to drive good marketing efficiencies. Our brokerage business continued to benefit from broader selection and IPOs, alternative assets, private offerings in addition to single stocks without commissions or robo accounts and our ETFs. And that, again, is really an affiliate and visual marketing channel acquisition product. Crypto is the new kid on the street, and we're developing new opportunities for marketing there. I would say we launched crypto in a really fast get to market. If we didn't have the technology platform business, there's no way we've been able to launch crypto buy sell and hold in such a short time period or SoFiUSD. And so we benefit from having that platform. That's something we haven't marketed aggressively yet. We want to make sure the product was scalable and one that was meeting the needs of our members, and we have that confirmation now so we'll continue to benefit from increased awareness of SoFi crypto impacting the P&L. Our credit card boost is actually doing pretty well, and we're excited about the changes that we've made over time. We're starting to see people transition from balanced transfers with 0 APRs actually paying a full APR at a reasonable rate. And so that's contributing to the numbers that we reported this quarter both on the interchange side as well as the revolving side. And then our debit interchange, the amount of debit interchange we're driving today is quite significant and scaled and is also contributing. When we talked about the $390 million of noninterest cash revenue, it's now large enough and scaled enough that it's contributing to the overall business and the marketing that we can put behind it is scaling as well. The last part that I'll mention is SoFi Plus. We launched SoFi Plus in January of 2025. And it wasn't that great of a product at first. But like with most things we launched, we learn, we iterate, we learn and we iterate, and we relaunched in April 1, it's doing phenomenally well. We're pretty excited about it. It's meant to be a product that's the best of SoFi in one subscription product. It's $10 a month. It's more than $1,000 of value. It's primarily a product our existing members are buying. And not only are they signing up for that product that is going to generate a recurring revenue stream kind of like the net interest income that we have that's very visible and recurring, but moreover, it's driving cross-buy. 50% of the people that sign up for SoFi Plus, which again, are largely existing members take out another product. So not only does it drive the direct revenue stream, it's driving additional cross-buying building awareness of us [indiscernible] at everything happened in Financial Services. Operator: Our next question comes from Kyle Peterson from Needham. Kyle Peterson: I wanted to dive a little more into the tech platform. I appreciate the segment guidance you guys gave. So I guess I just want to see if you guys give any more granularity on how the year should unfold there? I know you guys have several partnerships and product wins from last year that should be going live as the year unfolds and you also have the refresh. So just see like how the year should unfold and what the different puts and takes are to get you guys there from the 1Q run rate? Anthony Noto: Sure. Chris gave you a specific guide for the year on revenue. Clearly, the business revenue was negatively impacted by the loss of one large customer, which we've talked about in the past. So that shouldn't have been a surprise. The tech platform revenue, if you do like-for-like on a year-over-year basis was up about 12% year-over-year. We expect that year-over-year growth rate on a like-for-like basis to accelerate throughout the year both from our existing members growth as well as new partner ads. We mentioned in the prepared remarks that we have 13 new partners that have launched in Q1 2026 and generated revenue in Q1 2026 that were not generating revenue in Q1 of 2025. So that revenue will scale over time. It doesn't come instantly. We also have one partner in the quarter that has an existing installed base, and so that's contributing. We have another integration that will take place throughout the year of a partner with a large installed customer base, which will generate revenue as well. One of the things that may be hard for people to understand is the significant benefit that we have from owning the technology platform on our own innovation. Obviously, the resources there aren't unlimited. We made the decision last year to build out crypto buy sell and hold, made the decision to launch SoFiUSD. Those products are launched and they will start to generate revenue in 2026. That will be incremental, but they definitely use resources that would otherwise be used for other partners and other services. We're excited about the strategy that we have in SoFi Technology Solutions and the 4 areas being processing, core banking and ledgers, payment hub as well as risk platform. And that go-to-market against those 4 products will help us build good sustained growth and our objective is to get back to 20% to 25% compounding growth over the years to come. This is obviously a year in which revenue is going to be disappointed because we lost that large customer, but we'll try to continue to outperform it and deliver on the numbers that Chris shared with you earlier. Operator: Our next question comes from Pete Christiansen from Citi. Peter Christiansen: Anthony, I'm just curious how you're thinking about where we are in the credit cycle generally. Obviously, credit performance was pretty good this quarter. With the backdrop of certainly higher tax refunds this year. I guess there's some perception that some underlying data that's pointing to things could get a little bit more challenging later this year, giving to you a political macro stress. Just curious on how you're planning the business around some of these perceptions. Anthony Noto: Yes. Credit performance has been strong as we reported. We have an early warning dashboard that looks across a number of macro and microeconomic factors in the performance of our own loans as well. And if that turns yellow and then red, we reduced the tiers that we're willing to underwrite. We're not in that situation in any way, shape or form. The current loans are performing well. The macro has also continued to perform well. And not only are we seeing the strong trends in our own loans across the 3 that we operate in. We're also seeing strong demand from loan platform business buyers and otherwise more broadly. We have a lot of capital on the balance sheet. We have the flexibility to meet the demand from the consumers so the combination of strong demand from consumers plus strong performance in credit and adequate capital would be not to be able to meet that demand and hold some of it on our balance sheet and continue to generate increasing net interest income. As Chris talked about, we had $690 million of cash net interest income and we want to continue to grow that. It's a great baseline of revenue that allows us to invest aggressively because it's super profitable in these other areas, which helps build up the other revenue stream, which is the noninterest cash revenue of $390 million. And for those that aren't familiar, that $390 million reported in the quarter represents the interchange from debit and credit cards. It represents the fees from loan platform business, our technology revenue our brokerage revenue and our referral fee revenue as well as origination fees that consumers pay us, and it's a cash number. Operator: And our last question today will come from Don Fandetti from Wells Fargo. Donald Fandetti: Home Lending was obviously a large market and you've had some growth there. Would you consider doing anything on the acquisition side sort of building on what you've done in the past? And if not here, like where would you look for potential acquisitions? Anthony Noto: The M&A market is very vibrant. There's a lot of assets for sale. We're remaining disciplined and looking for things that can help us accelerate strategically. We feel like we've done the right acquisitions in home loans, that's not an area that we're currently focused on. It's really driving organic growth and we continue to optimize the operation to quickly meet our members' needs. We're still investing a lot in the home loans. As I mentioned, the business more than doubled from origination standpoint year-over-year. So we're doing a much better job meeting the needs of our members. As it relates to M&A more broadly, I would say we're prioritizing things tied specifically to SoFi Technology Solutions, technology platform business. We've talked about the fact that we'd like to have a revolving credit processing as well as a core tied to that. As we mentioned in the prepared remarks, on July 1, we will launch SoFi Bank on a new modern quarter as well as ledger, and that will unlock a lot of other capabilities that we'll bring to our partners including simultaneously launching big business banking with an API format and an exchange network for Fiat and crypto currencies. And so the areas that we would probably prioritize from an M&A standpoint are really in the technology space, specifically revolving credit as well as crypto and blockchain services. We want to build out the same infrastructure services that we have in Fiat and crypto. So staking as a service, stablecoins as a Service, wallet as a service, et cetera. Thank you all. Thank you all for joining today. I want to end with a closing remark. If you've taken anything away from today's call, please take away these key points. Our strategy and execution continue to be unmatched by any company I can think of at our scale and put SoFi in a class of one. We've achieved 18 consecutive quarters of exceeding the Rule of 40, far exceeding it again this quarter at 72%, with 41% revenue growth and 31% EBITDA margins when other companies are stumbling, our revenue growth is accelerating. Most importantly, we generated more than $1 billion in cash revenue, with $690 million in cash net interest income paid to [ Aspire ] members at $390 million in cash revenue from debit and credit card interchange revenue, tech platform revenue, brokerage revenue, LPB revenue, referral revenue and origination fees. These non-lending businesses, which do not require capital and are at lower risk were in their infancy only a few years ago. but now they have reached the critical scale to meaningfully contribute to our overall growth and profitability for years to come. Our focus remains on executing to ensure we're iterating, learning and innovating like never before to generate escape velocity in delivering on our mission for our members. Our goal is to have the greatest impact to our members of any company in the world. And in doing so, we will be the winner that takes the most in driving value for our shareholders. Thank you for joining us today and we look forward to seeing you next quarter. Operator: Goodbye. This concludes today's conference call. You may now disconnect.
Operator: Good morning. My name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2026 PPG Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Alex Lopez, Director of Investor Relations. Please go ahead, sir.. Alejandro Lopez: Thank you, Tracy, and good morning, everyone. This is Alex Lopez. We appreciate your continued interest in PPG and welcome you to our first quarter 2026 earnings conference call. Joining me today from PPG are Tim Knavish, Chairman and Chief Executive Officer; and Vince Morales, Senior Vice President and Chief Financial Officer. Our comments relate to the financial information released after U.S. equity markets closed on Tuesday, April 28, 2026. We have posted detailed commentary and the accompanying presentation slides on the investor center of our website, ppg.com. Following management's perspective on the company's results, we will move to a Q&A session. Both the prepared commentary and discussion during this call may contain forward-looking statements reflecting the company's current view of future events and their potential effect on PPG's operating and financial performance. These statements involve uncertainties and risks, which may cause actual results to differ. The company is under no obligation to provide subsequent updates to these forward-looking statements. The presentation also contains certain non-GAAP financial measures. The company has provided in the appendix of the presentation materials, which are available on our website, reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures. For additional information, please refer to PPG's filings with the SEC. Now let me introduce PPG Chairman and CEO, Timothy Knavish. Timothy Knavish: Thank you, Alex, and good morning, everyone, and welcome to our first quarter 2026 earnings call. Before we begin today's call, I want to take a moment to remember our dear friend and colleague, John Bruno. His passing last week is a tremendous loss. John was not only an exceptional contributor to our company, but a wonderful husband, father and friend whose leadership, intellect, compassion and human touched everyone who knew him. Thank you to the many of you that reached out. It meant a lot to us here at PPG, but more importantly, meant a lot to his family. Now I'd like to start by providing highlights of our first quarter 2026 financial performance, and then I will share our outlook. I am pleased to report that PPG delivered solid performance in the first quarter demonstrating our ability to maintain growth momentum in a challenging macro environment, led by our differentiated aerospace and PPG-Comex businesses. We achieved organic sales growth of positive 1%, marking our fifth consecutive quarter of higher year-over-year organic sales. This growth was driven by higher selling prices with further selling prices increased, announced and expected price realization for the remainder of the year targeted to offset any inflationary impact much more quickly than prior inflation cycles. First quarter net sales totaled $3.9 billion, up 7% year-over-year with adjusted earnings per share of $1.83 and an increase of 6% versus the prior year. Our segment EBITDA margin was over 19%, reflecting solid execution of our share gains the benefits of our technology advantage products, strong brand recognition, along with excellent commercial execution. Turning to our segment performance. In Global Architectural Coatings, first quarter net sales rose 13% to $965 million with positive 2% organic growth. Organic sales for Architectural Coatings, Latin America and Asia Pacific increased by a mid-single-digit percentage compared to the first quarter of 2025 with equal contributions from selling price and sales volumes. In Mexico, retail sales were especially strong, and project-related sales continued their recovery. Architectural coatings sales in Europe remain mixed by country with a low single-digit percentage decline in total, which was partially offset by favorable pricing. Segment income increased more than 30%, supported by pricing and execution of self-help actions, which drove EBITDA margins up 230 basis points above prior year levels. We expect organic sales and margin momentum to continue into the second quarter of 2026. Also, we continue to reduce our overall structural cost in our architectural business in Europe, and we have 4 manufacturing plants that will be closed in the second half of 2026, resulting in lower fixed costs going forward. Our Performance Coatings segment delivered 5% positive net sales growth to $1.3 billion, led by double-digit organic growth in aerospace and high single-digit growth in traffic solutions and protective and marine coatings. PMC has now delivered 12 consecutive quarters of positive volume growth. As expected, automotive refinish organic sales decreased by double-digit percentage as sales volumes were lower, reflecting customer order patterns stemming from our U.S. distributors during the first half of 2025. On a positive note, we are seeing improvements in the U.S. industry accident claims. February and March industry claims were down 1% year-over-year which now makes 3 out of the last 4 months with low single-digit declines year-over-year, reinforcing a normalization trend after the high single-digit to double-digit declines most of last year. Another positive data point we are seeing our U.S. distributor fulfillment orders sequentially improve as industry level -- or inventory levels normalize. In refinish, as we previously communicated, we expect year-over-year organic sales volume declines in the second quarter as we lap strong prior year first half order patterns. We anticipate volume growth during the second half of 2026. Segment EBITDA was strong at 24%, driven by the strength of our aerospace business despite the unfavorable year-over-year refinish volume comparisons. In fact, the investments that we are making in aerospace to support our customers' demand have resulted in improved productivity and improved output. And we are well positioned to deliver consistent growth in this key end market for the next several years. I would like to again emphasize the important and sizable role that our aerospace business plays as a key growth engine for our company. Demand is expected to remain strong given our highly specialized and qualified products for both the OEM and aftermarket channels. Our backlog remains at about $350 million despite year-over-year output increase. The PPG aerospace business provides unique technology advantage products in various subsegments transparencies, sealants and adhesives, coatings, services and engineered materials. In each one of these verticals, we have a strong presence that allows us to provide a superior customer offering, including excellent distribution capabilities, creating a truly unique value driver for our company and for our shareholders. Another differentiator of PPG aerospace business is the balance is not only between OEM and aftermarket, but also we are not overly dependent on any subsegment as we are well balanced across commercial, general aviation and military. I'd like to highlight just 2 examples of the proprietary technology advantaged aerospace products that are designed to provide customized chemistry solutions inside the can and improve productivity for our customers outside the can. PPG's PRC Seal Caps deliver lightning strike protection for aircraft while significantly improving application time and material usage for our customers. ARE 3D Printed Sealants, our customized gasket solution that offers superior quality and increased customer productivity solutions. Now moving to the Industrial Coatings segment. First quarter net sales grew 4% to $1.6 billion. Organic sales were flat, including share gains that led to 1% sales volume growth well outpacing industry demand as we realize the benefit of the share gains with strength in automotive OEM coatings and packaging coatings. We expect to launch additional share gains in the industrial segment throughout this year and into 2027. From a business unit standpoint, our automotive OEM business delivered flat sales volume which outpaced the decline in global automotive industry production by about 300 basis points. The industry decline was largely due to year-over-year comparisons in China as the first quarter of 2025 was very strong and first quarter of 2026 was tepid. Expectations for China industry comparisons are to improve in the coming quarters. For PPG, due to our strong product portfolio and commercial execution, we expect to continue outgrowing the market in the second quarter and for the full year in 2026. Organic sales for our Industrial Coatings business were down a low single-digit percentage as lower volumes due to inconsistent demand were partially offset by positive pricing actions in this business. Packaging coatings organic sales increased by a double-digit percentage year-over-year, growing significantly above industry rates. Sales volumes for PPG are up over 20% on a 2-year stack basis, driven by share gains as customers continue to select our leading technologies. Segment EBITDA margin was negatively impacted by regional mix as China automotive production dropped in comparison to a particularly high level in the first quarter last year. Looking ahead, we expect sequential margin improvement driven by incremental industry and PPG sales volume growth, selling price realization and aggressive cost management. With the impact of the Iran war, costs have risen for raw materials, energy, logistics and packaging across the coatings value chain. In this rapidly evolving macro environment, we are focused on our ability to supply our technology differentiated products and services to our customers, which will allow us to maintain our organic growth momentum. I'm expecting the actions we are taking, combined with PPG's portfolio strengths to offset geopolitical-driven impacts. To date, we have had limited impact from supply shortages and we have the ability to leverage our unique broad and global supply chain footprint to securely source raw materials and drive competitive pricing for those raw materials. Additionally, we are leveraging our years of expertise in product formulation technology and our ability to maximize the use of AI to optimize products to drive reductions in our raw material costs. Considering our procurement capabilities, our global footprint, our formula flexibility, our portfolio strengths and the current macro environment, the impact of PPG is expected to be a mid-single-digit percentage in the cost of goods sold for the remainder of the year. We expect to fully offset these costs and we are proactively raising prices to secure raw materials for our customers. Given the distribution models and price mechanisms we have in place, we expect to deliver price cost realization much more rapidly than we did in previous inflation cycles. This realization will impact our Global Architectural Coatings, Performance Coating segments. First, and then flow through our Industrial Coatings segment. Importantly, there are areas where we anticipate potential upside to the second half of 2026, such as our growing aerospace business, on our architectural coatings Mexico business where demand has been strong. Additionally, industry demand in automotive refinish has been recovering faster than we initially expected. As a result, we are reaffirming our full year 2026 EPS guidance range of $7.70 to $8.10. Again, let me reemphasize, our top priority is supporting our customers' needs through technical expertise, products with consistent quality and continuity of supply even as market conditions remain highly dynamic. Now let me talk about our balance sheet and cash. Our strong balance sheet continues to provide financial flexibility. We ended the quarter with cash and short-term investments of about $1.6 billion. We repaid $700 million of debt that matured in the first quarter and returned approximately $260 million to shareholders through dividends and share repurchases. Our cash deployment remains focused on maximizing shareholder value creation. Looking ahead, our accelerating organic growth momentum and proactive pricing actions position us well for the year. For the second quarter of 2026, we expect strong growth in aerospace, Architectural Coatings, Latin America, protective and marine coatings, automotive OEM coatings and packaging coatings, while demand in Architectural Coatings Europe, automotive refinish coatings and in global industrial end-use markets will remain below prior year. We expect overall pricing for the company to be positive, with the strength from our Performance and Architectural Coatings segment and flat year-over-year price in the Industrial Coating segment, with all 3 segments having improved pricing versus the first quarter. This will result in organic sales growth for the second quarter in the range of flat to positive low single digits versus the prior year. Given our ability to outperform the macro through our commercial momentum, combined with our pricing realization and self-health actions, we expect to deliver adjusted earnings per share growth in the range of flat to a positive low single-digit percentage for the second quarter versus the prior year period. We are confident in our strategy and the strength of our portfolio, we're delivering higher growth and earnings despite challenging market conditions. Thank you to our PPG team around the world who make it happen and deliver on our purpose every day. We appreciate your continued confidence in PPG. Now before we open the line for questions, I would like to congratulate Vince on his upcoming retirement on this, his final PPG earnings call. Thank you, Vince, for more than 40 years with PPG. Thank you for being a great contributor to our company, a driver of results, a driver of shareholder value, great mentor to many talents, a great teammate to our operating committee, a great partner to the last 3 CEOs and a great friend to me. Thank you, Vince. As PPG makes the CFO transition, we are delighted to welcome Jamie Beggs as our new Chief Financial Officer. With her extensive background and financial leadership, Jamie brings a wealth of experience that will be instrumental in driving our continued growth and success. Please join us in extending a warm welcome to Jamie as we work together to achieve new milestones and create lasting value for our stakeholders. We are thrilled that Jamie is joining our team. Now operator, please open the line for questions. Operator: [Operator Instructions]. Your first question comes from the line of Ghansham Panjabi with Baird. Ghansham Panjabi: Our best to you, Vince and our very best for John's family as well. I guess, Tim, first off, on your comments on price cost recovery will be much faster than prior period. Can you just outline some of the specific changes you've made to support that? And then related to that, you've been very calibrated in the past with pricing with previous inflation cycles to kind of maintain your market share, et cetera. Do you expect volumes to hold this go around as well, just given the near 20% increases you've implemented thus far? Timothy Knavish: Yes. Thanks, Ghansham. Look, the difference this cycle from a volume standpoint is, as you know well, for the last 3 years, we've been building our organic growth muscle, right? So we have to tremendous momentum from an organic growth standpoint that will help as we move forward with price increases. And if you compare it to a couple of cycles, the pre-COVID cycle of 2017, '18 took us about 1.5 years to get to run rate neutrality. The 2021 cycle, which was the post COVID, combined with the Texas freeze took us about a year. Now we're talking months. So it's a combination of 2 things, Ghansham. Number one, we've always had a good pricing muscle. And with each cycle, we refine that. We learn, we get better, we get faster. Now from a volume standpoint, we're combining it with positive momentum on the organic growth muscle that we're that we've been building and demonstrating results for these last 5 quarters or so. So we're confident that we're going to be able to strike the right balance between pricing and volume. Operator: Your next question comes from the line of Michael Sison with Wells Fargo. Michael Sison: Nice start to the year. And congrats to you, Vince, and John will be sorely missed. In terms of your outlook for the second half, Tim, how do you see volumes sort of shaping up sort of at the midpoint? Any effects from the [indiscernible] conflict on each of the segments? And just give us your thoughts on the type of volume growth that could be -- that's kind of embedded in your outlook? Timothy Knavish: Yes. Thanks, Mike. And everything, unfortunately, you kind of have the time stamp right now because it's just so fluid out there, right? But based on today's environment, we feel good about the second half volume. A couple of things. First of all, aerospace beat our own expectations in Q1, and we continue to see improving output there. And as you know, we're essentially sold out. So every incremental output that we get is an incremental volume for us. Second, and this is a significant one for us. We had said all along that Refinish would have positive volume in the second half, it's recovering a little earlier than we expected, and we got 2 really good sets of data points in U.S. collision claims rates as well as improving U.S. distributor fulfillment orders. Then on top of that, we've got the industrial segment share wins that we will continue to launch as we move through the year. And finally, Mexico, it's really recovered nicely for us. Retail is doing great. And with each passing quarter, projects get a little better. And in some of our other businesses, packaging doing great up double digits, PMC is doing well and has been doing well for a couple of quarters. We've got a good order book there. We have not seen any order book changes with the Iran conflict. Obviously, we've seen change in feedstock pricing, but when it comes to volume and order books based on today's current environment, we have not seen any negativity in our order books. Vincent Morales: Yes, Mike, this is Vince. Just to peeling back a little on the refinish comments. Just as a reminder for everybody in the baseload, we had very strong refinish activity in the first half of '25 distributors stopped up inventory. We were well above market. the second half, the patterns hurt us. So we have much easier comps. So we still expect muted volumes in refinish for the year, but the comparisons are why Tim said, we expect growth year-over-year in the second half. Operator: Your next question comes from the line of John Roberts with Mizuho. John Ezekiel Roberts: And it was good to see the PPG family come together for John Bruno. And welcome, Jamie and Vince again, thank you very much for all the good service. And good luck with the Penguins, tonight. Tim, on your guidance on Slide 9, raw materials, how much higher do you think costs are going up for the smaller competitors who maybe buy raw materials through distributors? And with the dynamic pricing that's going on out there, are there gaps opening up between competitor pricing? Or is it relatively orderly and competition is generally moving up together? Timothy Knavish: John, thanks for your support of Mr. Bruno. It's really hard for me to say what our smaller competitors are seeing. But what I will say is we are getting more favorable deals and contracts and agreements because of our volume, right? So even though prices are going up and we're projecting basically mid-single digits here based on today's knowledge, but -- and that's on the back of our volume, our global footprint and our ability to get the best deals in the market because of our scale. So I would imagine that our smaller competitors are likely like we're seeing higher prices than what we're seeing on the input costs. Operator: Your next question comes from the line of Chris Parkinson with Wolf Research. Christopher Parkinson: Vince, a sincere congratulations. And most importantly, thank you for the life advice going back to 2015 before I was even married. And I must disagree with one of my colleagues here, go Flyers. Okay. In terms of the second half of the year -- sorry, that was in honor of our friend. In terms of the second half of the year, Tim, perhaps you could just give us kind of the puts and takes. Obviously, you've been very proactive in pricing in terms of those dynamics, which is helpful in terms of to contemplate, but also that you could have some positive mix effects, specifically in PC. So could you just kind of go through your thought process in terms of how you're thinking about margin in the second half, what you want to take, what you need to see or just overall? Timothy Knavish: Yes. Thanks, Chris, and thanks for your support here recently with the passing of John as well. The -- first of all, I'm confident that we'll have positive volume in the second half. I'm confident that our net EBITDA margin will improve in the second half. And that's because of a number of things. Number one, aerospace will continue to grow, good margin contributor. The refinish recovery that we've already talked about, a big impact on our net-net margin. Mexico continuing to grow. That's a good contributor to our net margin. So from a mix standpoint, it's really all good news for us, right? And then from kind of a top line and gross margin impact standpoint, it's all those 3 things added together, plus the launch of our Industrial segment share gains as we progress through the -- and these are ones that are already locked in. So we've got a favorable mix. We've got pricing actions underway. Yes, raws will be higher, energy costs will be higher and logistics costs will be higher. But we feel good about the playbook and the actions that are in place to drive not only the price cost side of the offsets, but also these other really PPG portfolio differentiators that will drive elevated mix in volume as we move through the second half. Vincent Morales: And baked into our guidance, Chris, if you recall, we still have cost actions we're taking. We have several plants coming out in Europe in the second half of the year. And so that will help from a cost structure perspective. Operator: Your next question comes from the line of David Begleiter with Deutsche Bank. David Begleiter: First, the best to John's family. And Vince congrats and thank you, sincerely. Tim, just on the 20% -- on the price increases you've announced, how should we think about the realizations that you will realize and -- and beyond the current spike in raws, the sustainability of these increases when and if oil prices and other input costs come down. Timothy Knavish: Yes. So thanks, David. Thanks for your support. So we announced -- I announced to the world price increases up to 20% and -- and that's because I had to notify our customers around the world that there are some products that will have to go up that much, right? It will be -- we'll have -- the actual realization will be spread out depending on customer size, depending on what products they actually buy depending on the actual cost impact of those products. So in order to offset the mid-single-digit cost of goods sold increase that we're expecting for the remainder of the year, we need to realize low single digits to offset that as a total company. And then we're ready if the situation gets worse, if we have to flex more moving through the year, we'll do more, and we'll drift our price up to mid-single digits. But right now, based on today's operating environment, net-net, we need to get solid low single digits to offset mid-single-digit COGS inflation. Now what happens if and when it comes down the other side, just like there's a lag going up, there will be a lag coming down. And also, what's yet to be determined, Dave, is what's the impact of the structural damage to petrochem facilities in the region that may stretch out when -- how and when things back down. Vincent Morales: And just a reminder to everybody, in the prior cycles, in almost every business we went out for more than one price increase as the situation has developed. So again, this is not uncommon that we price for what we know today, and then we adjust as necessary. Operator: Your next question comes from the line of Frank Mitsch with Fermium Research. Frank Mitsch: Yes, rest in peace, John. We lost a truly great one. Vince, I'm roughly calculating that this is your 80th conference call as I was wondering if you could take a moment or 2 and recap the highlights of each one of those conference calls and perhaps they'll put a plaque in the conference room where these conference calls are held. But my business question is free cash flow generation was negative in the first quarter as is typically the case. I was wondering how you look at the potential for free cash flow generation in 2026? And feel free to be as bold as possible so you can give Jamie a stretch target. Vincent Morales: Frank, if you look at our cash from ops, we were up about $50 million versus the prior year. We did have elevated capital spending lower than the prior year, which was our target. So again, our cash forecast did not change versus what we gave in January. We're expecting a good strong cash here. Can you talk about the priorities? Timothy Knavish: Yes, yes. Look, first of all, we were thinking about a dartboard rather than a plaque here. We expect a good proxy walking around number for us is for our cash flow to be about 10% of our sales, right? And then the prioritization of that, of course, we got -- we got a dividend that not everybody has. We'll keep that going. We've got some really good organic investments like what we're doing in aerospace, for example. We've been looking at M&A. It's not our #1 priority. It's not the tip of the spear for us, but we will do deals when they make sense for our shareholders. In my 3.5 years, we've done 2 small bolt-ons. So we'll use that if and when the right asset comes along at the right price. But beyond that, I think we're now at 10 straight quarters of doing repo, and you should expect me and Vince and my new CFO to follow that same pattern. Operator: Your next question comes from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: A 2-part question. What about the present, what about the future? In the quarter, what was the currency benefit to EBIT year-over-year? And you speak about getting ahead of raw material cost inflation, but you do sell to the auto OEM industry. Do you think that, that an industry area where you will be ahead of raw material inflation or behind on it and in your spending for aerospace that you speak about being capacity and cost [indiscernible], at a point in time you are late a little bit because you have more capacity to be available as [indiscernible] or it doesn't work that way? Timothy Knavish: Yes. Jeff, we might have lost you at the tail end of your question, but I think I've got all 3 parts of them. So I'll take auto. Go ahead, Jeff, please. Yes, you're very choppy, Jeff. We lost you at the end. Jeffrey Zekauskas: But what -- Timothy Knavish: Yes, go ahead, please. Jeffrey Zekauskas: Just try to answer the questions, we'll go from there. go from there. Timothy Knavish: Okay. Thank you, Jeff. I'm going to take the 2 and I'll let Vince take the currency one. On auto, I mean, look, we all know it's the toughest of our businesses to get pricing, but we get pricing. If you look at the last cycle, we got pricing coming out of COVID and on the Texas freeze. One thing that helps with this situation, actually, Jeff, is it's such an acute and well-known event and driver to inflation and petrochem feedstock that you start from a stronger point of not having to demonstrate and explain and convince. Now that said, as you know, we also have some index contracts that will automatically move but will automatically move with some time lag. So in our guide, in our normalization by run rate normalization by the beginning of '27, Q1 of '27, we've got all of that factor in, okay? Now aero, absolutely, you will see increases in output volume and therefore, revenue for our aerospace business going forward. I would put it in a couple of different buckets. One, we're continuously improving output with some of these incremental debottlenecking kinds of investments that we've been making round numbers over the last year. So we've put about $150 million into those kind of investments. And they're paying off as we go, you'll see some improvement in late '26 into '27 coming out of those investments. Second, we announced a new plant to the tune of about $380 million that will be more of a step change in volume output as we get out into like the '28 time frame. The third category Jeff, is we've got a lot of engineering work happening right now. We're not done with investments, and I can't get ahead of my board or anything, but we're still working on additional investments. So you should, going forward, expect to see a nice increase in our aerospace revenue. Vince, do you want to take the currency? Vincent Morales: Yes. Jeff, the currency impact for Q1 was less than $0.10 year-over-year positive. That was included in our guide for the year and for the quarter. If you look at the balance of the year, so the remaining 3 quarters, the total is going to be less than half of that and most of that in Q2. So again, all included in our original guide back in January. Operator: Your next question comes from the line of Kevin McCarthy with Vertical Research Partners. Kevin McCarthy: Vince, congratulations to you. Appreciate all of your help over the last 20 years or so, and you'll be greatly missed, as well Mr. Bruno, of course. My question maybe for Tim, is on the subject of M&A. I think you made a small acquisition recently in [ Ozark ] as part of [ Traffic Solutions ]. Curious about that deal. But maybe more importantly, can you put external growth into forward context for us, Tim, I think you've been quite focused on organic growth now that you have 5 quarters of expansion under the belt. Do you feel like you have a little bit more license to grow [indiscernible]? Or should we expect PPG to remain highly disciplined as you have a [indiscernible]? Timothy Knavish: Yes. Thanks, Kevin. So [ Ozark ], I would call that an opportunistic asset. Highly synergistic for us with double underlying under highly -- we paid -- we got a good price relative to what it was sold for a number -- a few years -- just a few years ago. Walking around number, Kevin, about $100 million in revenue. So it's a small bolt-on, but what it does because of the highly synergistic nature of it is it actually helps our margin position and cash generation position for that small business force of traffic solutions. So it raises its margin profile a little bit. But the reason we have that in our portfolio is it's a really consistent cash generator for us that we can use to then deploy that cash on things like new aerospace plants. And it's steady because it's safety and infrastructure, it's very, very, very stable. And so it just kind of spits off cash for us year-over-year. And now those are -- that will deliver financial -- great financial returns for us and our shareholders because of the high synergies and the relatively low purchase price. Now more broadly, I am very pleased with how the teams have grown that organic growth muscle. And Kevin, I remember some of our conversations 4 or 5 years ago. And so we're not done. So we're pleased with 5 straight quarters of organic growth, and by the way, outperforming market over those 5 quarters. So I think we've always had a license. We've always had a strong enough balance sheet to do whatever M&A we want. But the way I think about it is, first of all, it's got to be the right asset. I'm not interested in just buying something so that I can put another [ plaque ] somewhere or paying something purely for the sake of raw material synergies. I want to buy something that adds to our future organic growth and margin profile. Second, it's got to be the right time. The last few years has not been the right time as we've been first of all, exiting some things in our portfolio and tripling down on organic growth. I think we can handle some deals now, but it still has to be at the right price because I've got some pretty darn good organic investment opportunities that have great financial returns. And so I'm really -- to use your word discipline, we will continue to be disciplined, but I do think we have the right license to do selective M&A. And you've seen us with 2 small bolt-ons this year. We actually did a kind of a productivity outside the can, [ Allied Products ] acquisition earlier in the year to help industrial refinish pipeline. So it's still not the tip of the spear for us. We will still be extremely disciplined. We will look at every asset that comes available, but it's got to meet the right assets, the right time and the right price. Operator: Your next question comes from the line of [ Duffie Fischer ] with [ Vertical Research Partners ]. Unknown Analyst: Two questions on refinish. So first, when you anniversary Q2 revenue will be down about 10%, has that done anything structurally to the margin there? Do you need to do any restructuring to reset that on a profitability basis? And then second, once we get through the snapback in the second half, should we think about that business structurally being kind of flat volumes and price of 2% to 3% going forward? Timothy Knavish: Yes. Duffie, I think you're pretty close there. We don't -- as far as the go forward, right, the go forward, it's not going to be a high-volume growth industry. But it's still a good revenue growth and EBITDA growth machine for us because of our ability to capture value for the total value that we deliver, because of the work we've been doing to expand our TAM, right, we're selling more into the body shops now than we ever did beyond just the coatings right? So when you think about digital tools, Moonwalk, [ Allied products ], we just have a bigger target TAM. That's enabling us to grow. And then we've had a really good run of share gains there. And so as the market normalizes, this will be -- it will never be our highest growth business but this will be a nice low single-digit growth business for us with really good margin and really good cash. Now to the first part of your question, we have not had to do massive restructuring with this decreased volume. So what you should expect instead is as things normalize in the second half, you should expect outstanding leverage because you've seen some of that negative leverage in the second half of last year, right? So you should expect a really nice snapback in larger leverage. Now define snapback though, that's really a bottom line snapback. We'll reach this industry, we expect to return to normal over the last x number of years and normal being a minus 1, minus 2 industry volume. We'll do better than that because of our expanded TAM and then a really nice EBITDA machine for us. Operator: Your next question comes from the line of James Hooper with Bernstein. James Hooper: I'd like to go back to aerospace, please. We've got Europe running out of jet fuel flight cancellations and other potential issues if the conflict continues. Can you remind us what your split of OEM and aftermarket is? And can you give a little bit of detail about how aerospace growth could be affected in flying in our [indiscernible]? Timothy Knavish: Thanks, James. I'll give you the spoiler alert answer first, and I'll give you a little more details. We see no impact of the potential slowdown in flight miles in some parts of the world in 2026. And here's why. First of all, the business is balanced roughly 50% OEM, 50% aftermarket. And then it's balanced across commercial aviation, general aviation and military. So kind of one of those subsegments may be affected from a flight mile standpoint, but it's one of many subsegments. And then even that subsegment has learned a very hard lesson coming out of COVID. What the commercial customers did is they radically depleted their inventories of aftermarket products, including a lot of what we sell. And because of the strength across the breadth of this industry, that has never been able to be rebuilt. And I still get phone calls like literally weekly about restocking and our ability to keep aftermarket parts and components in stock and rebuild. So what you should expect, if that does happen, I think we would be rebuilding aftermarket inventory for some time period while the -- all the other segments that I mentioned remain red hot. And I think, if anything, it could be an improved mix for us. Because typically, your aftermarket mix is a little richer than your OEM mix. So I watched news like everybody does, I see the impacts and I see customer, CEOs talking about this on the news, but we see really no impact here because don't forget, because of what's going on in the world here and the NATO rebuilding their own defenses, the military side of the business growing tremendously on both OE and aftermarket as well. Okay. Operator: Your next question comes from the line of John McNulty with BMO. John McNulty: Give condolences to John's family, a great guy. And Vince, it's been a really, really great ride. So appreciate all the help. Just a quick one on the protective and marine business. I think the expectation was that we were going to see that the growth in that business moderate just given the huge success you've had over the last 1.5 years or 2 in that? And yet you still put up high single digits. I guess, can you help us just think about what drove that presumably stronger-than-expected volume and how we should think about that throughout the rest of 2026? Timothy Knavish: Yes. So we did -- we have been stacking like lots of double-digit and high single-digit quarters for multiple years. So just by the laws of big denominators, we did expect that to come down somewhat, but we are very pleased that in Q1, we still put up high single-digit, high single-digit growth up of much bigger denominator. I'd say in the short term, the real strength is Asia and has been Asia and both marine newbuild and marine aftermarket have been stronger. But we -- look, there's a lot of protective coatings work going on around the world. There's a lot of data center work going on around the world. We just launched and announced a comprehensive end-to-end offering for data centers. There's a lot of infrastructure work going on. So we see that business continuing to be a growth engine for us for the rest of -- and, frankly, beyond because it's got some strength in some segments that are relatively unaffected by some of the macro issues that are affecting other places. Operator: Your next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent Andrews: Thank you Vince and my condolences [ on course ] for the Bruno family. John, he was a wonderful man. Could I ask you to talk a little bit about the Industrial Coatings margins? They came in a little bit softer than expected. You did call out Chinese mix on the auto OEM side, and I guess there was a little bit of negative price, I think, is a function of the index contracts. But can you just help us understand why the margin contraction was so great and how to think about it through the balance of the year? Timothy Knavish: So Vincent, you could answer the question for me because you nailed it, right? So let me just give a little more color to it. So the biggest impact was China auto. As predicted, it was going to be down. I think it was down well into the double digits as far as China auto builds for the quarter. And that -- we outperformed that a bit because of some of our wins, but it was still down significantly. And that is -- that's a really good operating margin business for us. Because if you think about it, 1 out of every 3 cars in the world is built in China, so the scale and the leverage is stronger on the upside when things are in produce in China, but the negative also happened. So that was the biggest. The second was even though we're talking constantly over these last 2 months about raw material increases, we were still rolling off some index contracts from the deflationary cycle, mostly in our automotive and our packaging businesses, which are both in Industrial segment. We should be wrapping up the roll-off of those in Q2. We've got a few more that have to roll off, but that's really been the drivers. Number one, automotive OEM builds in China; and number two, index contracts. Vincent Morales: And just to add some more color on China auto builds. So last year, as Tim mentioned, a very, very strong quarter for the industry for PPG. This year, the reverse. On a 2-year stack basis, we're almost flat in China. So again, we had -- the comp issue is really what we're dealing with. Operator: Your next question comes from the line of Josh Spector with UBS. Joshua Spector: My congratulations to Jamie and condolences to John's family. He'll be sorely missed. I did want to ask on pricing and surcharges specifically. How much are you using surcharges this cycle versus prior years? And then kind of similar again, on auto OEM, have contract structures changed to allow that? Or has the cycle of recovery become a lot faster in that part of the business? Timothy Knavish: Yes, Josh, we do -- we are using surcharges in some of our businesses more this time because freight costs are up, right? Whereas most of our contracts and even noncontractual businesses we're typically talking about raw materials, but we've got 2 additional ones that don't get as much attention, but are pretty significant to that MSD contributor and that's logistics cost because of diesel fuel and European energy costs because of what's going on. So I'd say in those 2 specific areas, we're using surcharges more than we typically have. Beyond that, it's largely been our typical price increase, which we prefer. They're stickier. And again, on the auto question, most of the auto contracts are designed around raw material inflation, less so around freight and energy. But those are discussions that we should have with our customers first, and we've started those discussions. So more to come there. But most of the index contracts that we have in auto and packaging are pretty much limited to raw materials. Operator: Your next question comes from the line of Matthew DeYoe with Bank of America. Matthew DeYoe: Yes, just echo what everybody has been kind of saying, Vince, congrats on a great career. And clearly, the sentiment on John, it was just such a core salt of the earth, guy. So yes, it's a huge loss. I wanted to ask on the OEM side in China. There's often discussions in the market around Chinese competition or China moving downstream coatings is one area where I feel like maybe there's roadblocks to how far China can compete globally. But in that market, are you seeing better competition? Are there pushes to adopt local suppliers for the auto companies? And then on the refinish side, I mean -- well, I'll just stop there and I'll let you answer first. Timothy Knavish: Okay. Thanks. So there's no doubt that the China automotive OEM industry has gone through an absolutely radical transformation in the last couple of years with Western JVs dramatically shrinking and the China domestics dramatically increased. And there's also no question, Matt, that those Chinese domestics have worked hard to get Chinese supplier content on the vehicles. But I would say thus far that has all been on, let's call it, hard parts, rigid part, [ rigids ] that the Chinese companies can produce. When it comes to automotive coatings in China, there is already more competition in the rest of the world because you've got the traditional 3 plus you've got the 2 Japanese players and 1 Korean player. But the finished film on a vehicle, it's very hard to duplicate, very hard to reverse engineer all the way back to resin formulation, which is really the backbone of automotive OEM coatings. And so that gives automotive OEM coatings some protection. I don't know what my peers do, but I know we produce the secret sauce outside of China and ship it into China. So the coatings by nature of you're buying kind of mixed chemicals and the end product is a finished film on the vehicles, which because of the transformation that happens in the application and curing process is different than the mixed chemicals. It does give a nice buffer of protection for automotive OEM coatings versus other automotive parts. Operator: Your next question comes from the line of Laurent Favre with BNP. Laurent Favre: I'd like to come back to the [ MSD ] inflation point, please. And we're seeing energy solvent, lots of spot prices on upstream chemicals that more than 50%, sometimes 100%. And I understand you guys don't buy products that are just out of the cracker, but still, I'm wondering how it's only are those spot numbers not coming through in actual contract negotiations? Or are the [indiscernible] producing resin and additives being squeezed? Or is it that you have contract protection for the rest of the year, but then you will see further inflation into 2027? Timothy Knavish: Thanks, Laurent. I'd say 2 comments on that. Of course, our suppliers are seeing that energy impact, mostly in Europe. And we've got that built into that blue box of mid-single digits overall cost of goods sales inflation. And then the second piece of energy is logistics costs, and we've got that built in there as well. And so we have all of that, everything that -- you got to timestamp it based on our best estimates of today's operating environment. But we've got that all built in. We're absolutely seeing what you described. But we've got that all built into our guidance. Vincent Morales: Yes. Laurent, as you're fully aware, most large coating companies do not pay anything close to spot, especially when you have commodity inflation spikes. So we're contracted and we are negotiated. Most of our raw material supply, not only for the quarter but for the full year. Timothy Knavish: And one final comment I'll make, really, Laurent, on your question and even more broadly, on the whole raw material and total inflation. One big difference between this cycle and the cycle coming out of COVID, which was a combination of post-COVID recovery and the deep Texas freeze, at that time, you'll recall that coatings industry volumes were very high. A lot of coatings companies could not keep up with customer demand. So that is a significant difference when it comes to what does a coatings company see, particularly a large coatings company see versus what is being seen upstream. Supply-demand, economics still matter. And that's a big differentiator between this cycle and the last cycle. Operator: Your next question comes from the line of Patrick Cunningham with Citi. Patrick Cunningham: I'd like to echo my deepest condolences to John's family and the PPG family and thank you to Vince for your partnership over the last few years. For Architectural EMEA, I think you mentioned closing 4 manufacturing plants in the second half. Could you quantify the fixed cost savings there and cost to deliver? And then maybe more broadly, how you are thinking of the long-term strategic value for the business -- Timothy Knavish: Yes. Are you there, Patrick, we lost you a little bit? Patrick Cunningham: I'll just try again. [indiscernible] you mentioned clean and -- yes, yes. And then the [indiscernible] long-term sort value -- Timothy Knavish: Right. So yes, 4 plants, here's a good walk-in around number for you. You'll see the savings in 2027. But a good walk in a round number is about a $25 million reduction in our fixed cost base from the closure of those 4 plants, and that will go on in perpetuity for us. Now in total, you'll see about a $50 million structural restructuring benefits for our company this year. You'll see another $50 million next year, with $25 million of that $50 million being tied to these 4 plants. Now that's not the only kind of fixed cost reduction initiative. We've got some restructuring, some back-office people costs being reduced. We've got a lot of formula optimization costs going over there as well. So the value to this business, when markets are even flat, this business delivers really good earnings and really good cash to us. That's the value in the portfolio. We have, over the last couple of months, seeing a little better volume. We had a good March in architectural Europe. So as you think about this market getting to flat volume and the mission of this business in our portfolio is to spin off good earnings and good cash so that I can deploy that in some of our higher growth, higher technology businesses. Every -- we're constantly evaluating each of our businesses' mission and how they're performing to that mission in our portfolio. But that's how we're viewing it today. And we've got -- we're not waiting. We're not sitting around hoping and waiting for a European recovery. We're building a business that can perform well at flat volumes. Operator: There are no further questions at this time. I would now like to turn the call back over to Alex for closing remarks. Alejandro Lopez: Thank you, Tracy. We appreciate your interest and confidence in PPG. This concludes our first quarter earnings call. Operator: This does conclude today's call. Thank you all for attending. You may now disconnect.
Operator: Good morning, everyone. Welcome to the Lennox International Inc. 2026 First Quarter Earnings Conference Call. All lines are currently in a listen-only mode and there will be a question-and-answer session at the end of the presentation. As a reminder, this call is being recorded. I would now like to turn the call over to Chelsey Pulcheon from Lennox International Inc. Investor Relations. Chelsey, please go ahead. Chelsey Pulcheon: Thank you. Good morning, everyone, and thank you for joining us as we share our 2026 first quarter results. Joining me today are CEO, Alok Maskara, and CFO, Michael P. Quenzer. Each will share their prepared remarks before we move to the Q&A session. Turning to Slide 2, a reminder that during today's call, we will be making certain forward-looking statements that are subject to numerous risks and uncertainties as outlined on this page. We may also refer to certain non-GAAP financial measures that management considers relevant indicators of underlying business performance. Please refer to our SEC filings available on our Investor Relations website for additional details, including a reconciliation of GAAP to non-GAAP measures. The earnings release, today's presentation, and the webcast archive link for today's call are available on our Investor Relations website at investors.lennox.com. Now please turn to Slide 3 as I turn the call over to our CEO, Alok Maskara. Alok Maskara: Good morning, everyone. Before turning to our quarterly performance, I want to recognize the exceptional adaptability and dedication of our team, as well as the trust and loyalty of our customers. While the macro environment remains uncertain, our core values empower us to respond with discipline, innovation, and an unwavering commitment to enhancing the customer experience. Turning to Slide 3, revenue was $1.1 billion, up 6% year-over-year as growth initiatives gained traction and channel conditions stabilized. Our segment margin was 14.4% in the quarter, down 130 basis points primarily due to the impact of factory under-absorption. Operating cash flow was $16 million, and adjusted earnings per share for the quarter were $3.35. In Home Comfort Solutions, industry conditions began to stabilize as expected. One-step results continue to be impacted by a weak new home construction market, while sentiment in the two-step channel improved as distributors began to restock ahead of the summer season. In Building Climate Solutions, emergency replacement momentum and disciplined execution contributed to record quarterly performance. We are reaffirming our full-year adjusted earnings per share guidance range of $23.5 to $25. With that context, let us turn to Slide 4 to discuss the current economic outlook. The industry environment continues to gradually improve. Channel destocking has largely concluded as dealers regain confidence and replacement demand strengthens. Consumer sentiment remains cautious, contributing to continued softness in new home construction and remodel activity. At the same time, Lennox International Inc.-specific growth initiatives are gaining momentum and beginning to offset these pressures. On the cost side, we are experiencing inflationary and tariff-related increases across commodities, components, and finished goods. Fuel and transportation costs are also rising. In response, we are sharpening our focus on mitigation activities, including productivity and reductions in material cost. We are also further streamlining our supply chain, optimizing manufacturing operations, and implementing thoughtful pricing actions. In Home Comfort Solutions, sales volume year-over-year improved sequentially during the quarter, supported by better performance in the two-step channel. Repair versus replacement stabilized, providing greater visibility into underlying demand trends. New product introductions, including a successful water heater launch and growing traction with new heat pump products, contributed positively. In addition, the on-track integration of Subco Parts and Supplies strengthens our attachment rate growth vector. In Building Climate Solutions, our superior execution continues, with emergency replacement and national accounts both driving volume growth. Greater engagement across our full lifecycle offerings, along with the integration of DuroDyne Parts and Supply, is expanding our commercial portfolio. Now let's turn to Slide 5 to highlight recent product introductions. Innovation continues to be a critical differentiator for Lennox International Inc. Our recently launched products further elevate our competitive position to meet the evolving needs of our customers, particularly around efficiency, backward compatibility, and ease of installation. In commercial, our new Stratagos rooftop with heat pump technology expands replacement options for customers. This product offers greater flexibility in where and how systems can be installed, supporting a wide range of electrification as efficiency expectations continue to rise. In residential, we are broadening our heat pump portfolio to serve all climates and installation requirements. Cold-climate capabilities allow us to better address demand in northern regions, while our new compact air handlers make it easier to deploy high-efficiency systems in retrofit and space-constrained applications. We are also extending our presence within the home through high-efficiency Lennox International Inc. heat pump water heaters via our Ariston joint venture. This new product integration supports the convergence of HVAC and water heating and strengthens the Lennox International Inc. home control platform. Together, these innovations expand our addressable market, increase share of wallet, and reinforce Lennox International Inc.'s long-term competitive position. With that, I will turn it over to Michael to review our financials. Michael P. Quenzer: Thank you, Alok. Good morning, everyone. Please turn to Slide 6. After two consecutive quarters of year-over-year sales declines, we were pleased in the first quarter to return to year-over-year revenue growth of 6%. Growth from our DuroDyne and Subco acquisitions completed in Q4 2025 contributed 6%, while growth in BCS was offset by continued sales declines in HCS. As expected, residential end markets remained down year-over-year, but the rate of decline improved sequentially versus the fourth quarter of last year. As inventory levels normalized, the segment profit was negatively impacted by approximately $50 million of manufacturing cost under-absorption. Against that backdrop, results progressed as expected. Let me turn to the details of our Home Comfort Solutions segment on Slide 7. In our fourth quarter earnings call, we noted that the first quarter end markets would remain challenging, which should show signs of improvement. Overall, HCS revenue declined 10%. M&A contributed a positive 2% while organic revenue declined 12%, with one-step down approximately 10% and two-step down approximately 5%. Organic sales volumes declined 21%, but this represented a meaningful improvement from a 32% decline in 2025. Within the one-step channel, lower new construction activity continued to weigh on results. In the two-step channel, distributor sentiment improved as customers began to restock ahead of the summer season. Mix and price realization contributed positively to results, driven primarily by the full conversion to new R454B products. Product costs were a $23 million headwind, driven by materials inflation and under-absorption due to lower production levels. Finally, acquisitions contributed approximately $2 million of profit, and SG&A cost actions taken last quarter mostly offset SG&A inflation. Please turn to Slide 8 for an overview of the Building Climate Solutions segment. BCS delivered another exceptionally strong quarter, with organic sales up 26%, M&A growth up 12%, and profit margins expanding 300 basis points. Sales volumes increased 17% as national account demand normalized alongside continued growth in emergency replacement and new customer wins across both equipment and service offerings. Price and mix delivered 9% revenue growth, driven by the full transition of light commercial products to the new R454B refrigerant. Similar to HCS, BCS experienced absorption pressure as we optimized inventory levels, but manufacturing cost efficiencies offset this impact. M&A contributed $7 million of profit growth, offsetting SG&A inflation and distribution investments. Please turn to Slide 9 for cash flow and capital deployment. Free cash flow in Q1 2026 was a $39 million use of cash, an improvement versus a $61 million use of cash in the prior-year quarter. Underlying operating performance improved materially. Adjusting for approximately $30 million of higher capital expenditures year-over-year, operating cash flow was $16 million, an improvement of $52 million driven primarily by inventory growth of $60 million this quarter compared to $210 million in the prior-year period. Inventory build in the quarter focused on parts and specific SKUs to support customer fulfillment during the upcoming peak season. Given normal seasonality, we expect inventories to moderate from current levels in the second half of the year. We continue to maintain a strong balance sheet, with healthy leverage while supporting the $550 million acquisition completed in Q4 2025 and continued share repurchases. We also see a healthy pipeline of bolt-on M&A opportunities and remain disciplined, prioritizing deals that enhance our portfolio and meet our return thresholds. For 2026, we continue to expect approximately $250 million of capital expenditures focused on innovation and training centers, digital capabilities, distribution network optimization, ERP modernization, and targeted AI capabilities. Please turn to Slide 10 to review our updated 2026 financial guidance. Our updated full-year 2026 guidance reflects Q1 results and trends including higher cost inflation and tariffs. The tariff environment continues to evolve with little notice. Earlier this month, new Section 232 tariffs were announced. As Alok noted earlier, we have a proven track record of using multiple levers including price and productivity to offset tariff-related cost pressure. As a result of our move to FIFO accounting, we do not expect any income statement impact from these new tariff rules until the third quarter. With that context, I will walk through the specific guidance items that have changed since we introduced our initial 2026 outlook in January. All other guidance items remain unchanged. Revenue is now expected to grow approximately 8% compared to prior guidance of 6% to 7%. The increase is driven by modestly higher mix and price, reflecting the Lennox International Inc. price actions announced earlier this week, the annual price increase implemented earlier this year, and the carryover benefit of the 2025 regulatory mix. Looking at the segment revenue guidance, HCS is now expected to grow 4% compared to the previous guidance of 2%, and BCS is now expected to grow approximately 16%. Organic volumes are still expected to decline low single digits, net of approximately one point of growth from parts and accessories, commercial emergency replacement, ducted heat pumps, and Samsung ductless products. Cost inflation is now expected to be up approximately 5% from up 2%, driven by recent increases in tariffs and input costs for aluminum, steel, copper, and fuel. Based on these updated assumptions, adjusted EPS is still expected to be in the $23.5 to $25 range. Free cash flow remains expected to be $750 million to $850 million, driven by inventory normalization and higher profitability. Overall, we feel good about the underlying momentum in the business while recognizing that the external environment remains dynamic and will require continuous focus and execution. With that, please turn to Slide 11, and I will hand it back to Alok. Alok Maskara: Thanks, Michael. As we close, I want to take the opportunity to share why, four years in, I am still genuinely excited about Lennox International Inc. We operate in an attractive growth industry with an enduring place in the market. However, what really sets Lennox International Inc. apart is how we deliver differentiated growth through our execution on enhancing the customer experience, disciplined capital allocation, and effective acquisition integration, all of which reinforce our resilient margin profile. What excites me most is that innovation is always at the forefront. Our product and advanced technology portfolios continue to expand, enabling us to capture a greater share of wallet. Of course, none of this would be possible without the strong foundation that is our culture. Guided by core values and guiding behaviors, the Lennox International Inc. team shows up every day committed to creating long-term value for our customers, employees, and shareholders. For all of these reasons, and many more, I truly believe that our best days are still ahead. Thank you. We will be happy to answer your questions now. We will now open the call for questions. Operator: Certainly. Ladies and gentlemen, if you do have any questions, please press 1. As a reminder, you can remove yourself from the queue by pressing 2. Additionally, we ask that you please limit yourself to one question and one follow-up. We will go first this morning to Noah Kaye with Oppenheimer. Noah Kaye: Good morning. Thanks for taking the questions. Michael, the FIFO conversion continues to give us talking points, and I want to ask, following up on your comments, how to think about the timing difference in cost increases versus price realization. You mentioned the incremental costs; many of them will not really layer in until the third quarter. How should we think about pricing? And should we still think about the previous guidance for first-half/second-half EPS splits as still applying, or is anything shifting given these moving pieces in the outlook? Michael P. Quenzer: Yes. Right now, for guidance, most of the cost impact and the price impact will fall within the second half. We announced a price increase earlier this week. It will take some time before we start to see the full impact, maybe starting a little bit later in the second quarter, but predominantly both of these should come into the second half of the year. When you look at the revenue splits, that will put a little bit more revenue in the second half than the first half. But overall, profitability should still be about the same by quarters as we reflected last year. Noah Kaye: As a follow-up, you called out the $15 million under-absorption impacting this quarter. Any lingering under-absorption headwind to think about for 2Q, or are we mostly caught up now that restocking is underway and you have not increased your inventories too much? Michael P. Quenzer: As you saw within our results in the first quarter, we continued to not grow inventory as much as we did in previous years, so we had some absorption headwinds. We reduced our production about 30% in the first quarter. There will be a little bit of absorption that will go into the second quarter, but by the end of the second quarter, the inventory normalization will have occurred. Operator: Thank you. We will go next to Ryan Merkel with William Blair. Ryan Merkel: Hey, everyone. Good morning. Thanks for the question. I wanted to ask first on HCS, the revenue outlook for 2Q. I think previously you saw it down low single digits year-over-year, but it sounds like you are seeing a bit of stabilization. Has April been a little bit better? Alok Maskara: Hey, Ryan. Good morning. It is pretty hard to call the quarter, especially given some of the impact of weather that is still unknown. I do not think at this point we would give you any further clarifications compared to what we said in the past. I would go with the same assumptions. The change we made in the guidance simply reflects a stronger Q1 overall and, more importantly, the impact of additional price increases that we announced earlier this week that are going to mostly fall in the second half. Ryan Merkel: Got it. Thanks. As my follow-up, BCS was really strong. You mentioned good execution. Anything else you would call out there, and why not raise the guidance a little bit more there? Alok Maskara: You should expect a conservative CFO as I have, Ryan, so I do listen. On the guidance piece, it is such a seasonal business. Weather makes an impact, and I think based on everything we know, Q1 is not a quarter to raise guidance anyway. There is just so much more to go given it is a shorter season, so I would not read too much into Q1. On BCS, first of all, congratulations to the team. The execution there is just superb. The new factory is paying strong dividends. We are getting the right amount of productivity that we expected, maybe a little more. The emergency replacement initiative, now that we have inventory positioned all over the U.S., is paying off meaningfully. More importantly, the fact that now Stuttgart is more stabilized is also helping us win back national accounts and gain additional volume from that. Do not forget the other two businesses. The service business is benefiting from the full lifecycle value proposition, and the refrigeration business also continues to set records both in growth and profitability. It is a good success story and something that we think we are going to start seeing in HCS as well as our markets stabilize and the end markets are not such a big drag on us. Congratulations to the BCS team. Nothing unusual, just strong execution on a very well-defined strategy. Operator: We will go next now to Julian Mitchell with Barclays. Julian Mitchell: Hi. Good morning. Maybe just wanted to start on the overall operating margin guide for the company. Is it fair to say that you have a flattish operating margin dialed in at the total company for the year? And then within that, you have HCS down and BCS up? How quickly do HCS margins climb out of that hole? Michael P. Quenzer: I will speak to the overall margin guide. When we talked in January, we expected a slight increase in the enterprise margin. Now, with the increase to revenue and cost, we expect a slight decline in the margin. You are correct. Within BCS, organically, we expect margins to be up. Within HCS, organically, we expect them to be down. M&A will have a slight drag overall on the enterprise. But we should expect to see, as volumes recover in the second half of the year, the incrementals within HCS improve. We just need to go through the first half of the year for HCS to see that challenge behind us. Alok Maskara: I think one thing as we dug into the results in Q1 is that the decline in margin, which we do not love at all, is 100% driven by factory under-absorption. We were able to offset inflation with price and efficiency, but it is the under-absorption. As that under-absorption continues to become less of an issue as we go into Q2 and the second half, we are very confident in the margin going back to normal. Julian Mitchell: Thanks very much. My follow-up is around the cost inflation moving to 5%. Is that roughly $100 million or so of extra gross cost headwind? Do you see any competitive implications from that cost base movement? And tied to that, how is price elasticity of volume playing out in HCS at present? Alok Maskara: Your numbers are roughly right, as usual, Julian. I do not see any competitive dynamic that disadvantages us. Inflation in oil and components is hitting all of us. The Section 232 derivative tariff impact hits people differently depending on whether they bring metal components or finished products from overseas, but it does not put us at a competitive disadvantage overall. We remain very sensitive to those dynamics and will continue adjusting as we go along. Michael P. Quenzer: I will add that, since our last guidance, aluminum is up about 25%, steel is up 20% to 25%, diesel is up 50%, and copper is up 10% to 15%. We have hedging programs and fixed contracts that delay some of that, but overall these input costs are up significantly since our last guidance. Operator: We will go next now to Chris Snyder of Morgan Stanley. Chris Snyder: Thank you. I wanted to follow up on the price/cost drivers into the back half. You are still calling for mid-single-digit price, but it sounds like more is coming. Can you provide a little more nuance around that? Also, why is the incremental on the price action getting better? I think now it is expected to be 90% versus prior 75%. Thank you. Alok Maskara: There is a bit of rounding. Mid-single digit is still a broad range. Given all the inflation we just talked about and the additional pricing actions we have taken this week, that gives us better drop-through because it is going to stick better. Michael P. Quenzer: Specific to the 90%, there are really two guide points. First, we have price that has an incremental of 100% because we have costs on the other side of our guidance. Then mix normally has an incremental somewhere in the 50%-ish range. When you blend the two together, you get a higher drop-through because there is now more price than mix. The mix is generally behind us now from the carryover from the regulatory change last year. Chris Snyder: Thank you. As a follow-up on the HCS revenue trajectory from here, to get to the full-year guide, the build into Q2 and Q3 off the Q1 level seems steeper than typical on my math. Is that a function of channels restocking, demand getting better, share, more price? Alok Maskara: In the second half, the comps get much easier. That is where we saw massive declines last year. Pricing will have more of an impact in the second half. In Q2, mix will still benefit us because we had not completed the R454B conversion all the way by Q2 last year. Q1 last year mix was very tough because a lot of people were stocking up in preparation for the transition and buying a lot of R410A inventory. So part of the answer is just comps and then the pricing impact. Michael P. Quenzer: Remember, Q2 last year had the canister shortage issue that significantly impacted that quarter. Operator: We will go next now to Jeff Sprague with Vertical Research. Jeff Sprague: Hey. Thanks. Good morning. Back to inflation, Michael, you went through aluminum, steel, copper, etc. How would you parse the inflation headwind between the tariff changes and general inflation? And given the half-year dynamics, would the price you are putting in place fully cover you for carryover headwind impacts into 2027? Michael P. Quenzer: We have hedging programs and fixed contracts. On average, we are about 70% hedged. There is a piece of our overall inflation guide for the remaining 30%, and then the balance is mostly tariffs. On the annualized impact, we are going to continue to find ways to mitigate. We still have a lot of levers that take time on supply chain and manufacturing processes to continue to mitigate that cost. Our goal is to keep focusing on cost mitigation; some efforts take a little longer. Alok Maskara: I am optimistic on our ability, just like we have done before, to reduce the mitigated impact of tariffs. Supply chain moves, manufacturing moves, product SKU moves, buying U.S. steel in Mexico moves—they just take time. We are working through all of that. Jeff Sprague: On channel behavior, do you sense there was pre-buy in front of inflation, or was it just a realization that inventories got too lean? Alok Maskara: We have no indication of any pre-buy ahead of price increases or inflation. The April tariff announcements took most of us by surprise. We think the restock is pretty normal. Folks are looking at the upcoming summer season, and nobody wants to be short. Inventory levels are pretty normal. We have not had a normal year in years; this will be the first time without a refrigerant or canister transition complicating things. We think inventory levels are reaching normal for the channel and for us. Michael P. Quenzer: We continue to look at our warranty registration data that suggests inventory in the channel continues to be normal, especially on the one-step side. Operator: We will go next now to Amit Mehrotra at UBS. Amit Mehrotra: Thanks a lot. Good morning, everybody. I wanted to come back on the Section 232 changes. There are a lot of moving parts—Mexico, cross-border scope, steel content versus total value, component flows. Can you pull back the curtain a bit on scope and net effects? Alok Maskara: The scope is pretty wide. We have a lot of tariff experts in our company and are running daily crisis-type calls to work through it. The primary impacts are understood once you align on product classifications, but secondary impacts are also emerging. This is not new—we had tariff-by-country surprises last year; this year we are getting some refunds and paying more elsewhere. We have trained ourselves to work through these uncertainties, remaining adaptable and flexible, moving products and raw materials as needed, and working with vendors to share the pain. Every manufacturer who deals with metal is impacted. We are dealing with it with appropriate resiliency and determination, while recognizing things could change again quickly. Happy to have offline conversations on the details. Amit Mehrotra: Follow-up on repair versus replacement stabilizing. Are you seeing consumers move back into replacement, or is repair just not getting worse? Alok Maskara: We are very close to thousands of users in the one-step channel. The sentiment from contractors is that it is not getting worse, and some deferred replacements from last year are now coming back as replacements. Last year we heard more hesitancy to recommend replacement versus repair due to canister shortages and limited R454B training. Now contractors are more confident, and consumers are returning to economic decisions—replacing 10–12-year systems to get better efficiency, warranty, and financing. Definitely stable with some green shoots. Operator: We will go next now to Tommy Moll with Stephens. Tommy Moll: Morning, and thank you for taking my questions. On the one-step channel, there are some green shoots. How have volumes progressed year-to-date? It seems like the year started slow, but March and April started to pick up. Alok Maskara: Things have improved sequentially month over month since the beginning of the year. Some of it is driven by easier comps versus last year’s holding patterns ahead of regulations, and some is confidence coming back in the channel. Two-step is eager not to be left behind if we have a hot start to the summer. Tommy Moll: On BCS, you mentioned emergency replacement momentum. What inning are we in, and how are you attacking the market? Alok Maskara: We are still early—call it the second inning of a nine-inning game. Last year we were not fully covered in the U.S.; we are still not fully covered, but we now serve most metro areas, launching each region one at a time. A positive surprise has been our Lennox International Inc. dealers getting back into rooftop with us. Another benefit is shifting most emergency replacement volume away from Stuttgart, making Stuttgart more of a configured-to-order factory dedicated to national accounts. That has restored confidence in national accounts with shorter lead times and more custom products. Early innings in emergency replacement, with good momentum in national accounts. Michael P. Quenzer: I will add that bundling service with national accounts continues to perform very well. Operator: We will go next now to Jeff Hammond with KeyBanc Capital Markets. Jeffrey David Hammond: Hey. Good morning, guys. It seems like your inflation impact is more Section 232. You mentioned everyone has the same issues, but what happens if most people move on price and not everybody does? Alok Maskara: There are many game-theory scenarios. Section 232 derivative tariffs are about metal content thresholds on imports from outside the U.S., regardless of where they are made, so it impacts a broader group than just Mexico-made products. Also, secondary impacts—higher steel and aluminum costs—affect everyone. We are confident we have taken thoughtful price actions to avoid share disadvantages and are sharing the pain with vendors and customers. Jeffrey David Hammond: On BCS, 1Q numbers were strong. The raise seems small. Any aberrations in 1Q or reasons to temper enthusiasm on emergency replacement or national accounts? Alok Maskara: Besides easier comps in Q1, there is nothing to temper the outlook. The comps get tougher as the year progresses, but nothing beyond that. Operator: We will go next now to Nicole DeBlase with Deutsche Bank. Nicole DeBlase: Maybe on the BCS business: with various drivers of market share gain, it is hard to see the underlying commercial unitary market. Is the overall market still down and Lennox International Inc. is outperforming, or have you seen any improvement? Alok Maskara: The overall market remains challenged. The latest AHRI data shows declines moderating, but the market is still down. We are clearly outperforming, and not just on unitary—services and full lifecycle offerings are contributing. Our market share remains small in the commercial space, leaving significant opportunity. Nicole DeBlase: A quick follow-up for Michael. You expect under-absorption to continue but at a lesser rate in Q2. Relative to the $15 million in 1Q, what are you expecting for 2Q? Michael P. Quenzer: It was $15 million in Q1. In Q2, it will not be zero; there will be a small headwind. By the end of Q2, that should be behind us, and we should start to see year-over-year absorption benefits in the second half. Alok Maskara: Also, $15 million makes a big difference in Q1, one of our softest quarters. In Q2, one of our more profitable quarters, it does not move the needle as much. Operator: We will go next now to Stephen Volkmann with Jefferies. Stephen Volkmann: Thank you, and good morning. Michael, you mentioned spending on ERP and targeted AI. Any details? Alok Maskara: On ERP, we are not doing any massive changes. As we integrate recent acquisitions, we are moving them to our platform, one at a time. On AI, we are seeing good results in three areas: pricing (higher win ratios and profitability), demand planning/SIOP (improving inventory outcomes), and general productivity (agentic AI in call centers, HR help desk, RPA). These require investments in data lakes and partnerships with LLMs. We are also reducing costs by cutting unused subscriptions and sunsetting legacy systems. In the long term, productivity and pricing benefits should outweigh the costs. Stephen Volkmann: On Samsung and Ariston—have tariffs changed how you think about those opportunities? Alok Maskara: Strategically, we remain committed to ductless and water heaters. We had solid momentum in Q1, and we launched the water heater in March. These are joint ventures with supply agreements, giving us flexibility to discuss supply chain moves, tariff cost sharing, and longer-term mitigations. Almost all ductless today is imported; we are moving with the industry and have no concerns around the structure. Operator: We will go next now to Nigel Coe with Wolfe Research. Nigel Coe: Thanks. Good morning. On tariffs, roughly where are we today in terms of U.S. production of residential/light commercial units? Are you planning to redomesticate production over time, or does it still make sense to keep production in situ and pay the tariff? Alok Maskara: It is early in that thought process. We need policy stabilization before making major changes. The approach is still evolving, and USMCA renewal is coming up. We are making smaller adjustments—source of metal, component moves—but no major reshoring in the pipeline today. We have three residential factories in the U.S. (Grenada, Orangeburg, and Marshalltown) and one large residential factory in Mexico, giving us network flexibility. Today, it still makes sense to continue as we are and mitigate impact product by product. Nigel Coe: You mentioned rationalizing residential new construction exposure last quarter. Was that an impact during the quarter, and is that process complete? Michael P. Quenzer: Residential new construction is about 25% of HCS. We definitely saw volumes down more than others—above 30% in that channel. It is a combination of weak new construction and share decisions. That weighed on overall one-step volume growth. Alok Maskara: That share loss will negatively impact us through the year and is baked into guidance. Two-step will do better than one-step. From a profitability perspective, that works in our favor because margins were negative to zero in businesses we exited. Operator: We will go next now to Joe O’Dea with Wells Fargo. Joe O’Dea: Good morning. On the pricing announcements over the past week, can you give any color? We see the HCS guide go from 2% to 4%, but presumably you priced a narrower scope of products. Any quantification of recent price increases and the dollar effect to the homeowner? Alok Maskara: Our price increases went to customers on Monday, and some competitors announced the week before. We need to work through it over the next several weeks. Michael’s changes to our revenue guidance reflect what we are expecting in price. There is the headline announcement and then a stick-rate. We are confident we will offset increased cost inflation through these actions. Michael P. Quenzer: On the impact to the homeowner, equipment is maybe 40% of total installation cost. We will have to see how that evolves, but we do not see this as a big driver of total install cost; contractor labor and margin are the larger components. Alok Maskara: In some cases, equipment plus parts and supplies can be less than 30% depending on install time. It should not change consumer price elasticity in a meaningful way. We are sensitive to market dynamics, but equipment pricing is the least variable component for the homeowner. Joe O’Dea: On HCS seasonality and margins, the past couple of years stepped from 16%–17% in Q1 up to 23%–25% in Q2. Is that a reasonable benchmark for the seasonal step-up in Q2 this year? Michael P. Quenzer: The main driver will be volume recovery within HCS. We had unusual comps last year, but we are building sequential year-over-year improvement: Q2 vs. Q1, Q3 vs. Q2, and Q4 vs. Q3. That will help margins, and in the second half, absorption will further benefit margins. We will watch the summer play out—Q2 is a big quarter—and then we should have strong line of sight for the year. Operator: We will go next now to Deane Dray with RBC Capital Markets. Deane Dray: Thank you. Good morning, everyone. On new products from Slide 5, do you track a new product vitality index? And any update on the Samsung JV would be helpful too. Alok Maskara: We track vitality closely and do not consider refrigerant changes as new products. Excluding that, our vitality remains in the 45% to 50% range; the current figure is about 48%. We are pleased with heat pump introductions, indoor air quality, and control changes, as we shared at Investor Day. On the Samsung joint venture, the meaningful impact is this year as we work through the channel and dealer conversion. We are pleased with momentum and see upside through the year. Feedback is that these are high-quality, quieter products with better controls, and contractors like the combined logistics and rebate programs. Deane Dray: Second question, on recent litigation against residential HVAC manufacturers. Are you able to comment? Alok Maskara: The matter is a pending legal complaint. The lawsuit contains only plaintiffs’ allegations, and there has been no finding of wrongdoing. We dispute the accuracy of the allegations and will actively and vigorously defend our position through proper legal channels. Operator: We will go next now to Analyst with JPMorgan. Analyst: Hi. Good morning. Tying the “inventory being normal” comment with growth on the balance sheet year-over-year—some of that is acquisitions—can you give color on residential units within that bucket year-over-year or versus current sales levels relative to history? Alok Maskara: Typically, from Q4 to Q1 we build inventory for the peak season. Last year we built about $210 million; this year we built $60 million—think of that as a $150 million reduction versus a normal build. We ended last year with $100 million to $150 million more inventory than needed; we are essentially back to a normal seasonal stance. We still have opportunities as demand planning and SIOP improve to work inventory down further. We will continue to invest in parts and supplies and emergency replacement to maintain high fulfillment rates. We are pleased with the drawdown progress and feel on track to normal inventory. Analyst: Cleanup on price/mix. For the 9% in the first quarter, how much came from price versus mix? And for the year’s mid-single-digit, how much is price vs. mix? Michael P. Quenzer: In the first quarter, the majority was mix. That mix should taper off in the second quarter. For the balance of the year, it is essentially all price. Operator: Thank you for joining us today. Since there are no further questions, this will conclude Lennox International Inc.’s 2026 first quarter earnings conference call. You may disconnect your lines at this time, and have a great day.
Debra Wasser: Hi, everyone, and welcome to Etsy's First Quarter 2026 Earnings Conference Call. I'm Deb Wasser, VP of Investor Relations. Today's prepared remarks have been prerecorded. Joining me today are Kruti Patel Goyal, CEO; and our CFO, Lanny Baker. This quarter, we've changed our earnings process to feature a shareholder letter, which we encourage you to read in detail and have shortened our prepared remarks to enable more time for Kruti and Lanny to take questions from our publishing sell-side analysts. We hope you find that this shift helps drive efficiency and transparency in our process, both for us and for all of you. Please keep in mind that our remarks today include forward-looking statements related to our financial outlook, our business and operating results as noted in the shareholder letter posted to our website for your reference. Our actual results may differ materially. Forward-looking statements involve risks and uncertainties, some of which are described in today's shareholder letter and our most recent periodic report and which will be updated in future periodic reports that we file with the SEC. Any forward-looking statements that we make on this call are based on our beliefs and assumptions today, and we disclaim any obligation to update them. Also during the call, we'll present both GAAP and non-GAAP financial measures, which are reconciled to GAAP financial measures in today's shareholder letter posted on our IR website, along with the replay of this call. With that, I'll turn it over to Kathy. Kruti Goyal: Thanks, Deb, and good morning, everyone. Thank you for joining us. I stepped into my first quarter as CEO after more than 15 years at Etsy, with a deep understanding of what makes this marketplace special and a clear view of where we can unlock more of its potential. At our core, Etsy has a differentiated value proposition that remains deeply resonant with buyers and sellers. Our focus is now translating that strength more consistently into the customer experience. Over the past year, we've been clear about what needs to change and the priorities that we're executing against to close that gap. -- namely expanding how and where buyers discover us, connecting them with items that feel personal and relevant and building relationships that go beyond transactions. That's how we drive engagement and frequency and ultimately turn the uniqueness and scale of our marketplace into a lasting advantage. In the first quarter, we saw encouraging signals that this strategy is beginning to take hold. All of our key performance indicators came in at or ahead of our expectations with GMS at $2.5 billion, up 5.5% year-over-year for the Etsy Marketplace. Revenue of $631 million on take rate of 25.7% and adjusted EBITDA of $185 million or 29.3% adjusted EBITDA margin. And more importantly, we're starting to see early positive changes tied to customer behavior on Etsy. Active buyers grew sequentially for the first time in 2 years. We delivered year-over-year growth in new buyers and active sellers GMS per active buyer grew year-over-year for the first time since 2022, and momentum in our mobile app continued to strengthen. These are early indicators, but they matter. They show the marketplace is getting healthier, and we have confidence this will translate into the top line over time because creating real value for buyers and sellers is what ultimately drives value for the marketplace. Let me briefly remind you how we're thinking about the business. Our strategy is built around four priorities: showing up our shoppers discover, matching them with the right inventory, retaining and rewarding our most valuable customers, both buyers and sellers, and amplifying human connection, one of our core differentiators. These aren't independent initiatives. They operate as a system. Discovery and matching bring buyers in and help them find items and shops they love. Loyalty and human connection give them reasons to come back. We believe that investing in this system is how we'll rebuild frequency over time. Today, we're seeing the clearest progress in discovery and matching, where coordinated investments are already driving meaningful impact across both the customer experience and our financial results. Our app is the centerpiece of this transformation. It's where personalization, machine learning and direct relationships come together most effectively, and we're seeing that show up in the numbers. App GMS is continuing to significantly outpace non-app growth and now makes up about 47% of total GMS, expanding 240 basis points year-over-year. Mobile app GMS was up 11.2% year-over-year in the first quarter of 2026 versus up 6.6% last quarter. As we keep improving the app through levers like better personalization, more effectively using our owned marketing channels and increased adoption, we see a clear opportunity to continue to grow app share and drive frequency over time. This matters because app users engage more deeply, convert at higher rates and come back more often. It's one of the clearest indicators that our flywheel is starting to turn. When it comes to matching, we talk a lot about search, and that's because Etsy's core job is to help shoppers find things that feel personal, relevant and worth coming back for. Historically, our systems prioritize what was most likely to convert in the moment. often favoring popular items over the ones that were truly tailored to a specific buyer. We're changing that. We're shifting toward a more personalized, relevance driven approach, powered by machine learning and AI that better understands what a buyer is looking for right now and their taste over time and the vast inventory offered by sellers on Etsy. We're already starting to see positive signals from models that bring these elements together. With early tests showing improvements in add to cart rates and conversion. We're also expanding the role of our personalized home fee. In Q1, we introduced AI-generated buyer profiles that help us go beyond the shoppers past activity. With the goal of expanding the categories they explore and inspiring new purchases. And finally, we're strengthening our direct relationships with buyers through own channels. using better timed and more relevant push and e-mail communications to drive higher engagement. Turning to loyalty and human connection. Our most valuable buyers and sellers drive a disproportionate share of our marketplace. And we're focused on earning their continued engagement. For buyers, we see an opportunity to both deepen loyalty and retention with our most valuable customers and to nurture those with the potential to become them. by making shopping on Etsy easier, more rewarding and giving them more reasons to come back. We believe that long-term loyalty isn't built through a single program or initiative but across every interaction. So our approach spans the full experience. For more personalized recommendations to targeted offers to programs like our Etsy insider beta. We're also moving toward more intentionally serving our highest value buyers. And importantly, we're expanding ownership of our loyalty initiatives across product, engineering, marketing and operations because all of those moments together determine whether a customer chooses to return. For sellers, we're looking to reduce friction and enable growth with plans to build on our AI-powered tools to simplify listing and shop management so they can spend more time creating and connecting with buyers. And for both buyers and sellers, we're strengthening trust through improvements to Etsy purchase protection and better support for our top customers. The final part of our strategy that I'll discuss today leans into what makes Etsy fundamentally different human connection. Buyers come to Etsy not just for what they buy. But for who they buy it from. This is one of our most defensible advantages and one that we haven't fully delivered on. We've begun taking a more structured approach to understanding how seller identity, craftsmanship and stories influence behavior. And we now have early evidence that when we make those things more visible, buyers engage more deeply and make decisions with greater confidence. So you can expect to see us integrating those elements more directly into the core shopping experience this year. We are also intentional early movers in Agentec deeply focused on developing integrated experiences. We're encouraged by early engagement and traffic signals from Etsy's integrations with OpenAI, Microsoft and Google. And we recently developed an integrated Etsy app for Chat GPT. At the same time, we're testing conversational AI experiences directly on Etsy because we see agents as a powerful way to simplify discovery and decision-making for both buyers and sellers, particularly when paired with our own data and insights. In Q1, we built two agents, one focused on helping buyers find the perfect gift and another that brings together insights for sellers to make better decisions, access the right resources and reduce operational friction. These are early examples of how ML and AI can make the marketplace meaningfully better for our customers. Just as importantly, they're allowing us to move faster, building and iterating in weeks, not months, which helps us learn more quickly and drive growth. Stepping back, we've now delivered two consecutive quarters of year-over-year Etsy marketplace growth, and our outlook points to growth again this quarter. But our progress won't always be linear. There's still a lot more work to do. What gives me confidence is not just what we're seeing in our metrics, but what's driving them. We have a clear understanding of how Etsy works at its best. We're rebuilding the marketplace based on that understanding, and we're executing with greater focus and discipline than we have in the past. Etsy has always stood for something different, creativity, human connection and meaningful commerce. As technology evolves, we believe these qualities matter more, not less. Our focus now is simple: execute against what we know works, measure progress clearly and build the foundation for durable growth. With that, I'll turn it over to Lanny. Charles Baker: Great to connect with all of you today. As Kruti just described, we've had an encouraging start to the year, and I will discuss some of the drivers of that progress, as well as what it means for our outlook going forward. As you review our shareholder letter and 10-Q, please keep in mind that on February 15, we entered into an agreement to sell Depop to eBay for $1.2 billion. We have received regulatory clearance for the transaction in the United States and Germany, and reviews are in progress and on track for other markets, including the U.K. and Australia. We expect to close the transaction by the end of the third quarter of 2026. Given the pending sale, Etsy's results are presented on a continuing operations basis, while Deep Hop's results are now presented within discontinued operations. I also want to note that Reverb, which we sold in June of last year is included in Q1 2025 continuing operations, whereas Q1 2026 reflects only the Etsy marketplace. This makes year-over-year continuing operation results not directly comparable, and we have included stand-alone Etsy marketplace comparisons where most relevant in order to provide investors with a more meaningful basis for evaluating our go-forward operations. kruti covered our top KPIs, so I'll provide a bit more color on Etsy Marketplace GMS, which advanced to solid year-over-year growth in the quarter. Q1 '26 Etsy marketplace GMS was up 5.5% year-over-year, which represents a 540 basis point improvement to the GMS growth achieved in the fourth quarter of 2025. On a currency-neutral basis, GMS growth was 3.6%. Progress in both product development and marketing are beginning to translate into underlying improvements across marketplace fundamentals. And we also benefited from foreign exchange tailwinds and softer performance in the prior year comparable period. Our key customer metrics are continuing to move in a healthier direction. Q1 '26 trailing 12-month active buyer count was $86.6 million, representing the first quarter of sequential growth in the past 2 years. Combined gross buyer additions, new plus reactivated were $11.9 million, up 4.8% year-over-year. Encouragingly, GMS per active buyer improved sequentially for the fourth consecutive quarter and grew year-over-year for the first time since 2022, reaching $122 on a trailing 12-month basis. Purchase frequency remained modestly lower than prior year while average order value increased year-over-year. Several factors, some of which we expect to be temporary contributed to higher AOV, including foreign currency exchange tailwinds and the expiration of the de minimis tariff exemption and subsequent seller listing price increases. We anticipate that these benefits and the resulting impact to AOV will moderate as the year progresses. That said, product improvements have also benefited AOV, including changes to our search and discovery algorithms that better surface higher quality, more relevant and differentiated inventory. Repeat buyer and habitual buyer figures, while still down year-over-year, continue to see sequential stabilization. On the seller front, Q1 '26 was the first period of year-to-year growth in total seller count since we introduced the seller setup fee. Active sellers grew 3.3% to $5.6 million. Turning to take rate drivers. Our shareholder letter depicts the primary factors that help drive our quarterly take rate to 25.7% up 180 basis points year-over-year. 130 basis points of this increase was due to the impact of the River divestiture last June. Meanwhile, Etsy marketplace take rate expansion was led by Etsy Ads where we continue to benefit from machine learning-driven improvements to relevance and seller budget pacing. Offsite ads and Etsy payments also contributed to take rate expansion. Although our current strategic priorities center on driving sustainable long-term growth in GMS. We're encouraged by the way, investments in ads, payments and services continue to provide durability to Etsy's take rate. We're pleased to be executing against our near-term priorities while improving the ways we work. continuously looking for operational efficiencies and keeping a tight control on expenses. This is visible in Etsy Marketplace operating expenses for the quarter with product development, marketing and G&A all gaining leverage on a year-over-year basis. In product development, modestly higher employee costs were offset by savings in other areas. Marketing leverage was achieved by targeted shifts in portfolio mix to better meet customers where they discover and a continued focus on efficiency. Growth of GMS derived from Etsy's owned marketing channels also supported marketing leverage. Turning to our strong first quarter balance sheet. Etsy held $1.6 billion in cash, cash equivalents and short and long-term investments at the end of the quarter. Net cash provided by operating activities of continuing operations was $102.5 million. We converted 50% of adjusted EBITDA to free cash flow more than twice the rate of conversion realized in the year ago quarter. We also repurchased a total of $145 million of stock, which reduced the outstanding share count by approximately 2.7 million shares. As of March 31, we have $828 million remaining on our current board authorized share repurchase programs. we took the opportunity in our shareholder letter to reaffirm and explain our approach to capital structure and capital allocation, which is based on four enduring priorities. Number one, maintaining financial strength to fully support organic investment in the Etsy marketplace. Two, preserving strategic flexibility to selectively pursue opportunities to strengthen our business. Three, ensuring we effectively manage our financial commitments; and four, enhancing returns for our equity holders as made possible by our strong free cash flow generation. Given this framework, the pending sale of DPO will allow us to further accelerate the direct return of capital to shareholders via repurchases. Turning to our outlook for the Etsy marketplace. We assume that overall macroeconomic factors remain relatively consistent and currency tailwinds moderate. We also note that prior year comparisons will become less favorable as we move through the year. We currently anticipate that Etsy Marketplace second quarter GMS will be between $2.48 billion and $2.53 billion, representing year-over-year growth of approximately 3% to 5% for the quarter. We expect second quarter take rate to be approximately 25.7% and adjusted EBITDA margin to be 27% to 29%. For the full year, we now anticipate that GMS growth will be in the low single-digit range as our outlook for the Etsy marketplace has improved relative to the full year commentary provided in mid-February. Our updated full year view incorporates stronger-than-expected first quarter GMS as well as the progress we're making on our growth priorities. We continue to expect year-over-year growth in Etsy GMS in each quarter of 2026. We currently expect full year take rate to be roughly equal to that of the first half of the year, and our full year adjusted EBITDA margin outlook of 28% to 30% remains unchanged. We're pleased to be executing on our plan and delivering better results. And as Kruti stated right upfront we believe there is significant potential yet to be unlocked. And with that, we'll now turn it over to the operator to take your questions. Operator: [Operator Instructions] Our first question will come from Michael Martin with Matt Mason. Michael Morton: Thank you for the question. Clearly, I wanted to ask about the most impactful changes you've made to the app. In the letter, you talked about expanding the role of personalized home feed recommendations. And I was curious, is this driving a measurable increase in frequency as you're putting the app in more buyers' hands, like as we know, I think for Etsy, growing frequency is the holy grow. So maybe any leading indicators you're seeing there within the app would be great to hear. Kruti Goyal: Great, thank you so much for the question. So you're right. We're really focused on the app. This is our highest value platform. As we mentioned, our app users have 40% higher LTV than non-app users. And that's because they visit more, they engage more deeply they convert at higher rates. And so our focus has really been around making the app much more personalized and a much better discovery jumping off point. And so the work there has been really shifting what we show you in the app home feed from popular inventory to items that are really based on buyer interests that are going to inspire new discovery. And so we're really excited about the work that we've done there and the evolution of that home feed. And it's starting to show real traction in engagement. And so as we talked about in the last call, we've introduced these new model that reflects much deeper buyer understanding. Basically -- develops a profile of a buyer of MAP to your interest in has over time and then map those interest inventory so that we can present to you when you first open the app, inventory that clearly connects to your taste but introduces you to new shopping missions and to discover new categories. And we're excited about the traction that we see there so far. It's definitely delivering deeper engagement and more engagement. And that's really the precursor to greater frequency. And so let's talk about frequency for a second. That was kind of the second part of your question. Frequency is really our ultimate goal, and it's what our strategic priorities are designed to work together to drive -- we're not seeing it inflected yet because it really requires a full end-to-end experience shift, not a single fix, not a single platform fix. And so maybe just pulling back from the specifics for a second, I want to explain what I mean by this. and how it relates to our priorities. So the first thing we have to do is show up consistently where our shoppers are with content that feels really relevant in the context to get them to consider and visit Etsy more. Then we need them and match them with items that are really relevant personalized to them so that they engage more deeply. And then for all the inventory we show them, we want them -- we want to consistently highlight what makes that inventory really unique and valuable, really the human touch behind it, that gives buyers confidence to purchase more. And then throughout, we have to show our buyers that we know them, that we value them because Etsy is getting better, the more they engage with us. So that they feel really rewarded for every interaction, and they want to come back again. That's really the flywheel. This is what drives consideration, engagement, conversion, retention and really ultimately frequency. So at this point, we're still in the early stages of driving that consideration a deeper engagement. That labor engagement is what you're seeing on the app, which we think is a really important early and encouraging sign. But it's going to take time for these changes to compound into sustained frequency and retention. Operator: Your next question will come from Trevor Young with Barclays. Trevor Young: Kruti, maybe a bit bigger picture one. Core Etsy has a very healthy take rate for a transactional marketplace. How do you think about the path for take rate here for over, I don't know, maybe 3 or 5 years now that adds and payments have been pretty well optimized. Are there new services you could offer buyers or sellers where there's a fair exchange of value which could push take rate higher? And then on the opposite side, what about opportunities to get a little more surgical on take rate to remove some of the friction in the marketplace that could maybe help drive purchase frequency. Kruti Goyal: Thanks for the question. Your question is about take rate, but let's talk about revenue first for a second because often, when we talk about take rate, it's about how we're really going to grow revenue. . And so the first thing I just want to say is our focus is very much on growing revenue through GMS growth. We think that is the healthiest long-term lever to drive revenue growth. It's by getting more people to buy from Etsy more open. We think we have a very healthy take rate, and we offer services that are really valuable to our sellers in the near to medium term, we're going to continue to invest in making those services better and more effective for sellers. And as we do that, we expect to see some modest improvement in take rate. Certainly, over the longer term, we're open to exploring other opportunities for delivering new services that would be really valuable to our sellers, but that's not the focus right now. The focus is really on growing GMS growth to drive long-term durable revenue growth. Operator: Your next question will come from Nikhil Devani with Bernstein. Nikhil Devnani: I wanted to follow up, Kruti, on related topic around frequency. The letter talks about inspiring discovery beyond a shopper's immediate attend. So I'm curious what trends you've seen or progress you've seen on cross-category shopping on Etsy and really introducing customers to more use cases and occasions on the platform if you were to step back and look at the progress made over the past couple of years, anything you can point to with respect to that trend line would be helpful. Kruti Goyal: Look, I think we're in really early days here, but we are seeing encouraging signs from the changes that we're making to the -- at Home feed in terms of really anchoring on buyers' tastes and interest and using that as a way to introduce them, not just to new shopping missions, but to new categories. But certainly, very early days. I think more broadly, if you think about our approach to how we're serving buyers, One of the shifts that we've made that you've heard from us recently is that we really understand that buyers think about us for shopping missions that are largely horizontal. So those span across categories. And so our approach is really -- has really been to serving those shopping occasion needs, more effectively. We think that, that approach is also going to really help us show up in a way that's more relevant to more people, more of the time and help them consider different categories that are relevant to a shopping occasion. Operator: Your next question will come from Maria Ripps with Canaccord. . Maria Ripps: I just wanted to ask about active is return growth. So as we think about sort of key initiatives there, personalization, the mobile app, there was the largest sort of top final drivers. Is there anything that kind of closer to the lower funnel initiatives that you can talk about? And then more broadly, how should we think about sort of the lag between product improvement and sustained growth inflection in active buyers? Charles Baker: When we think about active buyers, it really are two components. They are the existing recurring repeat users, and they drive most of GMS. And to the second part of your question, all the work we're doing on the product experience, the personalization, even things like customer service and support and trust and safety -- all of these are top priorities to build an environment for those existing repeat purchasers that is -- they become loyal to, they become familiar with and we can drive their frequency and engagement. On the -- in order to get the total buyer pool growing, we have to do more than just serve well the existing buyers. We have to bring in more new buyers and reactivated more prior buyers on Etsy. And that's why in our strategic priorities, we're talking about, we have so much focus on showing up where customers are starting their shopping missions. And so we're really pleased with the momentum that we've started to see now in the number of gross additions between new and reactivated users -- it's been a couple of quarters now of positive year-to-year comparisons there, not only in percentage numbers, but the aggregate numbers of new people coming in today versus a year ago is starting to look better. And that in the long term is what will really drive along with good retention of the existing buyers that accelerating growth on the new and reactivated front is what we're seeking. We've made some changes to our marketing mix to do that. We've been talking about showing up much more strongly in places like social media. We've been talking about making refinements the way we show up in classic search results. We've been leaning out on the very frontiers of what's happening in gene commerce to make sure we're showing up there. We've been emphasizing the mobile app, which we know is the way younger demographic shop. And all those things are starting to have an impact, and you can see that in the numbers that we're talking about. -- you get down into the smaller sort of nuance things. We've talked a little bit about TikTok has been a great channel for us since bringing in a much younger demographic. And I think there's a lot more for us to do in that channel. On the sort of low funnel, social across some of the others we found that we're not always in social acquiring new users. We might be -- and so we've modified our spending a little bit to really focus on activating new users and bringing back lapsed users. That's been a little bit less at the bottom of the funnel in social a little bit more at the awareness -- upper end of the funnel and social. All these things are -- the changes we made today are -- we're going to continue to monitor those and be really disciplined and very ROI-driven and very focused on on what you -- sort of starting point of your question, which is in the long term, growing the active buyer count on Etsy. Operator: Your next question will come from Nick Jones with BNP Paribas. Nicholas Jones: Great. I guess maybe one on internal AI at Etsy. -- if AI is going to kind of unlock bigger kind of more persistent context on our active buyer base. How should we think kind of like where you are and kind of the evolution of being able to build this kind of really rich contracts on a customer basis to build customization is there going to be kind of an impact on expenses as you maybe need to pay for more tokens or something to kind of deploy this to drive conversion higher? . So I don't know if that question makes sense, but just curious on kind of where you are, like what inning it is in terms of using the technology to maybe drive a more meaningful improvement in conversion. Kruti Goyal: Yes. Great question. Thank you. So first of all, we see just so much exciting opportunity for us to leverage this technology to build a much better, much more personalized experience on Etsy. And the way that we think about it is that we need to bring together a really deep understanding of three things: -- our inventory, which, as you know, is very diverse, very unique, very broad. And so we've made a lot of good progress there in terms of richer inventory understanding, leveraging LLMs. The second is fire understanding or understanding our buyers' interest and taste -- and understanding those over time, that's part of what you were just describing as that richer context that persists. And this is where we're putting a lot of effort an investment right now, developing new models that help us understand about the profile of a buyer's taste. I'd say that we're early here, but making really good progress mapping that understanding that deeper understanding of our buyers to our inventory. And then the third piece of this context is understanding your intent in the moment. So for our understanding of buyer interest is something that we build over time. You're -- your intent in the -- is something that is more about in the moment in a session. And that is really, really critical context to help us marry all of those three things together to provide a really personalized and relevant experience every time you shop on Etsy. We're still really early days here, but one of the exciting developments that we shared in the shareholder letter in the prerecorded plus was about the conversational agent that we've just introduced for buyers to help them find gifts. This is a really great example of how we're using this new technology to get a lot more context through a single interaction that again, then if you think about marrying those three things together can allow us to provide a much, much richer, much more personalized and more effective experience. So I'd say we're at different stages of maturity across all three of these areas, but making really good progress and really excited about the opportunity that they present. Charles Baker: To the sort of final bit of your question about managing tokens and the like, -- the way we think about it right now is we really want to embrace an experiment with these brand-new tools. And as Guy said, there's so many applications that we are -- we're really trying to be on our front foot and fund and invest and learn in this area as quickly as we can. . As you know, we will manage the costs, and we will apply that which, hopefully, you recognize we do all the time, we apply a very rigorous ROI discipline. And so the investments we're making in AI and the features that we roll and the costs associated with the compute behind that is all going to be framed with reference to its impact on GMS growth and long-term user growth and frequency growth. And we'll manage that with mine toward long-term profitability as we've done in so many other realms of our go-to-market. Operator: Our next question will come from Marvin Fong with BTIG. . Marvin Fong: I guess I'll ask the obligatory question about consumer health. I know you mentioned in the letter that trends are relatively stable. Is there anything to call out even at a granular level that you're seeing any impact from higher fuel prices? And relatedly, -- it looks like we're going to have like some fuel surcharges in terms of postage costs. Is that -- do you expect any impact on your seller behavior as they try to manage that cost that's embedded in your guidance? Charles Baker: Yes. Thanks. As we said, the consumer environment has remained relatively stable overall. There's been an interesting sort of tension back and forth between some of the softer data and consumer polls and surveys being more soft and concerning. And then the actual hard data that comes through from the consumer has held up. And that's kind of what we've seen. Our U.S. buyers have been resilient -- we've seen broad strength across various household income cohorts like others. I think others have said, we do see some of the strongest growth in the higher-income households, but it's broad-based. I think if you go a little bit -- trying to go a little bit more granular. One of the ways we look at it is segmenting our GMS by trade lengths and the U.S. domestic trade lane was the strongest at the start of this year. One thing that's interesting change is coming into this year from where we were last year, in the first half of last year, our U.S. import channel -- our trade lane was growing pretty well. It's probably the fastest growing channel. That slowed down with the imposition of tariffs and we returned to positive growth in the U.S. import trade lane in the first quarter this year, which kind of goes back to the first year I said, which is the U.S. consumer remains fairly resilient. Our non-U.S. currency-neutral GMS grew for the first time since 2023. So we're seeing some of that resilience overseas as well. U.S. buyers grew on a trailing 12-month basis. in the first quarter from where they were in the fourth quarter, and international buyers were about even in the first quarter with where they were in the fourth quarter. So when you try to pull apart the impact of tariffs and the foreign currencies and tax returns that have been strong in the season, and the impact of oil prices, netting it all out, it's hard to point to any one thing, and that's a stronger comment than the consumers remain pretty resilient, and we remain cautious about the forward outlook. Kruti Goyal: One more thing that I would add, a little bit higher level about the macro environment is like, look, we're obviously in a period of high macro uncertainty on predictability. . As Lenny said, we're really -- we're monitoring consumer confidence closely in the macro environment more broadly. But as we do that, our focus is largely on what we have control over. So there are two things that I think about there. First is we're focused on building a culture of learning quickly and adapting in real time. We saw this in spades last year with our team responded to tariffs to the emergence of genetic commerce, like we're really confident that we can continue to do that. And then second, -- we're focused on executing with clarity and discipline on our strategy, and that's about accelerating our product innovation, evolving how we show up for our customers, reinforcing trust through the entire experience. We think that's what's going to really continue to reinforce the resiliency of our marketplace, as Lanny mentioned. Operator: Your next question will come from Brian Smilek with JPMorgan. Bryan Smilek: Kruthi, curious to your thoughts overall, we've seen in the market open AI, potentially pulling away from constant checkout and focusing more on Discovery and SDK integration as you've launched your app within Open AI, can you just talk about the initial impact to conversions? I believe last quarter, we had talked about traffic being up multiples of what it was year-on-year. But really, AI traffic is still driving more on-platform marketplace conversions. So curious your thoughts there on the shifted strategy by open for the question. Kruti Goyal: I just want to clarify the app is not launched yet. But I think overall, big picture, look, we think that shift really reinforces our hypothesis that we continue to think Gentech shopping can become a meaningful discovery channel for us over time, but the focus is really discovery. That's reinforced by trends that are really consistent with what we shared with you last time we spoke, which is we continue to see strong traffic growth and high-intent traffic. So that's great. but it's still very, very small. It's a fraction of a percent of our total traffic. And so again, that reinforces our prothesis that it could be a high-value discovery channel, but that's where it's best suited. But that's going to take some time. That's over the long term. The other thing that I'll just say here is we continue to be really focused on early engagement being early movers here. It's very aligned with our priorities to show up where our shoppers discover. And we know this is going to be a really rapidly evolving space as we're seeing in real time. Our focus, our commitment is to being where our customers are, so we can learn from that behavior in real time and adapt our experience with that you see us doing that already. Operator: Your next question will come from Nathan Feather with Morgan Stanley. . Nathaniel Feather: Ncourage the stabilization in habitual buyers. What are you seeing that's allowing that to finally normalize, especially as frequency hasn't yet inflected in the hall. And do you have line of sight to that returning to sequential growth through the year? Charles Baker: The activity you're seeing in terms of stabilization on habitual buyers, on repeat buyers and even on frequency and on many of the biometrics, I think is really the fruit of the things we've been focused on strategically that Kruti talked about that we highlighted in the shareholder letter and frankly that we've been talking about for several quarters. Like what you're seeing in the numbers is just starting to see some of the initial early impact of the accumulating effort of last several quarters. One thing I want to point out about habits as you look at those, those numbers are still lower year-to-year. They were pretty stable in the first quarter from where they were in the fourth quarter. And I think the next thing that hopefully plays out is stability turns into a return to some modest growth and equally stronger growth in the long term as we continue to execute on our strategy. One thing it's important to remember is that the habitual buyer number is reflects a certain purchase frequency. And when that number goes down, it's pretty rare that, that habitual buyer has actually left Etsy -- and in fact, they've just kind of fallen below that purchase frequency threshold. And with all the work that we're doing, we hope to bring them back above that threshold, and that's what really will drive that cohort to be a little bit bigger in the future. Operator: Your next question will come from Bernie McTernan with Needham. Bernard McTernan: Great. acknowledging all the the good work that's going on within the app and double-digit growth on GMS. But I wanted to ask about the non-AP, the acceleration sequentially was actually stronger outside the app. So I just want to see what's going on there, whether it's product or whether it's some of those marketing efficiencies that -- in paid search that are driving it. Charles Baker: It's a combination of factors. It is certainly the product work that we're doing that's having an effect across the whole system. . And it's encouraging to see that, that product work -- that effort to be more personalized, to be more relevant, applied on all services has a sort of commensurate impact. It's having the biggest impact on the mobile app because that's all logged-in usage. And we can really go the deepest and fastest there. I think also helping our non-app traffic, our marketing activities were really effective during the first quarter. We increased our marketing spend year-over-year, and we gained operating leverage in terms of GMS and revenue revenue operating leverage on the marketing line. That's come from more efficient spending, mix optimization our owned channels becoming a bigger driver of activation and reactivation and some of the competitive dynamics, particularly in the paid search marketplace. In both PLAs and search engine marketing, we leaned in. We spent a little -- we increased our investment there. Google has made some changes to the algorithms that they use to surface results, and that's helped us in that channel. I talked a little bit earlier about what we're doing in paid social and in our sort of brand marketing on social -- and then really importantly, our owned channels, both the push notifications and e-mail continues to grow at double-digit rates year-over-year, in terms of driving GMS. And that's great because there isn't double-digit increase in spending in that channel. And we've had some search engine optimization wins over the last couple of quarters. that are also feeding some of that strength you're seeing in the desktop and non-app environment. Operator: Your next question will come from Ana Andrea with Piper. Anna Andreeva: Great. Thank you so much. Congrats. Nice to see a steady improvement in the business. We wanted to ask on the seller metrics. First quarter of growth really in quite a while now. And Kruti, you mentioned a better retention of the seller base. in the shareholder letter. Can you talk about what are some of the key initiatives behind that that are resonating the most? And should we expect stability in the seller metrics as embedded in the guide? Charles Baker: Well, the sellers are a fundamental portion of our marketplace kind of obviously the breadth and depth of the inventory that they bring is really what makes Etsy differentiated. We are in our product work, as Rise described, really trying to bring forward the human connection and emphasize the human element of creativity and craftsmanship that really differentiates Etsy sellers. And so as we've done that, and our buyer base continues to grow we're starting to see improvement again in the seller count. Kruti Goyal: Look, I think more broadly, I would just say our -- we haven't invested deeply in the seller experience over the last several years, and that's somewhere where we're shifting more focus to going forward. . And I think that we expect to see really positive impact from that. And really, what we're focused on is making it easier for sellers to do -- to manage their shops and to manage their listings. These are some of the areas that take the most time but are not the most value add. So we was talking about human connection, really the most important things that our sellers can do to add value to the marketplace is continue to innovate at really that new inventory into the marketplace and continue to provide really great human service. to our buyers. These are the places that we're really focused on investing in. I mentioned this in terms of some of the AI tools that we're launching, shopping shop management assistance, we've already talked about AI listing assistance. These are areas where we continue to focus on making the seller experience better to drive that side of the flywheel of marketplace growth. Charles Baker: The retention of sellers has started to improve. And that is helping the overall seller number. We're seeing healthier quality of sellers -- more of the sellers are completing sales and having strong GMS results and a higher percentage of them are staying with us year-to-year-to-year. So some of that product work that we've begun is the friction that we're taking out is starting to have an effect there on the telecon. Operator: Your next question will come from the use of Squali with Truist Securities. Youssef Squali: Lanny, with the mid-single-digit growth for Etsy Marketplace, GMS, you just put up in Q1, -- what are the main drivers pulling that growth rate to a low single-digit percentage expected for the year? And with all the changes you're making, do you believe you have line of sight to positive active buyer growth this year? Just trying to get a sense of what's baked into your low single-digit percentage gyms growth? Charles Baker: As we described, the outlook is predicated upon a gradual improvement in the underlying fundamentals of the business as we've started to show over the last couple of quarters. It will take us some time to get all the different metrics back into positive year-over-year territory. And we haven't commented on those very specifically. As we -- but that underlying -- we do anticipate that there'll be underlying fundamental improvement in sort of the core buyer metrics as we move throughout the year. The comparisons do get trickier, more challenging later in the year than certainly they were in the first quarter. and we roll off of the foreign currency, very strong tailwind that we saw in the first quarter that will moderate as we move through the year. And in the first quarter this year, our GMS was certainly helped by an increase in average order value -- and FX will slow down. We think that the increases in listings prices that corresponded with the end of the de minimis exemption and the implementation of our other tariffs. Those increases are probably sticky price increases, but they -- we will lap the benefit of sellers having taken that up. And also driving AOV have been product improvements that are helping us surface more relevant items, higher quality, higher value items, and that's contributing as well. So as we look across the course of this year, there's some mitigation in sort of the growth benefit of some of those external factors and continuation of the internally driver -- driven inputs to our growth creation. Operator: Your next question will come from Shweta Kajaria with Wolfe Research. Shweta Khajuria: Okay. Thank you for doing my question. Could you please talk about the balance of AOB and frequency. So when we think about frequency, you've now touched on this multiple times, including in your shareholder letter, that may take some time to see that inflection in frequency. But from your prior data, how -- what is the lag that you see once you start seeing an improvement in some of the other fundamental metrics, whether it is buyer or buyer growth or engagement, when -- what is the time lag when you start seeing sort of that uplift in frequency? And then similarly for retention, what are you looking for from personalized recommendations and targeted offers that gives you confidence in driving better retention? Charles Baker: One of the encouraging things that we've seen so far as we started this year is that despite the fact that the average order value has gone up, as I just described, our buyer numbers and our frequency numbers have been stable, if not improving. And that's nice to see that impact on user behavior even in an environment of slightly higher prices on Etsy and other places. And so I think there are some early signs that the work that we are doing to drive retention and frequency through personalization through the mobile app, everything we've been talking about is starting to have a benefit -- and -- but I do think, as we look forward, we'll continue to see that benefit be there and compound over time. See, it is challenging to predict with precision the exact timing of various inflections in that -- in various components of the frequency and the active buyer trend. So what I would say is expect -- we've stabilized. We've started to show growth in some areas. And we'll keep you posted as the benefits of the work that we are doing through our priorities, can you just play through the mechanics of the model. Kruti Goyal: Yes. A couple of other things that I would just add are, it's hard to predict the exact timing, but we know that, that -- we're very confident in the continued growth, but we know that growth won't be linear. . I think that's a really important thing to note. We've talked a lot about our priorities as taking a much more systematic approach that we expect to lift all of the key metrics behind -- that drive our GMS. So that's another reason that it makes it difficult to predict the inflection of any 1 of these metrics individually. I would just also reiterate that we're seeing very early but very encouraging signals, the initial improvements that we're making around personalization across services like App home and marketing communications are very, very promising and are the precursor to driving other metrics, particularly to meeting into frequency and retention. Operator: Your next question will come from Naved Khan with B. Riley. Naved Khan: Great. I just wanted to maybe dig into something you said earlier in answering question. I think it was for you see. But wanted to talk about AOV. And if you were to kind of look at on an FX-neutral basis and strip width impact on the exemption of the demise exemption and its effect on list prices, would -- how would AOV growth look like, excluding these sort of extraneous factors? Charles Baker: I think if you strip out the things that you talked about you would find that there is growth in AOV coming from product optimizations that we have made in how we respond to buyer search inquiries. To surface, we've talked about this for a long time, higher quality, more relevant items, incorporating the quality of the item into the search results ranking and what that's doing is it's elevating the average order value as we surface more differentiated, more unique, more in the eyes of the buyer more valuable items. But as I said, most of the increase in AOB right now is coming from the other factors, foreign currency and listing price changes. But we do have our -- there is an influence from some of the product work that we're doing on AOV. Operator: Your next question will come from Jason Holstein with Oppenheimer. Jason Helfstein: I want to ask goose around AI. I mean, obviously, every company is thinking how they should be deploying this at what scale, at what cost, right? And how much kind of like doing it all internally versus consults. Can you maybe talk about where is Etsy right now in that kind of thought process? And at some point, like should we expect you to hear from you that like it's time to get much more aggressive around kind of bringing AI automation into the workflow of the business. Kruti Goyal: Yes. I think there are a couple of different parts of what you just said. Let me tackle them separately. So how much we do things internally versus leverage external tools. We've been -- first of all, I'd just say we've been very proactive in how we're thinking about AI and the potential impact for AI on the business. . Really holistically. The place that we have all talked about the most is in terms of external partnerships, but we are being just as proactive in how we're thinking about deploying AI internally. I talked a little bit about this before in terms of some of the on-site investments that we're making. And when I look -- when you think about the internal-external mix, we really actively leverage a hybrid of options, open source models, commercial models and our internal models, really balancing capabilities with costs -- and we expect to continue to do that. We want to use the best tools out there to solve the problems that we're trying to solve. I think the other part of your question is how we're applying these tools internally to how we work, and we really see that is a space that is evolving very rapidly. We see these tools as a real force multiplier across our internal teams. These are like power -- there's power tools that are powering how we're working across really every function. And the biggest opportunity here is accelerating our build times -- our build cycles and time to learning. We have seen this already with the agents that we were able to launch in the last quarter really just built in weeks -- as we continue to see more of that opportunity to leverage tools to accelerate our work, we will deploy them actively. I see this as a continued area to lean in and to invest rather than 1 big drop. So you can expect us to take that same kind of disciplined but very proactive approach to how we apply AI tools, both on the experience and internally with our teams. Debra Wasser: Thank you, Kruti. Thank you, Lanny. I'm going to call it there. We don't have time to take a question and answer it. So we appreciate everyone's time this morning, and we'll be following up with all of you. Thank you all so much.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Clarivate Plc Q1 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star then the number one. I will now hand today's call over to Mark J. Donohue to begin today's conference. Please go ahead, sir. Mark J. Donohue: Thank you, and good morning, everyone. Thank you for joining us for the Clarivate Plc first quarter 2026 earnings conference call. As a reminder, this conference call is being recorded and webcast and is the copyrighted property of Clarivate Plc. Any rebroadcast of this information in whole or in part without prior written consent of Clarivate Plc is prohibited. The accompanying earnings call presentation is available on the Investor Relations section of the company's website. During our call, we will make certain forward-looking statements within the meaning of the applicable securities laws. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the business or developments in Clarivate Plc’s industry to differ materially from the anticipated results, performance, achievements, or developments expressed or implied by such forward-looking statements. Information about the factors that cause actual results to differ materially from anticipated results or performance can be found in Clarivate Plc’s filings with the SEC and on the company's website. Our discussion will include non-GAAP measures or adjusted numbers. Clarivate Plc believes non-GAAP results are useful in order to enhance understanding of our ongoing operating performance, but they are a supplement to and should not be considered in isolation from or as a substitute for GAAP financial measures. Reconciliations of these measures to GAAP measures are available in our earnings release and supplemental presentation on our website. With me today are Matitiahu Shem Tov, Chief Executive Officer, and Jonathan M. Collins, Chief Financial Officer. After our prepared remarks, we will open up the call to your questions. With that, it is a pleasure to turn the call over to Matitiahu Shem Tov. Good morning, and thank you for joining us. Matitiahu Shem Tov: Today, I will walk through our first quarter performance, progress against our value creation plan, and how execution across the business is positioning Clarivate Plc for improved organic revenue growth, margin expansion, and stronger free cash flow generation. This is our fifth consecutive quarter of improved performance. We are off to a solid start to the year, and I am pleased to report that our first quarter financial results have us on pace to achieve our full-year guidance. Revenues were $586 million, supported by continued VCP progress and execution across the portfolio. From a growth perspective, the quality composition of our revenue continues to improve. Organic ACV growth was 1.6%, with subscription organic revenue growth of 1.7% reflecting increased adoption of subscription-based solutions across Clarivate Plc. We are encouraged by the underlying momentum we are seeing due to stronger alignment between commercial execution and product strategy. Adjusted EBITDA was $241 million, representing a 41% margin, up almost 200 basis points year-over-year, highlighting the benefit of our subscription-first strategy and disciplined cost management. Free cash flow generation was also solid at approximately $79 million, which allowed us to retire $143 million of debt during the quarter. Most important, the value creation plan is working. We are seeing positive execution across all pillars, demonstrated by accelerating product adoption, improving sales effectiveness, and an expanding cadence of new product introductions. This quarter reinforces our confidence that the actions we put in place are beginning to translate into more predictable performance, expanding margin, and strong free cash flow generation. As a reminder, we launched the value creation plan in early 2025 to sharpen focus, accelerate execution, and unlock long-term shareholder value. The plan is built around four core pillars: business model optimization; improved sales execution; accelerated AI innovation utilizing our proprietary data assets; and portfolio rationalization. You can see these pillars showing up clearly in the numbers: subscription mix, margin expansion, debt reduction. Academia and government continue to be a strong engine for recurring revenue growth. We are executing well across all three pillars of the value creation plan with clear evidence of progress. On business model optimization, we are accelerating the shift towards subscription-based offerings. Adoption of our ProQuest subscription solution remains strong, with over 600 new subscriptions sold in the last twelve months, reinforcing the durability and predictability of our revenue base. Sales execution is also improving, driven by more effective cross-sell execution across content, research and analytics, and software solutions. During the quarter, we secured several key wins, including a multi-product institutional deal with Spire University, a new research-oriented university in China. We are expanding our China footprint, and this demonstrates our ability to deliver integrated solutions that address broader customer needs. We are leveraging the power of AI, which is generating real, measurable value for customers. Clarivate Plc academic AI solutions are optimizing key library workflows, resulting in a 30% to 60% decrease in manual repetitive work and doubling or even quadrupling throughput. This demonstrates how combining AI with Clarivate Plc’s unique content and extensive domain knowledge leads to significant operational improvement for customers. Turning to intellectual property, our attention remains firmly on execution and fundamentals. We are seeing encouraging signs that our increased focus on new subscriptions and renewal discipline is producing results. For the first quarter, renewal rates improved approximately 100 basis points, helping organic ACV trends improve to nearly flat. This represents a clear improvement versus prior trends and supports our confidence that the IP business is moving forward and returning to sustainable recurring growth. Sales execution continues to strengthen, for example with national IP offices, including the USPTO, where we secured a major trademark analytics contract and large-scale digitization programs. These wins are advancing patent and trademark operations globally and reinforce Clarivate Plc’s role as a long-term strategic partner in the IP ecosystem and analytics. During the quarter, we released brand image search, adding advanced AI capabilities such as clustering and multilingual support. These enhancements are expanding how IP professionals uncover insights, assess risk, and make faster, more confident decisions at a global scale. Overall, the IP segment is operating with greater focus and discipline, and we believe this improvement positions the business for future growth. In Life Sciences and Health, we are seeing steady progress with the value creation plan. The shift from transactional sales to subscription is on track, supported by positive customer feedback and more consistent sales patterns. The successful changes we have made are reflected in an almost 1% rise in organic revenue during the first quarter. Notably, we won a new top 20 global pharmaceutical customer for DRG Fusion, our new real-world data analytics platform. This reinforces the strength of our value proposition with large, sophisticated customers. In addition, we secured a six-figure subscription win with a biotech company for OpEx, our platform for preclinical and clinical safety intelligence, demonstrating continued momentum across customer sizes and use cases. On innovation, we continue to expand access to our trusted regulatory and scientific intelligence through strategic partnerships. During the quarter, we integrated Cortellis regulatory intelligence with Anthropic Cloud Enterprise, combining cloud-based proprietary data with advanced AI reasoning to deliver trusted insights directly within customer AI workflows. The collaboration underscores how Clarivate Plc is extending the reach and relevance of its content across the broader AI ecosystem. In February, we announced that we are actively pursuing the sale of the Life Sciences and Healthcare business as part of a broader portfolio rationalization effort. This is consistent with our broader strategy to concentrate capital and management attention on areas where we see the highest returns. The process is ongoing. As always, there is no guarantee of the outcome; we will provide updates as appropriate. Our objective remains clear: maximizing value for shareholders while sharpening strategic focus on our remaining businesses. We have spoken on previous earnings calls about the investments we are making in AI product innovation. Today, I want to highlight how we are scaling AI enablement across Clarivate Plc to drive efficiency and support acceleration of free cash flow. This is a core enabler of the value creation plan and a key lever for margin expansion as we return to healthier organic growth. Let me provide some color and examples. Across go-to-market functions, we are embedding AI within sales and customer care to accelerate revenue growth, streamline customer interactions, enhance service quality and experience, and increase retention. In technology, we are deploying AI throughout software engineering and content operations to accelerate innovation and shorten new product time to market. Within corporate functions, we are leveraging AI across finance, human resources, and legal functions to automate workflows and drive scalable efficiencies. We expect the deployment of digital agents will reduce manual effort, improve accuracy, and create operating leverage. Taken together, these AI-enabled cost efficiencies reinforce our core messages. As organic growth improves, these AI efficiencies give us confidence in sustained margin expansion and growing cash flow. To close, the first quarter demonstrates that the actions we put in place through the value creation plan are translating into stronger execution, improving fundamentals, and a clearer path forward. We are operating with greater focus, strengthening our business model, improving sales effectiveness, and delivering innovation that matters to our customers, all while maintaining strong discipline around cost and cash generation. Thank you for your continued support. We look forward to keeping you updated on our progress. I will now turn the call over to Jonathan M. Collins for a review of our financial results and outlook. Jonathan M. Collins: Thank you, Matitiahu Shem Tov. Slide 14 is an overview of our first quarter results compared with the same period last year. Q1 revenue was $586 million. The change over the prior year was due to the inorganic disposals, partially offset by organic growth and a favorable foreign exchange impact. First quarter net loss was $40 million; improvement over the prior year was driven by a foreign exchange benefit as well as lower restructuring, income tax, and interest expenses. Adjusted diluted EPS was up nearly 30%, or $0.04, over the prior year to $0.18. The increase was attributed to adjusted EBITDA growth, lower interest expense, lower tax expense, and a lower share count due to last year's repurchases, which each contributed about a cent to growth. Operating cash flow was $135 million in the quarter. The change compared to last year was driven by higher working capital due to incentive compensation payments, partially offset by higher adjusted EBITDA. Please turn with me now to page 15 for a closer look at the drivers of the first quarter top- and bottom-line changes from the prior year. The changes over the prior year were driven by three primary factors. First, organic revenues grew modestly as subscription growth of nearly 2% was partially offset by lower reoccurring and transactional revenues. We delivered a strong profit conversion on the growth as operating expenses were lower than the prior year despite the higher revenues as we achieved cost efficiencies across the business. Second, businesses we are disposing decreased revenue by $24 million but were almost entirely offset by cost reductions due to the wind downs, yielding a net $3 million reduction in adjusted EBITDA. And finally, the U.S. dollar remained relatively weaker against the basket of foreign currencies compared to the first quarter of last year, which caused a foreign exchange tailwind on the top line. The mid-teens profit conversion is due to transaction gains last year that did not recur this year. In total, disciplined cost management led to an adjusted EBITDA margin expansion of nearly 200 basis points, which is in line with our full-year guidance. Please turn with me now to page 16 for a look at how the adjusted EBITDA converted to free cash flow and how we allocated the capital. Free cash flow was $79 million in the first quarter, which was $31 million lower than the prior year. The change was due to higher working capital as a result of incentive compensation payments, partially offset by the adjusted EBITDA growth. We used the free cash flow and excess cash on hand to redeem the remaining $100 million of bonds that were due later this year, repurchase $43 million of bonds due in 2028 and 2029 at a blended discount of about 10%, and repurchased 7 million shares of stock to offset the dilutive impact of stock compensation investing. Please turn to page 17 for a look at our full-year financial guidance, which remains entirely unchanged from February. Today, we are reaffirming our full-year financial guidance for all metrics. Beginning at the top of the page, we anticipate the acceleration of our organic annual contract value last year will continue in 2026, resulting in growth of between 2%–3%, representing continued steady progress and an increase of about three-quarters of a percentage point at the midpoint of the range. We expect recurring organic growth of about 1.5% at the midpoint of our range, which is an improvement of nearly a percentage point over last year. Due entirely to the wind down of the businesses we are disposing, we expect revenue to decline by about $100 million at the midpoint of the range to $2.36 billion and that our organic recurring revenue mix, which excludes the impact of the disposals, will improve to between 88%–90%. Moving down the page, we expect adjusted EBITDA will grow modestly despite the lower revenue, increasing our profit margin to nearly 43% at the midpoint of the range. We anticipate adjusted diluted EPS will grow about nine percent at the midpoint of the range to $0.75, largely due to the share repurchases we completed last year. Finally, free cash flow is expected to grow by about 10% to $400 million at the midpoint of the range. Please turn with me now to page 18 for a reminder of the full-year top- and bottom-line changes we are expecting compared to last year. We expect adjusted EBITDA margin will expand by about 200 basis points at the midpoint of our ranges, driven by a return to organic growth, continued cost discipline, and completing the disposals. We anticipate organic growth of about 1%, led by subscription revenue growth from continued ACV acceleration. We have plans in place to achieve cost efficiencies to fully offset inflation, resulting in a full flow-through of the approximately $25 million of revenue growth to profit. This will account for about a third of the profit margin expansion. The inorganic disposals are expected to lower revenue this year by approximately $130 million, and we are reducing operating expenses by more than $100 million, which yields a profit impact of about $25 million, delivering the remaining two-thirds of the profit margin expansion. As a reminder, our financial guidance for this year assumes we will own the Life Sciences and Health business for the entire year, and if an agreement is reached to sell the business, a revision to our guidance for this potential divestiture may be necessary later this year. We continue to anticipate a modest foreign exchange translation benefit to the top and bottom lines of $10 million and $5 million, respectively, most of which we already experienced in the first quarter. Please turn with me now to page 19 to step through the expected seasonality of our revenues and profits this year, which we have refined based on our first quarter results. We continue to expect to make steady progress on the top and bottom lines as we move through the year. As we projected in February, we experienced a slight sequential pullback in our annual contract value organic growth in Q1 but anticipate steady acceleration through the balance of the year to arrive near the midpoint of our range. Recurring organic revenue growth in Q1 of 1% was higher than we expected, due largely to the timing of patent renewals. We do expect a slight pullback in Q2 as a result of this phasing, leading to accelerated growth in the second half of the year. We expect revenue will remain relatively stable over the next couple of quarters and then tick up in Q4 due to the normal seasonality of reoccurring and transactional revenues. We do anticipate profit margins will continue to expand as we move through the remainder of the year, due to the organic growth and the impact of the disposals. Please turn with me now to page 20 to review how we expect the more than $1 billion of adjusted EBITDA will convert to about $400 million of free cash flow and how we plan to allocate capital. At the midpoint of our range, we expect free cash flow to grow about $35 million, or 10%, over last year. One-time costs are expected to abate, primarily on lower restructuring costs. As noted a couple of pages ago, our guidance does not contemplate the sale of the Life Sciences and Health segment. If we reach an agreement, this is an area we would update later this year. We expect cash interest to improve by about $20 million over the prior year as a result of the debt we prepaid last year and last quarter, additional debt we plan to prepay the remainder of this year, and some savings associated with the projected forward base rate curve. Cash taxes are expected to be $510 million higher than last year due largely to the new corporate tax in Jersey. We anticipate the change in working capital this year will be a use of approximately $20 million, primarily due to the incentive compensation payments in Q1. We are also expecting a $10 million benefit associated with lower paired contractual cost. And while we remain committed to investing in product innovation, the disposals and cost efficiencies will improve capital spending by about $15 million. From a capital allocation perspective, we plan to use the free cash flow we generate in the remainder of the year for debt reduction. Please turn with me now to page 21 for more specifics on our deleveraging plan this year and beyond. The chart at the top of the page outlines our debt maturity profile. As you can see, we have a favorable runway with no near-term maturities. Over the past three years, 2023 through 2025, we generated $1.2 billion of cumulative free cash flow, just over $100 million per quarter on average. As I highlighted on the prior page, we expect to generate about $400 million this year at the midpoint of our range, and we expect to generate at least this amount next year and the following. This outlook results in a similar average quarterly rate of about $100 million. Given the current debt market conditions, we plan to use our free cash flow moving forward towards the early retirement of our bonds. Over the next nine quarters, we expect to retire our secured notes in their entirety before their maturity in July 2028. Once those have been redeemed, we plan to use our quarterly free cash flow to begin to retire the 2029 notes, leaving only $500 million of the $1.8 billion of midterm maturities to be refinanced in the next few years. It is worth noting that, as with all of our forward-looking guidance, this outlook includes our Life Sciences and Health business. If the potential sale does materialize, we expect it would eliminate the need for a future bond refinancing. We anticipate these debt reduction actions will lower our net leverage from four turns at the end of Q1 of this year to approximately 2.5 turns in a few years. We continue to be very encouraged by the improved results we are delivering as we implement the value creation plan and the durable cash flows we generate. I would like to finish by thanking all of you for listening in this morning. I will now turn the call back over to the operator. We will now open the call for questions. As a reminder, please limit yourself to one question and return to the queue for additional. Please go ahead. Operator: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star followed by the number one. Your first question is from the line of Toni Michele Kaplan with Morgan Stanley. Toni Michele Kaplan: Thank you. You have talked about your new AI capabilities that you have launched, and reducing some of the manual repetitive work through AI efficiencies. I was hoping you could talk about the traction of the new AI products, the reception from customers, how much growth you are getting from them at this point, and, similarly, any ability to quantify the efficiency benefits that you can get from AI as well. That would be great. Thank you so much. Matitiahu Shem Tov: Thank you, Toni. I will start, and Jonathan M. Collins will continue. First of all, we are intensifying our investment in AI. In the last fifteen to eighteen months, we invested more and more into AI, and it goes two ways. The first one that we started was major product introductions and innovation around the three segments, and then now we are shifting or moving also to internal cost efficiencies with AI. So I will start with internal cost efficiencies. There are opportunities in go-to-market, customer support, and sales operations; opportunities in technology to help us innovate and develop products faster with the support of AI; and also opportunities around corporate to rationalize some of our corporate costs, whether it is finance, general, or legal. So there are a lot of opportunities internally. Externally, the product dimension is delivering innovation to our customers where it really matters. So three buckets of product innovation that we have on AI. One is the first wave of products that we have improved with AI assistants. Product by product, in many of our products we have implemented research assistants. We have implemented in different products in A&G, then in Life Sciences, and we are now doing the same with IP. That was wave one. Wave two was agentic AI. We are implementing agentic AI capabilities across our products where it matters. And then, just coming back from some of the feedback we get from some measurements that we have done in implementing agentic AI within our Alma Prime library product, we have managed to reduce the manpower or to quadruple the throughput of some of our customers using agentic AI capabilities, and this is just a start. And the third wave is ecosystem implementation. Ecosystem implementation: we all know that this generation, especially students and researchers, but also lab scientists and IP professionals, are consuming AI through the major LLM providers. So we started the journey. We announced about a month ago that we are collaborating with Anthropic to provide AI capabilities within Anthropic enterprise customers, taking the Clarivate Plc proprietary products and proprietary data that we have, and in collaboration with Anthropic we are enabling the consumption of this data in the Anthropic environment. In a way, we are turning the LLM to our sales agent, meeting our customers where they are. On top of this, yesterday we announced another product from A&G called Nexus Connect. If you think about universities, they subscribe to a lot of different content. And, again, students and researchers are consuming this content through different types of LLM. Nexus Connect is our new offering from A&G that brings the data—ChatGPT, Copilot, whatever your designated LLM—using our technology to bring our content, but also other providers’ content, very close to our customers. So overall, a lot of energy and a lot of resources are going into AI innovation. We have just been awarded outside recognition that we are the front leader in terms of AI innovation in the academic ecosystem. It has been a long answer, but I will move it over to Jonathan M. Collins to talk a little bit about the financials. Jonathan M. Collins: I appreciate the part of the question, Toni, with respect to the opportunity size in the AI efficiency internally. We outlined the areas that we are focusing on there, and at this point, we are confident that the opportunity set here gives us a really good opportunity to continue to expand our margins and grow our cash flows. We are likely going to look to further dimension this probably later this year. Thank you for the question. Operator: Your next question is from the line of Manav Patnaik with Barclays. Manav Patnaik: Thank you. Matitiahu Shem Tov, I was hoping you could just give us an update on how you see the competitive environment out there. Presumably, they are using AI and enhancing their products as well, and I am just curious if you have seen any change and how you would compare your initiatives versus what you are seeing in the market? Matitiahu Shem Tov: I think I just mentioned that we have been recognized as an AI innovator. We see great adoption for our AI products across the three segments. In A&G, we have more than 400 institutions using academic AI solutions. I mentioned Nexus Connect. In Life Sciences, over 10 thousand researchers and users are using some of our AI product innovation. We recently announced the cloud collaboration with Anthropic. We are doing well with IP as well, with the recent brand image search that we have introduced. We always look forward; we try to set the scene as opposed to looking at what the competition does, but we feel good about our product innovation. Many of us come from a background of products and engineering, and we are seeing a lot of improvement and great feedback from our customers across these three different segments. Operator: Your next question is from the line of Scott Wurtzel with Research. Scott Wurtzel: Good morning. Thank you for taking my question. I think in your prepared remarks you talked about the China opportunity and expanding there. I am wondering if you can maybe just talk about that A&G space more broadly in China and the opportunity that presents to you? Matitiahu Shem Tov: China is a great contributor to our A&G capabilities and performance. We just came back from a meeting with some of our Chinese top sales executives. We sold 15 new Web of Science businesses in China last year. There is a lot of great momentum for A&G in China, specifically in Web of Science, and more recently also in Web of Science Research Intelligence. We have some development collaboration we are doing with a few institutions. We feel very good about our top A&G prospects in China—not only A&G, also Life Sciences and IP. We have different ideas we are currently contemplating. We will share more as we have it, but we feel good about the China market. Jonathan M. Collins: Thanks for the question, Scott. Operator: As a reminder, to ask a question, press star followed by the number one on your telephone keypad. Your next question is from the line of Ashish Sabadra with RBC Capital Markets. William Qi: Hey. Good morning, guys. This is William Qi on for Ashish Sabadra. Appreciate you taking our question. It is really great to see the continued sequential improvements on the organic sales metrics. I think IP continues to execute in a bit of a more muted environment. You have noted in the past that there are some expectations for that to improve maybe in 2026 into early 2027 as some of those historical batch renewal cycles come back. Is that the general trend that you expect for that segment? And you have had great wins as well—how do you combine all those together? Matitiahu Shem Tov: I will start, and then I will ask Jonathan M. Collins to add. Just a reminder that we are the market leader in IP. We tend to forget this, and we are the only company that has all the three or four sub-offerings that we have in IP. We are very big on IPMS, and we have great intelligence products, both for trademarks and for patents as well. We have a new management team. We have enhanced focus—very strong focus on two things: sales execution—we have gone through some changes in our sales organization, renewals, territory alignment, and other things that we have done—and then AI innovation. There is very strong AI innovation momentum that we are building with the management team of IP. Brand Image Search was one product we mentioned. We are confident in the return for IP back to future growth. Jonathan, if you can give some more color here. Jonathan M. Collins: As Matitiahu Shem Tov highlighted, the continued investment in AI, we expect, will help accelerate growth in our subscription products there. We have made steady progress. We saw a slight improvement in renewal rates in the first quarter, and we have got an organic ACV that is getting pretty close to flat after a few years of decline, so steady progress based on the investments that we are making there. The biggest part of the IP business—the recurring revenue stream—which is our patent renewal business, declined a few percent two years ago. Last year, it was flat. The first half of this year, due to the comps and some timing from the first half of last year, will be down slightly, but we do expect that business to return to growth in the second half of this year and have a good trajectory heading into next year. Market conditions there—the patent stock growth—have improved over the last few years, which is a good leading indicator. And the team, as Matitiahu Shem Tov said, has done a very good job on sales execution, improving our competitive position in that part of the market. So it is continued progress, and we look forward to better performance from IP in the coming quarters and into next year. Thanks for the question, William Qi. Operator: Your next question is from the line of George Tong with Goldman Sachs. George Tong: Hi, thanks. Good morning. Transactional revenues were down this quarter because of lower A&G activity. Can you talk a little bit more about what you are seeing there and what would need to happen for A&G activity to rebound? Jonathan M. Collins: Thanks for the question, George. Our transactional revenues were down a couple of percent in Q1. As you noted, A&G was the primary driver in the quarter. I will start by saying we do expect, on a full-year basis, our guidance contemplates that the transactional business will be down slightly compared to the prior year, so it was as expected. In the quarter, some of that in A&G was due to the timing of software implementations. That can be a little lumpy quarter to quarter. And then, on a full-year basis, as we continue to have success in Life Sciences with the migrations to subscription, we will expect to see a little bit of a headwind there on the transactional side. But Q1’s slight decline was in line with what we expected and is in line with what we expect for the full year. As we move into next year, as we continue to build that sales pipeline on the software products, there is some opportunity to improve that heading into next year. But that was the primary driver in Q1. George Tong: Very helpful. Thank you. Jonathan M. Collins: Thanks, George. Operator: Your next question is from the line of Andrew Nicholas with William Blair. Andrew Nicholas: Good morning. Appreciate you taking my question. I was hoping to hone in a little bit more on A&G growth. That has been a segment that has hung in there pretty well over the past handful of quarters. Within that approximately 2% organic growth, and the expectation for improvement in 2026, is research analytics and content aggregation leading the way there, or is it a software-led growth, or are they all kind of around that 2% number? Just curious if there is an underlying subsegment where you have more expectation for growth acceleration. Thank you. Jonathan M. Collins: Thanks for the question, Andrew. The bright spot for us as of late in A&G from an organic growth contribution standpoint has been the success in our research and analytics category, which is led by our flagship product, the Web of Science. As Matitiahu Shem Tov touched on in his comments around AI innovation, this is where we have seen a lot of the new innovation come into the product. We are very encouraged by the adoption of the research assistant last year, some of the agents that we have deployed that we are getting great feedback on, such as the literature review agent. And we are also very thrilled about this year's growth that will be driven from the Web of Science Research Intelligence platform. That is the new AI-native multi-agent platform that helps measure research success across the university ecosystem. So we are really encouraged by what we have seen there. The content business has held in; that usually grows at or slightly below the average for A&G. And then the software business is doing well, with very high renewal rates. We have some new product innovation happening there that can help to catalyze further growth. Those are the three main areas, and the strong performance has been in our research and analytics category. Thanks for the question, Andrew. Operator: Our last question comes from the line of Stifel. Analyst: Hi. I am calling on personnel’s behalf. Apologies if I missed this, but in the slide deck, Life Sciences and Healthcare is progressing ahead of schedule in the shift to subscription. What is the current subscription mix of the business, and how should this shift move organic growth through the year? Thank you. Jonathan M. Collins: Thanks for the question. This is our segment that has the highest proportion of transactional revenue. Just as a reminder, our consulting practice for commercialization, which sits in the Life Sciences business, is an important part of the go-to-market motion for this, but it creates a lower organic recurring revenue mix within Life Sciences. What Matitiahu Shem Tov touched on is that we have continued to invest in product innovation to migrate some of these solutions to a subscription. We started to see progress on that last year. That continues into this year, and we expect to continue to make steady progress making that business more predictable with a higher renewal base every year to help accelerate it into growth. So it is a combination of the commercial motion—where we are focused in the marketplace—and the product innovation that is helping to lead that. We expect to see continued traction there, and over time, we think we can see the recurring revenue mix get into the low nineties in Life Sciences. Matitiahu Shem Tov: Maybe just a few words of wrap-up. As I mentioned over the call, the VCP plan is working. This is the fifth quarter of improvement. Our subscription mix has gone to 88%–89%. We have better sales execution, and we are industry-leading in terms of AI. We are very pleased to be here today, and thank you for your time. Jonathan M. Collins: Thank you all for your time today. That concludes our call, and we look forward to speaking with you with any follow-up questions in the coming days. Thank you. Operator: This does conclude today's call. Thank you for joining. You may now disconnect your lines.
Operator: Good morning. My name is Cindy, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Lucas Sullivan, Director, Financial Planning and Analysis. Mr. Sullivan, you may begin. Lucas Sullivan: Thank you, Cindy. Good morning, everyone, and welcome to EMCOR'S First Quarter 2026 Earnings Conference Call. For those of you joining us by webcast, we are at the beginning of our slide presentation that will accompany our remarks today. This presentation will be archived in the Investor Relations section of our website at emcorgroup.com. With me today are Tony Guzzi, our Chairman, President and Chief Executive Officer; Jason Nalbandian, Senior Vice President and Chief Financial Officer; and Maxine Mauricio, Executive Vice President, Chief Administrative Officer and General Counsel. For today's call, Tony will provide comments on our first quarter 2026 and discuss our RPOs. Jason will then review the first quarter numbers, then turn it back to Tony to discuss our guidance before we open it up for Q&A. Before we begin, a quick reminder that this presentation and discussion contains certain forward-looking statements and may contain certain non-GAAP financial information. Slide 2 of our presentation describes in detail these forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. And finally, as a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings press release issued this morning and in our Form 10-Q filed with the Securities and Exchange Commission. And with that, let me turn the call over to Tony. Tony? Anthony Guzzi: Yes. Thanks, Lucas, and I'm going to start my discussion on Pages 3 and 4. Good morning, and thanks for joining us today. I'm pleased to report another outstanding quarter for EMCOR. Our first quarter 2026 results demonstrate the sustained momentum we have built over many years with strong execution across our business segments, and continued growth in our core market sectors and geographies. In the first quarter, we generated revenues of $4.63 billion, representing year-over-year growth of 19.7% and organic growth of 16.8% when adjusting for incremental acquisition contribution and the sale of EMCOR U.K. Operating income reached $404 million, with 8.7% operating margin, while diluted earnings per share of $6.84 represents an increase of 30% versus the first quarter of 2025. This reflects our strategic positioning in high-growth markets and operational excellence across our construction and services platforms. These results demonstrate our customers' continued confidence in EMCOR as one of their partners of choice for complex mission-critical projects. Our Construction segment once again performed extremely well in the quarter. The Electrical Construction segment generated year-over-year revenue growth of 33.1% with a 12.1% operating margin, while the Mechanical Construction segment achieved 28.9% revenue growth with a 10.9% operating margin. This performance reflects the range of our capabilities across both trade and geographies. It also takes into account increased customer scope and our reputation as one of the premier specialty contractors for complex, fast-paced projects. Our Construction segment's growth was driven primarily by increased activity in network and communications, which is where our data center business rests. Institutional, manufacturing and industrial, health care and water and wastewater market sectors. Within our Mechanical Construction segment, we also benefited from increased commercial market sector revenues, driven primarily by the resumption of demand for warehousing, distribution and logistics projects. Our teams continue to leverage our prefabrication and our virtual design and construction capabilities, excellence in labor management and planning, large project coordination and execution and a disciplined focus on contract negotiation, administration and the adherence to those terms. The U.S. Building Services segment delivered solid results, led by impressive performance in our Mechanical Services division. While we still face slight revenue headwinds within our site-based business, we've begun to see the benefits of the restructuring on the cost side, which reduced overhead costs, and we have a more profitable contract portfolio mix. Our Industrial Services segment generated revenue growth of 6.4%, and that was driven by our Field Services division. Now I'm going to turn to Page 5. Our remaining performance obligation positions strengthened significantly during the quarter, providing excellent visibility for sustained growth. Our RPOs totaled $15.62 billion at the end of the quarter versus $11.75 billion in the year ago period and $13.25 billion as of December 31, 2025. This represents year-over-year growth of 32.9% and sequential growth of 17.9%. These diverse RPOs reflect continued strong demand across many market sectors, with particularly robust activity in Network & Communications or data centers, where we continue to expand our geographic footprint and scope of services to better serve our customers. We see no sign of slowing demand in this vertical, where customer investments in AI infrastructure, cloud infrastructure and overall digital transformation are driving unprecedented levels of activity. We are pleased with the quality and diversity of our work booked outside of the data center space, including the notable awards within water and wastewater as we continue to win new projects in Florida; institutional, driven by demand for upgraded live space by certain colleges, universities; and health care as our customers continue to modernize their facilities while seeking to make them more flexible and responsive. The strong operational and financial performance I've outlined demonstrate the effectiveness of our strategic initiatives and the depth of our execution capabilities. Our teams continue to deliver exceptional results for our customers while maintaining disciplined financial management and operational excellence and continued good contract negotiation and adherence to the contract terms we negotiate. With that context, I will turn it over to Jason, who will provide a detailed review of our first quarter financial results. Jason Nalbandian: Thank you, Tony, and good morning, everyone. Starting with Slide 6, which shows revenues. I'm going to cover the operating performance for each of our segments as well as some of the key financial data for the first quarter of 2026 as compared to the first quarter of 2025. As Tony mentioned, revenues of $4.63 billion established a quarterly record for EMCOR, increasing 19.7% or 16.8% on an organic basis when excluding acquisitions and adjusting for the sale of EMCOR U.K. Revenues of Electrical Construction were $1.45 billion, increasing just over 33%. This segment generated increased revenues from the majority of the market sectors we serve, with the most significant growth coming from Network & Communications, where revenues increased by nearly 50%, driven by strong demand for data centers. While this accounted for 2/3 of the segment's growth, we did experience notable revenue increases across a number of other sectors, including hospitality and entertainment due in part to progress made on a stadium project and institutional as a result of certain public sector projects. In the quarter, our Electrical Construction segment also benefited from greater levels of short duration projects and service work. Mechanical Construction revenues of $2.03 billion are up nearly 29%. Similar to Electrical, this segment once again experienced the greatest growth from the network and communications market sector where revenues increased by 86%. Increased cooling requirements and advancements in liquid cooling, particularly for AI data centers continue to drive opportunities for this segment. Beyond data centers, Mechanical generated quarterly revenue growth from the majority of the other sectors in which we operate. Notably, institutional revenues doubled year-over-year manufacturing and industrial, including food processing, was up 34% and commercial increased by 33%, driven by warehousing, distribution and logistics projects, largely within fire protection. During the quarter, this segment also benefited from increased service revenues as we continue to expand our maintenance and inspection base, both within traditional mechanical services as well as our fire life safety offerings. On a combined basis, our construction segments generated revenues of $3.47 billion, an increase of 30.6%. I should note that this performance established new quarterly revenue records for each of these segments. Moving to Building Services. Revenues of $772.6 million grew by 4%, driven by our Mechanical Services division, which generated a 6% increase in revenues. From a service line perspective, the most significant growth was seen in repair service, service maintenance and building automation and controls. Revenues of our Industrial Services segment were $381.8 million, an increase of 6.4%. The greater contribution from our field services operations due primarily to progress made on a large solar project was partially offset by a reduction in revenues with our shop services division due to lower heat exchanger sales and related services. I'll turn to Slide 7 for operating income. We generated operating income of $403.8 million or 8.7% of revenues both of which are records for EMCOR for a first quarter. This represents an increase in operating income of 26.7% and operating margin expansion of 50 basis points versus the prior year. When adjusting for the acquisition transaction costs, which were incurred in Q1 of 2025, operating income grew by 23.1%, and operating margin increased by 25 basis points. Once again, if we look at each of our segments, due to the growth in revenues, operating income for Electrical Construction increased by 28.2% to a quarterly record of $174.5 million. Operating margin of 12.1% compares to 12.5% a year ago. With consistent gross profit margins, this segment continues to execute well across its project portfolio with the year-over-year decrease in operating margin, primarily resulting from an increase in intangible asset amortization given the 1 month of incremental expense from the Miller acquisition. Mechanical Construction had operating income of $221.6 million, an 18.7% increase. From an end market standpoint, this segment generated greater gross profit across many of the sectors in which we operate with the largest increases generally tracking in line with the growth in its revenues. Operating margin of 10.9% compares to 11.9% in last year's first quarter. As we anticipated when we exited 2025, operating margin in this segment decreased due to a shift in mix that included a greater percentage of revenues from projects where we're acting as either a construction manager or a prime contractor and which inherently carry lower-than-average gross profit margins due to reduced markups on materials, equipment and subcontractor costs. In addition, we had an increase in the number of GMP or cost-plus projects, particularly in newer geographies or on projects where scope or design are still evolving. Together, our construction segments grew operating income by nearly 23% and earned a combined operating margin of 11.4%. Building Services generated operating income of $40.4 million, which represents an 11.1% increase and operating margin of 5.2% expanded by 30 basis points. This segment benefited from strong performance within its Mechanical Services division, which experienced a favorable mix, given the greater volume of higher-margin service and controls projects. Also, as Tony mentioned, while we do face some headwinds within our site-based business, the restructuring we did last year has proven to be successful, resulting in both reduced overhead costs and a more profitable contract portfolio. And lastly, operating income for Industrial Services was $12.8 million, an increase of 89.1% and operating margin of 3.3% expanded by 140 basis points. As a reminder, and contributing to the favorable year-over-year comparison, the results for this segment in last year's first quarter were negatively impacted by a $4 million increase in the allowance for credit losses which negatively impacted operating margin for Q1 of '25 by 110 basis points. Excluding this impact, the remaining increase in operating income and operating margin was primarily a result of greater gross profit and greater gross profit margin within its Field Services division. If we quickly turn to Page 8. I'll cover a few items not included on the previous slides. Gross profit of $864 million increased by 19.5% and our gross profit margin of 18.7% remained consistent with that of the prior year, which represents a record level of performance for a first quarter. SG&A was $60.1 million or 9.9% of revenues compared to $404 million or 10.4% of revenues a year ago. With the top line growth we experienced during the quarter, we are pleased with the operating leverage we attained as evidenced by the decrease in our SG&A margin. And finally, on this page, diluted earnings per share was $6.84, which represents an increase of 30% or 26.4% when excluding the transaction costs in last year's first quarter. And finally for me, let's turn to Slide 9, which covers our balance sheet. Our balance sheet, including $916 million of cash on hand and $1.25 billion of working capital remains strong and liquid and enables us to continue to fund organic growth, pursue strategic M&A and return capital to shareholders. During the quarter, we returned $105 million of cash to our shareholders through stock repurchases and our quarterly dividend. Although not shown on this page, due to an increase in accounts receivable, given our strong organic revenue growth and coupled with the payment of the prior year's incentive compensation awards, cash flows from operations in the first quarter were essentially neutral. However, for the full year, we remain confident in our ability to generate operating cash flow at least equivalent to net income or up to 80% to 85% of operating income consistent with previous years. With that, I'll turn the call back over to Tony. Anthony Guzzi: Yes. Thanks, Jason, and I'm going to be on Pages 10 and 11. Given our strong start to the year and the strength of our remaining performance obligations, we are raising our full year 2026 guidance. We are increasing our revenue and diluted earnings per share guidance to a range that reflects our confidence in the sustained operational excellence that we have exhibited and strong market momentum. . Such guidance reflects the demand that we are seeing and our success of winning and executing large-scale projects across many geographies and market sectors. We now expect to earn revenues between $18.5 billion and $19.25 billion and diluted earnings per share of between $28.25 and $29.75. As a reminder, EMCOR's business is characterized by project cycles and timing that can create quarterly variability. However, our guidance reflects our current expectation of continued strong operating margins throughout 2026, supported by disciplined project selection and execution. We are focused on maintaining pricing discipline while delivering exceptional value to our customers. Our sustained success is built on focused execution across a number of key priorities that differentiate EMCOR and position us for continued growth. I'm now going to highlight 4 of them. The first one is our training, peer learning and our productivity initiatives. We continue to leverage our training programs, our virtual design and construction capabilities, prefabrication facilities and capabilities and advanced project planning and delivery methodologies. We are committed to improving our means and methods every day, sharing knowledge across our organization and investing in workforce training, retention and expansion. Second item is a contract management discipline and negotiation. We deliver exceptional results for our customers. However, we do protect our rights and interests through careful contract management, negotiation, particularly on complex fast-paced projects. Third, we're known for field service -- field leadership excellence. One can argue that is our core product. Our field leadership excellence from frontline [ foreman ] and superintendents to project managers and executives and subsidiary and segment leaders make EMCOR an employer of choice in our industry. And finally, supporting all of that is our commitment to invest with discipline and for the long term. We maintain a disciplined approach for how we grow organically and through acquisition. This, coupled with a return of cash to shareholders through dividends and share repurchases has provided the foundation for our compounding record of success over the past decade and provides balance to our approach to capital allocation. These interconnected priorities create a sustainable competitive advantage that drives superior, durable performance across many diverse geographies and market sectors. The fundamentals of our business remains strong with sustained demand across several key market sectors, we will continue to always face macroeconomic challenges. In fact, I can't remember a time when we haven't had them, such as geopolitical events, rising commodity prices, but our team has consistently demonstrated the ability to navigate complexity and continue to deliver results. Our success is a direct result of their dedication, their resilience expertise, which results in executional excellence from our teammates across the organization. I want to thank every member of the EMCOR team for their contributions to our outstanding first quarter performance and over the long term. And for everything you do to serve our customers, keep each other safe, and drive our success every day. Thank you for your time this morning. We will now open the line for questions. And Cindy, I will turn the call over to you. Operator: [Operator Instructions] Our first question comes from Adam Thalhimer of Thompson, Davis. Adam Thalhimer: Congrats on the strong Q1 and the record orders. I guess I wanted to start on the book-to-bill and orders. I mean, I think at 1.5x that was a record book-to-bill for you guys. And Tony, you broadly talked about the pipeline, but I'm just curious if you can give more detail on the pipeline and what the expectation should be for orders for the rest of the year? Anthony Guzzi: Well, I think I'd go back to something I said in our book, right? Orders come when they come, projects come when they come. There's variability quarter-to-quarter both on bookings. And when projects start, when they close, and what the pace of contracts are. So you know I'm not going to tell you what I see for orders for the rest of the year other than to say this. We continue to see, and I said it in my script, we continue to see no slowing of demand, especially in data centers and really across other key market sectors. I don't think we surprised by the demand we're seeing in water and wastewater in Florida, and we're winning a little more maybe than we thought we would. I don't think we're surprised by the demand -- continued demand over multiyears in health care. We continue to see a strong manufacturing and industrial business. I mean projects can come in there a little lumpy. And then it can also come in smaller task orders thereafter. I think the market has surprised us the most over the last 6 to 9 months or 2 to 3 quarters has been the institutional market. That has shown more resiliency than we would have thought. But I think that's a result of the market positioning we have in some key markets with some universities that are spending money. I also think that we weren't surprised by the resumption in warehousing and logistics and the transportation network work that we're seeing and return in the commercial market sector of that because we could foresee that based on the customer spending patterns. I would say right now, we will continue to grow in excess of nonres like we have historically pretty significantly. And we will continue to win important new projects and penetrating current geographies we are and investing in new geographies, even if they may seem adjacent across the data center space. One area I'd always remind people, because I know the question is coming about high-tech manufacturing. I think that's a market of choice for us. We are well positioned in several key markets, especially in the Mountain West and in Arizona, and we're positioned there specifically across the trades of fire life safety and mechanical and some electrical. And we have the ability in other markets to serve specialty fire life safety in just about every high-tech market that exists. We look at that as a flex market. They can be very difficult customers to work for, in some cases, especially in the semi market. And sometimes, we're making a mix management issue within the geographic market to maybe serve a larger data center campus that maybe go after the next semiconductor fab. But again, we feel good about demand right now. Spending patterns remain and things are pretty much unraveling for the year, much like we expected. We're not chasing margin percentages right now. We're much more focused on growing margin dollars, which is what you actually spend and invest for the long term. Adam Thalhimer: That doesn't set me up well for my next question, which is on margin percentages. But so high level -- that was great color. But high level, I did want to see if I can get at the margin potential in the back half? And maybe a way to do it is just Jason, I mean, you ran through a bunch of issues that impacted you in Q1 in terms of markups and mix? And maybe you can just talk about how those issues play out as the year unfolds. Jason Nalbandian: Yes. I think we said this exiting last year, and I think it still holds today. But if you look at that guidance range we provided, we do have some lower margin scenarios in there, which anticipate a changing mix. I think we believe execution is going to remain strong throughout the back half of the year, which gives us the opportunity to replicate last year's record margins at 9.4%. So I think some of these mix dynamics will remain with us throughout the rest of the year. I also believe what we've said kind of over the last several quarters and looking at kind of a rolling 12- to 24-month average, I think that holds true. Just understanding it's going to fluctuate quarter to quarter just based on that mix as you kind of saw in mechanical this quarter. But I think the fundamentals to hold, and I think really no significant change from what we said year end. Anthony Guzzi: Yes. And I think I'm always careful of false precision. We give a range for a reason. Could we be on top of that range a little bit, but it's not going to -- we don't think substantially at this point. They would take something an execution that we're not seeing right now or we take a booking that happened in year that had to be done very fast at superior margins. So we have a pretty good handle on what our mix looks like. And I think that's one of the things that's a little bit different than us and some other folks. Some of these companies are becoming one market companies. We are diverse by nature because of the geographies we serve and some of the companies we have that are earning very good returns that have nothing to do with data centers. And we do a little better in the data center market. We do on a margin percentage, but we should. These are fast-paced jobs. They require a very strong dedication of our resources. And look, they come with risk, right? I mean at the end of the day, we're always balancing contract risk versus execution versus type. And sometimes that leads us to take a contract structure that may have inherently lower gross margins, but on a risk-adjusted basis and then it could lead to follow-on work that comes in a fixed-price way, which will then allow us the opportunity to grow margins over time. But we feel good about where the margins are on a year-to-date basis. I think the year started out pretty much like we thought, which quite frankly, just stronger revenue than we expected. And we're winning in markets right now and that feels really good. Operator: The next question comes from Brian Brophy of Stifel. Brian Brophy: Yes. Nice quarter. Tony, you touched on my question at the end of -- end of your last answer in terms of potentially shifting some of this mix away from GMP to cost plus -- excuse me GMP and cost plus to fixed price over time. I guess help me understand, is that kind of a deliberate decision on your guys' part to start off with maybe some lower risk structures in these new geographies? And I guess, what is the -- what's the needle mover. What needs to happen for you guys to potentially move these to more fixed price and increased opportunity for higher margin over time. Is it just you guys need to get comfortable in the new geography? Or is there something else? Anthony Guzzi: No, look, first of all, it's not only our decision, right? Some of our customers prefer to operate in a GMP mode because they anticipate they're going to have a fair number of change orders and they want to get started on the job. So it's not only our decision. When it is our decision, I think you outlined it right. We have to get comfortable that we know the pace of build and the cost. I mean I'll just remind folks of last year, right? We had a -- I hate to always bring up bad news, but this is why we're in the -- how we have to think about the business we're in. We were in a market that checked 3 of the 4 blocks other than it was relatively new for the size we were trying to build. And at the end of the day, we took a fixed price. We didn't get the acceleration change order quite what we thought we should price it right and therefore [indiscernible] So that didn't make us shy away from fixed-price work. But it shows you when you don't get it right, you own it. And so contract structure is not only our decision, it also comes from our owners. And we typically work together. Now I think most owners if we think we have a good handle on what it looks like, and they can get a fixed price that looks like it can fit their budget, and it takes away all the auditing and contract stuff that goes with a GMP contract they're more than happy to move away. The other variation on that is we can get 50% into or 60% into a GMP job, we both feel comfortable with we've locked in cost and scope and therefore, we will change it to a fixed price contract. So I'd like to tell you there's 4 or 5 variables here that variables could be up to 6 to 12 of contract administration and structure. And ours is always towards the best outcome for us and our owner and also the best risk-adjusted outcome. Jason, you got anything to add on that? Jason Nalbandian: Yes. I don't think anything has changed overall in terms of our appetite for fixed price work or what we see in terms of the market and our customers. I think it's very much specific geographies, specific opportunities and specific customers in the quarter, which drove the revenue mix to skew more towards GMP... Anthony Guzzi: Especially in mechanical, which makes sense because you're doing more of these AI data centers now. And unless we're doing fabricated structures for those AI data centers, you can argue modular structures that have really as part of our build or somebody else's build, they do start those things up more GMP, and we would prefer they do that as they work out their designs. Jason Nalbandian: Yes. And that's the comment I tried to make about the designs evolving and the scope still evolving. Brian Brophy: Understood. That's very helpful. And then just as a follow-up. Any update on access to craft labor, labor tightness? Any notable changes you guys have seen there over the last few months? Anthony Guzzi: No, no notable changes. We're continuing to recruit heavily with the unions, especially in the Southeast, Texas, Oklahoma through the Midwest. We're working in a very cooperative fashion. One of the things that have benefited us is some of the programs, and that's one of the appeals of Miller. They are excellent at this. They have a pro trade program that allows a quick training program of 2 to 4 weeks, gets people functional, allows us to bring them in at the right classification and get them functioning safely and productively on a job site and that's something we're continuing to expand and grow across other EMCOR subsidiaries to grow our craft labor force. I will say that our -- and I've talked about this before, our real bottleneck, and it really hasn't been a bottleneck because we have this great amount of work to work on its supervision. We have to create more foreman. We have to create more general foreman, we have to get project engineers to be able to move to project managers, project managers to be able to move to project executives. That's how we really grow. Our constraint -- yes, we have to build fabrication shops, whether they're on-site in tents or whether they're offsite in our fixed facilities, we always have to be thinking about that curve. We don't like to get too far ahead of that curve because there may be other ways to skin that cap on fabrication, like on-site fabrication and other things. But we always have an eye towards developing that supervision level. I said it in my remarks, our core product is really [ field ] labor supervision and leadership, and we just apply in these trades, and we do that very well. And therefore, if you're doing that well, you become an employer of choice because trade craft people typically like 4 or 5 things, right? First, they like to know they're going to get paid every week, and their benefits are going to get paid and in no particular order that you're going to give them the safety equipment and tools that they need to be safe, that you have a good safety program. That the supervision they're working for actually knows what they're doing and can really share means and methods and are plugged into our network to gain more knowledge on means and methods that they're working for people up through the chain of command and understand the work they're doing. And finally, that if they do a good job and so choose they want to be part of one of our core teams, that we have ongoing work and that they want promoted that they have an opportunity to be promoted. EMCOR emphatically checks all those blocks in our subsidiary companies. And I think that's why you have -- it's difficult. Our guys are slogging away at it every day on mix management. I think we've been able to meet the moment as far as recruitment and retention of trade excellent [indiscernible] Operator: The next question comes from Justin Hauke of Robert W. Baird. Justin Hauke: Great. I guess -- so we already talked about, obviously, the first quarter, really strong revenue trend. The RPO is up 18% quarter-over-quarter. I think that's an organic record for you. But the revenue guidance only tweaked a little bit higher. You're looking for kind of 9% to 13% growth for the year and you just did [ 20% ]. So I guess I'm just trying to understand -- I know you've got some tough comps, but what's the conservatism in that outlook that would have the trends decelerate to kind of the more mid-single digits from what you put up at the start of the year bookings. . Anthony Guzzi: I think you just said it in your last sentence, we just started the year. We're sitting here in the first quarter. We have 3 quarters in front of us. I think we'll know a heck of a lot more on the revenue trend as we exit second quarter and based on what we see at the end of the year. And it's still -- I mean even sitting here with these RPOs, Jason and I still think we have to book 40% of our work. Jason Nalbandian: For the remainder of the year. If you're taking -- let's just use the midpoint of our revenue guidance range, if you take into consideration what's in RPO that we believe will burn through the rest of the year and what we earned in the first quarter, we still need to book about [ 30% ] of our work. Anthony Guzzi: And we think we can do that and if we can book more of that and execute it within the year, that's how the revenue guidance will creep up, and we'll have much better visibility as going -- said simply, we feel good about the revenue trend in the business. We feel good about our RPO bookings. We feel good about the margin in those -- in the RPOs. But we're sitting here in first quarter, April and we'll have a much better view of that when we talk to you again in late July. Jason Nalbandian: I think in the quarter, we made significant progress on a few jobs. Some of that accelerated maybe a little bit more than we expected. When we look at the rest of the year, I think where we land in that guidance is really going to depend on how quickly we mobilize on some of the new work we just booked, right? We had a lot -- we had strong bookings in the first quarter. So how quickly do those jobs mobilize, how quickly do we assemble a labor force and how quickly do they start burning. That's what's really going to dictate where we land. Justin Hauke: All right. And just so previously, it was 40% to 45% of kind of new work you had to book and you're saying it's 30%. I just want to make sure... Jason Nalbandian: you're right, Jason, given we have 1 quarter behind our belt and the strong bookings we had in the year. . Justin Hauke: Yes. Okay. And then I guess going back to the GMP contracts versus fixed price, can you give us -- I just would be curious to know kind of what's the mix in the RPOs today of what your contracts look like today versus a year ago or maybe 5 years ago in terms of [indiscernible] more fixed price . Anthony Guzzi: I don't think we could do that analysis from 5 years ago with any precision because things change halfway through a lot of times, and it ends up something different. I think versus a year ago, I think incrementally, it's moved a little more to GMP, and I would say this is not analytically for size. But I think that's mainly a mechanical and it's mainly driven by, I think, the larger scope of work which we're guessing, I mean, do we know that emphatically, we have a pretty good idea because of the power requirements and rack cooling we're doing, which is driven primarily, which we think by AI data centers. . These are some of the large language model data centers. And we think that's the case because of where some of them are being built. And a lot of this -- we can tie all that together because of access to power and proximity and all that. So I think that's really the difference. Where that will and later, we'll see and not all GMP contracts are built the same way. But at the end of the day, there has been a little bit of a mix shift to there. And it only takes a couple of points to change 10 bps or 15 bps or 20 bps of margin. I would offer, though, that we wouldn't take these things if we weren't driving more margin dollars by doing it versus other opportunities. . Operator: The next question comes from Avi Jaroslawicz from UBS. Avinatan Jaroslawicz: So I just want to discuss this acceleration in organic growth that we saw here in Q1. It sounds like -- some of it was due to increased mix of prime contracting pass-through revenues that you called out. Just when we think of that relative to the high single-digit to low double-digit organic growth that you've discussed previously within the construction business, is that kind of upper single to low double-digit framing around your self-perform work? Or was that including the prime contracting... Anthony Guzzi: It was all in -- I mean I think the preponderance of what we do is self-perform. But there's 2 places where it's more pass-through. One is, I think we don't even call it pass-through. We don't pass anything without a markup in the construction business. But it'd be primarily in our water and wastewater business, which we have a great team executing very well down in Florida. And it would be in our -- the 1 thing we do at EMCOR on an EPC basis at scale. Yes, we do chiller plants that way. We do other things. But the one place we do it at scale is in the food processing business. It's a very good business. It's a multi-trade package. But we have more of that revenue passing through right now in our manufacturing and industrial market sector and comes at a little over margin. But if you look at it on a return on capital basis, it's very, very good work. And when we look at projects, Avi, we look at it both ways. We look at a project like that, almost the way we look at an acquisition. With the cash flows look on that project versus what we've invested to do it, what does it allow us to do from a further with the customer, both from an aftermarket basis and also follow-on work. We have customers that we've been on site doing large projects every 3 to 5 years, we made continuous presence at those sites, doing small fixed-price projects and maintenance projects. I don't want to say for nothing's ever forever, but we've been there 20 years almost now. So that's a part of the business. Those are the 2 places where that pass-through revenue is the most significant. And that can affect margins 10 or 15 bps in a quarter to the negative. But again, I'll go back they generate really good margin dollars and a really good return on capital on those projects. Jason Nalbandian: And in this quarter, it was the food processing, right? We still have the water and waste water in our backlog. I think that's what you could see as the year progresses, and this quarter was very much coming from food processing though. Avinatan Jaroslawicz: Okay. Got it. Makes sense. Yes, I was in part, looking at the water and wastewater growth in the quarter. And so just trying to piece it all together. Anthony Guzzi: I'll get ahead of one of the other questions and somebody can maybe drop out of the queue. We're not forgoing any data center work to do this work. It's either a different team that does this kind of work or a different market sector -- I mean different geography. We're not forego different skills and capabilities. We're not forgoing any projects in the data center or high-tech world because we're doing water and wastewater or food processing. so Really Incremental growth at the end of the day. . Avinatan Jaroslawicz: Okay. That makes sense. And then just also, when we last spoke, you framed productivity and pricing together contributing about 5 percentage points to construction revenue growth this year. What do you have embedded for that in the updated guidance? Is it still about 5%? Or has that picked up? Anthony Guzzi: I think the way we termed it is less than half, right, at the lower end. So about 30% to 40% of our growth comes from pricing and productivity. But then now you have to tie that also into mix, right, Jason, to get to that answer. I don't think there's anything different than what we've done historically. Operator: The next question comes from Sangita Jain of KeyBanc Capital Markets. Sangita Jain: So if I can ask a follow-up on the mechanical margin discussion. Were these projects later on have incremental phases that you will then take on a fixed price? Or is the nature of these projects such that even the follow-on phases will be GMP? Anthony Guzzi: Well, the margin headwind in mechanical, some of it's GMP, others mix because of the food processing work, we hope to have fall on phases over a number of years. They won't be as large. Jason Nalbandian: I think it's true we determined what that contracting mechanism is, right? They could be fixed price in the future, on some of these jobs, if we get more comfortable with our labor force, we get more comfortable with the design. They may stay GMP because we do have a couple of customers who just prefer GMP work. So I think it's going to be dependent on the individual jobs, and I think we'll know more as the year progress. . Anthony Guzzi: I think we're beating this a little too hard right now collectively on the phone. We contract lots of different ways. And sometimes, our fixed price work on something like food processing because we're servicing more as a prime is a fixed-price contract. It doesn't have the same market characteristics and margin opportunity, the fixed-price contract can be on a single trade contract doing a data center or a manufacturing plant or a hospital. . Other parts, we're doing GMP work on data centers because a customer can't nail down a scope or a new geography or that's their preferred way of doing the business. And they do that, that way across their whole portfolio. I think we always think about operating in bands of margins. And as long as we're sort of within that 12- to 24-month look on bands of margins, we're performing pretty well. And then we take it a separate step further, At the part we're in a business, I think anybody that knows us, EMCOR is a return on invested capital type mentality. And if we can generate more margin dollars and balance that against the margins, we're happy. I know we're all trying to nail down this number of whatever percent for the year. A, we're not that good. That's why you have a range. And b, we have 12,000 projects going on right now, all kind of different contract structures. Is it a little bit incremental towards GMP, I look at that as a positive because maybe [indiscernible] off the table where we shouldn't have been taking the risk on a fixed-price contract and allows us to penetrate a customer further. So I think we're trying to put too fine a point or something that you can't put a fine point on. Jason Nalbandian: Yes. And I just go back to those 12 to 24 month averages to Tony's point, if you look at mechanical prior to this quarter and you look at those 8 quarters, margin for mechanical was as low as 10.6% and as high as 13.6%. So we're still right -- we're bouncing around those 8 quarter averages. And so I don't see anything here that's fundamentally different. Anthony Guzzi: Yes. We grew mechanical operating income, 18.7% and we grew electrical operating income 28.2%. I'd say on any given day, sign me up for that. . Sangita Jain: Understood. That's very helpful. Can I follow up on the 1.5 book-to-bill? And can you give us a little bit of a look as to -- are you being able to book the onward dated backlog? I know this space has traditionally been more of a book -- a short-term booking cadence business, but can you tell us at least some of these large projects give you a longer look into your performance maybe next year. Jason Nalbandian: Don't think in a significant way. I mean, I think if you look at the end of last year, we would have said at the end of '25, 82% of that RPO is going to burn within 12 months. Where we sit today, we say 78% is going to burn within 12 months. So a little bit longer, a little bit more extending beyond the 12 months, but not in a significant way. If you look at our total RPO, I'd be surprised if $6 billion to $6.5 billion goes even into '27... Anthony Guzzi: And that will [indiscernible] Jason Nalbandian: Yes, of course. Operator: The next question comes from Tim Mulrooney of William Blair. Timothy Mulrooney: Jason. Just a couple of quick ones here. So I heard you say that productivity and pricing is contributing, I don't know, which said like 30% to 40% of total growth this year and you're growing, call it, 10% to 12% organically, if you exclude contribution from acquisitions. So this implies pricing is maybe adding 3 to 4 points to growth, which I'm just wanting to confirm is directionally correct. And the reason I want to is because that surprises me a little bit, like we're hearing about pricing being very strong, particularly around AI infrastructure, EMCOR are critical to the whole process, but you're not the largest cost bucket for a long shot. So it seems to me that pricing would be a lot higher than 3 to 4 points, but maybe I'm missing something. Anthony Guzzi: I think -- look, I think in general, when contractors talk about strong pricing, a lot of times, they got to execute the work. And so we're saying our expectation going into the year on pricing is we're working with really smart customers. We never assume our customers don't have alternatives. I've never assumed at any time in my career and that we want to be with these contractors, these customers long term. I think when you look at our gross margins, and you look at our execution over a long period of time, and our ability to retain customers and at times we replace other contractors on site, but I don't remember us ever being replaced on a site. I think we get the price productivity execution just about right. I've never been the guy that's going to sit here. There's people throwing work at us, and we just get it in buckets. And some of my peers that say that I'm not sure they have the long-term view of the market that we have with pricing really means in contracting. Price in our business comes in a lot of different ways. If the assumptions you're making on the productivity of your labor, especially as you move further down the labor curve and there's more of a mix of people who are less familiars or more untrained, pricing also can cover what you expect on unforeseen job conditions, you don't get an adversarial relationship with customers who are going to work with a long time. if there are small changes on a job. So maybe you're giving up some of that in the execution of the job to retain the customer. I think the pricing environment is good, and I think we're almost getting paid for what we're worth. But I would take probably better contract terms, better change order administration and give up some price any day as we execute these large, fast-paced jobs for what are some of the most sophisticated customers in the world. Jason, you have something to add on that? Jason Nalbandian: No, I just think when you look at the number of jobs we're executing today versus the number of jobs a year ago, and you kind of back into the growth rate in jobs or even average contract values, I think it supports what we're saying, which is that really volume demand and productivity are the core drivers of our revenue growth. Operator: Our next question comes from Manish Somaiya of Cantor. Manish Somaiya: Congrats again to the team. A couple of questions. Maybe, Tony, for you first. When I think about the contracts that you're being awarded, especially the mission-critical projects, are you seeing both electrical and mechanical scopes or is that... Anthony Guzzi: I mean we don't -- I think underneath your question, are we combining electrical and mechanical scopes and bidding the jobs that way? Absolutely not. But are we on some sites, both electrically and mechanically, Yes. But do we make decisions contingent on that? Absolutely not. These are separate scopes of work. These are separate themes. Now if we're fortunate enough that we have 2 EMCOR companies on that site, or even 3 when you include fire life safety, does the job tend to go better for the owner in those cases? . Probably, Yes. Our guys know each other how to work together. They work with the same VDC tools, the integration becomes better on the drawings. They can talk to each other and get coordination better on the job sites ot prevent [indiscernible] stacking. But do we specifically bundle the 2 things together and bid it as a package. No, we don't do that, almost never. I don't want to say never. Nothing's never, but we almost try not to do that. Jason Nalbandian: But if you look at our bookings and you say, okay, there's a significant increase in data center bookings or networking communications RPOs. That's coming from both mechanical and electrical... Anthony Guzzi: Electrical. Jason Nalbandian: When you look at the revenue growth within each segment, let's just, again, look at Network & Communications, round numbers, electrical is up $240 million and mechanical is up $280 million. So we're seeing that growth in both, and we're seeing the bookings from both. Manish Somaiya: Okay. That's super helpful. And then, Jason, on the cash flow aspect, how should we think about the cash flow use reversing over the course of the year? Is that second half weighted typically or some of that comes... Anthony Guzzi: Yes. I think if you look at the pattern we've had over the last 2 years or so, we think that pattern will hold true through the remainder of the year. Q4 tends to be the strongest for us from a cash flow generation perspective. Q1 tends to be the weakest. But if you look really over '24 and '25, we expect those patterns to be about the same. . Manish Somaiya: Okay. And then just, Tony, back to you. Maybe if you can just talk about the M&A pipeline, what you're seeing out there, what are still the missing pieces within EMCOR geographically or product-wise? And then maybe if you can also just give us a sense as to what you're seeing so far in the second quarter. Anthony Guzzi: I won't answer that... Manish Somaiya: In terms of demand. Anthony Guzzi: I won't answer that question. We're reporting on the first quarter today. Look, our acquisition pipeline is good. Deals happen when they happen. Our primary area of interest is electrical construction. We're a medium-voltage company or line voltage company. We're not really looking to grow our -- the high-voltage market or the T&D market, we do have a position there, but it's mainly in the Mountain West and it's a very good company, but we're not looking to become [ Quanta ] in the T&D business. We're going to continue to do low to mid-voltage acquisitions in Electrical. We still have places where we can expand geography or strengthen geography in a lot of cases now. I think what we've had great success with is either buying an acquisition of scale, which is a Miller. That's a great example of that. But we also have many examples in EMCOR, which is, I think, where you create the most value is when we take an electrical contractor that was just a good industrial or health care contractor could do really sophisticated work. We know that there's customers that want us to do data centers in that market. We were able to come in and take that group of folks and take their core business, to have them continue to do that through our peer learning and health. We can then have them expand into data centers. And that comes at a much better valuation than the folks that are doing 80% of their work in data centers that everybody is frothy over and want to spend 12x or 15x earnings. We're not going to do that for one market company and a one sector company. Secondarily, we buy construction. We've tended to do that more buy and then take a larger platform like Batchelor & Kimball, and grow organically. And the reason that sets up they could do that well is because the amount of prefabrication on a mechanical job, they can take more labor hours off the job, and therefore, they feel much more comfortable. And then that's sort of the fire protection story too, which is the other part of mechanical that we would grow through acquisition inorganically. And with the fire protection, we're both growing the construction capability and the aftermarket capability. The other area of interest for us is, of course, the mechanical service space. We do both. They're not large compared to the construction acquisitions, but we'll do larger acquisitions there. There, we're buying footprint. We're buying technician capability and sometimes those acquisitions are small as a couple of million dollar asset deal to open up a market or strengthen our market, whether it's a certain type of equipment, a certain kind of capability. And then we also love to continue to support our customers through building controls and automation and mechanical services acquisitions, where we're one of the more significant independent building controls, and we have a number of different brands we're dealer for, and we have good capability, and that's both on the front end of the business and the design, the development of the user interfaces and of course, the installation and the commissioning to make sure it works. Those are our primary interests as we grow through acquisition. I would also argue that we also are not immune to doing the right kind of fabrication acquisition. We haven't done a lot of that to date, but we would do that if we thought we could add -- we have ongoing work that we could take some of that capacity and then also kit up some call it modular more than we're doing today. It's not something we've done, but it's something we look at all the time. Jason, I miss anything? Jason Nalbandian: I think that's a good summary. Operator: Our next question comes from Adam Bubes of Goldman Sachs. Unknown Analyst: This is Anuj on behalf of Adam. So wanted to understand what is your prefabrication capacity today? And how much capacity do you plan to add this year? And additionally, if you can discuss the puts and takes of internalizing fabrication versus leveraging fabrication for third-party sales? Anthony Guzzi: Look, I think the best way to think about how we think about it is to look at our CapEx spending. We don't necessarily look at it as -- we're destined to add this much square footage and I think you got to take the fabrication that we do and break it into 2 or 3 pieces. One is the traditional fab we do just about every contract that we have, which they're doing some pipe fabrication, a little bit of fittings on the sheet metal side and they do that to support the aftermarket and the smaller projects in our market. We do a lot of that. The second fabrication is more dedicated fabrication, especially in our larger mechanical and electrical contractors. And that breaks into 2 pieces, too. There's -- especially electrically, there's almost a catalog we can do. That said, we're taking all these different parts from distributors and OEMs, put them together, so it almost kits out to the site. And then there's job specific where we're making conduit racks and different bands that we're doing specific to that job. It looks more like what we do on the mechanical side. Where there, we can have pretty significant pipe shops, pipe rack shops that do a variety of sizes from small board to large board. And then we also have sheet metal shops where we're hoping to generate off those coil lines, somewhere between 800,000 and 1.2 million pounds a year. Now again -- and then there's the third part of that is part of that fabrication if we can do on job site in a tent and bring equipment in and not have to move it as much, we do that, too. So we're much more adaptable maybe than some others of fabrication. And I think that distinguishes us from other people is, for the most part, you never say everything is ever, but for the most part, EMCOR is fabricating for EMCOR and doing it as part of our job design. We do have cases where people want us to build than other people installed, but that's a small minority of our fabrication versus others. And I think part of that is because we tend to have our trades focus on it. We're not a multi-craft workforce, maybe like a nonunion workforce can be in some markets. And my discussion about if we did fabrication and looked at it that way, that would be a fabricator would buy that we think we can bring more value to by looking at more multi-trade work. Jason? Jason Nalbandian: I'd just say, if you look -- Tony made the point about our CapEx over the last several years, and we've said it before, if you take even just a 3-year look, our CapEx, if you look at a CAGR is growing twice what our revenue is, and that's those investments we're making in prefab. If you look at '26, I think we'll spend somewhere between $115 million and $125 million on CapEx. And I think a significant part of that will be fitting out fabrication facilities or upgrading the ones we have today. Unknown Analyst: That helps. And just 1 more follow-up. So demand remains particularly in your data center business. So what if anything, sets the ceiling on level of growth you can achieve from a capacity standpoint? Is it labor equipment procurement, et cetera? Anthony Guzzi: Well, it's emphatically not equipment procurement because on data centers, most of the major equipment is being bought by the owners. For the owners through the GCs because they're deciding what size they want to do it. So we really have nothing to do with what they're doing on the major end product equipment in data centers. In small cases, we still do, but for the most part, the owners buying the equipment. I think I've addressed where the bottleneck could be. We've been great at producing leaders. Our bottleneck is fill leadership and it gets to the frontline leaders, foreman, general foreman and project manager project executives. . No one can grow without that constraint. We feel pretty good about being our growth targets we have out there, we wouldn't have taken the work. And so therefore, we feel pretty good that in this quarter, that year-over-year, it's up plus 30%, up plus 17% sequentially. We feel we can fill the teams either through increased scope or the teams that we've built to service that demand. And law of large numbers eventually tells you that your growth rate is going to slow, but the dollars stay up. And I'd say the same thing about -- that's my whole margin point. We're in the search for margin dollars right now more than margin percentages. All right. Thank you all. We'll see you again at the end of July, and thanks for your interest in EMCOR. Bye.
Operator: Good day, ladies and gentlemen, and welcome to the 1Q 2026 Arch Capital Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Before the company gets started with its update, management wants to first remind everyone that certain statements in yesterday's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review the periodic reports that are filed by the company with the SEC from time to time, including our annual report on Form 10-K for the 2025 fiscal year. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to certain non-GAAP measures of financial performance. The reconciliations to GAAP for each non-GAAP financial measure can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website at www.archgroup.com and on the SEC's website at www.sec.gov. I would now like to introduce your host for today's conference, Mr. Nicolas Papadopoulo, and Mr. Francois Morin. Sirs, you may begin. Nicolas Alain Papadopoulo: Good morning, and welcome to Archer's First Quarter 2026 Earnings Call. We delivered a strong quarter, reflecting both attractive underwriting margin and the disciplined execution of our underwriting and capital management strategies. After-tax operating income for the quarter was $901 million or $2.50 per share, producing an annualized net income return on average common equity of 17.8%. Today's market is clearly more competitive than in recent years. That said, rates and terms and conditions in aggregate still support strong returns. Capturing those returns requires the ability and willingness to actively manage the portfolio across and within lines of business. This is embedded in Arch's operating principles and among our differentiating traits to dynamically add to areas where returns are attractive while declining those risks that no longer provide an adequate margin of safety. Regardless of where we are in the cycle, Arch is committed to generating superior returns for our shareholders. I'll now provide updates across our reporting segments, beginning with insurance, which generated $66 million of underwriting income in the first quarter. It compares favorably to the first quarter in 2025 that was impacted by the California wildfires. Overall, market conditions remained favorable. However, top line growth in the segment was essentially flat in the quarter, reflecting our focus on profitability over volume as competitive pressures increase. Growth opportunities remain across most casualty focused businesses, including excess and surplus line casualty, construction, alternative market as well as a number of our London market businesses. Growth was offset by softening rates in a few areas, including large account and excess and surplus lines property as well as in some short-term lines in London. We also chose not to renew certain program business acquired in the middle market commercial transaction that did not align with our risk appetite or meet our profitability requirements. As we have discussed on prior calls, these nonrenewals are expected to reduce net premium return by approximately $250 million throughout 2026. I also want to note a significant operational milestone achieved in our middle market commercial business. Earlier this month, our team successfully completed the data and system migration of the acquired businesses from Allianz to Arch on systems. The ability to complete this effort in just 18 months speaks not only to the dedication of our teams but also represents a strong use case for artificial intelligence in accelerating systems and platform transformation. With a significant step completed, the business can now pursue its objective of creating a scalable best-in-class experience for clients and distribution partners. Our reinsurance segment delivered an excellent $441 million of underwriting income in the quarter, a significant increase from the $167 million in the first quarter of 2025 which was heavily impacted by the California wildfires. Rate reductions and increased retention by our students contributed to a 6% decline in net premiums written versus the same quarter last year. shorter lines, including other property, property catastrophe and marine were the primary driver of these declines. Strong industry results over the past few years and attracted significant new capacity from traditional markets and third-party capital, resulting in a broadly competitive environment, its additional supply continues to put downward pressure on property catastrophe in short-term rates while also moderating the push for needed rate increases in some casualty lines. However, underwriting performance remains excellent. Our focus and disciplined underwriting led to the reinsurance group's 76% combined ratio marking the fourth straight quarter of sub 80% combined ratios. Consistent with our cycle management philosophy, our reinsurance team actively manages the portfolio mix by continuing to write new business, admits a risk-adjusted return target and by reducing our share of business that falls below our minimum return thresholds. The mortgage segment delivered another strong quarter with $221 million of underwriting income to go along with $266 million of net premiums return. Mortgage originations picked up modestly in the first quarter, no affordability challenges tied to high mortgage rates and home prices continue to constrain demand. Credit quality across the mortgage insurance portfolio remains excellent with delinquencies normalizing from seasonally higher levels in the fourth quarter of 2025. Competition remains disciplined and we continue to pursue growth through innovation and new product introductions across our global footprint. Overall, mortgage performance continues to exceed expectations and provide shareholders with a differentiated and diversifying source of earnings that support long-term value creation. Turning to investments, which contributed $408 million or $1.13 of net investment income per share in the quarter. The decline in net investment income from the fourth quarter of 2025 was driven in part by lower cash yields lower qualified refundable tax credit benefits and seasonal compensation payouts are nearly $48 billion in investment portfolio provides a material contribution to earnings and book value growth, effectively raising our quarterly earnings flow. In the first quarter, we repurchased $783 million worth of our common stock while still increasing book value per share by 1.7%. Our first priority remains to deploy capital into our business. When organic opportunities do not meet our return threshold, we view repurchasing our shares as an attractive use of excess capital, reflecting our conviction in the intrinsic value of the franchise. The Board's recent $3 billion increase to our share repurchase authorization underscores its approach to capital allocation. To conclude, Arch delivered another strong quarter, I think true to our principles of disciplined cycle management and by leveraging the strengths of the Arch brand and our diversified platform. In today's market, underwriting discipline powered by insights from our investment in data and analytics, rewarding our underwriter for profit and volume, and prudent capital management continues to differentiate Arch and drive long-term value for our investors. Arch's 25-year record of strong returns and compounding book value at double-digit rates is a direct result of hard work and discipline. That is Arch. That is our DNA, and that is why we believe we will continue to deliver best-in-class results across market cycles and into the future. I will now turn the call over to Francois, who will talk through the financials in more detail. Francois? François Morin: Thank you, Nicholas, and good morning to all. Last night, we reported our first quarter results with after-tax operating income of $2.50 per share in an annualized operating income return on average common equity of 15.4%. Book value per share grew by 1.7% in the quarter. Our 3 business segments once again delivered excellent underlying results with an overall ex-cat accident year combined ratio of 82.3% up 130 basis points from the same quarter last year and consistent with the more competitive environment we are facing. I will provide more color on trends in each of our segments shortly. Our underwriting income included $200 million of favorable prior year development on a pretax basis in the first quarter or 5 points on the overall combined ratio. Recognized favorable development across all 3 of our segments and in many of our lines of business, but mainly in short tail lines in our P&C segments and in mortgage due to strong cure activity. Of note this quarter, we commuted a large transaction, which increased the level of favorable prior year development in our reinsurance segment by approximately 25% in the quarter. Current year catastrophe losses were $174 million, net of reinsurance and reinstatement premiums and were mainly the result of winter storms in the U.S. and the Iran conflict. All in, these losses were slightly lower than our seasonally adjusted expectations for natural catastrophes. The insurance segment's gross premiums written grew 2% while net premiums written declined 1.4% year-over-year. As Nicholas explained, the nonrenewal of certain program business acquired as part of the MCE transaction impacted our top line this quarter. In addition, net premiums written were also impacted by a shift in business mix toward lines with lower net to gross retention ratios. The ex-cat accident year loss ratio improved by 70 basis points to 56.7% compared to the same quarter 1 year ago. The acquisition expense ratio for the current accident year increased by 160 basis points the benefit we observed in the first quarter of 2025 from the write-off of deferred acquisition costs from the MCE acquired business rolled off. We would expect the most recent acquisition expense ratio to be more representative of long-term expectations. Our operating expense ratio was higher this quarter as we incurred additional expenses related to the transition of our middle market business to Arch Systems. We would expect our operating expense ratio to revert back to a level closer to historical levels during the second half of the year. The Reinsurance segment had an excellent quarter to $441 million in pretax underwriting income. Overall, gross premiums written were down by 2.3%, while net premiums written were down by 6% from the same quarter 1 year ago. Net premiums written were up in specialty partly due to timing differences in the recognition of certain treaty renewals that impacted our financials in the first quarter of 2025. Over 1/3 of the decrease in net premiums written in property catastrophe was attributable to a lower level of reinstatement premiums compared to a year ago, which were impacted by the California wildfires. Overall, our ex catastrophe accident year combined ratio of 78.1% is comparable to last year's results for the same quarter. Our mortgage segment produced another very strong quarter with underwriting income of $221 million. Net premiums earned were down by approximately $6 million from last quarter, mostly driven by lower levels of cancellation premiums in our CRT business. Of note this quarter, new insurance written at USMI reflects a large non-GSE transaction of $2.2 billion in NIW. Absent this transaction, which increased our NIW by 15%, we would expect our market share of the PMI market to remain relatively unchanged from the prior quarter. The delinquency rate for our U.S. MI business decreased by -- decreased to 2.06%, consistent with our expectations and seasonal trends. On the investment front, we earned a combined $568 million from net investment income and income from funds accounted using the equity method or $1.57 per share pretax slightly down from the $1.60 per share we earned last quarter. Cash flow from operations remained positive at $1.2 billion for the quarter. Our portfolio remains a very high quality with a short duration and in line with our asset allocation targets. Income from operating affiliates was $36 million for the quarter, up from $17 million from the same quarter 1 year ago, which was impacted by the California wildfires. As a reminder, this quarter's result reflects our lower ownership stake in Summer's Re since the start of the year. Our effective tax rate on pretax operating income was 14.8%, reflecting the mix of income by tax jurisdiction. It was slightly below the 16% to 18% previously guided range mostly due to a 1.7% benefit from discrete items. As of January 1, our peak zone natural catastrophe probable maximum loss from a single event 1 in 250-year return level on a net basis. remained flat at $1.9 billion and now stands at 8.2% of tangible shareholders' equity. On the capital management front, we repurchased $783 million of our shares in the quarter or 8.3 million shares. We have repurchased an additional $311 million in shares so far this quarter through last night. Our balance sheet remains in excellent health with strong capitalization and low leverage. With these introductory comments, we are now prepared to take your questions. Operator: [Operator Instructions] Our first question comes from Elyse Greenspan from Wells Fargo. Elyse Greenspan: My first question is on property cat on the reinsurance side. I was just hoping to get some of your expectations for the midyear renewals? And then if you expect declines in the book to continue, would you expect your cat load to come down after the mid-years? Nicolas Alain Papadopoulo: Yes. Elyse, so we don't -- as we always said, we don't have a crystal ball, but for the 6/1, I think we really expect the market to remain competitive and to adjust our underwriting stand based on the actual rate decrease that we will see at that time. So we don't really have a forecast there. On the overall trend of the catastrophic portfolio, I think we have huge headwinds because of the double-digit rent decrease and we really -- I said it in prior calls, we really monitored the property cat through a lens of 50 separate zones. So I think some I go back 2 years ago, they were all green. So now we have a bunch of them that are still green. I think Florida is still green and -- but we have a bunch of them that are yellow and some of them that have churn rates. So I think depending on the where the business renew and our perception of the attractiveness of that zone, we -- our underwriting team, we make the decision, so. Elyse Greenspan: Okay. And then on the casualty side, you guys were mentioning still some good opportunities, I think, on both the insurance and the reinsurance side. Can you just talk through within casualty, where you're currently seeing the best growth opportunities? Nicolas Alain Papadopoulo: Yes. I think we still optimistic on the casualty. And we think that the pain is not gone through yet. As you may have seen I think we're still seeing some little development from the year 2016 and '17, but the most recent years, '21, '22, '23, '24, we've seen additional adverse development. And so that should, in our view, continue to sustain price increases above trend. So in terms of our risk appetite on the insurance and insurance, I think it hasn't changed. I think we like the specialty casualty, the excess sensor plus line, casualty, primary position on the large accounts. So that's where we play. we are not -- we stay away from the commercial auto and also the larger account excess towers, which we think are still very challenging despite some of the rate increases that we've seen. Operator: Our next question comes from David Motemaden from Evercore ISI. David Motemaden: I was hoping maybe just to get an update on the insurance book where we stand just on rate versus trend in both the U.S. and internationally. Nicolas Alain Papadopoulo: So starting with the U.S., I think on the U.S., I think we are broadly getting rate at trend. And I think so, as I mentioned earlier, we are getting rate above trend on the casualty lines of business. And we are getting -- as the tractor on the trend is really the short-tail property lines of business where we've seen a rapid rate decrease. But when you sum it up for North America, I think we're seeing rate slightly below trend. If you go to international, I think we have more short-tail lines on the international book of business. So we're seeing some rate pressure on the short-tail lines. So overall, low 1-digit rate decrease of over trend overall. But we started there with pretty high margins. So we feel very good about the business there. David Motemaden: Got it. And then I believe you mentioned just in reinsurance, some of the supply there and good returns in short tail lines, trickling into casualty re, just wondering, does that change sort of how you're thinking about the growth opportunity there as an offset to the headwinds on the property side? Nicolas Alain Papadopoulo: So on the casualty on the reinsurance side, I think we are mainly talking about quota shares. I think that as I mentioned earlier, I think we like the fundamental of the specialty casualty business. The difficulty there, it's really the sealing commissions. I think based on the past experience of the casualty market, ceding commission should have gone down, but we get we get excess supply. I think there's a lot of other competitors wanting to get on that business or increase share on that business. So that allows for the sealing commission to stay flat and on the best account to continue to go up. So the side cars, the latest flavor of the day with the casualty side car is just going to add to that dynamic. Operator: Our next question comes from Tracy Benguigui from Wolfe Research. Tracy Benguigui: One of the largest primary insurers had said on the earnings call some pretty pessimistic views of property pricing, particularly shared and layered in North America and in London and the culprit is cheaper forms of capital coming in from MGAs reinsurers and alternative capital. So from your vantage point, is this a real structural shift in the market? And how does that influence your underwriting appetite? Nicolas Alain Papadopoulo: Yes, for us is more business as usual. So the advantage that we have is that we are not a retail large account players. We don't play in that space. So that has been -- that has gone up, it has coming rapidly going down. So we don't play in that space. We play in the excess and surplus line property business. And so that space is getting competitive, and we are taking a very careful approach to that line of business right now. Tracy Benguigui: Excellent. And there was also a recent settlement development early in the second quarter around Francis Scott bridge collapse. Are you currently sizing industry loss? And has that pushed your loss estimate upward? Nicolas Alain Papadopoulo: So in that particular case, I think we were holding much more conservative estimate than loss estimates in the market. So no real change for us. Operator: Our next question comes from Mike Zaremski from BMO. Michael Zaremski: In the insurance segment, the underlying loss ratio continues to show some healthy improvement. Is that -- if you can kind of talk about some of the drivers, I believe, right, some of the nonrenewals on some programs is, I think, helping that, but if you can kind of talk around the dynamics we should consider. François Morin: Yes. This quarter, in particular, as we benefited from a relatively benign amount of activity in attritional losses in London, in particular. So our international segment book did very well this quarter. So that explains most of the favorable or a reduction in the kind of ex cat loss ratio compared to a year ago. Again, as a reminder, we'd encourage you all to look at trailing 12-month kind of rolling numbers to kind of get a view on performance of the book. And the impact of the MCE and non renewals is yet to be seen, right? I think it's -- we're -- as the business earns out, it's -- it will show up in the numbers. But at this time, we don't think it will be material. I think it's still a relatively small part of the book you think of an $8 billion insurance segment book of business, the impact of nonrenewing some of these programs will be somewhat immaterial or limited. So hopefully, that explains that really the quarter was all about kind of really good performance out of London. Michael Zaremski: Got it. And Francois my follow-up, I think you mentioned on the catastrophe side that this quarter's losses were I think you said a bit lower than "normal". And you also added a bit on the Iran conflict. Maybe you can kind of just elaborate on the Iran conflict, how you guys are thinking about that? Is it all IBNR, are there real losses or... François Morin: Yes. I mean there's nothing paid, but it's certainly -- there are some real losses, specialty book out of London, like terror, political violence. I mean those are the some of the lines that are exposed, will be exposed. It's ongoing. So we took a first stab at it this quarter based on what had happened and, call it, in the month of March. But we will expect -- we do expect more losses to come through in the second quarter. And we'll keep reporting on it. But it's -- yes, it's ongoing. And the point in my comments was really to communicate that we have been able to absorb those losses in the first quarter as part of our overall cat load, even though technically, the cat load is only on the natural catastrophe side. So it's a man-made. We call that man-made cat, but we still report it as part of our cat losses to the street, and that's kind of included in the overall number. Operator: Our next question comes from Andrew Kligerman from TD Cowen. Andrew Kligerman: So I know you've gotten a lot of questions about property. And I'm kind of -- just to kind of gauge a sense of where we are in the cycle, which you are very good at. I'm wondering if you could share -- and again, this is blunt. Where are you seeing risk-adjusted returns in property catastrophe reinsurance. And I know there are different layers and risk online, et cetera. But like if you had to gauge a risk-adjusted return range, what are we seeing today? And maybe the same question with the E&S property that you've been writing. Nicolas Alain Papadopoulo: And so the way you actually understand is that -- as I explained, we -- property cat, we managed very dynamically based on the actual underlying profitability we see in 50 zones. So we said earlier that 2 or 3 years ago, we were in the 30s. I think the business we have on the book today is still in our mind very attractive because, again, we we're not writing some of the business that we think has fallen below the threshold for us to ride the business. So we think the business -- it's a different mix than it was probably 3 years ago. The mix has shifted, but the business that we have today remains attractive on our book. So -- and we are still in the high teens, I think. Andrew Kligerman: I see, I see. But it's sounds Nicolas... Nicolas Alain Papadopoulo: And on E&S -- yes. Go ahead. Andrew Kligerman: Just following up on that, Nicolas. It sounds like that there is business out there that Arch Capital won't write that is well below your upper teens return threshold. Is that fair? Nicolas Alain Papadopoulo: That's fair. Operator: Our next question comes from Cave Montazeri from Deutsche Bank. Cave Montazeri: First question is on share repurchases. It was nice to see a little uptick. I think this quarter, it was 87% of your operating income versus roughly 70% over each of the past 2 quarters. Then my question is, if the current pricing trends continue, you don't really need any capital to grow and you're starting from a pretty healthy capital position. So without any obvious mine targets, is there any reason why you couldn't pay out of income, potentially even more, given that you're releasing capital when you're shrinking. I guess I don't want to sound greedy, but like I'm wondering what held you back from doing more this quarter? François Morin: I mean, there's nothing -- I mean, nothing is stopping us. We don't set targets and how much we're going to buy back. So we go at it, we look at what's in front of us. We look at both in terms of the stock price and also liquidity in the stock, which is still very liquid. So that means so far hasn't been a problem. But in terms of like could we buy back 100% of our income for the year, we could. I mean we -- but that's not how we think about it. It's more, I'd say, an outcome if things work out in a certain way in terms of kind of, again, the stock price and the volume, et cetera. So you saw the reauthorization by the Board. I think, hopefully, that gives you a little bit of a some direction in terms of how we think about the opportunity there and how much capital we think we can buy back or are looking to buy back. But whether it happens this quarter or next quarter or next year, I think that's nothing set in stone. So we'll react to what's in front of us. But to answer your question, there's really no structural limitations in beyond, again, the regulations around buying back stock that we have to deal with. Cave Montazeri: That's great to hear. My second question, just want to pivot to cyber insurance. And maybe if you can help us separate the cyclical versus structural pieces for us. So I guess first question, where are we in the underwriting clock today for cyber? And then structurally, like given the recent developments in AI and the potential for cyber attacks to become more frequent and more destructive, does that change your view of tail risk, aggregation risk or even the long-term insurability of the product? Nicolas Alain Papadopoulo: Yes. I think in terms of [ Ingrid Clark ], I would think cyber is probably around 3:00 p.m., I think is still okay, but it's getting to that point. So in terms of the recent AI, Anthropic Mythos, we see it as a real current threat. But we don't really see it's changing the cyber product. I think we see the cyber product as more of a the cyber market as more of an arm race between attacker and defender. And certainly, Mythos is accelerating that trend. But Mythos can help the attacker, but the defender can also reinforce in deference using the same model. So we think it's really an acceleration of the speed at which maybe cyber attacks can be conducted. And it's -- and to your point, it's also an acceleration of the scale. So I would think because the scale would be larger I would think we see it more as an increased systemic risk. So we are taking a very careful approach to that in our RDS scenarios, so. Operator: Our next question comes from Josh Shanker from Bank of America. Joshua Shanker: Yes. I know you don't give guidance certainly on margins, but it's an interesting time. Obviously, property declines and prices are well noted. Broadly speaking, Arch and other companies, loss ratios are generally in the same sort of range they were a year ago, but growth is about I guess maybe it's a clock question, but as you sort of give an outlook to internally for the next year, do you expect arches and the industry's loss ratios to begin to deteriorate from here? Or do you think the current levels are supportable. Nicolas Alain Papadopoulo: So I don't know about the industry, to be honest. It's hard to predict because as far as we are concerned, we are confident in our ability to manage the cycle. That's what we do. So I think we I think that's our first line of defense. If things fall below our threshold, we reduce. And we are confident in our ability to continue to find attractive opportunities to be able to expand. And I think we have -- certainly, the property market is coming down. So everybody can see that. But we still think we have a good opportunity on the casualty side. So overall, I think -- again, as I said, based on our own mix of business, we think that we see rates just below trend. So that would support a thesis that margins are sustainable at this for the near future. Joshua Shanker: And then in terms of SME commercial business, the mid-core acquisition was in part to be less cyclical. Are you seeing fruits of that play out in 2026 that you're able to capture some incremental share in less cyclical ostomy business. Nicolas Alain Papadopoulo: So again, we just -- as I mentioned in my remarks, we just finished the cutover. So the main focus on the -- for us has been to roll over the portfolio and to get to create an entirely workbench with which we can underwrite the business on Arch paper. So those have been the primary goal. So now that this is done, it opens our abilities to try to enhance the value proposition of that business and be at scale. So I think we -- I would doubt I think it's more of a 2027 game than it is in 2026 because after you do the cutover, you have to stabilize, then we have to start to -- we are focusing on building new tools to really help our underwriters with battery selection, triage and so on that will make them more productive. Operator: Our next question comes from Rob Cox with Goldman Sachs. Robert Cox: Just a question on premium leverage. So on the one hand, the business is shifting away from property and property cat, which should allow for an increase to premium leverage. But in the past, we've noticed it's been hard to rightsize leverage in a softening market like this due to the lack of growth opportunities I guess the question is, do you foresee premium leverage would continue to fall like this as we get further into the soft market? And how does that impact your view on the future ROEs? François Morin: Well, certainly, we're managing the equity side of the leverage. So if we can't grow, we can't deploy the capital in the business as we've been doing like the last few quarters, we'll be returning more of the capital to the shareholders. So that's certainly a tool we have that we have been using. We'll keep using and make sure that our ROEs remain attractive. So I'd say, for sure, like if the mix goes more long tail than short tail, it helps on the leverage. And again, the equity part of it is something we're watching careful. Robert Cox: That's helpful. And then just a follow-up on terms and conditions. Just curious, if any negotiations on terms and conditions started to change in the quarter and like which terms you think could start to get further negotiated as we move deeper into the soft market. Nicolas Alain Papadopoulo: Which lines of business are you talking about property cat or the... Robert Cox: Yes, particularly property cat reinsurance. Nicolas Alain Papadopoulo: So we've talked to our team. And we are seeing a bit more, but it remains a very small portion of some of the aggregates, a bit more aggregate a bit more top end drops, which -- but it's at the margin so far. So -- but as the market gets more competitive, we'd expect more of those structures that are much more difficult to price to come back to the market. Operator: Our next question comes from Ryan Tunis with Cantor. Ryan Tunis: Well, the company is obviously a much larger company a day than it was 7 years ago, both from a premium side, but also from an OpEx side. And I imagine a lot of that increase in OpEx is in support of hard market growth. So my question is, no longer being in a hard market. To what extent are you looking at managing the OpEx side of things as a potential source of boosting margins? Nicolas Alain Papadopoulo: I think the answer is yes. We -- that's something that's in our mind, I think the loss ratio part is probably more important as the market gets softer, but yes, I think I would say especially in the insurance group, I mean, the expense side is important, and we are actually paying attention to it. Ryan Tunis: Okay. And then just a follow-up for Francois. Underlying loss ratio and the mortgage insurance segment looked a little elevated. Nothing really stood out to me, maybe a little bit higher reserve for default. I'm not sure if that's seasonal, but how should we interpret that loss ratio result this quarter in mind? François Morin: Yes. Definitely, some of it is a result of the change or the growth in the average mortgage that goes into NOD. So if you think of the loans that are currently going in NOD this quarter are more -- from more recent vintage years and post-COVID effectively, right? And that's when mortgage loans were up in size. So as you look at the -- frequency assumptions have not changed. They've been flat for us the last couple of years, I want to say. But the math behind the reserve levels is such that we apply the frequency with the severity per loan and the severity has -- remains stable, but it's the average size of the loan that's hitting the loss ratio. So I think it's a little bit kind of like an evolving kind of thing within the loss ratios. I think it's -- for mortgage, it's gone up a little bit, but still very much within what we would expect it to be. Operator: Our next question comes from Alex Scott with Barclays. Taylor Scott: I guess I wanted to follow up on the excess capital and less about just asking how much you buy back. But thinking more broadly, I mean, you don't have the business that you can really lean into growth. And right now, like you have in sort of most environments in the past has been -- 1 of your 3 businesses has been attractive to really leg into. So does it create any need to sort of look at potentially diversifying transaction? And then is lagging into an artificial intelligence investment and doing it that way to try to achieve growth something that you think is achievable? Just trying to understand how you're thinking about the different ways to get invested. François Morin: Yes. I mean I'll take the first part. I mean, certainly, the business are all doing well. I mean, yes, I mean, you're right. I think the growth opportunities in all 3 of our segments are somewhat limited. We're working hard trying to find new opportunities internationally and et cetera, like mortgage and insurance for sure. But at this point, it's harder to see how the market will support massive or outsized growth in any of our segments. So yes, I mean, the share buybacks, again, like as we generate -- we keep generating meaningful earnings, I think that we don't want to accumulate excess capital beyond what we think is prudent. So we're certainly looking to return it or do something with it. M&A is -- we look at a lot of things, but we want for us to do something, given our scale, we truly think it has to be something that is additive. We're not interested in doing deals just for the sake of doing deals. It has to make us better. It has to make us more competitive, increase our presence or our scale in a market, et cetera. So we're very selective there. But we're trying to think outside the box, too. I mean if there's things that we don't do currently that can make us better, we'll explore those. In terms of AI, I mean, I don't -- I mean, it's certainly something that is coming at us really quickly, really fast. We're trying to think of ways where we can kind of, again, automate things, and we're doing some of that, but I think there's -- it's still very early innings, very early days of that. So I think we'll -- that will evolve, and we'll see where it goes. Nicolas Alain Papadopoulo: Yes. [indiscernible] we've been investing in AI for the last 10 years, both in mortgage and P&C. So we've deployed a bunch of AI and machine learning models and -- but it's changing really fast. I think the industry in our struggle is really to really show results while at the same time, working on our data strategy and our integration of our system to really support AI at scale. And third, really figure out what AI would look like 3 years from now because it's changing so quickly. If you look at the Entropic model, they open huge opportunities to do certain things, but what's next. So I think you really have to take -- and it's a lot of investment. At the same time, you're trying to create productivity and the insight for your underwriters to be able to compete. So I think it's... Taylor Scott: Yes, all helpful. And as a follow-up, I wanted to see if you could talk a little bit about exposure to private credit. I know I think in the past, you've talked about the alternatives portfolio allocation and private credit, so we have a rough idea of that. But I wanted to see if you could tell us about anything that would be sort of considered private credit within the fixed maturity part of the book? François Morin: Yes. We have some, but limited, right? So we have it both in our, again, call it, public markets and private markets. the general thinking that the strategy with our investment guys has been to go more on the high-quality loan. So kind of low loan to value and kind of very good collateral supporting the investments. So yes, it's something we're watching like everybody else. But at this point, there's no red flags, nothing that really is rising to a level where we have to take action. Operator: Our next question comes from Matthew Heimermann with Citi. Matthew Heimermann: I just wanted to follow up on your call related to using AI in the technology rollover of mid-corp. And just curious how that experience has been different than past. I recognize that you're not a significant acquirer. So universe of past might be smaller, but just thought that was provocative comment. Nicolas Alain Papadopoulo: Yes. So I think the -- I mean, the way it really help us and speed up the process is to write some of the codes. I think we old didn't do it out there. But when we did, it was really helpful. And the big help was on the testing. A lot of the testing was done by AI, and that really accelerated the time to market. So those are the 2 aspects that we -- when we talk to the teams, the really highlight as the impact of AI on this shift, on this [indiscernible]. François Morin: Because again -- right, Matt, just quickly, I mean, again, it was a build-out of a brand-new effectively platform infrastructure, right? So it's unusual in that sense that we bought the business. But without the systems, we had to create this infrastructure or this platform, brand new that we ourselves at Arch did not have. So it's -- that's where I think to Nicolas' point, the AI kind of capabilities really came through and helped speed up the process. Matthew Heimermann: That's helpful. I just want to make sure I understand the using -- use of the word testing correctly. Is that -- should I think about that as auditing output of... Nicolas Alain Papadopoulo: Running scenario to make -- is running scenarios to make sure that every time you create -- we created a new platform to a good point, Francois for context. And so every time you create a new software you have a lot of testing that to make sure that the software is doing what it's supposed to do. And a lot of it today can be done through AI as opposed to individuals going in and asking the underwriter to test, the guys that collect the cash to test that -- what they answers get to the right places and so on. Operator: Our next question comes from Meyer Shields with KBW. Meyer Shields: Francois, starting question for you. I guess I expected operating expense and reinsurance to go down because you should have more Bermuda tax credits. And I guess I didn't see that. I was hoping you could talk us through the moving parts. François Morin: Down relative to last year or last quarter? Meyer Shields: Last year. For sure up from last quarter. François Morin: Yes, they're certainly up from last quarter. From last year, I mean, yes, there is some -- no question that there's some QRTCs this quarter in reinsurance. I mean, what explains the increase is more investments in staffing and building out further the insurance -- the reinsurance group. So I think there's -- well, I know that there's been kind of hiring around like technology and improving systems, so that's certainly a big part of it. And then a little bit of noise around some of our structured deals that we wrote a year ago. I mean they were actually beneficial to the expense ratio, the OpEx ratio a year ago. So if you adjust for that, that explains a little bit of the difference as well. But nothing -- I'd say -- nothing, I'd say structural that we -- was a surprise to us. Meyer Shields: Okay. That's very helpful. And then shifting gears, there are some reports of very significant rate increases for product lines exposed to the Iron conflict. And I was wondering whether Arch is trying to write more of that business or being more cautious because of the risk. Nicolas Alain Papadopoulo: So we do that. I would be with our London office, where we write some political variants and were on line. So we we've been cautious, but we -- the rates have spiked up. So we actually run a little bit more business but in a very cautious way. Operator: Our next question comes from Rowland Mayor from RBC Capital Markets. Rowland Mayor: I just wanted to ask on your PML disclosure because I'm kind of curious, do you think that the catastrophe models are fully capturing the improved loss environment in Florida from AOB benefit perform? François Morin: The P&L that we report? Rowland Mayor: Yes, I'm just curious on when you model the cat losses out in the state if it's fully capturing how the personal line side of the business has seen significant reports in the loss environment. François Morin: It's been reflected. I think we -- historically, we have -- as we do our modeling, we have loads for certain features of the -- specific to the Florida market that with the reforms, I think, have changed. So we changed how we model those things on fraud and additional expenses around kind of claim handling, et cetera. So that's all captured right now. So yes, our thinking has changed and what we report to you is how we see the business, how we expect the environment to respond given what we know about the latest reports. Operator: Our next question comes from Brian Meredith with UBS. Brian Meredith: Back on the PMLs, I noticed your PMLs did not decline. That kind of stayed the same at 4.1% versus your 1/1 disclosure, but you're declining property cut and everything. Can you help us reconcile kind of what's going on with the PMLs relative to what you're doing with property reinsurance and insurance. François Morin: Yes. I think right, Brian, it's the 4.1 number. So not a ton -- again, think of it as the peak zone. It's -- so I would expect changes at 7.1 next quarter. There's not a ton of activity for us necessarily at the 4.1 renewal that impacts our zone. So that would be the answer being Florida Tri State -- Tri County, in particular, we'll see what 6.1, 7.1 does for us, but that's where I would expect maybe a more meaningful change. Brian Meredith: Got you. But I mean even if I look at -- sorry, look at what happened between September and 1/1, it still was up despite the reduction in business you had at 1/1 renewals, right? So is it like -- is it simply we're just looking at changes in rate? Are you dropping exposure as well? François Morin: Well, at 1/1 -- I mean we held on to most of this. We actually grew a little. So you have we gave up some rate, but we still found that, that business met our -- we're still attractive in terms of returns. So dollars of P&L didn't really change a whole lot. There's always -- you lose one account, you replace it with another. So it might on the margin change the P&L a little bit. But you're right. I mean the rates went down. So we gave up some returns weren't as good as they had been the year before. But that's again, looking ahead, 6.1, 7.1, don't know how it's all going to shake out, but that's when you may want -- I mean there could be some more significant changes in the PMLs depending on kind of what we will do or not. Nicolas Alain Papadopoulo: As we said earlier, we put Florida was green. So I think, for us, we getting the return, we're not going to let go to renewals, and we're going to try at the margin to write more. So I think that was not a zone where we decided to come back. Operator: Our next question comes from Pablo Singzon with JPMorgan. Pablo Singzon: This will be a quick one. Nicolas, just want to follow up on your comments regarding actually side cars. Do you think this is a blip or is there a risk of casualty or refacing the same structural hesitance that property cat experience alternative exacerbating the soft market cycle there? Nicolas Alain Papadopoulo: I couldn't hear you which line of business? Pablo Singzon: Just the casualty side cars? And do you think that ultimately, it will have the same effect that alternative capital had on property cat. Nicolas Alain Papadopoulo: I mean it's hard to tell. The thing we know is that it's not helping. I think the thing that may the thing I may mitigate that is the security risk. I think the people that have used the site cars they usually use it because they want to write that business, but they don't like it. They haven't seen people that are in the market, like Arch using those tools yet. So I think it's -- for the buyer and for the broker, I mean, they have a decision to make because those claims are going to get paid 5, 6 years, 7 years from now and with the vehicle and the cedent, which are usually not the best way of students be there to pay the claim. So I think that may be mitigation factor compared to property cat, where the loss is imminent, and we know the capital roads are high. So I think that would be the difference. Operator: Our next question comes from Yaron Kinar with Mizuho. Yaron Kinar: Just want to circle back to the man-made Iran-related losses. Can you break them out for us for insurance and reinsurance and then maybe what the associated premiums are as well earned premiums? François Morin: Well, we don't break out any -- we report everything as part of cats. But again, the -- it's part of the -- it's priced, right? So when we write some of these payrolls or these lines of business, again, colic violence, tear, et cetera, which in this case, are generating cat losses to us, again, just in terms of how we report them to you, there's -- it's part of the pricing, but it's not really captured in the, call it, our cat load per se that we report to you. Nicolas Alain Papadopoulo: Yes. I think to give you an idea, I think when we talk to our teams, we think that political balance on loss is about $3 billion, and we think the -- it's about the premium that you collect for those lines of business. So that gives you -- I mean, it's not a precise information, but that's the sense that we have $2 billion maybe. Yaron Kinar: $2 billion. And that's across both reinsurance and insurance. Nicolas Alain Papadopoulo: So the loss for the market today, I think, is estimated at $3 billion. We estimate an estimate the premium for those lines of business that have been impacted to be around $2 billion. Yaron Kinar: Because I guess what I'm trying to get at here is when I look at the kind of the underlying loss ratio here, it now doesn't capture some losses, but we still have the premiums associated with that book and the attritional. So like as we think forward, I want to make sure that we're using the right base for the underlying loss ratio. François Morin: Yes, good point. And maybe -- I mean, we can do that offline with you if you -- if that's okay. I mean, I think we can kind of walk you through what the -- yes. Yaron Kinar: That will be perfect. And then my other question was in the insurance book, I saw that the other liability claims made line grew quite nicely in the quarter. Can you talk about what drove that? Nicolas Alain Papadopoulo: Yes. It's really the transaction liability. I think we write transaction liability, both in North America and in our London office and it's really driven by higher pricing in that line of business as well as the M&A activity that has picked up in the last couple of quarters. Operator: I'm not showing any further questions. Would you like to proceed with any further remarks? Nicolas Alain Papadopoulo: Yes, I want to thank you all to participate to our call. And we feel good about the business as it is a challenge with the market conditions for sure. But I think as we said, we think we are equipped and our teams are equipped and ready to compete in that market environment and generate a decent return for our shareholders. So thank you. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect.
Operator: Good morning, everyone, and welcome to the Vulcan Materials Company First Quarter 2026 Earnings Call. My name is Jamie, and I will be your conference call coordinator today. Please be reminded that today's call is being recorded and will be available for replay later today at the company's website. [Operator Instructions]. Now I will turn the call over to your host, Mr. Mark Warren, Vice President of Investor Relations for Vulcan Materials. Mr. Warren, you may begin. Mark Warren: Thank you, operator. I'm joined today by Ronnie Pruitt, Chief Executive Officer; and Mary Andrews Carlisle, Senior Vice President and Chief Financial Officer. Before we begin our prepared remarks, please note that a press release and a supplemental presentation related to this call are available on our website, vulcanmaterials.com. Today's discussion may include forward-looking statements, which are subject to risks and uncertainties. Details on these risks, other legal disclaimers and reconciliations of any non-GAAP financial measures are defined and described in our earnings release, supplemental presentation and other filings with the Securities and Exchange Commission. For the question-and-answer session, we kindly ask that you limit your participation to one question, and this will allow us to address as many questions as possible. during the time we have available. And with that, I'll turn the call over to Ronnie. Ronnie Pruitt: Thanks, Mark. We appreciate you all joining us for our call this morning. At Vulcan Materials, safety is a fundamental expectation of our employees each and every day. And I am proud of our industry-leading safety performance that we carried on from last year into our first quarter of this year. Another key expectation is driving continuous improvement in our underlying business. Our teams delivered a solid start to 2026 by executing well on the commercial and operational plans that we laid out for the year. We generated $447 million of adjusted EBITDA, a 9% increase over the prior year. Gross profit margin expanded in each segment. SAG expenses were lower than the prior year adjusted EBITDA margin grew. Trailing 12 months aggregate cash gross profit per ton continues to move higher with strong realization of our January 1 price increases and our disciplined approach to operational execution. Currently sitting at $11.38 per ton, we are aligned across the company to drive this highly important metric to $20 per ton and win the future in aggregates. Aggregate shipments in the first quarter support the anticipated return to growth for 2026. Shipments increased 5% compared to the prior year due to both improving demand and fewer extreme weather days than in the prior year. On a mix adjusted basis, aggregates freight-adjusted price improved 4% over the prior year's first quarter, in line with our expectations. The sequential growth from the prior quarter demonstrates the success of our January 1 price increases and discussions are already underway for midyear increases. Pricing continues to compound across our footprint. Aggregates freight-adjusted unit cash cost of sales increased 4% compared to the prior year, also in line with our expectation. I am very pleased with our operator's ability to execute on the [ bulk wave ] operating to drive efficiency in our plants and help mitigate inflationary increases in our input costs. Better weather this year allowed us to make more progress on our annual plans for stripping and project work than we did last year's first quarter, impacting the total unit cash cost of sales year-over-year comparison. I am confident our teams are focused on the right things to continue to enhance our core and drive compounding improvements in our durable aggregates business, even as the macro environment continues to be very dynamic. We remain equally focused on opportunities to continue to expand our reach through acquisitions and greenfield projects, including several bolt-on acquisitions we expect to finalize in the coming months. From a demand perspective, we still expect strong public activity and improving private nonresidential opportunities to drive year-over-year shipments growth in 2026 and mitigate the ongoing challenges facing residential construction. Trailing 12-month highway awards in our markets are up 12% from a year ago, and public infrastructure awards are up 17% over the same time frame. These levels far outpaced the U.S. as a whole. Our footprint is advantaged. And this public demand provides a solid foundation for shipments and supports a healthy pricing environment. Legislators in D.C. are actively working on a reauthorization bill for future highway funding upon the expiration of the Infrastructure Investment and Jobs Act later this year. We expect the new build to provide higher levels of funding for highways and bridges than the current build. We also anticipate a smooth transition between funding programs given the significant amount of IIJA funds that are yet to be spent. On the private side, non-res continues to benefit from accelerating data center activity. With approximately 650 million square feet under construction or announced, we anticipate data centers and other related investments to be a positive catalyst for future aggregates demand. We are especially encouraged to also now have active projects related to the energy build-out, necessary to support rising data center power needs. Currently, 60% of all large projects, both public and private, are within 50 miles of a Vulcan facility, highlighting the advantage of our footprint. Our scale, quality and customer service makes us a supplier of choice on these large complex projects. Residential construction continues to be impacted by affordability. Longer term, there remains a fundamental need for additional housing and we are well positioned to benefit from an eventual recovery. As I said earlier, we continue to expect overall growth in aggregate shipments in 2026. The pricing environment remains healthy. And while we are currently facing geopolitical uncertainty, and incremental near-term headwinds in terms of energy input cost, I am confident in our ability to remain focused on the things we can control and to drive durable growth in our aggregates-led business momentum from our solid start to the year and continue to expect to deliver between $2.4 billion and $2.6 billion of adjusted EBITDA for the full year. Now I'll turn the call over to Mary Andrews to provide some additional commentary on our first quarter performance before we take your questions. Mary Carlisle: Thanks, Ronnie, and good morning. The earnings from our aggregates-led business continue to compound and drive attractive cash generation. Over the last 12 months, we generated $1.8 billion of cash from operations, which we have deployed for capital expenditures to maintain and improve our existing asset base, for greenfield and other growth projects to enhance our franchise, for capital returns to shareholders, and for debt repayment to further strengthen our balance sheet. Approximately 70% of our trailing 12 months capital expenditures of $686 million were utilized for fixed plant mobile equipment and land projects at our existing facilities. The remaining 30% was invested in greenfield and other growth projects, including a new quarry site in South Texas, several rail distribution properties in key markets and new production facilities in Arizona and South Carolina. Capital returns to shareholders totaled over $800 million over the last 12 months, with $262 million of dividend accompanied by $550 million of share repurchases. This includes $149 million of share repurchases during the first quarter. Total debt of $4.6 billion at quarter end was approximately $350 million lower than a year ago and resulted in net debt to adjusted EBITDA leverage of 1.9x. The balance sheet is well positioned to support an active acquisition pipeline. Additionally, we expect that the announced divestiture of our California concrete assets will close during the second quarter, providing even more capacity for continuing to strategically grow our aggregates business. SAG expenses in the first quarter were 2% lower than the prior year. Trailing 12 months expenses of $562 million were 7% of revenue, 20 basis points lower than the prior year period. We remain focused on investing in technology and talent to drive our business performance while also leveraging our overall expenses. We are also focused on continuing to improve our return on invested capital through compounding improvements in our business and disciplined capital allocation. Our trailing 12-month return on invested capital improved 30 basis points from year-end 2025 and to 16% at quarter end. We are confident we have the right strategy to continue to deliver value for our shareholders. And now Ronnie and I would be happy to take your questions. Operator: [Operator Instructions]. We'll hear first from Trey Grooms with Stephens. Trey Grooms: So clearly, you guys are off to a very strong start to the year. Ronnie, could you maybe walk us through some of the key puts and takes in the quarter across price, volume and cost? And then also as we look ahead to the balance of the year, how are you thinking about these drivers in light of the recent moves we've seen in diesel and the broader macro backdrop? Ronnie Pruitt: Yes. Thanks, Trey. Look, I agree with you. It was a solid start. And I think it reinforces the trajectory for another year of earnings growth. Our performance in the quarter was really a direct result of strong operational and commercial execution, and it definitely positions us well to deliver the earnings expectations that we laid out in February. On the volume and price side, we saw a healthy acceleration of our backlog tons converting into shipments, particularly within the data center space, which was supported by more normalized weather within our footprint. With regards to pricing, we said coming into the quarter, the year-over-year comparisons were going to be difficult as we continue to lap the hurricane relief efforts from 2 of our higher-priced markets in Tennessee and North Carolina. But that alongside with some pricing mix, which was a shift towards base products and our current backlog driven primarily by data centers as well as more public work, but these things were known variables. And so they played out as anticipated, but pricing at the lower end of our full year guidance, but we expect that continue to accelerate throughout the remainder of the year. On the cost side, I was very pleased with our team's execution. Keeping a total cash cost growth only to 4%. The run-up in diesel price really began in February, and the impact is really reflected in some of our March [ calls ]. But we have a proven track record of offsetting these types of fluctuations through our bulk way of operating also our Vulcan web selling and our commercial disciplines. So the more normal weather also meant we were able to keep pace with plant projects like stripping and painting and some other efficiency investments that we did during the quarter. And as you recall, last year, those types of investments were delayed with more inclement weather in the first quarter of last year. So overall, I think the fundamentals of the business are performing as expected and really in a good position as we head into the heart of our shipping season. But let me turn it over to Mary just to give you a couple more points of context. Mary Carlisle: Trey, one thing I would add that I think further underscores the solid fundamentals that Ronnie talked about and really highlight the compounding results versus noisy year-over-year quarters, and he referenced some of the hurricane relief work last year and obviously inclement weather. So I think if you step back, and look at 2024 and see that aggregate cash gross profit per ton is up 23%, and our total cash cost of sales and aggregates has increased only 1%. To me, these metrics clearly show the solid execution of our teams and the compounding margin growth that they're delivering. And that gives us a lot of confidence in our ability to execute for the rest of the year. Operator: We'll turn next to Garik Shmois with Loop Capital. Garik Shmois: Just wanted to follow up on that a little bit. Just given a lot of the moving pieces here as you look forward and some of the diesel cost impacts that are starting to hit. Just wondering if you can go in a little more detail just the confidence that you have in reiterating the full year guidance today. Ronnie Pruitt: Good question. And so let me start with -- I'm going to dig deep into kind of how diesel impacts our business. And so if you think about the 2 parts of diesel to us or the price of the diesel, but the more important part is the usage of diesel. And so as I look at our business, our downstream as well as our delivery costs are really covered through surcharges that kicked in immediately. And so have really had no impact on the cost of our doing business downstream and delivery. But when I look at the operational side, I'll start with what we do in the plants. And so from a stripping aspect is the first step of what we do stripping is just really equipment, labor and fuel. And stripping is also something that isn't necessary to uncover future reserves, but it's not something we're doing just in time. Stripping is something we can push forward or pull back depending on what macro environment we're in. And so those are things that we have the ability to fluctuate on. And then when I look at loading and hauling within the pit. And so you start with that [ hall ] to the primary, again, this is something that uses diesel equipment and labor. But this is where our [ VWO ] processes kick in because when we talked about process intelligence and investment we've made with [ VWO ], a lot of that is focused on our critical product size production and impacting yield. And so when we're doing that, for every ton we get to the primary, we're more efficient in how we produce products. And so that definitely impacts the use of fuel. And then when you get into the plant itself, there's not much fuel used within the production process. So from the primary all the way through the secondary. But again, the process intelligence and [ BWO ] is very impactful on the front end and the back end. And so again, it's an opportunity for us to really focus on the efficiencies and how we're earning fuel. And then the actual load out process. And so when you're loading trucks or rail, a lot of our larger plants, we have been systems. And so there's not much mechanical process there from a diesel consumption side. But we do -- at a lot of plants we load with loaders. And some of the things we're doing, our operators are doing there, instead of idling loaders, you're turning off engines. And so we've got a lot of things we're doing to make sure that we're focused on the usage of fuel in this time of uncertainty with the volatility that we've seen. So all of that being part of the variability of our production process, which is the beauty of aggregates. On the selling side, remember, half of our sales is really to fixed plants and half of our sales is to more of the real-time quoted stuff. And so we're moving those things fast. We've already announced midyear price increases. And so again, I think as you look at what we've been able to accomplish through the history of aggregates is our ability to take headwinds and turn them into a positive story on the back end. And so is this a short-term headwind? Yes. Is this something that we're going to be able to control on the back end? Absolutely. And I'll let Mary Andrews just give you a little more insight into the numbers behind the fuel headwind. Mary Carlisle: Yes. The only thing Garik, I would probably add is, I think Ronnie gave some great examples of levers that we're using to -- as we navigate this current fuel situation. The second quarter is where we expect to feel the squeeze of the higher diesel most acutely before some of these pricing actions that we've already taken begin to flow through. So the way I would probably think about it is we would have initially expected aggregate cash cost of sales on a year-over-year basis to look very similar in the second quarter as the first quarter. And that's still the case, excluding diesel. So I think with diesel, now your cash cost of sales on a year-over-year basis could approach maybe double of what it was in the first quarter, so closer in that high single-digit range. And again, with the full expectation that the margin impact will moderate as we move into the second half of the year. Operator: We'll turn now to Anthony Pettinari with Citi. Anthony Pettinari: Ronnie, Mary Andrews, you mentioned midyear increases. And I'm just wondering if you can give us any more detail in terms of magnitude, percentage of your markets that might cover timing? And then I'm just curious, you're obviously seeing a lot of inflation in diesel. Are there any other costs outside of fuel, metal, parts equipment where you're seeing maybe knock-on impacts from the Middle East conflict in terms of costs that may be a little less obvious to us? Ronnie Pruitt: Yes, good question. We have not seen any other impacts as of yet. We are monitoring that. And again, as the -- if we go back to 2022 with the inflationary things that happened back then, and our discipline around being able to move pricing quickly when those inflationary environments hit us. So I would tell you from a process side, we went out with midyears several weeks ago, a little earlier than we did last year. We went out with all of our markets. We're very disciplined in that. We will always be very opportunistic when it comes to using inflationary pressures or any other headwinds. I mean we're going to capture that. And so -- we sent that out in all markets. And remember, like I said earlier, about half of our shipments really are represented by that fixed plant. And then within that fixed plant side, if I break that down to the concrete side and the asphalt side, and I would tell you, the asphalt side of our business is really more heavily tied to public and the larger private nonres piece of where that's at. So they have a very active market. There's situations within each of the DOTs that they have indexes on longer-term projects, and so the asphalt producers are covered on that. And so I don't think we see a lot of resistance on the asphalt side. Within the concrete side, look, the concrete guys are still facing the headwinds of residential. And so those conversations will be probably a little more healthy and spirited. But again, it's not something that is unexpected. I mean we have a long track record of recovering cost. And my hope is that our concrete customers use that as a reason why they're going to have to go out because they're already -- they feel diesel costs immediately. And it hit them on their delivery costs immediately and hopefully, they have the same surcharges in place. But over time, I think we've proven that these headwinds, we will be able to over time and we will be able to pass that along. And the beauty of aggregate is -- we also -- we keep that in our pocket. We don't give that back. Operator: We'll hear next from Steven Fisher with UBS. Steven Fisher: Congratulations on the good execution. Just a follow-up again on clarifying some of these points here, particularly on the near-term expectations. I guess what's the expectation we should have for pricing in the near term, say, Q2, and I guess that would be inclusive of the diesel? Do those surcharges get recorded in the pricing you're going to report? And then on the cost side, it sounds like you're expecting, Mary Andrews, upper single-digit growth in costs. So how do we think about that in light of, let's say, the low single-digit guidance you still have for the full year with the first quarter? It sounded like it's going to be in at least mid-single digits. Ronnie Pruitt: Yes, I'll take the first part, and I'll let Mary Andrews talk again about the second part. Our delivery is not. So we report freight-adjusted. And so when we talk about price, that's freight adjusted. So all the stuff that we're talking about with surcharges does not get reported on our pricing because we don't think it's the right way to look at that. But when it comes to kind of cadence of pricing, we said going into the year, because of the comps of last year first was that our pricing would have started out at the lower end and accelerate through the year. And I think this opportunity that we have with midyears just confirms that our pricing trajectory will be backward half more accelerated than the first half of the year, but we anticipated that. We also said that in the first part of the year, as these data centers continue to grow, the mix impact, which we called out, we continue to see a lot of shipments from our backlog converting the shipments faster because of the size of these projects, but also the speed of these data centers, meaning once they're announced, they're going really quick, which is a good thing and it will play out on the cost side of our business as well because when we're continuing to improve the yield of our plants with the amount of base shipments, that's a really good thing on our cost. But I'll let Mary Andrews walk you through kind of the puts and takes on the model. Mary Carlisle: Yes. So Steve, from a cost standpoint, at this point, we do still believe that we can deliver that low single-digit cost for the full year, where we fall within that range, the diesel situation and how it continues to develop, I think will a big role in that. But Ronnie highlighted some opportunities that we have to -- even on the cost side, focus on efficiencies, pull some levers to make sure that we're making good decisions given the macro environment. So I feel good about the full year guidance and just wanted to give you insight into what that could look like for second quarter from a cost standpoint. And that was always our expectation that costs would be higher in the first half of the year, moving lower in the second half of the year. So as we said today, 2026 is playing out like we expected. Operator: Great. Thank you very much. We'll hear next from Michael Dudas with Vertical Research. Michael Dudas: Ronnie, following up on interesting comments on the data centers and the time to market and speed. Is that -- could that be contributory on like volumes, given the acceleration of some of these projects. And there are other heavy markets or even public markets that are trying to move quicker to try to get the funding or try to get the projects through, given some of the funding uncertainties? And can that be helpful to have maybe a quicker conversion on your total backlog and get some efficiencies and volumes through the system? Ronnie Pruitt: Yes. I would -- I mean I'll go back to my prepared remarks and I look at our advantaged footprint. And as I stated in my prepared remarks, in our specific markets on a trailing 12 months, public contract awards are up 12% and we're seeing in the rest of the country, double-digit declines in places. And so it amplifies that we're in the right markets and the public side continues to be strong. When I look at starts and kind of the flow of -- before the expiration of the bill, I think the states are doing a really good job. I think all the money will be targeted towards the job they want, which is really where they have to get as the money has to be allocated, and that allocation is going well. Across our footprint, I'm seeing how we start up in Arizona, New Mexico, North Carolina, South Carolina, all really, really good spots for us. Coastal Texas, North Texas, Georgia on the infrastructure side. So we're seeing good momentum there. On the private side, and again, as I stated, 60% of our large projects that started last year are within 50 miles of a Vulcan facility. And so that just shows you again, we're in the right markets. And where we're seeing momentum in construction growth is really because of our advantaged footprint. I mean that's not the same stats you're going to see across the rest of the country. And so again, our business model is proven. And over a long period of time, we've been able to say that any headwind that faces us, we're going to be able to capture that over the long term. But I think as we look forward in saying that our confidence in 2026 returning to growth, it's because of these things I'm talking about on the public and private side. We're not seeing it on residential. We are seeing some green shoots on multifamily but it's really being driven by -- that's the necessity of jobs that have been created in some of those markets and people are moving there, and there's nowhere to move. And so the multifamily side, we're seeing a little bit of green shoot and -- but the majority of our confidence right now is really going to be based on the public and private side. And remember, only 45% of the dollars are actually spent. And so even with the expiration in the middle of reauthorization now, we have confidence that the transition between those funding bills will be very smooth. Operator: We'll turn now to Kathryn Thompson with Thompson Research Group. Kathryn Thompson: I just want to focus a little bit on the federal highway bill reauthorization coming up in September. And as is typical each year, this happens, there's a lot of noise leading into the debate. What we are hearing from a wide variety of contacts is that early discussions or funding sizes of $600 billion to $700 billion. But the health bill now is closer to $500 billion to $550 billion, both of which are still increases from where we are currently. Could you give your perspective in terms of what you're hearing and what you're seeing and how you think about the cadence? And as one contact said, we don't see the bill going backwards in funding. It should be going forward? And how much credence does that statement have? Ronnie Pruitt: Yes. Thank you, Kathryn. And I think your sources are pretty good. And consistent with what we're hearing. I mean, if you think about the kind of the process, I mean, I think where we're at today, the Transportation Committee is in the middle market. So we think we'll get a first reading sometime mid-May. And so as it comes out, as you know, I mean, this is a negotiated process between [ dollars and the Ds ]. The [ Ds ] are -- we're hearing being a little more aggressive towards wanting to spend more. But I think there'll be a lot of negotiations. And as you know, there's bits and pieces of that throughout the country that people are going to want to get their piece of them. But I think, overall, directionally, your numbers are very consistent with what we're hearing. Obviously, as it gets to the senate, it's a little more complicated with a number of committees that has to go through. But look, I think we're in a good position of -- could it get done by midterms? It could. But historically, we've seen continuing resolutions are probably going to be the path. But again, with the dollars that are left to be spent, the momentum we see in starts, the backlog visibility that we have within the public jobs that we've booked gives us a lot of confidence that there's just not going to be a disruption and even under a continuing resolution, the dollars keep spent at the same level. And so I think we're in a really good position. I think it's good momentum. I think the bipartisan part of this is it's good for the economy, it's good for job creation. And I think both sides of the -- I'll like to take that as a win. And so the funding side, I think they're making progress, what they're going to do with electric vehicles, with registrations, all that's being considered. But I think your sources are correct. And I think we walk away today thinking we're in a really good position and confident the bill will get done and pretty confident it will be at a higher level than the previous bill. Operator: Now we'll hear from Keith Hughes with Truist. Keith Hughes: So we get a lot of questions on specifically the second quarter, the drag from what we know today on diesel prices. Can you give any kind of dollar figure of what that's going to do in the quarter, understanding you're going to be going for us good selling prices to offset that? Ronnie Pruitt: Yes. I'll let Mary Andrews get into the numbers. But I think, Keith, if you look at it kind of as we step back overall and say, on a typical year, and I would tell you, over the last 2 years, we burned about 57 million gallons of diesel a year. And so trajectory and if you look at that, it's really variable with the tons we're shipping is the tonnes we're producing and you got to play where your inventories. But all that, if you just step back and said that's kind of the range of the diesel we're going to burn. And obviously, that's going to fluctuate pull stripping and delay some of that with diesel costs because we think this is a temporary situation, and we're not planning long term for diesel to be that. But if it is, we're more than prepared to fight that headwind through our commercial efforts. And so I think that's kind of the context of it. But Mary Andrews, why don't you give him a little more data on -- Mary Carlisle: Yes. I mean I think given those pieces Ronnie described, you're looking at probably $25 million in the second quarter. If you think about the amount of diesel where we would burn and retail diesel today is a couple of dollars higher than it was coming into the year. So that's probably a good round number to think about on the diesel side. The other place that we'll feel the energy impact is on liquid asphalt. But some of our -- about 1/3 of our work is indexed, so the impact will be a little bit less there. And that's one, same thing. Over time, we'll use pricing to catch up and maintain our margins at the healthy levels that we've seen over the last couple of years. And one other thing to keep in mind just as it relates to the downstream is in our original guidance. We did not have the California ready-mix business. That contributed about $10 million of cash gross profit in the first quarter. we still own it today. We do expect that to close soon in the second quarter. But I would think about the downstream at this point with the contribution from the ready mix being a helpful offset to the near-term energy headwinds that we could see. Keith Hughes: Okay. Okay. Great. Let me ask one other real quick back on Kathryn's question. There was a political article a couple of weeks ago talking about this $500 million to $550 billion from the Republican headed Transportation Committee. Some of the Democrat comments are actually for a higher bill than the, call it, $550 billion. I guess my question is based on from your lobbying groups. Is there actually close to bipartisan support around these numbers we're talking about? What is your sense on that? Ronnie Pruitt: I think the -- I mean I think they both see the need for it. And I think the dollar amount is really both of them doing their work on a lot of different information that comes to them on what are the real needs from both a growth of the infrastructure system as well as the maintenance of the infrastructure system. So I think when you talk to -- and Sam has announced his retirement, and so he's still leading it as of today, but -- he's also been involved in 7 reauthorization bills. And so it may be something that he wants to get done before his retirement. But they're also -- they want to know where we're going to get the funding from. And so a lot of it is how is it going to be funded and where all those mechanisms going to hit -- but I think the beauty of the $550 million to $700 million, whatever that leads out is when you think about this bill versus the last bill, it's going to be a more pure highway and infrastructure bill with a lot less other stuff that was in the last bill. And so we look at it as all signs of positive what degrees that is. The politicians will have to figure that out. But again, I mean, you know this gives us long-term visibility into a very meaningful portion of the supply side and the demand side of our markets. And so we think we're in a good place. Operator: We'll go next to Phil Ng with Jefferies. Philip Ng: Congrats on a solid quarter. Ronnie, Mary Andrews, I think you guys both kind of highlighted M&A as the avenues to deploy capital, balance sheet is in a great spot. Are you seeing any choppiness in terms of sellers in this current backdrop? Or it's been -- Ronnie, any color in terms of markets that you're targeting, size of these deals? Is it pure play aggregates, virtual in grid? Just give us a little more perspective what you're seeing out there and what's compelling to you? Ronnie Pruitt: Yes. Good question. When we talk about one of our cores is expanding our reach. And we said at Investor Day that we were willing to look outside of our footprint as we continue to focus on aggregate led. So number one, I would tell you the things we're going to focus on are going to be aggregate that business. If they happen to come with downstream, as we've proven in the past, we'll address that and decide whether we want to be in that business or not. And we've proven in the businesses that we didn't want to be in, that we would exit those businesses. But I would tell you, it's -- the footprint of where we're looking is really the high-growth areas and how things have changed both with demographics as well as public funding as well as some of the private non-res side and the data center is driving a lot of that. But as we look forward, we also see the energy that is needed to support these data centers is going to be another tailwind to us as we have begun really booking some energy projects. We're quoting a lot, and we've actually started booking some. And so I think the energy backdrop in a lot of these states is going to be critical as they try to fulfill the needs of this data center construction. But -- but so I would tell you very active. From the seller side, I think headwinds with energy or anything, obviously, they have to look at that. Does that accelerate them? In some cases, it could because they weren't expecting this cost to be like this, and it may accelerate their desire. But I would tell you, over time, these are generational changes. These are families that have to make that decision. And so there's a lot of complexity to that. And I think a lot of the macro stuff obviously plays into their family conversations. But I don't know that it moves the needle on faster or slower. I think it's just another something we deal with. But I would remind you also, part of our growth efforts is our greenfield and the investments we continue to make in our downstream. And as I look forward to this year, I mean, we've got 3 new plants coming online, 1 in Arizona, 1 in Texas and 1 in South Carolina that we've talked about is our greenfield strategy. From a distribution side, we have 7 yards that we'll be bringing online this year. Several of them, a couple in Texas, 1 in Florida, 1 in California, 1 in South Carolina. And so we continue to invest in the business to protect our franchise to enhance where the growth of our core market is. And that's why we said, as we continue to expand our reach, we can control things we do internally to protect the franchise that we have externally as we look at growth opportunities, we wanted to expand that. And so some of those newer markets is where we'll be looking. And again, as I said in my prepared remarks, we got several of them that we think will be coming to close before the end of the year. So I think we're in a good position. Operator: We'll hear next from Angel Castillo with Morgan Stanley. Angel Castillo Malpica: Just 2 parts, one on the full year and then one on 2Q. I guess on the full year running, I think you mentioned that you don't expect the big prices to be kind of longer lasting and you kind of [ be that ] as a little bit more temporary. Just wanted to clarify, I guess, the full year guide at this point, just want to guess clarify, it does assume diesel prices remain at current levels? Or are you anticipating that to come off in the second half? And then kind of related to that, I guess, depending on what your assumptions are, midyears you typically talk about as being beneficial to kind of the following fiscal year. So should we think about it as being any offsets in the second half of this year being more woken wave operations driven? And then on the second quarter, apologies if I missed it, but I just wanted to clarify, I guess, what is kind of your expectation on price volume and gross profit per ton when you kind of put all the pieces together? Ronnie Pruitt: Let me unpack all that. So first, I would start with kind of where our assumptions are. And I would tell you, I mean, the assumptions that we're making in reinforcing our earnings for the full year is really a combination of the history of our business. And so if fuel stays up for the remainder of the year, then our pricing will reflect that. If fuel comes back down, then our margins will reflect that. And so we're very flexible in our ability to go out and capture whatever those headwinds are. And I think our business model has proven that time over time over time. And so I'm confident in that as we build out and look at what we anticipate for the remainder of the year. I mean, we would love to say that this thing is temporary, but we're planning for it to be longer, and we have that accounted for in our guidance. And so I'm not worried about that headwind. As far as growth in the second quarter, again, as we looked at the cadence of our quarters, we said our pricing was going to start out at the lower end because of the comps over year-over-year on some of the hurricane recovery work and it was going to accelerate through the year. And I think that's going to play out exactly like we've laid it out. On the demand side and our shipment side, I mean I think we experienced more normal weather in the first quarter, and I think that contributed to the growth in our shipments that we saw I think also the size of these projects and the speed of which these projects are shipping is also something that is -- weather impacts those. And so as we see more normal weather, I mean our contractors aren't out there going, okay, we're going to ship this much during the first quarter, and then we'll stop and then we'll start the second quarter. I mean they're building these projects -- they don't care about a calendar. They care about what's happening today, what's happening with the weather they're experiencing. And if they can go forward faster, they're going to do that. And especially with this data center work, I mean, these companies are looking for return on these large investments, and they don't get a return that thing being under construction. They get a return when it's finished. So the speed of those things are obviously critical to the process of the job. And so I think we see second quarter continue to play out that we would expect, again, based on normal weather, that our shipping levels would continue to be as expected as we planned out in the year, and as we laid that out, they're going as expected. And so I don't see a lot of noise right now within the shipping side or the demand side. I think those are some visibility that we have through our backlog and our bookings. Mary Carlisle: Yes. And Angel, one thing we highlighted coming into the year in terms of how to think about earnings overall was to think about more normal seasonal spreads than to think purely about year-over-year comps. And so as we sit here today, I think one might think is look at historically what our business kind of looks like first half, second half and given the strong start that we got and the contribution that we got in the first quarter, and what our expectations are for the second quarter. I think we'll still land in that probably [ 45-55 ] type split. And as I highlighted earlier, the diesel headwind in the second quarter, we'll squeeze us a bit there. Operator: We'll hear next from David MacGregor with Longbow Research. Joseph Nolan: This is Joe Nolan on for David. I just wanted to I just wanted to touch on the nonres business. You've obviously talked about the strength in data centers, but just in some of the other verticals, like warehouses, manufacturing and commercial, if you could just talk about backlogs and demand within those businesses? Ronnie Pruitt: Yes. We're -- as we went into the year, we said we were data centers were leading private nonres. We said we thought we would see some of the green shoots in warehousing. And we've seen some of our markets turn positive, but from a very low starts very low rate. So I think those are opportunities for the future as those markets play out. But when I look at kind of buildings and non-res side, I mean, we've got good momentum going and in Texas with some fuel energy-related projects, some LNG projects that started back, we're shipping on some manufacturing type projects that we started back shipping on in Illinois, we've seen both data centers as were some warehouse stuff that has really kicked in. And so I think it's a combination. I mean, data centers is obviously growing at the fastest pace within our private non-res category. But I mean, the energy side is very encouraging. And we're in a lot of active conversations around energy projects. And I think the energy companies are in the middle of planning a lot of those projects. I think that -- those type of projects, obviously, we'll have more permitting and things that they have to do from a timing perspective. I'm not sure they'll move as fast as what some of the data centers have. But in the end, it's all really forms of good forward-looking demand on the private nonres side. And so it's a mix of different types of projects. But again, data centers has been kind of the lead of that. Operator: We'll turn now to Michael Feniger with Bank of America. Michael Feniger: Ronnie, just if we do get a CR, does that change your view at all on 2027? And how that looks up? Does that shift us from a growth market to maybe flattish or we're still maybe in growth [ go ] because of the dollars left spend? Ronnie Pruitt: Yes. I don't think it changes it. And I'll give you a couple of reasons why. One, the point you make is we still have dollars that are going to carry over. I mean when we look at our bookings and backlog is a lot of those projects from a federal side are multiyear projects. And so not only are they booked and we're shipping on them, but also the dollars that are carrying forward will project well into '27. But I'll also remind you that only third of highway and funding is really the federal side. And so when we look at the state side and then we look at other measures that the states have put in, we look at these public-private partnerships, we look at toll authorities, there are a lot of growth projects out there right now that are very small in federal dollars and larger and other funding that gives us a lot of confidence that, again, I've said it in the past, and I'll continue to say public is probably the least of my worries. I mean I just think we're in a really good position to get the funding in place, and there's other ways the states have gotten creative around funding their own programs. And so I think -- as I look forward, I don't see '27 being a problem when it comes to public. Michael Feniger: Great. And Ronnie, just on the pricing side, I know we started Q1 at the low end that was something you guys always talked about with that plus 4%. Just with the miners, are we exiting above that 4% to 6% range on the full year growth? And you referenced 2022, how you guys respond to inflationary pressure. You guys are very quick to get that price increases in there and we saw that in the numbers. Is there anything different that we should think about 2026 and versus 2022? Just in terms of the demand environment coming out of COVID versus maybe where we are now, are there differences or similarities and how we should kind of look at that 2022 period where you guys are quick to respond to inflation versus where we are now today? Ronnie Pruitt: Yes, I think there are. I mean, there's lots of differences, and there's always differences on the demand side. And so as I look at the difference between 2022 and 2026, 2022 coming out of COVID, residential really took off. And so a lot of that midyear and first of the year pricing, again, we reference that back to the customer base was a lot of our fixed plant stuff, which the concrete guys back then, we're experiencing some really good tailwinds when it came to the majority of their market being tied to single family, that's a different -- I mean that's not happening today. If that accelerates, and we've said if the third leg of our stool, public private nonres and single-family or resi, if that's our [indiscernible] tool kicks in, obviously, it's going to give us a lot of tailwinds when it comes to both the demand side of our products as well as the pricing side and that momentum. But I think originally, what you said, I mean, I think it's absolutely right that our confidence is that our pricing throughout the year will continue to build momentum. So exiting that, obviously, we'll be -- we'll need to be at the higher end of our range because that's just the math. And so we have confidence in our ability to do that. And I think it's too early to call what's the success of midyear is going to be because it's choppy. I mean it's every individual market. I mean these are local markets that we have active conversations going on with our customers, and we want to be their supplier of choice. And so in the end, we're going to be disciplined around that. But I would tell you we have good momentum. The quarter played out exactly what we expected. And I think the rest of the year, we have all the mechanisms in place to continue to reinforce the earnings of the business. Operator: We'll turn next to Ivan Yi with Wolfe Research. Ivan Yi: Can you comment on transportation cost, truck rates are currently about 20% to 30% year-over-year. Are you able to fully pass through these higher costs to your end customers? And on that, you hire truckload rates incentivized moving more volumes to rail where you can? Ronnie Pruitt: Yes. So I guess I'll answer the back half of it. When it comes to rail, I mean, you can move more to rail, but you also have to have the rail yard to be able to do that. And so our rail yards are a really extension of the operating plants that those markets support. And really the significance of that is our ability to capture the value of those products at the yards in distribution costs, which would include rail distribution, we're able to capture that. And a lot of those yards are really in high-growth markets. That's why we put yards there because that's where the growth is, and it helps us supply that market and it limits the amount of distribution cost to get there. On the overall delivery side, as I said early on, we have surcharges in place to capture that. Delivery to us is really a pass-through, we don't try to make money on delivery. That's a third party. We have owner operators that do that. And so we do provide that service to our customers, but it's not something that we see as a headwind or a tailwind. It's just the cost of doing business. You got to get the rock to the job. And so delivery to us is a pass-through, and we have surcharges in place to make sure we're not paying the penalty on any fuel cost increases. Mary Carlisle: Yes. And one other thing, Ronnie talked a lot earlier about the -- our advantaged footprint in terms of where we are an advantage we also have is not just geographically where we are, but what our positions are in those markets. And so I think over the longer term, if you think about those positions in an environment of rising transportation costs, it can serve to widen our logistical mode advantages. Operator: And we'll hear next from Rohit Seth with B. Riley Securities. Rohit Seth: Just back on the volumes, [indiscernible] up 5%. So you booked a little bit of cushion here on into the rest of the year. Can you provide a sense of how the quarter played out, the cadence from January to March? And then if you have any comments on April? Ronnie Pruitt: Yes. I would say when we talked about more normal weather, really the more normal weather we experienced was really more in the smile of the U.S., it's really more California-based and then in the South and Texas and then across the Southeast. I mean we saw a lot of very cold start to the year in Illinois and in our Northeast markets. And I would tell you, our shipments reflected that. I would tell you, we started off slower in January, and we built momentum through February and into March. And so really, weather for us, it's 2 parts. I mean, precipitation rain is one thing, and rain obviously affects the day that we're shipping, but the cold start to the year in the Northeast and the cold start to the year in the middle of the country, it definitely had an impact on, one, you're not laying mix and one you're not for in concrete, but 2, you're not operating. I mean, so -- we really got off to a slower start in January in some of our northern markets, but that's typical. I mean, that's not something that caught us off guard. I mean, we knew that was going to -- that's what we planned for it to be cold in Chicago in January. So I would tell you the quarter from a cadence side, I think it played out exactly like we said. And I would tell you, as we got into March, I mean with drier weather and with warmer temperatures, again, the size of these projects matter and where our footprint is matters. And when I say literally 60% of these large projects are within 50 miles of a Vulcan facility, that matters and their ability -- and we highlighted this in our Investor Day when we talked about the complexity of these jobs and how much they want a supplier that can have redundancy, they want suppliers that can meet their production schedule. And some of these schedules literally can drift up 30% or 40% in their schedule as far as the demand perspective, and so that matters. I mean I think our size and location is very critical when it comes to where these projects are going. And so I would anticipate, again, I mean, as we get into the second quarter, I think that cadence will be. But we also said we started off 5% up. We said we still believe we're going to be in growth, but we didn't say we raise our expectations on the overall demand of our products. We think it's still going to play out through the remainder of the year in that low single-digit carry-on. Mary Carlisle: Yes. And that's really based on a seasonally adjusted basis, we feel like we're right on track for our full year guidance. I think as you think about the rest of the year, one thing to keep in mind is that seasonally adjusted last year's second quarter was weaker than where we finished the year. So we'll have easier year-over-year comps in the second quarter than we will in the back half. But in terms of the -- again, a lot of noise in the quarters, but in the -- for the full year guidance, we think we're on track to deliver that modest growth for the year. Rohit Seth: Any thoughts on April? Ronnie Pruitt: I think April is going as expected. Rohit Seth: Okay. And then just a last follow-up. Are you seeing any project cancellations or anything getting pushed out to the [indiscernible] maybe just delaying waiting for it to normalize? Ronnie Pruitt: We have not. We're paying very close attention to that because I mean that's a possibility, obviously. But we have not seen anything as of the date with either public or private side, we've seen any projects that have been canceled or delayed. Operator: Thank you, everyone. With no further questions in queue, I would like to turn the floor over to CEO, Ronnie Pruitt for closing comments. Ronnie Pruitt: Thank you, and thank you all for your interest in Vulcan Materials. I'm proud of what our teams have accomplished in the first quarter, but we're never satisfied, and we're always looking ahead. We're committed to continuous improvement and long-term value creation for all of our stakeholders, and we look forward to speaking with you at our next quarter. Thank you. Operator: Ladies and gentlemen, that will conclude today's event. Thank you for your participation. You may disconnect at this time, and have a wonderful rest of your day.
Operator: Hello, everyone. Thank you for joining us, and welcome to Unum First Quarter 2026 earnings. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions] I will now hand the conference over to Matt Royal, Investor Relations. So Matt, please go ahead. J. Royal: Thank you, and good morning to everyone. Welcome to Unum Group's First Quarter 2026 Earnings Call. Please note today's call may include forward-looking statements, and actual results may differ materially, and we are not obligated to update any of these statements. Please refer to our earnings release and our periodic filings with the SEC for a description of factors that could cause actual results to differ from expected results. Yesterday afternoon, Unum released our earnings results and financial supplement for the first quarter of 2026. Materials are also available on the Investors section of our website. . Also, please note references made today to core operations sales and premium, including Unum International, are presented on a constant currency basis for improved comparability period to period. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; and Chief Financial Officer, Steve Zabel. Following remarks from Rick and Steve additional members of management will join and participate in Q&A, including Tim Arnold, who heads our Colonial Life and Voluntary Benefits lines, Chris Pyne for Group Benefits; and Mark Till, who heads our Unum International business. Now let me turn the call over to our President and CEO, Rick McKenney. Richard McKenney: Great. Thank you, Matt. Good morning, and thank you for joining us. We are very pleased with a solid and encouraging start to 2026. It is one that reflects strong execution across the business for both the top and bottom line, greater capital deployment and continued progress in management of our Closed Block. Core operations performed well with earned premium growth of over 5% adjusting for the transactions. After-tax adjusted operating earnings of $353 million and after-tax adjusted operating EPS of $2.14 is up nearly 10% from a year ago. Leading the way our group -- our U.S. group business had a standout quarter with sales up 22% and persistency is strong at 92%. Combined, this drove premiums up approximately 5%, specific to our group lines. The top line also translated to the bottom line as we saw record earnings in group life, bringing total U.S. group earnings to over $220 million and with a very high ROE. Within the group portfolio, this quarter, it was clearly the Group Life business, which outperformed, but not to be overshadowed, our group disability business showed consistent strength with high returns and good long-term disability fundamentals. As we pay careful attention to pricing and risk selection at the employer level for new and existing customers, our team continues to do an excellent job helping people get back to work and fulfill our purpose. These results reinforce what has long been true for us. We have built our business on disciplined pricing and underwriting, strong customer relationship management, which is key to high persistency and continued focused investments and capabilities that differentiate Unum in markets. It is particularly important where technology and human support come together at moments that matter most. It is also another quarter in which we delivered on the consistency and execution that our customers and shareholders expect from us. To achieve this, we have been deliberately investing in technology-enabled solutions that help us win, retain and grow business by making it easier for employers and their employees to engage with their benefits. This is evident in this quarter's results with the success we're having in providing solutions and services that resonate with our customers. In recent years, employers have placed increasing importance on managing employees leads. The expansion of state family and medical lead programs has provided another avenue to leverage our LEAP management leadership position and reach more people. Our Digital First Total leave platform combined with our traditional insurance products and technologies such as HR Connect, delivers a best-in-class experience to our clients which in turn contributes to the high levels of satisfaction and persistency exemplified this quarter. Extending from our leading group businesses is a very successful and broad-reaching supplemental and voluntary product business. These lines of business saw a 20% sales growth in the quarter. We see employers looking at the broader benefits package more often as these products leverage the same digital tools and employers know they can depend on Unum across their benefit needs. Taking our Unum US business in totality, we delivered strong before tax earnings of $338 million and an ROE of 25% in the quarter. At Colonial Life, momentum continues to build. The business delivered a record earnings quarter supported by premium growth in line with expectations, attractive returns and continued benefit from disciplined execution and strong relationships in the worksite market. Colonial Life is an important component of our reach and able to get to employers of different sizes that are looking for high-quality solutions to help take care of their employees. Looking internationally, after significant growth on top and bottom line over the last several years, Unum International produced mixed results this quarter. Strong performance in Poland, where growth continues at an exceptional pace was offset by benefits pressure in the U.K. Our market position and know-how gives us confidence that we can actively address macro market dynamics and we are excited about the long-term value growth and contribution of our international businesses. Overall, core operations are in excellent shape heading into the rest of the year. As we refine how we present and focus our earnings on an ongoing basis, we'll also continue to provide transparency into our closed block. This remains an area of active and deliberate management. Importantly, results this quarter reflect tangible progress in reducing both the size and the risk profile of the block. As we announced late last year, we discontinued new employee coverage on existing group cases. The response was well received by clients, particularly among employers who had not recently evaluated the cost and value to their employees of this legacy offering within their broader employee benefits package. Because this product was last marketed in 2012 and provides benefits well beyond an employees working years, our engagement this quarter led some employers to voluntarily cease their coverage. As a result, 7% of all group LTC cases closed during the first quarter, meaningfully reducing our exposure. Importantly, this reduction in footprint was achieved with clarity and transparency for our clients. As our customers' evaluation continues, we expect additional case closures going forward. Beyond that, our fair wind protection remains at a robust $2.2 billion. The external reinsurance transaction we completed last year continues to perform well. and the elimination of new employee tail risk is fully in place. We continue to evaluate a broad set of options to further mitigate LTC exposure, including risk transfer, and we are encouraged by our progress and the opportunities ahead. The actions we are taking are methodical, deliberate and effective. Each step improves the risk profile and allows us to keep our focus where it belongs, growing and strengthening our core business. Turning to the balance sheet. Our portfolio continues to perform well in the current environment and remain solidly investment grade. Our team has done a good job over the last several years, increasing our overall credit quality at a time when you weren't getting appropriately paid for the inherent credit risk. Additionally, our capital position remains very strong. with RBC at 460%, which is over 100 points above our target range and holding company liquidity is strong at approximately $1.7 billion. With solid capital generation, we remain committed to our capital deployment framework, investing in our business for growth, both organically and inorganically, and then returning capital to our shareholders through dividends and share repurchases. Our outlook calls for the redeployment of roughly $1.3 billion, which is roughly what we generate in a year. During the first quarter, we repurchased approximately $400 million of shares taking advantage of attractive prices to accelerate a portion of our planned repurchase. This reduced our public float by approximately 3% in 1 quarter. After paying out $78 million in dividends in the first quarter, we will also look to increase our dividend rate in the coming months heading into our annual meeting. Our delivery of investing in growth and deployment plans are intact. Looking ahead, we remain confident in our 2026 outlook, which consists of delivering 4% to 7% top line growth, 8% to 12% EPS growth, attractive returns on equity in our core operations and continued strong capital generation and deployment. The environment remains supportive. Our sales pipelines are building as we move through the year. Digital connections with our customers continue to deepen and our teams remain intensely focused on execution. Most importantly, our purpose of helping the working world thrive throughout life's moments continues to guide our teams. Our growth and our culture over the long term. This year, we were pleased to be named 1 of the world's most ethical companies for the sixth straight year. This all comes together to generate the results of today and the long-term value creation we are building for customers, employers and shareholders. I'm happy now to turn the call over to Steve to walk through the numbers in more detail. Steve? Steven Zabel: Great. Thank you, Rick, and good morning, everyone. The first quarter of 2026 was a strong start to the year with many of the expectations we laid out in our outlook meeting emerging across our businesses, resulting in after-tax adjusted operating income per share of $2.14. Notably, Group Life and AD&D, along with Colonial Life had record levels of earnings and group disability met our expectations. Alongside the strong margins we saw, top line trends were ahead of our expectations with sales growth of 14.4%, grew persistency increasing 2.7% year-over-year to 92% and core premium growth of 3.9%. While premium growth is slightly below our 4% to 7% full year expectation, we had expected this to accelerate and build throughout the year. . Adjusting for the runoff of the stop loss business and the transactions executed last year, core premium growth would have been just over 5%. Before moving on to our segment results, I will remind you that this is the first quarter reporting under our new definition of after-tax adjusted operating earnings, which excludes the closed block. While the closed block earnings are no longer represented in our headline adjusted after-tax operating income, I will spend some time later in the call to talk about key trends in that business. Diving into our quarterly operating results across the segments, the Unum US segment produced adjusted operating income of $337.9 million in the first quarter of 2026, compared to $329.1 million in the first quarter of 2025. Group disability adjusted operating earnings of $106.6 million in the first quarter of 2026 reflect a benefit ratio of 63.7% compared to 61.8% in the year ago period and an improvement from 64.2% in the fourth quarter of last year. Overall, long-term disability results are consistent with the assumptions embedded in the models that underpinned our guidance last quarter and reflect continued progress as the line continues to normalize. With that said, the quarter did include higher incidents in the short-term disability product line compared to the same period a year ago. Specifically, paid family and medical leave experience was somewhat elevated in newer PFML states and modestly pressured in existing jurisdictions, reflecting continued investment in the attractive leave opportunity discussed earlier. As PFML remains a maturing market. Our standard 1-year rate guarantees provide flexibility to respond quickly. Excluding PFML, group disability experience was solid and within expectations supported by stable incidents, strong recoveries and a rational pricing environment. Results for Unum US Group Life and AD&D include adjusted operating income of $115.1 million for the first quarter of 2026 compared to $69.2 million in the same period a year ago. The benefit ratio decreased to 61.8% compared to 69.3% in the first quarter of 2025 driven by lower incidents. This result was extremely favorable compared to our outlook of 70%, and we've now seen multiple years of better-than-expected results, averaging in the mid- to high 60s. We believe that this moderate level of outperformance could continue to persist. Adjusted operating earnings for the Unum US supplemental and voluntary lines were $116.2 million in the first quarter, a decrease from $140.7 million in the first quarter of 2025. The decline in earnings was driven in part by last year's long-term care transaction, which ceded a portion of our IDI business. but also by unfavorable underlying experience in that line. Turning to premium and sales. Our top line trends remain healthy. Unum US premium grew 3.3% with support from high levels of persistency. Excluding the impact from the runoff of the stop loss business and our transaction last year, Unum US premium grew just over 5% year-over-year. Our pipeline for future growth remains strong. Unum U.S. quarterly sales were $335.1 million compared to $277.5 million in the first quarter of 2025. Total group persistency of 92% increased sequentially from the fourth quarter and from the same period last year, reflecting the enduring relationships we are able to create with our customers. Moving to Unum International. Adjusted operating income for the first quarter was $30.9 million compared to $38.7 million in the first quarter of 2025. And and below our outlook for earnings in the low $40 million range. The International segment's benefit ratio was 71% compared to 66.5% in the year ago period driven by unfavorable experience in the U.K. business. Adjusted operating income for the Unum UK business was GBP 20.4 million in the first quarter compared to GBP 29.5 million pounds in the first quarter of 2025. The results reflect underlying claims performance, including a benefit ratio of 72.9% compared to 76.1% a year ago. The change in benefit ratio was primarily due to a larger average claim size in our group long-term care disability business in 2026. International premiums continue to show growth. increasing 8.1% and are supported by healthy persistency levels and sales growth of 5.5%. Premium growth was broad-based with U.K. premium growing 6.5% and and Poland premium growing 15.2%. Next, adjusted operating income for the Colonial Life segment of $127.8 million in the first quarter was a record, and increased from $115.7 million in the first quarter of 2025 driven by strong benefits experience and underlying premium growth. The benefit ratio of 46% compared to 47.7% in the year ago period and was better than our expectation of the range of 48% to 50%. Premium income of $472.7 million compared to $457.3 million in the first quarter of 2025 and was driven by strong sales in the prior year and stable persistency. Sales in the first quarter of $106.3 million were up slightly from the prior year. Colonial Life produced strong returns, including ROE of 19.2%. I will now provide an update on the closed block focusing less on the earnings results and more on key business trends and balance sheet health. Long-Term Care's results this quarter were largely influenced by employers' decisions to cease coverage following the discontinuation of new employee enrollments on existing GLTC cases that we announced in the third quarter of last year and that was effective in February of 2026. As a result of these decisions, we saw elevated GAAP accounting volatility from these closed cases, which is acutely seen in the headline segment earnings results. Despite the margin in these closed cases, which reduced current period GAAP earnings, we are very pleased to reduce the associated exposure and tail risk in the block. In addition, first quarter results included amortization of reinsurance costs related to the LTC reinsurance transaction that closed in July of 2025, which did not impact the year ago period. Outside of these impacts, underlying experience trends remain in line with expectations. Combined with the underlying benefits experience, the NPR increased 10 basis points to 97.6% on a sequential basis. Other key considerations for monitoring the block health include our Fairwind protection remaining stable at approximately $2.2 billion and continued success with our premium rate increase program with our achievement rate sitting at approximately 15% for our current program. Then lastly, for the closed block, our alternative investment portfolio, which mainly supports LTC and and an annualized yield of 6.7% in the quarter, below our long-term expectation of 8% to 10%. We typically see seasonality in first quarter marks due to the timing of receiving year-end statements and therefore, we remain confident in the construction and resiliency of this portfolio. I'll end by covering our capital position. In the quarter, capital metrics across the board remain robust. Holding company liquidity stood at $1.7 billion and traditional RBC at 460%, both above our long-term targets and consistent with our expectations. These levels keep us on track to achieve our full year outlook of 400% to 425% RBC and $2 billion to $2.5 billion of holding company liquidity. Our robust capital position is supported by statutory after-tax operating income of $314 million in the first quarter, positioning us for our full year expectation of $1.4 billion to $1.6 billion of total capital generation. This cash generation model paired with our strong position enables our durable approach to deploying capital to our shareholders. In the quarter, we took the opportunity to execute a dynamic approach to share repurchase buying back around $400 million of stock. While we are constantly evaluating our capital deployment plans, we view these actions as a pull forward of our plan and remain on track to repurchase $1 billion of stock this year representing all of the free cash flow we plan to generate. Our thoughtful share repurchase, paired with our common stock dividend of $78.4 million put first quarter deployment just under $0.5 billion, underscoring our ongoing focus of executing prudent capital management. So all in all, it is a solid start to the year for the company. The encouraging top line trends and strong margins across many of our products illustrate the high-quality nature of our business. This paired with our continued active management in the Closed Block and opportunistic acceleration of share repurchases and provides us with healthy optimism for the remainder of the year and positions us well to execute against our goals. I will now turn it over to Rick for his closing comments before going to your questions. Richard McKenney: Thank you, Steve. And overall, you heard from both Steve and I as we delivered a strong first quarter. It reinforces both our near-term momentum and our confidence in the company's long-term positioning as we move through the year. Before we move to Q&A, I want to recognize an important leadership transition for our company. After more than 4 decades at Unum, Tim Arnold has decided to retire in July. Tim has been a highly respected leader with a significant impact on our voluntary benefits businesses, particularly at Colonial Life, where he has been the President for the past 11 years. Tim is 1 of the few people who has lived in each of our 4 major locations and has impacted the people and the communities he has served. We are grateful for his many contributions and the legacy he leaves behind. We're also very pleased with the planned leadership transition, including the appointment of Steve Jones. Currently, Colonial Life Head of Market and Field Development as the next President of Colonial Life. This reflects the depth of our management team and our focus on continuity and long-term growth. We will look forward to Steve joining us on this call in the future. So with that, operator, we'd be happy to take questions we have out there. Operator: [Operator Instructions] Your first question from the line of Alex Scott with Barclays. Taylor Scott: First one I had is on the paid family medical leave. I wanted to see if you could provide a little more color on what you're seeing in that product line as you move into new states and -- just help us understand if we should expect to continue to see some pressure there until we hit another renewal cycle or what you saw in first quarter is a little more one-off in nature. Richard McKenney: Yes. Thanks, Alex, for the question. It's Rick. I just wanted to just say that this is an important part of the overall mix. And so when we think about it, we think about it, it's been consolidated in our group disability results, which, as you can see, very high returning business. And so this is a new developing area, which one we've been talking about for a long time. But certainly, we can give us some more details behind that, which is just an extension, as I mentioned, of our leave business. But maybe, Chris, we give some more context in terms of the dynamics in the paid family medical leave currently. Christopher Pyne: Sure. Thanks, Rick. And thanks, Alex. Ultimately, this is an exciting time in our business. If you think about PFML and the states that have come on over time and most recently, Minnesota and Delaware were added 1/1, and then May will come up in the first quarter this year. This is an expansion of a business we're in, giving more employers the requirement to be covered for short-term disability on the employee side, but also adding coverage for family events where people need to be away from work. So it really fits the work and the investments we've made in the lead business where you bundle products and services to make sure that we can be that partner to employers as they manage their workforce for both regulated events and also just what they want to provide in terms of flexibility for their employee population. When stays come on, we deal with it like any other new line of business coming on in a state. And you can see some pressure from pent-up demand that happens at times. We manage it. The good thing about PFML is, it is high-frequency type coverage like short-term disability. It gets credible quickly. You can see how the experience emerges and it is short in terms of rate guarantees. So normally, a 1-year rate guarantee gives us the opportunity to reprice and we've been doing that at current, and we'll continue to do that. It also can give you a little bit of lift in sales. Normally, that's been small enough to just be absorbed into our business because it's one state at a time. And obviously, our disability business is quite large. When you have 2 or more or it can show up a little bit, and that does provide a little bit of tailwind in sales. But I would bring you back to -- this is the business we're in. This is the business that employers need our help with, so it's an exciting time. When new states come on, that is part of it as prior states mature in terms of how the experience plays out, that's given us more information, and we'll continue to adjust price and manage that business very well, which is part of our heritage. Taylor Scott: That's helpful. Second one I have is on long-term care. Could you talk about the in-force management actions that you've taken? And just the 7%, can you tell me about what portion of the policies had that renewal that that occurred this quarter? And how much are you expecting to renew that you're working on some of these actions with through the rest of the year. So how do we think about that 7% potentially growing to a larger percentage of the total group LTC . Richard McKenney: Yes. Thanks, Alex. Let me just provide a little bit more context around our LTC actions. And we've been taking them now for several years. As we've said, it's been methodical addressing different parts of our book of business. That includes rate increases, which we've been doing now for a long period of time, also includes the capital actions we've taken behind Fairwind over the last several years. And then most recently, last year on the risk transfer that we did as part of that -- and then in third quarter, we took some actions around new lives on group cases, and I think that has some impacts that we've started to see coming out there. And Steve, maybe you can take us through some of the details of Alex what we saw specific to this quarter? . Steven Zabel: Yes. Yes. So I would go back to last year when we notified our employer base that we were going to be no longer accepting new lives on existing cases. And then what that did is it really -- it really started a lot of conversations with our employer groups, just about the value of the program, the future of the program. You get into the discussions about kind of what we're looking for going forward around our rate increase program. And it's just a point in time where they evaluate their entire employee benefits package and how the LTC plans might fit into that. And so -- as a result of some of those discussions, we did have much higher levels of employer level terminations of those cases, we did quote that about 7% of our cases did terminate in the first quarter. That equates to approximately 30,000 actual lives on a net basis that would have ceased coverage during that period of time. And so as we think about just ongoing communications with our customers, that's part of the conversation. We will continue to have those going forward. I would say, as we look forward, first quarter is probably the most acute that we feel the impact, but we could see future terminations on some cases as those conversations continue. I would just pull it back up though. I know there's a lot of GAAP accounting noise on this one. But at the end of the day, we're having good conversations with our clients. As a result, we've reduced risk exposure, tail risk on that book of business, and we just view it as another part of us thinking about how to manage this business going forward. Operator: Next question from the line of Tom Gallagher with Evercore ISI. Thomas Gallagher: First question is just on how to think about guidance over the balance of the year. I heard your comment on Group Life and AD&D, how you think that's probably going to trend somewhat favorable relative to initial assumption. I don't know, can you just mention have you changed anything for the other businesses? It does seem like international is running somewhat adverse. And I guess, group disability, the loss ratio sounds like it might be more toward the high end of the range, if I'm reading you correctly on this PFML issue, assuming that process for a bit, can you just talk about how are you thinking about the different businesses over the balance of the year? Steven Zabel: Yes, this is Steve. I mean I would go up and just say, we feel very comfortable in the guidance range that we've given based on what we've seen in the first quarter, the drivers of some of the margins in the first quarter and how we look to the back half of the year. I'd start with we feel great about growth within our core businesses, and that's a real driver than of bottom line. So everything we're seeing commercially would very much support the top line growth that will drive the earnings that we have in that outlook. We did have some variances against kind of original expectations in the first quarter. You mentioned group life. That was a great result for us. We do think that there's a possibility that will continue to be somewhat favorable to the 70%. But as you know, group life can be very volatile. So we just have to see how the year plays out. International benefit ratio was a little bit higher. There was kind of some one-off things around just the average size of new disability claims. We don't believe that will persist. That will be wild cherry for us, though, and we'll monitor that as the year goes on. Colonial had a great quarter. Really everything from a benefit ratio perspective was very positive. We have a lot of different products within that. And there's usually a little bit of offsetting of performance. But this quarter, everything was very positive. And then there are some other lines where we had some variations, including group disability, but they were all within our range, going into kind of planning for that ultimate outlook. So Tom, at this point, we're 1 quarter in. And so I'd say we still feel very good about the broad outlook range that we gave at the beginning of the year. Thomas Gallagher: Got you. My follow-up also long-term care. Can you give a little bit of color for how big are the group LTC reserves relative to the total of -- we'll call it, $14 billion or so? And did you -- when you had a 17% reduction from nonrenewals, can you provide a little more transparency, what did that do to reserve levels versus the capital that make up the $2.2 billion of excess over best estimates in Fairwind? Steven Zabel: Yes. So it wasn't 17%. We had a 7% reduction in cases in the first quarter due to employers ceasing the coverage in their plans. What I would tell you is kind of from a statutory reserving perspective, we did release reserves in the first quarter of the year and felt very good about that. I kind of zoom back a little bit and just think about the protections that we have in Fairwind generally. And mechanically, what happens is we release those statutory reserves and those in essence flow into excess capital in Fairwind. And when you think about our definition of protections in Fairwind, it's a combination of the margins that we have in the reserves and the excess capital, it was pretty much neutral. . And so the way I think about it is we still have $2.2 billion of protections in Fairwind on a block that's smaller. And so net-net on net, feel like we have more relative protection in Fairwind for the remaining walk there. We haven't really disclosed the split between GAAP and individual -- or sorry, group and individual statutory reserves. And so -- and that's something we can consider going forward. There is a lot of demographic information about the split between individual and group in our annual investor packet that we send out as part of that call. Operator: Our next question from the line of Suneet Kamath with Jefferies. Suneet Kamath: Just wanted to start out, congratulating Tim Arnold on his retirement, but I did want to ask him a question. Just on the voluntary business, we're starting to see some reports of states telling insurance companies to lower premiums on certain products. Just wondering if you're seeing any of that in terms of your business? Timothy Arnold: Yes, this is Tim. Thank you so much for the congratulations on the retirement. I appreciate that. There have been states throughout the last 10, 15 years who had loss ratio requirements that differ -- and so it's not something new that we're working through, but we are seeing a couple of additional instances where states are inquiring about loss ratios and just trying to make sure that the products are performing as they were originally priced. Suneet Kamath: Got it. Okay. And then, I guess, turning to Unum US, I mean, the 20% sales growth was pretty strong. I think most of it is from the core market. But -- can you just kind of unpack that a little bit? How much of that is sales to existing customers versus new customers? And any comment on kind of the natural growth that you typically talk about on these calls. Richard McKenney: Yes, Suneet, actually, we'll let Chris get into that. But I think it would be helpful to actually talk about sales around the horn because I think we had a really good sales quarter and in the U.S., but I think that, that was other places as well. So Chris, do you want to start us off and maybe we'll ask Mark and Tim talk a little bit about sales as well. . Christopher Pyne: Great. Thanks, Sumit. Yes, strong sales in the quarter, 20% growth and we're thrilled as we look at that sales growth that we continue to tie back to where we've made investments and capabilities, no surprise, HR Connect and connecting to the platforms of choice hugely popular with our new sales and also growing existing sales when that type of connection is in place. totally is a huge driver of decisions that people make and they buy a bundle when they do that for both total [indiscernible] HR Connect type platforms. I want to also reinforce that we've got a very strong marketing alignment in terms of going out and finding the right types of prospects so that we know where to spend time and energy and our brokers and consultants are focused on the right things when it comes to making a difference for their client base. That's an exciting partnership, and it's nice to see that alignment all the way through the sales funnel. You referenced that new sales for small and mid customers really strong. That was -- there's a little bit of tailwind in PFML in that space, but even when you strip that out, new sales for small and mid customers really strong, nice to see that growth year-over-year. First quarter is a little bit more volatile. It's a small quarter for us in terms of our national client group. And we -- again, we did see some tailwind from PFML in the large space with Maine coming on [indiscernible] which we credit the -- which we see in the quarter. But overall, the fundamentals of where we're winning tied to capabilities, winning on new and growing our business have been really positive, great start to the year. So thanks for asking. Richard McKenney: Tim, do you want to follow up? Timothy Arnold: Yes, sure. I'll start with the Unum VB side of the house. Extremely strong sales in the first quarter, up 24% year-over-year. New sales were at a record level. In the VB business on the Unum side, the first quarter is the biggest quarter of the year. So it's particularly comforting to see the business get off to a plus 24% start that bodes well for the remainder of the year. On the Colonial Life side, sales were a little sluggish in the quarter. However, I would just bring you back to the fourth quarter where sales growth was almost 10%. I think we had a little bit of a soft pipeline coming into 2026. But I would tell you the fundamentals and the leading indicators remain very strong. Recruiting is very strong. We like the number of sales managers we have in the organization and the performance that they are demonstrating. We saw strong sales in the quarter from new clients and also from large case clients, had a little bit of weakness in the existing client sales base. And [indiscernible] and the sales team are working hard to get that back on track. And we believe that the remainder of the year, there's reason to be optimistic. If you look at the gap between where we finished the first quarter at Colonial Life and where we thought we would be, it's about 1% of total annual sales. So we certainly think that, that is recoverable. And then if I may, Suneet, since you started the question with my retirement, I'd be remiss not to say I'm extremely excited about Steve Jones. I have the opportunity to work with him now for 2.5 years. He joined Colonial Life as the Head of Sales and Marketing support field to market development. He is an incredibly strong leader. He's led 2 other P&Ls in his career. And I think this transition is going to be extremely smooth. He's very much aligned to all the things that we've been doing and [indiscernible] of a zone that I think are pretty exciting. And so really, really happy to have Steve in the role moving forward. Richard McKenney: Good. Thanks, Tim. And Mark, let's talk a little bit about international. . Christopher Pyne: Yes. Thanks, Rick. If you look at international as a whole in dollars, sales were up 14%. As we know, the U.K. is the predominant part of that. So if I perhaps touch on local currency sales in the U.K., they were up 15% on the quarter. I always think sales are a function of the proposition that you have and the way in which the brokers in the U.K. market view you. We've been investing hard in broker service, digital propositions. It was last week that actually an independent survey by NMG on brokers rated as the number 1 for Net Promoter Score, and we led the market in pretty much every major capability, whether that's relationship management, claims, management, absence management, rehab product, value-added service. Those are the things that contribute -- those are the things that contribute to the growth in the business. We also got some data last week that said that in 2025, we were the #1 writer of new business in the U.K. market. So I think we've got some confidence that we have the support of the brokers and the propositions to be able to drive the growth sales in the business over time. Richard McKenney: Good. Thanks, Mark. I think you have Suneet. I mean I think it is a broad-based story, and so I don't want to focus on just the USP sales looked very good across the enterprise in the quarter. Thanks for the question. . Operator: Your next question from the line of Jack Matten with BMO. Francis Matten: Just 1 follow-up on the group LTC actions. I guess what you said that Unum is incentivizing its group customers in any way to determinate their cases? Or do you plan to offer any consensus there? Or is it really just these terminations or an outcome from kind of more normal course conversations around things like rate increases? Steven Zabel: Yes. This is Steve. Absolutely no incentives. This is a unilateral decision that a group HR director makes when they're looking at their entire benefit package for their employees and just evaluating the value of the different pieces of that package. And so we're obviously here to have that conversation with them and discuss their options with their plan, but there's absolutely no incentive coming from us, and from our perspective, the key is for us to continue to serve those customers that remain in force, and that's what our team is focused on. But we're also there to help give a little bit of education and help and administrate or through their decision. . Francis Matten: Got it. That makes sense. And then a follow-up on the international business. And I think some of the pressure you talked about in the U.K. Group LTD. Can you just unpack a little bit more? Was that more frequency or severity issue -- and do you view any of the trends there or something that could persist for a period of time? Or do you view it more as just kind of a one-off this quarter? Steven Zabel: Yes, this is Steve. I can cover that one. It definitely was for the quarter, an average size for the long-term disability business over there. And really, the size of new claims is a function of just those individual claims that come in based on diagnosis based on occupancy, based on based on the industry. And so we have a lot of data to say those types of claims when they come in, this is a reserve that we need to set up. And so you just -- you get into some of these quarters where just the mix of those claims drive a higher expected size of claims than what you would have expected. So really nothing to do with the incidence counts specifically there. I will say we've seen that in the U.S. business as well over time, and they tend to just be kind of anomalies that you see in a quarter, and so right now, we would view it as just some first quarter volatility. But obviously, we're going to need to look at that as the year plays out and see how that impacts our view of the outlook for the business. . Operator: Your next question from the line of Joel Hurwitz with Dowling. Joel Hurwitz: First, Rick, in your prepared remarks, you mentioned that you were I think, encouraged by opportunities and progress that's been made on further risk transfer. Can you just elaborate what you're seeing in the market? And I guess, any optimism in getting another deal done this year? Richard McKenney: Yes. Thanks, Joel. And as I talk about that, I look back to the transaction last year, it's been just over a year since we announced the transaction closed at midyear last year. Very happy with how that performed, how that went through close, and we think it's just a good overall impact to the risk transfer. We talked a little bit about what's happening on the group side today. But we are looking across the book with different counterparties to think about what our other ways that we can use reinsurance and risk transfer to help mitigate that. So coming off of a successful 2025, we also, at that time, said we're a deal ready. We're ready to go for the next tranche. It's just about finding the right counterparty. So we have the preparation and the teams are ready to do that. We have a strong desire to remove this risk, which we have been very consistent on, and that's in multiple forms in terms of taking the risk across the enterprise. And on the risk transfer side, the market is constructive. I think we've used that term constructive before. There are a number of players out there that might take on this type of risk, lots of interest that's out there, but getting interest to be actionable, takes some time because it does take a good qualified counterparty who's willing to do the work. But there are a number of people out there willing to take the biometric risk. And I think part of the development we saw a couple of years ago is the ability of companies to parse the risk between the biometrics and the asset management side, which is such an important piece as well. And there are a number of players out there thinking about the biometric side. There are many players out there thinking about the asset side of it and then how do you bring it all together? So I'd put it with the same category, it's constructive where the team is active, does not necessarily mean any deal will come to fruition. This is still a complicated hard work, and we're going to do the right thing in terms of shareholders as well when we take off that risk. And so -- but we're working hard at it. And I think that we'll continue to have this to be a priority in the company to remove the risk of LTC from the balance sheet. Joel Hurwitz: Great. And then just shifting to Group Life, just I guess can you unpack the experience? Was it all essentially frequency? And then just given -- I think it's been a little over 2 years now of continued strong results in group life. When does that get reflected back in pricing? Or is the benefit ratio in the 60s for this line, sort of the new normal now? Steven Zabel: Yes. So in the quarter, it was definitely just incidents. These tend to be lower face amount type policies in group life. So normally, when you see kind of fluctuations in overall benefit ratios, it's just going to be driven by the number of claims that we receive in a period, and that's definitely what we saw in the first quarter, very, very low number of claims submitted when I kind of zoom back a little bit, if you go back and you look at the average benefit ratio in this line going back many quarters, it's been kind of in that high 60% range. So this quarter was really an anomaly and doesn't necessarily change our view of the block significantly. I did make a comment that looking forward, it may be in that high 60% range benefit ratio. But I would say, from a market and a pricing perspective, we'll take it into account, but it is just 1 quarter of very, very good performance. And we'd have to see that play out for longer really before it impacts pricing in a big way. And like all of our products, we look at this in a bundled way as we're working with our cases. And so we'll look at the overall economics of the case. And over time, it could factor in, but right now, I think it's too early. Richard McKenney: Yes. And I think that's an important point, Joel. When you think about it, it is that bundling factor. We've been talking about that a lot on the group disability and the great results we've seen there. It's more than just the stand-alone product line, what's doing. It's more about the relationship, our risk selection and all those different things that come in as we've talked about leave management and the wrapper around that, that's all important. So it's good to look at it. We're very happy with the results, but it's really hard to predict in terms of where that's going to go or how the market will factor some of that in. . Operator: Your next question from the line of Wes Carmichael with Wells Fargo. Wesley Carmichael: I wanted to come back to group LTC for a second on the terminations in the 7%. Just looking at the statutory annual filings, I think the group LTC reserves around $7.5 billion at the end of 2025. So just curious, Steve, does that imply that the reserve releases are in the neighborhood of, call it, $500 million, $525 million? Or is there any help you can give us on the impact on the statutory front? Steven Zabel: Yes. What I'll tell you on that one. You can't just kind of use averages to think about what a statutory reserve release might look like just because the policies are in different ages. There's different benefit coverages. And so it's kind of hard just to do that. What I'll tell you is on a net basis, the statutory reserve release it was less than $100 million. It was significant, but it wasn't something that would change a capital plan or change the way we think about protections on the balance sheet. We're very happy for us, the main thing is we're very happy reducing the risk exposure, but not a big capital impact, I would say, in the quarter, but as you said, the reserves on these are going to be positive for statutory purposes. So there will always be a reserve release. . Wesley Carmichael: Yes. That's helpful. And I totally acknowledge the reduction in risk along -- sorry, was it something else? Steven Zabel: No. Wesley Carmichael: Okay. Just a second question, I guess moving to Unum US. Just on expenses, and I think I asked about this last quarter and you guys had hinted that maybe there is some potential operating leverage coming. But any thought on how you can improve the expense ratio going forward in Unum US. Steven Zabel: Yes. I mean we kind of think about it in aggregate and kind of take it to the top of the house house of the consolidated operating expense. I think the comments that we made is our expectation for 2026 is going to be -- that's going to be relatively flat with maybe some improvement as we work our way through the year. We are driving productivity within the organization, which we think is important, but we're also investing back into what we're trying to do commercially. And so I think if you want to look for this period in 2026, I think it will be a pretty neutral story, all things being considered. Operator: Your next question from the line of Brian Kruger with KBW. Unknown Analyst: I had a question on the traditional group persistency improvement of about 3 points year-over-year. Can you just talk about the, I guess, the dynamics that you think led to that both from a market perspective and maybe anything unit specific? Christopher Pyne: Yes. Thanks, Brain, it's Chris. Persistency is really strong. We're thrilled with the beat we had with persistency, and we do think it reflects very directly, the investments we've made in capabilities. We've got historical evidence that continues where there's a spread in persistency in terms of higher persistency where you've got either HR Connect, technology investments and/or total leave, and we expect that trend to continue. Couple that with the fact that we talk about consistent and transparent discussions around price. And when things are going really well, we'll make sure we set the price on a go-forward basis in a way that reflects good value to us and fair value to the consumer. . Employers appreciate that. It shows up in terms of persistency, and we can keep customers with a modest rate reduction going forward at very high margins. That's a good day. And when you tie that to full bundle, lots of different products, lots of services that we provide, including fairly significant from a volume perspective in [indiscernible] things like managing leave customers value our -- what we do for them, and we feel the persistency, while not always going to hit the higher that we had this quarter is going to be a real kind of key to growth in the future. Operator: The next question from the line of Mark Hughes from Truist. Mark Hughes: Flip side of that, I think supplemental and voluntary persistency, perhaps down a little bit, I think, still with a normal range, any strategies to see similar improvement like you've seen in those core group disability, life and AD&D? . Richard McKenney: Do you want to take that . Steven Zabel: Talk about the volume business. I would start with the wrapper though because those things that Chris talked about are important overall in terms of the digital connections we have, et cetera. But our voluntary business does have a little bit lower persistency at the employee level. And Tim, maybe you can talk a little about that. . Timothy Arnold: Yes, Rick, that's right on. That's exactly where we experienced the pressure in the quarter. So as we continue to attach the voluntary benefits business on the Unum side to our lead program and to our platform partnerships with HR Connect and brokerage things of that nature, we're seeing improving person on the employer choice side, we had what I would describe as volatility in the first quarter on what we call member lapses. So policyholders who are either changing employers or for whatever reason, dropping their coverage. The overwhelming majority of those are changing employers -- and so we're taking a deeper look at that just to make sure that we are fully understanding it and then we'll put together any actions that are necessary to bring that back. But we think a big part of it was just some volatility in the quarter. Richard McKenney: Yes. I mean, I might just underscore Tim's point, it's a really good one. Those conversations when you're in talking holistically about the human capital management platform and leave and the full portfolio. We have the chance to talk about how to make sure that ongoing enrollments remain strong, and we get persistency left over time. So glad to let him with that. Mark Hughes: Appreciate that. And then the corporate outlook for the balance of the year, what do you expect in terms of the corporate loss? Steven Zabel: Yes, this is Steve. I would say mid-40s loss is probably about where I peg it. It was a little bit light. The loss is, I think, a little bit light this quarter, but that would be probably where I would estimate it being going forward for the year. . Operator: Your next question from the line of Pablo Singzon with JPM. Pablo Singzon: One more question on Unum International, where you referenced macro dynamics in the U.K. Was that related to inflation potentially picking up again, the economic outlook or something to do with underlying risk experience that you had already commented on. Richard McKenney: Mark, I don't know if you picked up the question, but I was talking about just the macro environment and if that's causing some of the benefits and you specifically highlighted inflation. So it's a little hard to hear. So . Mark Till: Yes. I mean I think it's fair to say that the macroeconomic environment in the U.K. is not as strong as it has been for the last couple of years. We have some slightly higher inflation. The Bank of England is yet to respond with higher interest rates and actually sent some very calming messages saying that it wasn't going to do that. But there has been a little bit of a slowdown in -- we saw in 2025. And in existing employers adding lives to schemes. But actually, that picked up in quarter 1 '26. So -- at the moment, I would say, I think there's a mood is a little bit lower, but not lots of site that the economic activity is much lower. Steven Zabel: Yes. The other thing that I'd add, Pablo, because I think you maybe have a specific question about what the benefit ratio somehow influenced by some of our policies that are inflation-linked. And I would say that that's not a significant contributor this quarter, it's more just around the average size of some of the claims submissions. . Pablo Singzon: Yes. And then second question, U.S. supplemental. 1Q was below the quarterly run rate get provided before, I think it was $120 million to $130 million, and the loss ratio was at the high end of your range. Can you give us an updated [indiscernible] . Steven Zabel: Yes. There's not really anything in there specific that I would say would be recurring. We still feel really good about kind of the quarterly outlook that we give for supplemental and voluntary IDI claims were a little bit high for the quarter. We saw a little bit of volatility in voluntary benefits. But nothing that we're looking to really continue as we proceed through the remainder of the year. So not really changing our viewpoint on ongoing earnings there. . Operator: Your next question from the line of Tracy Benguigui with Wolfe Research. Tracy Benguigui: Most of my questions are asked. So just 1 for me. I appreciate you clarifying that $100 million of reserves for the group LTC case exits was not material enough to move the needle on capital. So just taking a step back, can you share what you need to see to reallocate some of your $2.2 billion of LTC protection into excess capital? Steven Zabel: Yes. It's Steve. We feel really good about leaving the protections down in Fairwind right now. We don't really have any other needs for that capital necessarily. We would have the ability to dividend some of that up to the holding company. But as everybody knows, we have plenty of excess capital of the holding company to have flexibility to do what we need to do. So right now, we think the most prudent thing is to leave that protection down in Fairwind that also possibly could support a transaction in the future. So we just think it's good to use of capital right now, Tracy. Operator: Your next question from the line of Mike Ward with UBS. Michael Ward: I Just wanted to go back to the paid family Medical. I'm just wondering if you're able to kind of like help us size the actual underwriting business that you've gotten from the state lease management programs just because it -- you've spoken about this for a couple of years, but I kind of understood it was like a fee-for-service kind of model. Christopher Pyne: Yes. Mike, it's Chris. Thanks for the question. And when you talk about leave, there is an element that is fee-for-service, and that's somebody can have us outsource their corporate leaves and FMLA which is the federal lead job protection component. But where -- PFML generally gets most of the discussion, and there are different flavors is when a state has a mandatory plan and they provide for a private option. We very much like to play in those spaces, and we have an offering that will be compliant with the state requirements, and we can incorporate that into the broader short-term disability and long-term disability play. It ties in with leave management in total. -- helping employers keep track of what their different employee populations that are eligible for because inside of 1 employer obviously, you have multiple states frequently and different rules apply to different people. But really, it's the insured component of not just the leave associated -- paid leave associated with a medical claim the employee has, but also an event that a family member may have where they need to take time away and they also get insurance cover for that. When you -- maybe to just size it, it's still less than 10% of our overall disability book. And normally, once that comes on at a time, it doesn't have that much impact. I think this quarter, as we referenced, we had 2 larger states that -- obviously, with Minnesota being a little larger and Delaware that showed up a little bit in the loss ratio and also new sales coming on can have an effect in a smaller quarter like the first quarter for when Main comes on. But in general, that's the element of PFML that we're talking about outside of the fee-for-service lead management business that you historically know. Michael Ward: And then is it -- like are you seeing -- is it a rental leave? Or is it more so that sort of family member that is ill that needs care? And is there anything that prevents that from becoming a long long-term claim, if it's a family member. Richard McKenney: Great question. So think about -- so your short-term disability long has forever been Maternity has been the most prominent claim in short-term disability that now gets extended for the birth mother and also the paternity leave associated with it. So a mother can go longer than historically, just the the element of giving birth and the time after birth. They're frequently, there are set number of weeks that they're eligible to stay out. And then there is a maternity factor, which has become a very meaningful bonding element of family medical leave that is real, but there's also a cap on that. Same with family members. So if you have a [indiscernible] or a child or some reason you're taking time away from work, all of these things are capped. So they're eligible to be used, but they very much have a tail. That's part of what we do for employers is we actually keep track of how long somebody has been away from work, what they're eligible for, how long they can be paid. And then part of our job is to tell them when they've exhausted that cover. Steven Zabel: And I think, Mike, the important thing is all of that can be priced for right? And so that's how you respond to changes that might emerge in that book. It's very short tail and the pricing cycle is very short as well. . Operator: Our next question from the line of Wilma Burdis with Raymond James. Wilma Jackson Burdis: Last was in Group LTC, can you just go into a little bit more detail as 1 large account that left? Or was it a lot of small accounts. Maybe just kind of give us some visibility there. We're trying to evaluate just is the product just not as attractive as it once was. I know you mentioned that it is still attractive. Maybe just give us a little bit of color there? Or was it just kind of 1 big account? And just help us think about how we should think about it going forward? Steven Zabel: Yes, I think kind of a good articulation of it is we did have 7% of cases terminate. So it was definitely broad-based. It wasn't that there were a couple of major accounts in there that terminated their plan. It was more broad-based. And it's just based on kind of the value that an HR Director use with their budget of how they spend their money because many of these tend to be funded by the employer. And so that's just a decision that they're making as they think about the broader benefit package. . Wilma Jackson Burdis: And then we haven't seen as many of your peers laying into buybacks to the extent that Unum did this quarter. Can you just talk about how you guys view that kind of tactical buybacks going forward? Richard McKenney: Yes. When we think about -- I appreciate that, Wilma. It's very consistent with the things that we've talked about overall in terms of taking our overall generation and then with a similar amount of deployment billion over the course of the year was our plan is our plan currently. And we just saw the opportunity to actually buy more. We sit in excess capital, so it was not challenging to make that decision, and we were opportunistic in the market. But I think 1 of the things we said we want to be dynamic in that share repurchase. We showed that in the first quarter. We're not changing the longer-term outlook on that, but we want to make sure we're taking advantage of different things that we see in the market, and we did that in the first quarter. So very happy to retire 3% of our shares in the quarter, and we'll see what future quarters look like as well. Operator: We have reached the end of the Q&A session. I will now turn the call back over to Rick McKenney for closing remarks. Richard McKenney: Great. Thank you for joining us today. We do appreciate the engagement. So we will be out there upcoming opportunities to connect. We would note that our annual meeting will be held on May 21. You can all dial in for that as well or send questions. Thanks for your time. Please do send Tim Arnold a note. I'm sure he would appreciate it. And congratulations to him. And that concludes today's call. Thanks, everyone. . Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: _Good day, and welcome to Expand Energy 2026 First Quarter Earnings Teleconference. [Operator Instructions] Please note that this event is being recorded. I would now like to hand the conference over to Brittany Raiford, Vice President, Treasurer and Investor Relations. Please go ahead. Brittany Raiford: Good morning, everyone, and thank you for joining our call to discuss Expand Energy's 2026 First Quarter Financial and Operating Results. Hopefully, you've had a chance to review our press release and the updated investor presentation that we posted to our website yesterday. During this morning's call, we will be making forward-looking statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections and future performance and the assumptions underlying such statements. Please note that there are a number of factors that will cause actual results to differ materially from our forward-looking statements, including the factors identified and discussed in our press release yesterday and in other SEC filings. Please recognize that except as required by applicable law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements. We may also refer to some non-GAAP financial measures, which help facilitate comparisons across periods and with peers. For any non-GAAP measure, we use a reconciliation to the nearest corresponding GAAP measure that can be found on our website. With me on the call today are Mike Wichterich, Josh Viets, Marcel Teunissen and Dan Turco. Mike will give a brief overview of our results, and then we will open up the teleconference to Q&A. So with that, thank you again. I will now turn the teleconference over to Mike. Michael Wichterich: Thanks, Brittany. Good morning, and thank you for joining our call. The team delivered another solid quarter. Honestly, they make great execution look easy. Over the past 2.5 months, I've had the opportunity to work with our team and spend time with our customers, speak to potential domestic and international counterparties. I got to tell you, I'm more optimistic today about our industry and company than ever. There is no disputing our industry is in the midst of a major demand growth. The big 3 drivers of demand, AI power, the reshoring of heavy industry and global LNG growth are converging to make the future bright for natural gas. All of this was happening even before the recent events of the Middle East. So now in addition to structural demand growth, energy security has pushed the U.S. natural gas to the forefront. Expand is uniquely positioned to take advantage of these events. Simply put, we have positioned ourselves to be in the right place at the right time. For example, our Gulf Coast assets sit at the epicenter of LNG. In fact, our largest customers today are LNG facilities, and there is an increasing recognition of the strength and competitive advantage of our Haynesville position. According to third-party reports, today, we own 72% of the lowest breakeven inventory in the basin, allowing us to deliver certified natural gas directly to LNG facilities with minimal risk of basis bloods. Fundamentally, we see LNG as a natural extension of our business. Demand in the region is not just LNG, AI-driven power and industrial demand is rapidly growing in the region. When you combine structural demand growth in energy security, we believe the Gulf Coast is well positioned to become a premium price market. Our Appalachia assets sit at the core of AI power demand. We believe the Northeast will soon see demand growth of 4 to 6 Bcf per day. In-basin demand growth will unlock pipeline-constrained production. We're also seeing a renewed optimism to build infrastructure to serve more Americans in the Northeast and Southeast markets. In-basin demand growth, combined with new infrastructure, will unleash our low-cost inventory and create substantial value for both Expand and our shareholders. Now let's turn our attention to the first quarter. Financially, we did well. We generated $1.7 billion of free cash flow inclusive of working capital inflows. True to our word, our strong cash flows were used to reduce gross debt by $1.3 billion and returned over $290 million to our shareholders through base dividends and buybacks. Operationally, like our peers, we kept Appalachia assets running with an impressive 98% uptime during Winter Storm Fern. Our Gulf Coast assets were impacted by the storm, resulting in some shifting of CapEx from first quarter to second quarter. Importantly, our full year production and capital guidance are unchanged. A lot of you, and frankly, a lot of our peers are anxious to hear about the progress in the Western Haynesville. Early production results from our first well have been encouraging. We are pleased with our execution and cost competitiveness on the well and have more wells planned this year. So stay tuned. Last year, we made tremendous operational improvements, but we see room for continuing operational improvements across the portfolio. and are excited about the early impact of machine learning and AI is having on lowering cost, enhancing well productivity. I see this as our own self-help program. Marketing and Commercial has been our primary focus for the quarter. As promised, we have attacked this opportunity with discipline and urgency. The time is now for us to improve our margins, grow cash flow per share. Our goal this year was to increase the number of commercial opportunities evaluated to ensure that we are achieving the best risk-adjusted returns for our shareholders. I'm happy to say we've made great progress on this front. On our last call, we stated the size of the prize of this effort is about $0.20 of margin improvement, which equates to approximately $500 million of repeatable incremental free cash flow per year. We do not believe that we have to swing for the fence searching for one transformational deal. We will be disciplined and create value by stacking singles and doubles across 3 general categories: First, reaching premium markets. Our expansive footprint across 3 different operating areas gives us access to more customers and options to optimize our flows. To be clear, we are changing our mindset to be a more customer solution-focused company. In the past 6 months, we've added a combined 0.5 Bcfd of term sales and firm transportation to end users, extending our reach to premium markets. Second, monetizing volatility. In the first quarter alone, we generated nearly $90 million incremental value, a greater example of how we can capture and monetize the volatility we see in the market. While this was primarily driven by unique events, these are the types of gains we're looking to achieve more sustainably. Finally, facilitating and capturing new demand. Today, we announced a new offtake SPA with Delfin LNG for 1.15 million tons per year, extending our market reach to global demand centers. We see great value in this transaction as it's bigger, reaches market sooner and cheaper compared to our previous agreement, which has been terminated. Our LNG strategy will be dynamic and shape of the economic merits of each agreement partnership or joint venture. We will take a portfolio approach, continuing to add to our LNG opportunities over the next several years with different types of contracts. In parallel, we'll continue to pursue opportunities to broaden our power sector customer base. supplying natural gas to a growing number of power generators, load-serving utilities and increasing our exposure to data centers and hyperscalers. We have no doubt that Expand is built for this moment. Why? We're the largest natural gas producer in North America. Counterparties want to do business with someone who's going to be around for the next 20 years. The depth of our portfolio, combined with our investment-grade balance sheet, provide that confidence. We are in the right place at the right time. Nearly 90% of expected U.S. demand growth can be served by our assets. Lastly, we have a team that can execute. We reset the economics of our Haynesville position last year. And today, we continue to see opportunities to strike more value from every dollar of capital we deploy across our portfolio. Before we take your questions, I would like to take a moment to thank Brittany for her service as interim CFO. She did a terrific job. I'd also like to welcome Marcel Teunissen to the team as Executive Vice President and CFO. Marcel is the kind of leader who can elevate our entire organization. He brings deep experience that aligns perfectly with the opportunities we've highlighted today. I'd also like to note our CEO search is progressing well and remains on target for the time line I presented on our last call. However, the team is not waiting around. The Board and management team are fully aligned. We are executing our plan today, and we see numerous paths to reaching more markets and improving our margin. Thank you. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Matthew Portillo with TPH. Matthew Portillo: Wanted to start out on LNG. Could you perhaps discuss why the Delfin LNG project was attractive to Expand? And then maybe more broadly, could you talk about your thoughts on the global gas market as it relates to supply-demand balances and how this might play into your LNG marketing portfolio from a time to market perspective. Michael Wichterich: Great. Thanks, Matt. This is Mike. Number one, our LNG strategy is really an extension of our Haynesville. We think about it more broadly than I believe most, which is we think about first, delivering gas to Gillis, which we think will ultimately be a premium market because it's connected to all of the LNG facilities. In fact, LNG facilities are our biggest customers today. When we start to think about on the water, of course, LNG, we think about that as international pricing. We want exposure to the prices, whether it be JKM or TTF or others. Delfin is the start, and we'll call it a foundational sort of contract in order to start to capture the LNG market opportunity and the premium pricing. It kind of flows into our bigger marketing plan. When I think about the 3 different sort of categories, we want to be in premium markets. We think LNG will do that as we move into Europe and to Asia. Two, of course, volatility. It's a different volatility sort of shape than our Henry Hub exposure. And then, of course, new demand, that's a new facility that's getting built. And so it is actually helping new demand in the area. And in fact, that gas will come from both Sabine Pass and [indiscernible] pass. Dan, why don't you tell them a little bit more about the details? Daniel Turco: Yes. Thanks, Matt. So as you know, we originally had an agreement with Delfin in Vessel II, and we had this opportunity where our conditions precedent date passed, and we terminated that contract. And as Mike said, we believe in the global LNG demand here. And so we had the opportunity to look at Vessel I and take out a larger position. And important to that as we terminated the back-to-back contract as well. So as Mike alluded to, this gives us all the integrated strategy that we're trying to do, facilitate that new demand through that SBA reach premium markets, get that asymmetry and importantly, we have some of the control on the water, either ourselves or through long-term partnerships where we can create more value and take a portfolio approach to our supply position and our sales position downstream offered different terms and tenures of sales and also different indexations. The other important aspect I'd point out here is, we're trying to integrate this through our value chain. So we have a long-term partnership with Delfin. We're negotiating with them right now to be the gas supply managers. So we're integrating it right through our value train. That differentiates us and brings more value to us. And we think bringing more value to the customers, we'll be able to offer different solutions. Matthew Portillo: Great. And then maybe as a follow-up on the marketing side. If we look out over the medium term, at least to us, it feels like it might be a bit of a challenge given the inventory exhaustion for smaller producers around the Gulf Coast to maintain a supply level that can keep up with demand growth over the next few decades. And I was just curious if you see an evolution in Gulf Coast supply-demand balances? And specifically, do you think we need to see more pipeline capacity coming out of the Northeast to help bolster supply on the Gulf Coast over the medium to long term? Michael Wichterich: It's Mike again. Generally, we agree. We agree. We have a lot of demand coming to a very small area. That's, of course, near our Haynesville asset. So we feel pretty well positioned, and we're fortunate to have a deeper inventory than most. And so we'll be able go a lot longer than everyone else. Long term, when you start thinking about 20-year contracts, of course, you need to find other supply in different basins. That, of course, can come from the Northeast. We're always worried about can it be done or not should it be done? We definitely think it should be done. So more gas will have to come from Appalachia. And of course, we'll benefit from that on our own assets. And of course, everyone knows that there's going to be more gas that's coming from the Permian as well. Operator: Our next question comes from the line of Doug Leggate with Wolfe Research. Douglas George Blyth Leggate: Marcel, I welcome, first of all, I wonder if I could take advantage of this being your first call. You obviously joined from a retail company, but you have a tenure at Shell, long tenure at Shell before that. So I wonder if you could maybe just share with us why did you take this position? What do you think you bring to the table? And if I may, on that last point, we know Mike is very keen on getting the breakeven down in market is a big part of that. So I wonder if you could share your thoughts on how you think you fit into that strategy. And I guess my follow-up is on one of my favorite topics, which is cash return on balance sheet, you appear to have inherited a pretty stellar balance sheet in the first quarter. My question is, when you think about hedging, when you think about volatility what is the right capital structure in terms of balancing things like cash returns versus continuing to delever. Marcel Teunissen: Well, great. Thank you, Doug. Thank you for the question. It's a pretty long run. So it's good to get out there. So maybe just by way... Douglas George Blyth Leggate: Part in Part B. Marcel Teunissen: Yes. Okay. I'll take them all. So my -- just by way of my background, so I've been in the energy sector for almost 3 decades, and I've worked in the upstream, the midstream, the downstream on the oil side, the gas side. And also in every part of the world, so I bring an international perspective on that. And I've done finance jobs, obviously, but also commercial, corporate development strategy, jobs and operations. The last 5 years, as you mentioned, I've been in the Canadian downstream company, really on the customer demand side working on optimizing the integrated margin, capital allocation and the likes. And prior to that, I spent almost 25 years at Shell, which the last many years, on Shell's integrated gas business. So that's how I kind of come to the job. And then to Expand, I think most of it has been said by Mike, right? I think the Expand platform is just incredible in terms of its size, in terms of its positioning here within the U.S. And it's at a time that the energy market is really -- both in the U.S. and globally is going to transform fundamentally and we're well positioned. And then you look at the strategy where we are we want to capture more value by being integrated into that value chain, and that's why I bring a lot of kind of experience and background. And so I'm excited about the opportunity and what we can do here with the team, incredible people and as is an incredible business and platform to kind of grow from. So that's kind of the background and why I joined and the opportunity I've seen. In terms of breakeven prices, right, you asked a question what I believe around breakeven prices. We are kind of leading there within the industry, well below $3 now on a breakeven price. And that breakeven price by capturing margin will just create more value for our shareholders when we do that. So we'll continue to work on the cost side as Mike also alluded to with Josh and his team but also by capturing more of that upside on the margin, we will just improve our relative position even further. So that's an important part. The balance sheet. Made incredible progress on the balance sheet. And the way I look at that, it's important for us to be investment grade. We're a big company. We are a counterparty. People need to be able to rely on us. And of course, we're in a very cyclical business. So we want to be investment grade, not just in the good times, but through cycle, and that's important. You've seen after Q1 that we now have peer-leading kind of leverage, and we reduced most of the free cash flow we generated in the first quarter to reduce our gross debt and, of course, to put some additional cash on the balance sheet as well. And then going forward, this continued -- our strategy continues to be anchored on that balance sheet as we think of the opportunities that we have. Now having said that, I think given the allocation of free cash in the first quarter and the progress that we've made relative to what we laid out at the start of the year, we can rebalance a little bit the pace of that and also kind of lean a bit more on the shift that kind of balance to shareholder returns in the form of buybacks. So that's kind of how we think through this. Let me pause there unless, Doug, there was a part of the question that I... Douglas George Blyth Leggate: No, I think you've given -- I just want to -- maybe just on that last point. So at the end of the day, your breakeven is still above where the gas price is right now. So is share buybacks more of a -- I mean, do you think about that as opportunistic? Do you think about it as ratable or when you're theoretically at a gas price, which is burning cash, by definition, below breakeven. Is now the right time to back your stock? Or is now the right time to put cash on the balance sheet. I'm just trying to understand where buybacks fit in the seriatim of priorities? Marcel Teunissen: Yes. So I think we do both, right? And we can walk and chew gum. We're still generating cash. Of course, our hedging program means we are realizing prices well above what you see in the spot markets at the moment as well. So I think that's important. And think of our buyback program is opportunistic, right, relative to the value we can get in buying back. And so it's a capital allocation question, and it's a balancing act, and I think you highlight that well. Operator: Our next question comes from the line of Kevin MacCurdy with Pickering Energy Partners. Kevin MacCurdy: Maybe to start off with an operational question. You guys made tremendous progress on well cost last year. CapEx also came in lower in the first quarter, but you also had kind of lower turn in lines I wonder if you had any comments on leading edge well costs are you still making progress on efficiencies? And maybe any comments on increased competition for services or higher prices you're seeing out there? Josh Viets: Kevin, yes, we continue to make progress on our operational efficiencies. Just just in the last couple of weeks, we've drilled the fastest well ever within our Utica program in Southwest Appalachia. So the teams continue to do a phenomenal job and finding ways to unlock new value. I think we'll continue to see those strides. An area of focus right now is for us perfecting how we drill our 3-mile laterals in the Haynesville. And so I still see upside there. As far as pressure on services, of course, we've seen an uptick in rig counts in the Haynesville. We really haven't seen the impacts of that show up in our business yet. Our costs have been stable I would say, outside of some near-term inflation around diesel prices, which is largely tied to the conflict in Iran. But beyond that, I would say the cost structures have been relatively stable. Kevin MacCurdy: Great. I appreciate that detail. And then maybe for my second question, I'll move to the Western Haynesville. And I realize that program is still pretty early. But is there anything you can share with us on what you saw in the first well in terms of -- where you think well costs are going to go, where you think you can take your expertise from the legacy Haynesville and translated over to the Western Haynesville? And any thoughts on production on that first of all? Josh Viets: Yes. So the well has been online for the last couple of months now, came online in early March. And so we're still monitoring well performance there. I would say we've been very pleased with what we've seen to date. We liked what we saw when we initially drilled the pilot well there. So we knew we were getting into a really good overpressured reservoir there. But again, it's still early. We want to be methodical about how we appraise those results. We've also, just here recently in the last week, spud our second well about 50 miles to the north of our first producing well. And I do think on the cost side that I have every expectation that we will continue to work ourselves down the cost curve. We're by far the most proficient operator in the Haynesville. We've built up a lot of history drilling our deep hot wells in the southern part of the Louisiana core. So of course, we're going several thousand feet deeper, but there is a lot of learnings that we can translate into the Western Haynesville position. In fact, when we just look at our first well that we drilled in the area last year, we're already on the lower end of the cost curve relative to what we've seen from competitors. And again, that's on one well. And I have every expectation that we'll continue to leverage those learnings and continue to work ourselves down the cost curve. Operator: Our next question comes from the line of Neil Mehta with Goldman Sachs. Neil Mehta: Yes. Marcel, congratulations and looking forward to working with you again. And Mike, you gave us a little bit of an update on the CEO process. It sounds like you're tracking for a Q3 or Q4 event, but just any mark-to-market on how you're progressing through it, how you're attacking this process and what you're looking for in timing? Michael Wichterich: I like the way you said that mark-to-market. Look, number one, the team is not waiting for a new CEO. I think you should see from our behavior and our quarter results here and efforts on marketing that there's no waiting for a CEO to show up before we do something. So #1 job is just to continue to create value for our shareholders. With that, of course, we're looking for our leader, and we still expect to be on the same time. The mark-to-market, I'd say, is still kind of at the money on my 6-month sort of prediction of when this person would show up. We don't think that we'll find the perfect person. We think we're trying to build the perfect team. And so with that team, you'll hear about Marcel's background. Of course, we have marketing with Dan, Josh, and so we're thinking it very holistically. We expect to have an energy person, not someone from Starbucks or Chipotle to come into this job, something more closer to our business. But on path, on strategy, I think that's fine. And now today, it's just about execution that we continue until this person's arrival. Neil Mehta: Okay. That's really helpful. And then -- just the follow-up on the hedge to wedge strategy. You have a good slide in the deck just talking about how volatile the gas environment has been. We've been living in this $2 to $6 range. Obviously, in the shoulder, we're below the midpoint of that range. And so the hedging strategy has worked out pretty well for you guys. But do you have some competitors out there that are running a much more unhedged program. As you guys think about the balance sheet being where it is, what's the right approach to hedge the wedge? And just while we're talking about hedging just any comments on the gas macro broadly as we set up for '26. Marcel Teunissen: Well, thanks, Neil, and good to hear your voice and looking forward to working with you. It's Marcel here. Let me answer the question on hedging, and then I'll pass it on the macro back to Mike. So coming in from the outside, and obviously, risk management is a critical part of how we manage the business. So -- and I've studied the hedge to watch program and all of that, and it is the right approach for our company. And I think if you look at it, really the volatility of the market, which you point out, it's just much faster than how we can plan for capital. So by hedging the wedge, we really create that kind of -- we protect the downside while we preserve the upside, and that creates consistency in the cash flow generation as well as predictable returns. So for where we are with the balance sheet as well, I think it's the right approach. It's not a static approach, and you've actually seen that in the first quarter, right? So we kind of lay out what we want to do, and then we optimize around that position in a way, not in a speculative way, but really from an approach of risk management and then optimization -- and I think the last thing I would say is that being the largest player in the market, we have a lot of information on what is moving around there, and that allows us to just capture a bit more, make the program more efficient, and you can expect that we continue to do that. Michael Wichterich: Yes. On the macro front, when we think strategy, we don't think this year, it's like trying to predict the weather, of course, and even next year. We're thinking much longer term. We think that large macro program -- macro demand is sort of amazing. Generally, I think that, that macro shows up bigger in the Gulf Coast before the Appalachia because LNG is on the schedule that you can see, you can see massive sort of growth in Calcasieu Pass and Sabine Pass. So think that will be a premium market. That's not to say Appalachia won't get its fair share with AI demand in power generation, but definitely it feels like Gulf Coast is positioned to be impacted first. Operator: Our next question comes from the line of Scott Hanold with RBC Capital Markets. Scott Hanold: Yes. I'd like to kind of go to some of the commercial stuff you all laid out in Slide 8 on your presentation deck. It seems like you've defined what the LNG, the industrial side, the power side is as catalyst. How do you think about the ideal allocation reaching to those various end users? And do you think one area is under, I guess, underlooked by other companies. It feels like industrial is an opportunity you all have that I don't hear others talking about as much. Michael Wichterich: Yes. I mean, I think about it in timing more than anything. I think the Gulf Coast, when I think about what's going to show up, LNG is going to show up first. That makes the Haynesville particularly valuable. What people that are missing, of course, is the rest of the world, International actually are much, much more optimistic about the demand, the world's demand and the need for LNG. And so if we overperform, I feel like it will be in that area. When we get to industrial, industrial will come, but those are always big projects. We haven't seen the FIDs yet like we see on LNG. Power is just all over I mean it's every -- whether it be in Louisiana or Texas or in Appalachia, we're seeing tremendous sort of discussion about power. But when that generation equipment comes on is a little bit to be [indiscernible] . And so it feels like that's secondary right now. It's not that we're not chasing it. We chase it every day. But LNG is here, and so you can plan for it and you can start building your asset to serve it. Scott Hanold: And when you think about the LNG opportunity, obviously, you signed the Delfin agreement. But given what's happened in the global LNG market right now, how competitive is it? Is it tough to be able to contract in this market given the heightened nature of it? It's my analogy would be if your house is on fire that's not the time you call your insurance agent for more coverage, right? So how is that LNG market? Can you actually get things done? Daniel Turco: This is Dan. In terms of contracting on this -- I'll talk about it on the supply side and the sales side, right? On the supply side, this Delfin contract is a long-term SBA. So that's priced at a cost of liquefaction. So it's easy to get those kind of deals done at the moment. There's a few more in the market that are available that we're looking at. And then on the sales side, this is, again, a longer-term business driven by long-term relationships. LNG doesn't trade like really any other market in the world. It's really driven by long-term relationships, fundamentally underpinned by long-term contracts. And we've been in discussions with counterparties already on how we could end up supplying them, supplying them different. So in the real near term, yes, the markets are priced to perfection. So if you're going to get a short-term strip in this year, you're going to have to pay up for it on the U.S. Gulf Coast, but we're setting up this business for the long term. So we expect to add supply positions and have a sales portfolio on the other end, where we can market differently and a mix and a real portfolio approach to longer-term contracts and shorter-term contracts and spot exposure. Operator: Our next question comes from the line of John Freeman with Raymond James. John Freeman: I wanted to go back on the marketing side on that. Slide 13 that you've got sort of you show sort of the 3-pronged sort of strategy to achieve this $0.20 uplift. And the first one, the facilitating and capturing new demand like Delfin is obviously, longer term, back in we test are 4, 5 years or more. So you sort of get to realize those versus the other 2 which are already underway, the premium markets and the monetizing volatility, where you're just trying to kind of ratably expand those. I'm curious like if the ultimate prize, the $0.20 kind of uplift, like how much of that can you all achieve with just those other 2 kind of buckets, the premium markets and the monetizing volatility. Michael Wichterich: Of course, it doesn't matter where it comes from. And ultimately, our ability to execute will determine exactly where it is. In our view, today, we think this is about 50-50. 50% on facilitating and capturing new demand and 50% in the other 2 categories. Between those categories, they're a little bit intermingled. So exactly how they're broken out, we don't, and we don't think about it that way necessarily because they're often combined, but think about the bottom 2 of those things is sort of near term and about half in the top -- the very top one about half and a little bit longer. John Freeman: That's great. And then the you'll remove the heat map slide in the presentation this time. I'm just making sure there's nothing changed in the way that you all sort of think about that relationship between kind of production CapEx in the natural gas price. Josh Viets: Yes, John, this is Josh. That's right. I mean it's not in the deck, but it's absolutely helping us formulate our views on production and therefore, CapEx and it all centers around taking a 3- to 5-year view on a mid-cycle price. And of course, there's been a lot of volatility. Mike talked about this earlier. -- in the near-term gas markets. But as we think about the business over the next couple of years, we think delivering that 7.5 Bcf a day given the current price outlook makes sense. If we see those fundamentals change, of course, like we've done in the past, we'll be responsive to those changing market conditions. Operator: Our next question comes from the line of [indiscernible] with JPMorgan. Unknown Analyst: Maybe just to follow up on John's question, are you starting to think about your activity levels changing at all where current natural gas prices are, the 27 strips fall into below $3.60. Are we getting closer to a price where you would consider moderating some activity or at least maybe building some deferred productive capacity as you've done in the past? Josh Viets: Yes. We're obviously looking where the strip is landing and we'll always be responsive to pricing. That plan that we laid out and as the heat map that was referenced earlier is predicated on that $3.50 to $4 price range. Of course, we're still in that today, but we're not stuck to it. And so just like we've done in the past, 2024 and 2025 was a great example of this. Our toolkit is there, and we know how to leverage flexible operations. And if we see markets soften further we'll absolutely be in a position to defer turn in minds, slowed out our completion activities as we see those the best measures to better align our production with price. Unknown Analyst: And my follow-up, just on the balance sheet and how you're thinking about capital allocation. You paid down $1.3 million in debt in April, that meets your commitment to reduce debt by at least $1 billion this year. How do you think about allocating the incremental free cash flow after the dividend for the remainder of the year? Should we think about that going mostly to buybacks at this point? Josh Viets: I think the way that we look at it is that having achieved the goal that we set out at the start of the year, we can now look at night allocation, whereas in Q1, it went primarily to debt reduction, right? In the rest of the year, we can rebalance that with share buybacks and shareholder distributions. Operator: Our next question comes from the line of Phillip Jungwirth with BMO. Phillip Jungwirth: Can you come back to the Delfin gas supply manager comment from earlier in the call? Just what all does this entail this imply that you'd look to take additional offtake from the project? And if you look at other LNG opportunities, what all goes into the assessment as to whether that's an ideal project for Expand to participate in to partner with. Josh Viets: Phillip, the gas supply manager, that's something that's under negotiation with Delfin at the moment, and that's supply from upstream, where we would be managing all the gas into the facility, manage that capacity. It sets up naturally for us given our footprint and how our growth and what we're doing versus Delfin building that out that capability on their own. So it's kind of a win-win for both of us. So it's the opportunity to supply to them and to manage the capacity into the facility. And then we're creating a long-term partnership. They're looking to do other vessels later on. And again, we'd be in the mix of supplying -- supporting that new demand, getting after our strategy of facilitating capturing new demand. And then when we look at all the other projects, we're looking at similar aspects. We like the integration through our Haynesville asset. We think we're well positioned to be able to supply to these facilities. We already are supplying around 2 Bcfd to these facilities. So we have conversations with them. And then we look at all these projects in terms of value and economic risk. And we believe in the long-term demand both in the U.S. Gulf Coast and globally in LNG. So we're going to look at all these projects individually in terms of their economic merit. But essentially, we're trying to build a well interconnected portfolio on our upstream and through to the LNG market. Phillip Jungwirth: Okay. That's great. And then can you talk about what kind of role you see Expand playing in the Northeast for new power demand projects? I mean you clearly have the dominant position in the Haynesville, but there's certainly a larger competitors up there in Appalachia. So just how do you see the opportunities for Expand here versus the Gulf Coast considering the different competitive dynamics? Michael Wichterich: Yes. Thanks for that question. This is Mike. In general, when I think about the Appalachia, I think about it in 2 buckets because we have Northeast PA, which we actually are dominant in that particular area, and that's where our competitive advantage is on power generation, which is actually PJM, and that's the right market for it. And so we're definitely in negotiations and discussions with power providers in that area in particular. And again, we feel like we have a competitive advantage there. In Southwest App, location to the western side of that. And so we think we can be competitive on that side of the basin as some of our other competitors are further east. But the overall strategy is to focus on where we're the best. And so we're thinking about Northeast PA in that market. Operator: Our next question comes from the line of Neal Dingmann with William Blair. Neal Dingmann: My first question just, Mike, simply on your strategy. I'm just wondering specifically, I know you've mentioned really taking a full integration focus. And I'm just wondering, could you give us some details of what specific transactions make the most sense in the coming months? Would it be just simply like those -- the Delfin agreement? Or maybe what else should we be looking for as part of your strategy? Michael Wichterich: Sure. We're a producer. And as a producer, we think of 2 things: Sell more gas at higher prices. And so that's what we do. And so our focus is really pushing towards new demand and better pricing. And therefore, we're focused on our marketing. We think the time is now. That's where the opportunity is. And so number one, we want to sort of continue to look at the LNG value chain and push that because it's nearer term, and it's close. And of course, we can actually provide our actual gas in the Haynesville. I like the -- I think the word we just used interconnectivity, I really like that, Dan. So that's sort of the first deal. But doesn't mean we are competing heavily, of course, for power generation in Northeast PA, like I already mentioned. Neal Dingmann: Got it. And then just on the -- my second question, just on the incremental free cash flow on the $0.20 NIM that you continues through there to capture. Am I correct I'm thinking this is still -- I mean, what are you thinking around timing around that? Is it a couple of years? Or could it be even longer if some of the agreements are not FID-ed? Or how should we think about schedule of this? Michael Wichterich: Yes. Like we just talked about, we think about it in 2 general buckets. We have 3 categories, but 2 generally buckets. We have our near-term bucket that's happening now. I mean that's what you're seeing in our marketing that we just saw this quarter in the $90 million. And so that is a now answer. Let's chase, of course, long term, LNG, power, those are 3 years. And so -- but we have a lot of value to capture and to execute in this moment here in time. Operator: Our next question comes from the line of Charles Meade with Johnson Rice. Charles Meade: And your whole team there. My first question, I think, is probably for Josh, but you guys will fill it as you choose. It's specifically about the cadence of CapEx and activity in '26. If we look at your 2Q, volumes are essentially going to be flat and CapEx is up. And I'm curious, is that just some activity sliding from 1Q into 2Q? And -- or is that -- is perhaps already -- does that reflect some decisions you've already made to maybe defer tills or build some DUCs in 2Q is that's the low part of the curve for '26? Josh Viets: Yes. Charles, thanks for the question. Q2 will end up being the high point of our CapEx for the year. Just the way the program was set up. It is a little bit more front-end loaded D&C activity is going to be just slightly higher in Q2 relative to the second half of the year, we'll actually have a couple of rigs across the Appalachia region coming out in the second half of the year. So that will leave CapEx just a little bit lower. And the other artifact in Q2 is just on our non-D&C CapEx. So it shows up in the guide. That's a little bit higher than what we'll see in other quarters in the year. That's really just timing of our leasehold acquisition program. We have several things that have been in the work, works over the first quarter of the year. We expect those to close in Q2. And then also Q1 tends to be a little bit lighter with our capital workovers, just because the weather conditions where as we get into the spring, it's much more favorable. So workover activity also picks up in Q2. But again, as we get into the second half of the year, activity will moderate just slightly. Production will grow modestly across Q3 and Q4, again, assuming the market is there. But really, I think the main thing there is that we are in a position where we expect to deliver 7.5 Bcf a day at $2.85 billion of CapEx. Charles Meade: Got it. And then Mike, my follow-up is probably for you. It's really about your financial approach to pushing further down the value chain with these commercial opportunities. It looks to me that for the most part, what you guys have done is decided to sign up for capacity or transport rather than take equity stakes in projects. But an exception that seems to be your approach to storage where you guys actually have spent money to get equity stakes in those facilities. So can you kind of tell us about how you evaluate looking at signing up for capacity versus buying equity stakes? And if that if that approach is either changing over time or changes between the kinds of opportunities you're looking at? Michael Wichterich: Sure, sure. Happy to take the question. Thank you. Generally speaking, we think about our capital allocation from a sort of a disciplined financial view. And then we think about it long term. Our first goal is always sell more gas, higher pricing. So I want to repeat that about 10x. So we're on the same page. But when you think about how to facilitate that, how do we facilitate it? We've facilitated it with NG [indiscernible], our ownership there because we wanted to move more gas to Gillis. We thought about it in FT to move our guests further east into the Southeast market. We think about it on a long-term value accretion basis, and that's our first threshold. Well, first is strategic then discipline on financials. So when we think about any sort of capital that's not in what we'll call it, the commitment side. It's got to be accretive, and that's long-term accretive. So I don't think we've changed our opinion on how we think about value. We have our nonnegotiables that's still in place today. So we will act when we can achieve our strategic goals and certainly create long-term value. Operator: Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Mike for closing remarks. Michael Wichterich: Well, thank you, everyone, for joining our call. I'd like to leave you with 3 things today. Number one, our industry has experienced unprecedented structural demand growth. We are excited about the future as I'm sure you are. Second, we are in the right place at the right time. Our assets are are reaching 90% of the expected demand growth in this country, and our Haynesville is sitting on the epicenter of growth because of the LNG market. We think we are in the best position to take advantage of that. And third, our strategy is clear. We are not waiting for a new CEO to show up before we act. We are acting now. We are chasing value now. So we look forward to updating you about the progress, and thanks for joining the call. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and thank you for standing by. Welcome to the AbbVie First Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations. Elizabeth Shea: Good morning, and thanks for joining us. Also on the call with me today are Rob Michael, Chairman and Chief Executive Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Roopal Thakkar, Executive Vice President, Research and Development and Chief Financial Officer; and Scott Reents, Executive Vice President and Chief Financial Officer. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. Abby undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rob. Robert Michael: Thank you, Liz. Good morning, everyone, and thank you for joining us. AbbVie is off to an excellent start to the year, with first quarter results exceeding our expectations across our diverse portfolio. We are delivering top-tier growth and continue to strengthen our long-term outlook with pipeline advancements and strategic transactions. Turning to our first quarter performance. We achieved adjusted earnings per share of $2.65, which is $0.07 above our guidance midpoint. Total net revenues were $15 billion beating our expectations by $300 million and reflecting robust sales growth of 12.4%. I'm especially pleased with the momentum in immunology and neuroscience, which are both delivering share gains in growing markets. Based on this strong performance, we are raising our full year adjusted earnings per share guidance by $0.12 and now expect adjusted EPS between $14.08 and $14.28. Turning now to R&D. We are making meaningful progress advancing programs across all stages of development. Recent highlights include the U.S. regulatory submissions of Rinvoq for Alopecia Areata giving us a potential new source of growth in dermatology and Skyrizi subcu induction in Crohn's with an approval decision expected later this year. We also saw promising interim data from our Crohn's platform study, combining Skyrizi and our own alpha 4 beta 7, which has potential to deliver transformational efficacy. In obesity, we announced early-stage data for our Amlin Analog 295 with very encouraging weight loss results. In oncology, we are now expecting the regulatory submission for [indiscernible] by the end of this year, which is earlier than our previous expectations. We also expanded our emerging oncology pipeline by closing the Remagen agreement, giving us a novel PD-1 VEGF bispecific antibody. We will continue to augment our portfolio with business development to access external innovation. And given our strong growth outlook, we have significant financial capacity to pursue both early and late-stage opportunities. Lastly, as part of AbbVie's $100 billion commitment to U.S. R&D and capital investments over the next decade, we recently announced construction of several new manufacturing sites. This includes a $1.4 billion investment to build a pharmaceutical manufacturing campus in North Carolina, and a $380 million investment for 2 new plants in North Chicago. These strategic investments will strengthen AbbVie's ability to produce medical breakthroughs in immunology and neuroscience, oncology and obesity. In summary, the fundamentals of our business are strong, and we are well positioned to deliver top-tier growth for the long term. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeffrey Stewart: Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of $7.3 billion reflecting impressive sales growth of $1 billion. Skyrizi total sales were $4.5 billion, up 29.2% on an operational basis, exceeding our expectations. We continue to demonstrate exceptional performance across psoriatic disease, where we are gaining share and have clear leadership over all biologics and orals by a very wide margin. The psoriatic market is growing robustly, and we feel extremely confident in Skyrizi's best-in-class profile, including high and durable efficacy on both skin and joints as well as simple quarterly dosing, which collectively gives us a distinct advantage relative to all the existing and emerging therapies in this area and we continue to generate compelling evidence to support Skyrizi as the preferred treatment option for psoriatic disease. At the recent AAD meeting, we presented new data highlighting Skyrizi's strong efficacy in genital and scalp psoriasis, which are very difficult to treat areas, often leading to significant social and emotional burden to patients. The FDA has recently approved adding the new study results in these high-impact area to the SKYRIZI label. We also now have long-term efficacy and radiographic data in psoriatic arthritis demonstrating Skyrizi's durable efficacy with nearly 90% of patients showing no radiographic progression through 5 years of treatment. This data will enhance our existing leadership in the important PSA segment where Skyrizi's is the frontline in-play patient share leader in both the derm and room segments. Performance also remains very robust in IBD, where Skyrizi is on track to deliver more than 30% global sales growth across Crohn's disease and ulcerative colitis this year. Competitive dynamics within IBD are playing out in line with our expectations, with Skyrizi continuing to capture a leading share of total new patient starts in the U.S. in the quarter. including very significant in-play leadership in the frontline setting, which is the strongest signal of overall physician preference for Skyrizi I'm also pleased with the compelling results from our recent subcutaneous induction study for Crohn's with data, particularly in the bio-naive population that we believe compares very favorably versus the competition and we look forward to providing an additional dosing option for physicians and IBD patients later this year. Turning now to Rinvoq, which is also performing above our expectations. Global sales were $2.1 billion, up 20.2% on an operational basis. Demand remains strong across all of Rinvoq's indications. We are now achieving high-teens in-play patient share in and are seeing a nice inflection in prescriptions across gastro, especially in UC, following the recent expanded label supporting access to Rinvoq earlier in the treatment paradigm for IBD patients. We are also planning for the potential near-term commercialization of 2 additional indications, [indiscernible], which will meaningfully expand Rinvoq label and where we have also recently expanded our field force to support these emerging opportunities. Lastly, in immunology, HUMIRA global sales were $688 million, down 40.3% on an operational basis, reflecting biosimilar competition and in line with our expectations. Moving to neuroscience, where we continue to outperform our expectations as well. Total revenues were nearly $2.9 billion, up 24.3% on an operational basis. In migraine, our leading portfolio continues to gain market share with [indiscernible] and Botox Therapeutic each delivering robust double-digit sales growth. In psychiatry, Vraylar global sales were $905 million, up 18.4%, reflecting strong prescription growth in both bipolar disorder and adjunctive MDD. Vraylar has significant close to branded competitor, and we expect continued momentum following the introduction of new lower doses, allowing prescribing flexibility as well as pediatric usage. Moving to Parkinson's disease. We continue to see encouraging uptake for VYALEV, which is on track to achieve blockbuster revenue this year. Total sales were $201 million, up approximately 10% on a sequential basis. We are also preparing for the potential approval and launch of Tavapadon in the U.S. later this year. an exciting new oral treatment for patients with Parkinson's and a very complementary addition to our growing Parkinson's portfolio with Biolab and Duopa. Tavapadon has demonstrated strong efficacy as both a monotherapy as well as an add-on to the standard of care, and we believe it will be a sizable commercial opportunity. Moving now to oncology, where total revenues were more than $1.6 billion, down 3% on an operational basis. Venclexta continues to perform very well. especially in CLL as combination use with BTK inhibitors are emerging as a preferred fixed treatment duration globally. We've recently received full approvals in the U.S. and the U.K. as well as positive CHMP opinion for Venclexta's use with BTKs for that fixed treatment course. Total Venclexta sales were $770 million, up 9.7% on an operational basis. Continued sales growth from [indiscernible] also helped to partially offset the expected sales decline for IMBRUVICA, which was down 24.7% due to IRA pricing and competitive share pressure. Moving now to aesthetics, which delivered global sales of nearly $1.2 billion, up 5.1% on an operational basis. Botox cosmetic total revenues were $668 million, up 17%, reflecting a favorable price comparison in the U.S. as well as modest market growth globally. Juvederm Global sales were $232 million, down 2.9%, reflecting continued headwinds in key dermal filler markets. While economic headwinds have continued to impact market conditions globally, the long-term prospects for the category remain attractive given high consumer interest and low penetration rates. As the industry leader, we are investing in promotion and innovation support patient activation. I'm particularly excited about the potential for [indiscernible], our fast-acting short-duration toxin which, once approved, we expect will be market expanding and complements our toxin portfolio very nicely. While [indiscernible] is delayed in the U.S. we continue to anticipate approval and launches this year in key international markets, including Europe, Canada and Japan. So overall, I'm extremely pleased with the execution and continued strong performance across our commercial portfolio. And with that, I'll turn the call over to Roopal her comments on our R&D highlights. Roopal? Roopal Thakkar: Thank you, Jeff. We continue to make good progress across our pipeline. I'll start with dermatology programs in immunology. As Jeff just mentioned, new data was presented at the recent AAD meeting, highlighting SKYRIZI's strong efficacy in genital and scalp psoriasis and long-term efficacy, including radiographic data in psoriatic arthritis. These recent presentations add to the growing body of evidence supporting Skyrizi's best-in-class profile in psoriatic diseases. Its strong durable efficacy on both skin and joint measures, favorable safety and tolerability profile and convenient quarterly maintenance dosing, give us confidence that Skyrizi will continue to be the preferred first-line treatment option for patients with psoriatic disease. Additionally, Discussions are ongoing with the FDA regarding revised label language related to tuberculosis evaluation for Skyrizi. While TV monitoring has become fairly routine prior to initiating treatment with biologics, updated language would allow health care providers to use their clinical judgment. Moving to Rinvoq. The regulatory application for alopecia areata was recently submitted to the FDA approval decisions are anticipated later this year in Europe and Japan and in early 2027 in the U.S. [indiscernible], Phase III studies for both Rinvoq and lutukizumab are progressing well and remain on track for 16-week top line results in the second half of this year. Turning to gastroenterology. All co-primary and key secondary endpoints were met in the Phase III AFFIRM study with Skyrizi's cutaneous induction in Crohn's disease, demonstrating very high levels of endoscopic response and clinical remission. While not a direct head-to-head comparison, when matching these data against results from the Skyrizi IV induction program, the subcu induction achieved numerically higher results across key end points. We are extremely pleased with the strong performance demonstrated by subcutaneous reduction, especially considering that this study enrolled a very difficult-to-treat patient population. 2/3 of the patients received prior advanced therapy with half failing 2 or more therapies and a third failing [indiscernible] or a JAK inhibitor. Data in those who had not previously experienced advanced therapy were particularly noteworthy, where 61% of Skyrizi patients achieved endoscopic response and 73% achieved clinical remission at week 12. This is 45 points higher than placebo on both measures. These are very impressive results, which will continue to support first-line use. These data reinforce Skyrizi's best-in-class profile and provide an additional induction dosing option for patients with Crohn's disease. Our U.S. regulatory application was recently submitted with an approval decision anticipated later this year. Subcu induction for ulcerative colitis is also being assessed and we will be discussing options with health authorities. Next, on to other gastro programs. An interim analysis was recently completed on our Crohn's disease platform study. In the cohort evaluating Skyrizi plus our novel anti alpha-4 beta-7 antibody, ABBV-382, the combination resulted in a higher rate of endoscopic remission at week 12 and at week 24. The rate was double that of either monotherapy arm. Endoscopic remission was achieved by approximately 42% of patients receiving the combination at week 24. These results were absorbed -- observed in a broad population that had severe and refractory disease, which included 82% advanced treatment failures and 53% of patients failing 2 or more advanced treatments, of the patients that previously received advanced therapies, 63% failed an agent with an overlapping mechanism with the combination and 20% failed a JAK inhibitor. At baseline, patients had a mean Crohn's disease activity index of 325 and a simple endoscopic score of 14, which represents a very treatment refractory patient population. Achieving this level of endoscopic remission in this setting is a particularly meaningful achievement as this endpoint is an objective measure of mucosal healing and is associated with long-term benefits, including reduced rates of hospitalization, surgery and disease progression. Safety of the combination was consistent with the profiles of the monotherapies no new signals were observed. These results demonstrate the potentially transformative level of efficacy that our novel combination can achieve. The study is expected to complete in the third quarter with presentation at a medical meeting anticipated by early next year. A Phase IIb study is planned to begin this summer in patients with Crohn's disease and ulcerative colitis to evaluate Skyrizi in combination with both 382 and with our extended half-life TL1A antibody. In parallel, we will be evaluating Phase II acceleration options for Skyrizi plus 382 in Crohn's disease. In the Skyrizi plus lutikizumab cohort, the combination did not sufficiently differentiate from monotherapy Skyrizi and will not be moving forward. In the early-stage immunology pipeline, we are nearing completion of a Phase I study for an [indiscernible] inhibitor, ABBV-848 and and plan to begin a Phase II study in rheumatoid arthritis later this year. This potent inhibitor has the potential to provide biologic-like efficacy, a favorable safety profile with no box warnings and convenient once-daily oral dosing I will now discuss neuroscience. Top line analysis was recently completed on our Phase II trial evaluating ABBV-932 in bipolar depression. In the study, the overall difference observed between the drug treated and placebo groups was not statistically significant. However, in a prespecified subgroup analysis of bipolar I patients an efficacy signal was observed. The safety profile of 932 was generally similar to placebo, including rates of extrapyramidal events, demonstrating the potential for a more favorable tolerability profile compared to Vraylar. We are evaluating next steps to continue 932 development in bipolar 1 patients. Dose escalation work continues for emraclidine in both schizophrenia and elderly patients. In schizophrenia, we have cleared the 100-milligram dose and will begin evaluating 150 milligrams. Phase II studies in monotherapy and adjunctive schizophrenia as well as psychosis related to Alzheimer's, Parkinson's and Louis Body Dementia are planned to begin in the fourth quarter. Moving to our psychedelic acid brain. Additional data from an ongoing Phase II study in major depressive disorder will be available this year. Several studies are planned to begin in 2026, including a Phase III trial for single course acute treatment in MDD, a Phase IIb evaluating repeat dosing for chronic use in MDD and a proof of concept Phase II and post-traumatic stress disorder. And in Parkinson's disease, we remain on track for an approval decision for tavapadon in the third quarter. Turning to our solid tumors program in oncology. [indiscernible] is progressing well across a broad range of tumor types. At the upcoming ASCO meeting, early-stage safety and efficacy results for Tmab-A in head and neck and ovarian cancers will be presented. Based on these results, we are engaging with regulators regarding ways to accelerate programs for Temab-A plus pembrizumab in frontline head and neck cancer and Temab-A plus bevacizumab in front-line ovarian cancer. In colorectal cancer, we have made a decision to update our strategy in the third line plus setting and will now focus the pivotal program on Temab-A in combination with bevacizumab in an all-comers population as opposed to pursuing monotherapy in cMET selected patients. Targeting all comers will allow Temab-A to reach a substantially broader population. Temab-A plus bevacizumab demonstrated improved response rates and disease control versus current standard of care regardless of c-MET expression levels. Treatment with Temab-A at 2.4 milligrams per kilogram plus [indiscernible] achieved an objective response rate of 30% and and a confirmed disease control rate of 97% compared to rates of 0% and 70%, respectively, for [indiscernible]. Given the expanded patient population for the all-comers Phase III trial, we anticipate faster enrollment compared to the study in cMET selected patients. Initial data readout is expected in the second half of next year. In lung cancer, Temab-A received its first breakthrough therapy designation as a monotherapy in second-line plus EGFR wild-type non-squamous non-small cell lung cancer. We are in the process of planning a Phase III trial in this setting. SP369624356 In small cell lung cancer, a Phase III trial for monotherapy, ABBV-706 recently began in relapsed refractory patients. Two Phase II studies evaluating 706 triplet combinations in frontline patients are also planned to initiate this year. These trials will evaluate 706 in combination with atezolizumab plus [indiscernible] cell engagers. Moving to AbbVie 96 dose escalation data in late-line metastatic castration-resistant prostate cancer will be presented at ASCO. Based on these results, we are in the process of discussing acceleration options with regulators in order to advance into Phase III trials as quickly as possible. We also continue to augment our solid tumor pipeline through investments in external innovation, including one with Castro Therapeutics, we recently began a Phase I study to evaluate a [indiscernible] inhibitor in advanced solid tumors harboring KRAS mutations. This next-generation inhibitor has the potential to provide an improved efficacy and safety profile based on increased potency and specificity against the most relevant KRAS mutations, while sparing H and NRAS [indiscernible]. Our strategy is to combine this pan KRAS inhibitor with Temab-A in pancreatic, lung and colorectal cancers. In hematologic oncology, our Phase III trial evaluating monotherapy [indiscernible] in third-line plus multiple myeloma is tracking ahead of schedule. We anticipate a response rate readout in the third quarter with potential to also see an interim analysis on progression-free survival. If this interim analysis is positive, regulatory submissions would occur later this year. Progress continues in earlier lines of therapy as well. The increasing use of anti-CD38 antibodies in earlier treatment setting is driving a need for CD38 free BCMA combinations, particularly those that can provide the convenience of monthly BCMA dosing combined with an oral agent. Plans are underway for a Phase III study evaluating [indiscernible] in combination with [indiscernible] in second line plus patients, including those that were exposed or refractory to a CD38 antibody or who lost response to a BCMA, CAR-T or ADC. Moving to other areas of our pipeline. In aesthetics, the FDA issued a complete response letter for our [indiscernible] application related to manufacturing questions. The CRL did not identify any issues related to safety, efficacy or labeling of [indiscernible] nor has the FDA requested any additional clinical trials be conducted. We will be working closely with the FDA to address their feedback and determine next steps for resubmission. In obesity, positive top line results were announced from a multiple ascending dose study, evaluating our long-acting amylin analog, ABBV-295. In the study, 295 demonstrated clinically meaningful weight loss of nearly 10% and after only 12 weeks of treatment despite enrolling a predominantly male nonobese population, 295 was well tolerated with mostly mild and transient GI-related adverse events no cases of severe nausea, vomiting or diarrhea were reported. These early results are encouraging and reinforce our view that our long-acting amlin analog has the potential to provide strong weight loss with favorable tolerability. In the next phases of development, higher doses of 295 will be tested in patients with obesity, including every other week and monthly regimen. Interim data from our Phase I study in obese patients are anticipated later this year. Our Phase II program is now expected to begin in the third quarter. To summarize, significant progress continues with our pipeline, and we look forward to additional important data readouts, regulatory submissions and approvals throughout 2026. With that, I'll turn the call over to Scott. Scott Reents: Thank you, Roopal. Starting with our first quarter results. We reported adjusted earnings per share of $2.65 and which is $0.07 above our guidance midpoint. These results include a $0.41 unfavorable impact from acquired IP R&D expense. Total net revenues were $15 billion, this reflects top tier growth of 12.4%, including a 2.1% favorable impact from foreign exchange. Adjusted gross margin was 83.6% of sales. Adjusted R&D expense was 15.1% of sales, and adjusted SG&A expense was 22.7% of sales. The adjusted operating margin ratio was 40.8% of sales, which includes a 5% unfavorable impact from acquired IPR&D expense. Net interest expense was $645 million, the adjusted tax rate was 15.4%. Turning to our financial outlook. We are raising our full year adjusted earnings per share guidance to between $14.08 and and $14.28. Please note that this guidance does not include an estimate for acquired IP R&D expense that may be incurred beyond the first quarter. We now expect total net revenues of approximately $67.3 billion, an increase of $300 million. The impact from foreign exchange on full year sales growth remains roughly in line with our prior expectations. This upgraded revenue forecast includes the following approximate assumptions for several of our key products and therapeutic areas. We now expect Skyrizi global revenues of $21.6 billion, an increase of $100 million, reflecting demand growth in psoriatic and IBD indications. Rinvoq global sales of $10.2 billion, an increase of $100 million, reflecting strong performance in the room and gastro indications. Total Neuroscience revenues of $12.6 billion an increase of $100 million, reflecting momentum across the portfolio. Moving to the P&L for 2026. We continue to forecast full year adjusted gross margin above 84% of sales. Adjusted R&D expense of approximately $9.7 billion and adjusted SG&A expense of approximately $14.2 million. We now anticipate an adjusted operating margin ratio of approximately 47.5% of sales, in line with our previous expectations after including the roughly 1% unfavorable impact of acquired IP R&D expense incurred through the first quarter. We also now expect adjusted net interest expense of approximately $2.7 billion, a reduction of $100 million, primarily related to favorable rates on our debt issuance. Turning to the second quarter. We anticipate net revenues of approximately $16.7 billion. This includes an estimated 0.6% favorable impact from foreign exchange. We are forecasting an adjusted operating margin ratio of approximately 50%. We -- we expect adjusted earnings per share between $3.74 and $3.78. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. In closing, AbbVie continues to deliver outstanding results and our financial health remains very strong. Our capital allocation priorities remain focused on the future as we are investing in the business at record levels, have financial flexibility to pursue compelling business development and returning capital to shareholders through our strong and growing dividend. With that, I'll turn the call back over to Liz. Elizabeth Shea: Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call. We ask that you please limit your questions to 1 or 2. Operator, first questions please. Operator: First question comes from David Amsellem from Piper Sandler. David Amsellem: So appreciate all the metrics you have on Skyrizi, but I wanted to get your thoughts on the competitive landscape, particularly with the rollout of code are you thinking about its impact on [indiscernible] going forward, if any? And give us some color on your counter detailing messages to practitioners regarding the product as you enter this period with more intensive competition. Jeffrey Stewart: Yes. Thank you, David. It's Jeff. I'll give you some flavor on that. As I mentioned, it's just such an exceptional product. We see in our audits and our trackers that over the last couple of quarters despite incredibly high share, really over 4x basically the in-play share and total share versus the next leading competitor, our NBRx has accelerated and continued to hit all-time highs. And that's because of a few of the items, right? The superiority data that we have on skin clearance is just exceptional. So we have head-to-head trials in 5 mechanisms in psoriasis, including the 2 oral agents, the [indiscernible] and [indiscernible]. We can show category-leading durability in the real world. It's just exceptional adherence given the dosing cycle and the ability to keep the disease controlled. We have that leading PSA indication with that new 5-year joint stability data that Roopal and I highlighted and then this new data on hard-to-treat areas like the scalp, the genitals, the hands and feet, head to toe for Skyrizi, so to speak. So those are just really, really powerful messages to the physicians who write this medication. I would say there's other things around the -- maybe the oral competitors you highlighted. Look, the launch is quite early. The way that we look at this is, certainly, we're able to communicate that it's not an oral Skyrizi the efficacy parameters are quite a bit lower when you match all the controls. You understand the populations, which our medical teams and our commercial teams are able to highlight Certainly, PSA is a huge market value driver, and there's not a lot of evidence there. There's also some complexities really just even around an oral in the adherence there, and we have some data and evidence on the orals in the category as well. So we're well prepared for this dynamic. So we think that we can navigate this competitor quite well. And we may see, in fact, we saw it with Otezla over a decade ago that there's going to be some market expansion as well. So again, the teams are prepared. We're very confident, and hopefully, that gives you a little bit of flavor of the dynamics in the market. Robert Michael: And David, this is Rob. What I would add is, I mean, we obviously contemplate competition. when we provide guidance. We've obviously now once again taken up the guidance for Skyrizi. We continue to see upside to consensus forecast for Skyrizi going out every year and growing each year. And so we have a tremendous amount of confidence. We are well aware of the competition that's coming in. We factored that in, and you can see the asset continues to perform exceptionally well. Operator: Next, we'll go to Chris Schott from JPMorgan. Christopher Schott: Just first one for me is on the Skyrizi alpha 4 beta 7 program. Can you just comment a little bit on what dosing looks like for this combo and where you see this fitting into the competitive landscape? So is this kind of a second line drug post Skyrizi or something that could eventually actually get to frontline? And the second question is just maybe building on that and looking at kind of the broader I&I competitive landscape. It does seem like there's significant development across the space. I think the Street is increasingly concerned about this means relative to your portfolio. So can you just kind of address your -- like how you think about sustaining the competitive position you have in I&I how important the Skyrizi combo is, your ability, again, freedom to operate with BD and I&I. Just help us a little bit in terms of how you're envisioning that playing out over time. Roopal Thakkar: It's Roopal. I'll start. The dosing -- I would say, Skyrizi, you know the dose, it's already in the label. So the other assets, 382, the alpha beta 7 and the TL1A, the goal there is to optimize those. So in fact, while we start gearing up for a Phase III study, we have a Phase IIb plan. We had preplanned that ahead of time. And in this quick interim look that we have had we've already observed a non-flat slope, so meaning an exposure correlation with 382, meaning patients with higher exposures did better. So what we'll do in the Phase IIb is in fact, study a higher dose of 382 in combination with Skyrizi. So there's a potential that the efficacy could go even higher. The goal with this one will be likely monthly dosing, co-formulation work is ongoing. And while we're finishing that work, we'll also be speaking with regulators and there's a potential to further accelerate. I don't think we need to wait for the Phase IIb to be totally finished. If we see something while we're conducting the trial, we can pivot relatively quickly. We would anticipate starting, I would say, roughly where we sit today in about 2 years in the Phase III or even sooner. And the team will be looking at ways to accelerate. And as I stated, the TLA will be added into this platform as well, and we'll be studying ulcerative colitis along with Crohn's. So as you think about IDD and competitive dynamics, what you see coming from AbbVie is next-generational therapies and really raising the bar on efficacy, as we stated on the endpoint in my opening remarks, we doubled the endoscopic data. And that's really what's most critical. It's the most objective and that's what clinicians are looking for. So as we look to the future, you see that what we're doing, we see other competitors coming entering. But we see these as monotherapies and even the Phase II data observed to date regardless of mechanism the data do not differentiate from where we sit today with Rinvoq and Skyrizi. So the goal here for the whole portfolio that we've spoken about is to raise that standard of care meaningfully higher. And again, Rinvoq and Skyrizi do that very well today even against emerging competition. And the data that I speak about are battle-tested Phase III data in very difficult-to-treat populations. That's going to hold for the near term, and we have not seen a competitor that can beat that other than us with our own combinations, and we have more to come. So that's, I think, the way to think about how we think about immune technology. Robert Michael: And Chris, this is Rob. I'll just add to Roopal's comments. The way we've been thinking about business development over the last couple of years, is to support that strategy. So you've seen us add through business development, new mechanisms, TL1A, IRAK4 [indiscernible] as we think about this combination approach. We acquired Nimble to give us the oral peptides capability. So that obviously plays an important role in the future of immunology. And then I'd say the one that doesn't get enough attention is the Capstan acquisition with the B-cell depletion approach with the in vivo CAR-T platform. as we think about the future of immunology, now we're thinking about growth beyond Skyrizi and Rinvoq, we certainly see a trend there. And so we've been very active with business development over the last couple of years. to add depth to our immunology pipeline so that we can continue to remain ahead of the competition. And we have tremendous amount of confidence given our long-term experience here. We obviously have -- or commercial powerhouse, but I'd say our R&D organization understands the space very well. And I think we positioned ourselves for long-term growth. Operator: Next, we'll go to Mohit Bansal from Wells Fargo. Mohit Bansal: Just wanted to double click on the IRAK4 that you are developing in RA. So you try its is a space where after HUMIRA, there's not a lot of options which are safe as well. So like what gives you excitement about IRAK4 compared to what is out there in the world in terms of in terms of therapies which are being tested in imitates because is trying to become a win work without the box warning here. Roopal Thakkar: Thanks, Mohit. It's Roopal. We have very early data. This is a partnership with [indiscernible], and we saw some data. Clinical data in China in a small study. And what we observed there was biologic-like efficacy. So something like existing therapies, including the anti-TNF class and what we saw preliminarily in that data, similar to our combo data and IBD, a relationship with PK and response rates. So we have the opportunity here to do this Phase IIb study to see if we can push efficacy even higher. And what we like about that is it's another oral. And potentially the safety profile as it's played out to date, we don't anticipate a boxed warning. So that would be a differentiator versus the anti-TNF class and the JAK inhibitor class. So that's what gets us excited about this particular molecule ahead. Operator: Next, we'll go to Louis Chin from Scotiabank. Louise Chen: Congratulation I wanted to ask you, first, if you could provide more color on your opportunities for an extended half-life IL-23 and also your oral peptide IL-23. And you still plan to enter the clinic with those this year. And then just on your combos, just curious if you plan to look at those for first line or save those for more refractory [indiscernible] Roopal Thakkar: It's Roopal. So yes, we do have it's called ABB-547, which you'll hear more about. And that is our asset based on all of our experience with Skyrizi and IL-23 inhibition and this is what we'd like to advance. And this would be a longer-acting version. And to your point, the dosing has already initiated Along those lines, we also anticipate dosing our long-acting IL-23 TL1A bispecific antibody and the nimble anti-IL-23 asset both of those will be first in human this year. The goal for those are to -- at least for the long-acting is to be slightly longer acting than Skyrizi but not too much longer acting. And the reason for that is, I should state, is that when we take all these factors given that Skyrizi is already available as quarterly, and that is very, very convenient and the data are all very compelling when you look to the maintenance data. I know we've seen some short-term data. But when you look at Skyrizi, and this extends well beyond week 16, we've demonstrated Pass 100 responses of approximately 60%, passing 90 responses, exceeding 80%, and that's already happening with quarterly dosing. And what I would say there is similar to what Jeff had stated, we also are focused on all of our assets on difficult-to-treat manifestations that includes [indiscernible], genital scalp psoriasis that Jeff has mentioned. Now the other important fact here and why I said the long-term duration is important, is that 30% or so of patients with psoriasis will go on to develop psoriatic arthritis. And again, that's why durability and long-term data are very important. Now the reason I made the comment on the half-life of where we want it to be, we want to offer choices in the future. And that will matter, I would say, to the -- most of our clinicians who want to individualize the therapy for example, on this longer half-life. If an infection, for example, were to occur or there's a tolerability issue and you have a very, very long half-life biologic, the prolonged pharmacologic persistence could limit the ability to rapidly discontinue therapy. And also, you could have clinical scenarios that may necessitate switching therapies prior to full washout. And if you have overlapping mechanisms of actions that could pose challenges. So we are targeting 2 or 2.5x of where Skyrizi is today, and that would create another option and that would be along with the oral that I said would also be focused on a slightly longer half-life on that one than what we see today for orals, because what we know and Jeff pointed this out, the adherence matters with orals. We see it with Rinvoq, but we have very potent efficacy. For the oral from Nimble, we would like to see higher potency and a longer half-life in case someone slips up and misses a dose. So that's how these are being developed. And as you stated, they're both in the clinic this year. So we anticipate data hopefully by next year, if not sooner. And then I apologize, I think I had the combo question on how we're positioning this. Well, the data that we have to date, we're in an all-comers population, and you see particularly refractory. And when we've seen that with Skyrizi and Rinvoq and you pivot to a naive population, the efficacy getting in higher. So we are not going to restrict at all how we would study patients because it's important to clear second line and third line and even come after Skyrizi. In fact, we had Skyrizi patients in the study. We had vedolizumab patients in this study. we had Rinvoq patients in the study. That's an important market because second and third line continue to evolve and grow. But in IBD, the front line is also important. Many of our clinicians want to tackle the inflammation right away in the best possible way they can. Because with gut inflammation, you can run into problems, it results in hospitalizations, structuring and irreversible damage that can result in surgeries. So nobody wants that. So if you have the best therapy, we believe there's many clinicians that will want to use that early on in the course and not hold out. So we're very excited about the data that we've observed because we see that high level of efficacy in this interim analysis across different lines of therapy in IBD. Operator: Next, we'll go to Terence Flynn from Morgan Stanley. Terence Flynn: Great. Rob, I was just hoping you could elaborate on your thoughts on M&A. Obviously, it's been a very active year so far across the space, seeing companies lean in really at that kind of $5 billion to $10 billion deal size. You mentioned comments on immunology and some of the work you guys have done on the early-stage side. But do you see a need here to maybe be more aggressive and also push into other areas quicker than what you're currently doing? Would just love your broad high-level thoughts there. right. Robert Michael: Terence, it's Rob. So I'll take that question. So yes, we have been and continue to be very open to acquiring external innovation, really with a major focus for us in neuroscience, oncology and obesity. And to the extent we see a differentiated asset in any of these areas, whether early stage, late stage or even on market, we are very willing to pursue it. I mean, today, we have an on-market portfolio and an emerging pipeline that gives us a clear line of sight to very strong growth into 2030. So we are operating from a position of strength and we have ample financial capacity. So if you think about over the last 2 years, we have added significant depth to our pipeline, including deals with [indiscernible], as I mentioned earlier, [indiscernible] and [indiscernible] to name a few. I see each of these opportunities as an opportunity to really drive growth in the next decade and beyond. But that said, while we don't need BD to deliver top-tier growth this decade, we're not opposed to near-term revenue drivers that are differentiated in our core areas of focus. Operator: Next, we'll go to [indiscernible] from RBC Capital Markets. Unknown Analyst: Just 2 on Skyrizi, please. So first one is when I look at the 1Q Skyrizi sales, you look at it versus the IQVIA scripts, it looks like net pricing is flat. So slightly better than that low single-digit erosion you guided. I guess, first, can you clarify if there were any one-off items in 1Q for Skyrizi? Or is that discrepancy from IBD and IV induction. And then how should we think about that pricing step down through the year, if you are on track for low single-digit decline? And then just following on [indiscernible] successful exclusivity extension to 2037, what's your confidence in extending Skyrizi's LOE? Is there any time lines you have there? Or any signals you have for potential biosimilar settlements. Scott Reents: This is Scott. I'll take your first question regarding Skyrizi pricing. You are correct. And in the first quarter, Skyrizi pricing was relatively flat. That's really just a comparison issue on a year-over-year basis in the quarter, a gating, if you will. On a full year basis, we continue to... [Technical Difficulty] Operator: Please standby, the conference will begin again shortly. I apologize for technical difficulties. We are experiencing technical difficulties. Again, please stand by. Thank you for standing by. Liz, you may go ahead. Elizabeth Shea: Okay. Sorry. I think we were in the midst of answering the question about sales [indiscernible] Yes, go ahead, Scott, sorry. Scott Reents: Great. Thanks, Liz. I apologize for the technical difficulty there. I'll start from the beginning again with respect to your question on first quarter Skyrizi, you are correct. The price was flat in the quarter, relatively flat. It was just a comparison year-to-year when we look at it from a full year basis, we do continue to expect low digit pricing for the full year. So that means while we've not given specific gating guidance, if you will, you'll see continued low single digits for the remainder of the year. And I think that when you think about that price. That's something we've talked about low single-digit in the immunology franchise across the board from rebates low single digits over time. And so Skyrizi is going to be very consistent with that. There was a slight amount of inventory destock as well. So the total demand number was consistent or right around 30%. I think that's consistent with what you would have seen in IQVIA. Robert Michael: And then [indiscernible], this is Rob. I'll take your question on Skyrizi. Look, although Skyrizi's competition of matter patent expires in 2033. We do have later expiring IP granted and in process that embodies Skyrizi significant innovation. And this includes patents expiring in the U.S. in the mid-2030s and later. Now it's important to note that regulatory data protection for Skyrizi does not expire until 2031. So we do not expect to see biosimilar application filings until the end of this decade. But clearly, we have a strong track record of vigorously defending our patents and protecting our innovation, and I would expect that to continue. Operator: Next, we'll go to James Shin from Deutsche Bank. James Shin: I have one for Roopal on [indiscernible] PD-1 VEGF. Given [indiscernible] is relatively behind some of the other PD-1 VEGF we all know. Is there any angle or differentiation to make up for a lost time and then sticking with oncology rule, what should we envision for [indiscernible] Do you see this being a transformational kind of readout is getting a competitive space in frontline [indiscernible] Roopal Thakkar: For the PD-1 VEGF, the key for that and what you've heard previously from us and other dose, the [indiscernible] deal that we just talked about, the DLL3 TCE. The key for these assets are in combination with our emerging ADC portfolio, in particular, Temab-A where I highlighted some readouts to come at ASCO. And that for us is the key looking forward, especially across colorectal cancer lung cancer, I noted combinations in pancreatic cancer today. So this, wherever we see a PD-1 we can utilize that in combination. So that's where the innovation occurs where we're going to use our ADCs wherever we can to replace chemotherapy provide higher efficacy, potentially longer durability because of better tolerability. And if the data point us in this particular direction, you could have a biomarker population. So physicians were able to individualize care and optimize that benefit risk. So you would see an efficacy contribution from ADCs and with an asset like 148. The other place that's under consideration is in the [indiscernible] alpha space in ovarian. There could be potential for 148 there. So you can see how it can be introduced across multiple tumor types. And regarding DLBCL discussions will be ongoing with the current readout where we saw improved PFS and no detriment to OS that discussion is ongoing. And then we still have the potential for second line DLBCL and even front line DLBCL data this year. And that frontline is at [indiscernible] plus R-CHOP. So I would say a very simple and potentially easily adoptable regimen. So again, potential for readouts this year. And if you do see a benefit there, I would say, in front line is the largest opportunity for [indiscernible] Operator: Next, we'll go to [indiscernible] from Canaccord Genuity. Unknown Analyst: First, for the additional indications for Rinvoq. As they start to come through, Vitiligo and Alopecia areata will be next. Are you still thinking all those indications can be $2 billion in aggregate or are you getting more optimistic on that front? So what's your latest thinking on the contribution from those and additional efforts you're putting in the derm space and then just on tavapadon in Parkinson's, just how you're thinking about that product, how it will fit into the treatment paradigm within Parkinson's mono versus combo and then the overall opportunity for it. And if you'll put more resources within the Parkinson's franchise as well. Jeffrey Stewart: Thanks. It's Jeff. And I would say that we have been very, very encouraged over the data that we've seen as these products have read out. And the first of the the third wave of the Rinvoq indications was giant cell arteritis, which was the smallest of the bunch. What we've observed has been quite interesting in the rheumatology community as we've started to highlight the benefits of of Rinvoq for GCA, it actually has what I would call a spillover effect onto RA and PSA. So the rooms get more and more comfortable. So these indications, we believe, will build on top of each other. We still look at that $2 billion as a reasonable base case. But I would say, basically, we're leaning towards more, let's say, bullishness. And one of them has to do with certainly the timing of vitiligo this is the -- will be the first truly systemic drug for vitiligo. And we look at the data, and it seems to continue to build over time. Now this isn't like atopic derm itch. -- where you get like in 1 or 2 days, you get something profound on the symptoms. The patients need to be consistently taking the medication, but it just continues to be this really significant burn in terms of stopping the inflammation. So that's very positive. So the first in vitiligo I would say the other thing that surprised us is there are approved JAKs in alopecia. We can see their revenue level, but the efforts were not very significant and basically, the Rinvoq data, again, cross-study comparison is twice as good. So I would say we're sort of really leaning towards that we can have some upside to that initial approach, I would say, primarily driven by alopecia areata given the profound changes that we're seeing. And I would be remiss if I didn't say that we're also very excited to see how the ultimate readouts are in HS. We built the HS market. And so with HS, with basically [indiscernible] and the readout for Rinvoq, that's also another nice portfolio play for us. So they're meaningful meaningful approaches that we have as we get closer to that. Robert Michael: And then this is Rob. Just to add to [indiscernible], just maybe to zoom out a little bit. I mean obviously, we're very excited about this next wave of indications and the impact they can have on the asset. When we look at overall Rinvoq expectations, at least for what sell side consensus is modeling we still see broadly upside on Rinvoq in each year with that number growing each year. And so this will contribute to that. But I'd say the underlying performance of the approved indications also is very strong. Jeffrey Stewart: And to move to tavapadon, again, is the idea of building these deep portfolios. Obviously, we have the small product with [indiscernible], which had the surgery [indiscernible] is continuing to progress towards that blockbuster status. It's progressed much faster than we thought even 18 months ago. And with the approval of tavapadon we can actually play with an innovative molecule and brand in front of Violet. So we're bringing this into the oral market, which is about 85% of the market right now. And as you highlighted, it's attractive in both monotherapy setting as well as an add-on setting to the standard of care levodopa/carbidopa. Our physicians are reacting to the monotherapy side, particularly for patients that are younger okay? And there are significant amount of younger patients where they could be on these oral medications for a decade or more, and they try to want to spare, which we've seen like the emergence of dyskinesia if you're sort of using over time too much levodopa/carbidopa. So that's very important adding on to control the dyskinetic events and sort of spare again, this march towards dyskinesia that you see is also something that is brought up by the thought leaders. I would also say that the adverse event profile is remarkably different than we've seen with, let's say, the older generation of these agents. So you see again, far less dyskinesia, you see less edema, you see amazingly low sedation, which is just a horrific side effect of the older medications as well as basically compulsive disorders. So we're super happy with this. We're looking forward to the launch here, and we've started to build out our team in Parkinson's, like we have for dermatology for those additional indications. So a nice catalyst that's coming here at the end of the year. Robert Michael: This is Rob. I'll just add. [indiscernible] obviously then complements [indiscernible] and giving us a very strong footing in Parkinson's. And we think about neuroscience overall for the company, I've said before that we are now the industry leader, and we expect to be the industry leader in [indiscernible] for a very long time [indiscernible] giving us essentially a business of Parkinson's that we expect to peak above $5 billion. That's 1 of $5 billion-plus franchises between psychiatry, migraine and Parkinson's that we think can really drive AbbVie's leadership in neuroscience is probably another area that doesn't get enough attention. Operator: Next, we'll go to [indiscernible] from Guggenheim Securities. Unknown Analyst: On the call today, especially on the pipeline. So I have one, maybe following up on the comments you made around HS data coming later this year. So I was just curious if you could maybe just level that sort of expectation of what you're hoping to see from both [indiscernible] from those readouts that we should get soon? And then the other one, tend to make looks like that's moving a little faster than you thought potentially filing this year, obviously, a pretty competitive space. Just curious if you can based on how things are evolving in that market where you see the differentiation for your product would be relative to a competitor? Roopal Thakkar: It's Roopal. On HS, the 16-week data is what we anticipate for Rinvoq and [indiscernible] and the way these are designed, they're slightly different. So lutakizumab will be enrolling patients that have already been on advanced therapies and treatment-naive patients. And if you go back to the Phase II data, that was 100% TNF IR and a very refractory patient population with quite severe HS, and we saw very strong data in that setting, we did conduct some data in naive patients, and that data looks even stronger. The issue in HS for all of us in drug development is control of the placebo rate. So for luticizumab being in naive and failure populations, we will be utilizing a high score 75. And hopefully, that serves to reduce that placebo rate but then if that data looks good and the potential for approval, you would have an agent that could play in both areas of the market. And then secondly, on Rinvoq, that is going to be 100% bio failure population. And because of that, that has the potential ability to control some of the placebo effects and we'll have the standardized high-score 50. So if both look good and are approved, you'll see a dynamic that's not dissimilar to what we have in IBD, where you have a frontline very powerful asset and then one that can come later on in case there's a loss of response like a Rinvoq. And that's consistent with what we see with Crohn's and UC. And I think it will be beneficial to both assets, if approved, if we're able to take them both to market, again, strategically like we've done the setup in IBD and what's driving what we see as being the potential of those assets is best-in-class efficacy and, I would say, ease of use. And I think that segues into the 383 [indiscernible] question, we do see the crowded market, as you've stated, but the opportunity is still tremendous. And that opportunity exists if you have the right asset with the right profile. And what [indiscernible] brings is very high substantial efficacy that we've seen, and that is, we think, associated with the strong binding to BCMA. It has a slightly lower affinity for the T cell side of things and the T-cell engagement. And that has set up what we believe to be a best-in-class safety profile and we have a somewhat extended half-life. So what you could then see happening if we're successful, is a singular priming or step-up dose and immediately going to the full dose, you would see very low CRS. And if that's the case, you have the potential for outside of hospital outpatient like setting where you could give the asset, and it's something consistent with what we've seen very successfully with [indiscernible] particularly in heme cancers 80% of these are treated in the outpatient. So [indiscernible] is designed for that in the community setting. And then after the full dose, after the priming dose or step-up dose, you're immediately able to dose on a monthly basis, which is very convenient for the clinic, you don't take up a chair. And then for the patient who doesn't have to keep coming into the hospital. So that currently, the profile I just described doesn't exist. So entering a little bit later is okay. We believe if you're bringing the right profile. Recall, we've had some success with Skyrizi coming in third as a 23 and Rinvoq as a third JAK inhibitor. But we believe the profile is going to be the key driver of the potential uptake in the future. Operator: Next, we'll go to Asad Haider from Goldman Sachs. Asad Haider: First, Rob, just maybe for you in the context of the statements that you continue to see upside to consensus forecast for both Skyrizi and Wink going out each year and that upside growing each year. Just curious as to how that triangulates with your calculus of no longer updating mid-term guidance for these products? And related, are there still areas of where you see meaningful disconnect versus consensus outside of those 2 products. And then maybe if I could squeeze one in for up. Just on obesity, as you think about doing -- building a broader portfolio around 295, just what might that look like in the context of Rob's earlier comments on obesity as an area of potential PD interest? Robert Michael: Okay. So, it's Rob. I'll take your first question. And recall, our previous long-term guidance really served a very specific purpose ahead of the HUMIRA LOE. But I wouldn't rule out doing it again in the future if it made sense. That said, when I look at the current state of AbbVie's business, the long-term outlook and the pipeline is replacement power, we have never been in a stronger position. I mean we are the clear leader in immunology and neuroscience with a portfolio of assets that are demonstrating very significant growth, in many cases, north of 20%. And both areas have a pipeline that can deliver transformational improvements over existing therapies. When I look at sell-side consensus, I mentioned, we do see upside. We see upside for the total company revenue in every year with that upside growing. I already mentioned that we expect to -- we have upside versus the sell side on Skyrizi and Rinvoq. We expect to exceed the peak consensus that's in those models. I already mentioned in neuroscience that we see upside versus expectations for the migraine in Parkinson's [indiscernible] right now, what we see in consensus is peaking at below $4 billion. We've said several times, we expect them to each peak in excess of 5. And then we look at our oncology pipeline assets. Roopal just highlighted [indiscernible]. We haven't really talked about Temab-A. We believe both of these have significant multibillion-dollar peak potential and both have really not even been described any value by roughly half of the cell site. And so we will continue to highlight this in our commentary when we see the upside Clearly, the previous long-term guidance was very granular more than really anyone in the industry has ever provided but we did it at a time where it was important to help understand what the company will look like on the other side of the HUMIRA LE, we're now in a very strong position. We can deliver top-tier growth for the long term, puts us in a position of strength to continue investing in the business. I already mentioned our commentary around BD. We're very active in the BD area open to areas of differentiation within our -- within each of our core areas. And so we think the setup is very strong. And so I wouldn't rule out giving another long-term update at some point. But clearly, we have a lot of confidence in the outlook, and we'll provide updates as we see Fed. [indiscernible] as you heard, the initial strategy is to drive as high of efficacy as we can, but clearly balance that with tolerability because that's what's going to drive ultimate durability. We've seen too many people fall off their current [indiscernible] assets because of tolerability. So, so far, we see that shaping up nicely and notable weight loss in a nonobese population. So that opportunity still exists and along with our ability to further increase dose and what we saw in the multi-ascending dose. So that strategy will play out over the course of this year and next year before we start designing Phase IIs. But the key is to optimize that efficacy, tolerability to drive that durability to the patient can experience those benefits long term. That could be in an early patient population naive, but we understand many of those patients will be coming off of their increase. The other opportunities that we would be looking for externally or anything that can augment that weight loss but maintain tolerability. If we see that in a subcu that's combinable, that would be very important and oral would be something that we could be interested in. Also any other assets that would allow the optimization of being able to retain muscle and have a majority of the weight loss come from fat. We still see there's an opportunity there. So there will be some other areas that we would be interested in. Other unique areas are in immunology and potential combinations with our own assets. There's a substantial amount of obesity in psoriasis today, and that's a set up and something that we are exploring now and also even higher rates of obesity in [indiscernible]. So that could be a potential other combination. And recall, with our tremendous amount of experience and presence in the aesthetics channels for any type of asset that comes up, that sets us up very nicely and could have a very good go-to-market synergy because of that aesthetics channel. Operator: Next, we'll go to Dave Risinger from Leerink Partners. David Risinger: I missed part of the call, so hopefully I'm not repeating something. But with respect to AbbVie 295, the amylin [indiscernible] has stated that the secret sauce and [indiscernible] is that it dialed out the calcitonin. So can you please comment on 29 activation of amylin one relative to calcitonin. And also, if you could discuss its half-life because the press release suggested the potential for monthly dosing and just wanted to get clarity on the half-life and your level of confidence in monthly dosing. Roopal Thakkar: It's Roopal. Again, and I'll talk about. So yes, we have a DACRA molecule it signals through Amylin and calcitonin. And we -- I don't think we know yet where the secret sauce is relative to outcomes. As we stated, the weight loss was substantial in only 12 weeks in a mostly male population that had a BMI of around 29%. We anticipate in later stages of development, BMI is in the range of 36 and 37. And more than 50% of the patient population would be women where most of the weight loss comes. So we still see a tremendous amount of potential there. The safety profile looked very strong. The potential upside is a benefit to bone because of the calcitonin signaling. And as we develop the molecule, we'll be able to obtain, for example, [indiscernible] to monitor bone and to see and compare if there's less loss of bone and preservation of bone, that could be very important for women, especially as they get older. And we know with rapid weight loss, you do see loss of bone density. So at this stage, we see this as a potential advantage because of the efficacy and tolerability that we've seen to date. The half-life is approximately 270 hours. And what we did observe is every other week and the potential for monthly, the pharmacodynamic effect should also be considered along with half-life. We've seen examples of that. Skyrizi is a good example in psoriasis. The half-life is 28 days. If one is considering a dosing interval at around 1 to 2 half lives, you see Skyrizi is a type of molecule that really over delivers beyond its half-life. And so far, the pharmacodynamic effect with 295 does create the potential for once a month dosing, I would say, particularly in the maintenance setting, which would be really important from a tolerability and convenience standpoint. Elizabeth Shea: Operator, we have time for one final question. Operator: For a final question, we'll go to Steve Scala from TD Cowen. Steve Scala: Rob, just to be clear, cars consensus is $33 billion in 2031. So are you saying there's upside to that? And Rinvoq is $16 billion in 2031. Are you saying there's upside to that? And would you care to add whether or not you think it's just marginally low or whether there is significant upside. And then secondly, during periods of past economic uncertainty, I think AbbVie has observed and stated that aesthetics businesses were fairly resilient. But this time, it seems to be different. So is my recollection correct? And if so, why is it different this time? Robert Michael: Steve, I'll take the first question, Jeff will take the second question. So the numbers that you're quoting from are consistent with what we've -- what we're seeing in terms of sell-side consensus. And yes, -- we do expect the peak potential for both Skyrizi and Rinvoq to exceed those estimates. Obviously, the sell side doesn't go out much further than that. and we think they obviously have more runway. And so we do think there's a significant runway and upside opportunity for both assets. Jeffrey Stewart: Yes. And Steve, you remember correct on we -- several years ago, we referred to some recessionary type dynamics around the Great Recession, for example, we had a [indiscernible] has the legacy business where we saw sort of compression and then a more rapid response to robust growth. But in this case, we've seen this more lingering inflationary dynamic that we haven't seen for 40 years. I think we're seeing relative stability in the markets now. I mean, low single low single-digit growth for toxins still decline for fillers. I do think it's a different cycle of pressure on the consumer -- but you're correct in terms of what we had said previously with different types of recessionary issues. Elizabeth Shea: All right. Thanks, Steve, and that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you all for joining the AbbVie First Quarter 2026 Earnings Conference Call. That concludes today's conference. Please disconnect at this time, and we hope you have a wonderful rest of your day.
Operator: Good morning. My name is Jennifer, and I will be your conference facilitator today. At this time, I would like to welcome everyone to TWO's First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Ms. Maggie Karr. Margaret Field: Good morning, everyone, and welcome to our call to discuss TWO's first quarter 2026 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer; Nick Letica, our Chief Investment Officer; and William Dellal, our Chief Financial Officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website as well as the Investor Relations page of our website at twoinv.com. In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are described on Page 2 of the presentation and in our Form 10-K and subsequent reports filed with the SEC. Except as may be required by law, TWO does not update forward-looking statements and disclaims any obligation to do so. I will now turn the call over to Bill. William Greenberg: Thank you, Maggie. Good morning, everyone, and welcome to our first quarter earnings call. I would like to begin by addressing the recent developments regarding the merger plans that we initially disclosed last December. As we described in detail in our proxy statement, in March, we received an unsolicited all-cash proposal from CrossCountry Mortgage. After careful consideration and in coordination with our financial and legal advisers, our Board unanimously determined that the CrossCountry proposal was superior and in the best interest of shareholders. And on March 27, 2026, we executed a new merger agreement with CrossCountry, pursuant to which CrossCountry agreed to acquire Two Harbors for $10.80 per share in cash. In connection with entering into this agreement, we terminated the prior merger agreement with UWM. Yesterday, we announced that we signed an amendment to the new merger agreement with CCM. Under the terms of the amended agreement, CCM will increase the per share cash consideration payable to Two Harbors' stockholders to $11.30 per share, an increase from $10.80 per share under the original merger agreement. The amended agreement follows our Board's thorough evaluation of an unsolicited competing proposal received on April 20, 2026, from UWMC. After consulting with our financial and legal advisers, including assessments of the competing proposal's terms, proposed financing, regulatory path, deal certainty, and other factors, the TWO Board determined that the CCM transaction as amended, continues to be in the best interests of TWO and its stockholders. The business combination with CCM pairs the country's leading retail originator with RoundPoint's best-in-class servicing platform, creating a fully integrated mortgage company. We are confident that this merger is in the best interest of shareholders, allowing them to receive the certainty of cash and reinvest the proceeds in a manner that best suits them. The transaction is expected to close in the second half of 2026 and is not subject to any financing condition. Prior to closing, we intend to continue paying regular quarterly dividends, but not stub dividends, consistent with past practice. We will hold a special meeting to approve the CrossCountry merger on May 19 at 10:00 a.m. Eastern Time. If you have already submitted your vote in favor of the CCM merger, your vote remains valid. If you have not yet voted or if you previously voted only on the terminated UWM transaction, please submit your vote as soon as possible. Your vote is very important. Our Board unanimously recommends that all shareholders vote in favor of the transaction with CrossCountry. Now let's turn to our quarterly results as summarized on Slide 3. At the start of the quarter, RMBS' performance was buoyed by the continued decline of implied volatility and the announcement on January 8 by the FHFA Director instructing the GSEs to purchase $200 billion of Agency MBS in an effort to explicitly tighten mortgage spreads as part of a larger effort to lower mortgage rates. However, mostly as a result of the outbreak of the Middle East conflict, the performance of risk assets, including RMBS, deteriorated over the balance of the quarter. Amid this backdrop, for the first quarter, we had a total economic return of negative 2.0%. Please turn to Slide 4. Forecasts for inflation and economic growth became more uncertain as the quarter unfolded. And as a result, the Federal Reserve left rates unchanged at their February and March meetings. As you can see in Figure 1, market expectations for the Fed's effective rate at 2026 year-end rose from 3.06% on December 31 to 3.57% at quarter end, essentially wiping away any prospects of Fed cuts in 2026. Economic statistics over the quarter were mixed, punctuated by a weaker-than-anticipated employment report on March 6, with the unemployment rate unexpectedly rising to 4.4%. Normally, such an outcome would likely result in a bull steepener with short rates falling more than long rates. In this instance, rekindled concerns over inflation, both from continued elevation of core PCE inflation and from the oil price shock were strong enough that rates did the opposite, rising into the end of the quarter. As you can see in Figure 2, the U.S. Treasury yield curve bear flattened with 2-year yields rising 32 basis points to 3.79%, while 10-year yields increased 15 basis points to 4.32%. The Fed's median forecast released in March continued to price in 125 basis point cut in 2026, though forecasts for core PCE inflation increased from 2.5% to 2.7%, which Chairman Powell said partly reflected incoming inflation news since the last report. Please turn to Slide 5. Our DTC platform has made excellent progress since we began making our first loan in June of 2024. In the first quarter, we funded $92 million in first and second liens, about the same as in the fourth quarter despite rising interest rates. We also brokered $38 million in second liens. At quarter end, we had an additional $57 million in our pipeline. These are still small numbers, which, to some extent, are expected given the low note rate nature of our servicing portfolio. However, we believe the upcoming combination with CrossCountry should bring the origination efforts to a new level, and we expect that our recapture efforts should improve substantially, benefiting our servicing customers. Now I would like to hand the call over to William to discuss our financial results. William Dellal: Thank you, Bill. Please turn to Slide 6. Our book value decreased to $10.57 per share at March 31 compared to $11.13 per share at December 31. Including the $0.34 common stock dividend, this resulted in a negative 2% quarterly economic return. Please turn to Slide 7. The company incurred a comprehensive loss of $24.7 million or $0.24 per share. Net interest and servicing income, which is a sum of GAAP net interest expense and net servicing income before operating costs, decreased as a result of lower float earnings rates and lower balances due to MSR sales and seasonals, as well as lower servicing fee collections on lower UPB, partially offset by lower financing rates. Mark-to-market losses on Agency RMBS and TBAs were due to higher interest rates and wider spreads in the first quarter versus gains in the fourth quarter driven by bull steepening in rates. The decrease in mark-to-market losses on MSR was driven by a slight favorable change in valuation inputs and assumptions used in the fair valuation of MSR versus an unfavorable change in Q4, as well as lower portfolio runoff and lower MSR balances as a result of sales and lower experienced prepayment speeds. Other derivative instruments utilized for purposes of hedging our interest rate exposure, including swaps, futures and inverse interest-only securities, experienced net mark-to-market gains in Q1 versus net losses in Q4. You can see the individual components of net interest and servicing income and mark-to-market gains and losses on appendix Slide 20. Please turn to Slide 8. On the left-hand side of the slide, you can see a breakdown of our balance sheet at quarter end. We ended the quarter with over $500 million of cash on the balance sheet. As we said on our last earnings call, we repaid our convertible senior notes of $261.9 million in full on January 15, 2026, maturity date. RMBS funding markets remained stable and available throughout the quarter with repurchase spreads at around SOFR plus 15 to 18 basis points. At quarter end, our weighted average days to maturity for Agency RMBS repo was 71 days. We financed our MSR, including the MSR asset and related servicing advance obligations across five lenders with $1.5 billion of outstanding borrowings under bilateral facilities. We ended the quarter with a total of $977 million in unused MSR asset financing capacity. We have $69 million drawn on our servicing advances facility with an additional $81 million of available capacity. I will now turn the call over to Nick. Nicholas Letica: Thank you, William. Please turn to Slide 9. In his opening comments, Bill discussed the up-down nature of mortgage performance over the quarter. Ultimately, risk sentiment took an abrupt negative shift in late February with the onset of hostilities in the Middle East, leading to wider spreads for RMBS. Though mortgage spreads widened, they outperformed the increase in volatility due to favorable supply-demand technicals aided by the administration's explicit support of the mortgage basis. At quarter end and even today, the situation in the Middle East is highly fluid with a broad range of outcomes. For the near term, geopolitical tensions will remain the primary driver of market sentiment and economic outlook. That said, the widening of spreads by quarter end made performance outcomes more balanced and improved the return potential of our portfolio. At March 31, the portfolio was $11.9 billion, including $8.9 billion in settled positions and $3 billion in TBAs. Our primary risk metrics quarter-over-quarter were not much different. Our economic debt to equity was lower at 6.4x while our portfolio sensitivity to a 25 basis point spread tightening decreased slightly from 3.7% to 3.2%. Throughout the quarter, given the elevated level of macro volatility, we kept interest rate risks low in aggregate and across the curve. You can see more details on our risk exposures on appendix Slide 17. Please turn to Slide 10. As previously discussed, January was an excellent month for mortgage performance with the Bloomberg MBS Index delivering 52 basis points of excess return, its best month in over a year. Implied volatility as measured by 2-year options on 10-year swap rates fell to 73 basis points on January 27, its lowest level since October 2021. Spreads ratcheted tighter after the January 8 announcement directing the GSEs to buy MBS, adding to what was already a constructive supply-demand picture with money managers enjoying consistent inflows of capital, banks driving CMO demand through floater purchases and REITs raising capital in the equity markets. Current coupon spreads reached quarterly tights on January 12 with nominal and option-adjusted spreads tightening by 10 to 15 basis points from the beginning of the quarter. In response, we lowered our mortgage exposure given historically tight treasury spreads, mostly by selling 4.5% specified pools and 5% TBAs. However, over the course of February and March, driven predominantly by the start of the conflict and the attendant increase in realized and implied volatility and the flattening of the yield curve, performance deteriorated. As you can see in Figure 1, implied volatility on 2-year 10-year swaptions finished the quarter up 5 basis points nominally to 85 basis points. Current coupon spreads versus swaps on a nominal and option-adjusted basis widened by 26 and 15 basis points, finishing the quarter at 141 and 60 basis points, respectively. With mortgage spreads cheaper, we reversed course and managed our spread exposure higher by quarter end, simultaneously adding some 5.5% specified pools. As you can see in Figure 2, the spread curve, both nominally and risk-adjusted, steepened over the quarter with lower coupons close to unchanged, while 4.5% and higher coupons widened. Peak spreads were in the 5.5% to 6% coupons. Please turn to Slide 11 to review our Agency RMBS portfolio. Figure 1 shows the performance of TBAs and specified pools we own throughout this quarter. Hedged performance versus swaps across the coupon stack was mixed with some belly coupons and higher coupon specified pools eking out a positive return, while the performance for most of the stack between 4.5s and 6s was negative. Hedge performance versus treasuries was better as longer-end swap spreads tightened over the quarter. Even so, the Bloomberg MBS Index, in which performance is measured against treasuries, had an excess cumulative return of minus 36 basis points over February and March. 30-year mortgage rates finished up about 25 basis points quarter-over-quarter to 6.5%, though they touched 6% in both January and February, allowing savvy and fast-acting borrowers to find the best rates in years. Prepayment rates for refinanceable loans jumped higher in March, reacting to the multiyear lows in mortgage rates. Though absolute prepayment rates refinanceable coupons reached similar levels as observed in October 2025, they were actually more benign after adjusting for rate incentive. Thus, the prepayment S curve was not as reactive as it had been in the fourth quarter when the media effect was more elevated. With prepayment rates on higher coupon TBAs remaining fast, the call protection offered by our carefully selected specified pools was evident as can be seen in Figure 2, which shows TBAs versus the specified pools we owned by coupon. For 5.5 coupons and higher, our specified pools paid at a fraction of TBA speeds. On aggregate, pool speeds increased to 9.8% from 8.6% CPR quarter-over-quarter, mostly driven by increases in speeds from these higher coupons. Please turn to Slide 12. Activity and demand for MSR in the first quarter remained high with servicing transfers topping $93 billion UPB, outpacing Q1 2025, though below the prior 2 quarters. We continue to see most of the supply coming from nonbank originators with a broader array of buyer types, which include other nonbank originators, banks and REITs. Figure 2 shows that with mortgage rates at their current level of around 6.5%, the share of our MSR portfolio that is considered in the money drops to 1%. If mortgage rates were to drop to around 5%, the portion of our portfolio in the money would rise to about 9%. The housing market remains slow, and persistent inventory shortages in many markets is expected to continue to put upward pressure on prices. That said, there are pockets of weakness in Southern markets with builders continuing to offer buydowns to move inventory. Housing affordability, which had been improving since mid-2025, is likely to reverse given the rise in mortgage rates. On a broad basis, we anticipate home prices to rise in the single digits annualized and for housing turnover to continue to trend about 5% higher year-on-year, especially as primary rates today are lower than a year ago at this time. Please turn to Slide 13, where we will discuss our MSR portfolio. Figure 1 is an overview of our portfolio at quarter end, further details of which can be found on appendix Slide 23. In the first quarter, we added $152 million UPB of MSR through flow sale and recapture channels. Given the increase in mortgage rates and wider RMBS spreads, the price multiple of our MSR increased slightly quarter-over-quarter to 5.9x. 60-plus day delinquencies remained low at under 1%. Figure 2 compares CPRs across those implied security coupons in our portfolio of MSR versus TBAs. Quarter-over-quarter, our MSR portfolio experienced a decrease in prepayment rates to 5.6% CPR, reflecting lower housing turnover that is typical in the winter months. Importantly, prepays have remained below our projections for the majority of our portfolio, which has been a positive tailwind for returns. Finally, please turn to Slide 14, our return potential and outlook slide, which is a forward-looking projection of our expected portfolio returns. We estimate that about 65% of our capital is allocated to servicing with a static return projection of 11% to 14%. The remaining capital is allocated to securities with a static return estimate of 11% to 15%. With our portfolio allocation shown in the top half of the table and after expenses, the static return estimate for our portfolio would be between 8% to 11.4% before applying any capital structure leverage to the portfolio. After giving effect to our unsecured notes and preferred stock, we believe that the potential static return on common equity falls in the range of 7.3% to 12.9% or a prospective quarterly static return per share of $0.19 to $0.34. Looking ahead, the situation in the Middle East remains highly fluid. The economic disruptions caused by this conflict are inherently hard to gauge. While technical factors in the RMBS market are a positive for the sector, the outlook for interest rate volatility is less certain. It's worth noting that while there was a substantial increase in volatility off the quarterly lows in Q1, volatility for much of the term structure only went back to levels last seen in Q4 2025. Relative to that time frame, current coupon spreads finished the quarter slightly tighter than they were then, which reflects the explicit support the sector has received from the administration. In addition to demand from the GSEs, the latest proposals for the Basel III end game could provide a lift as banks should have more capital to use to purchase MBS and hold mortgage loans, which could reduce securitization rates and RMBS supply. In total, RMBS hedged with swaps possesses good nominal yield with a balanced performance profile, albeit with a key dependency on the direction of volatility. The MSR market remains very well supported with a broad range of buyers. We favor the portfolio construction of pairing MSR with RMBS, which we expect will deliver attractive returns over a wide range of market outcomes. Thank you very much for joining us today. And now we will be happy to take any questions you might have. Operator: [Operator Instructions]We will go first to Doug Harter with BTIG. Douglas Harter: Just talking about kind of the book value performance in the quarter. Hoping you could help break that down between the 2 strategies and kind of how MSR performed and how kind of the hedged agency would have performed just as we think about those components? Nicholas Letica: Doug, this is Nick. Thank you for that question and a very good one. Over the quarter, we saw our MSR -- hedged MSR strategy performed extremely well over the quarter, that was a positive. The hedged securities part of the portfolio was an offset to that. I think over the quarter, there was a fair amount -- big pickup in both realized and implied volatility. Convexity hedging costs over the quarter were definitely a pickup from the prior quarter. And if you look at the -- anecdotally, if you just look at the basis points traveled or the range that the market traded in, in terms of the 10-year, you definitely would see a pickup that would make sense in that context. So, it was a better quarter for hedged MSR versus hedged securities. The one thing I will say is in terms of like relative performance among the REITs, and I saw the comment you made in your note about us last night. I would say there are 2 things. First of all, we have generally a higher expense base. So, when you actually -- I think if you look at the portfolio in isolation relative to other REIT portfolios, I think on a comparative basis, it probably looked pretty favorable. The expense -- a higher expense base because of our servicing business is an offset to that relative to some peers. And the other part of it is that unlike other peers, the peers that had raised equity over the quarter and had some accretion relative -- owing to the fact they're trading over book value and some of that adds to their performance. I think with those adjustments, I think that the portfolio performance would actually look relatively favorable, if that makes sense. Operator: And we'll go next to Bose George with KBW. Bose George: Can we get an update on your book value quarter-to-date? Nicholas Letica: Bose, this is Nick. We are up about 2%. Bose George: Okay. Great. And then I'm not sure if you can answer this, but in terms of the merger, is the situation with UWM over? Or does that remain kind of live until the shareholder vote? William Greenberg: Well, as we disclosed last night, we executed a revised merger agreement with CCM, right? We are working through the process in terms of getting that merger to completion. There is a shareholder vote, which is scheduled for May 19, and we're excited about that transaction, and we're focused on doing everything we can in order to bring that to completion. Bose George: Okay. Great. But I guess that's good. I was just curious; there's still room for bids until the vote happens. Is that a fair statement? William Greenberg: The merger agreement is very, very prescribed and lays out the details and the circumstances for how someone should do that if they were so interested. Operator: We'll take our next question from Jason Weaver with JonesTrading. Valentin Alvar: This is Valen Alvar here filling in for Jason Weaver. Just had a quick one for you. Can you walk us through the financing package supporting the $11.30 cash consideration, whether it's debt sponsored, private equity, internal cash? And also, whether the merger agreement contains a financing condition or a market carve-out tied to book value per share, mortgage spreads or like rate volatility at close? William Greenberg: Yes. Thanks for the question, and I appreciate it. As you might expect, everything that is disclosable has been disclosed in the merger agreement, which is filed publicly. So, I would refer you to that document to answer some of your questions. Operator: And at this time, there are no further questions. I'll turn the call back to the speakers for any additional or closing remarks. William Greenberg: I'd like to thank everyone for joining us today. And as always, thank you for your interest in Two Harbors. Operator: This does conclude today's conference. We thank you for your participation.