加载中...
共找到 17,826 条相关资讯
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.
Operator: Good day, and thank you for standing by. Welcome to the CTO Realty Growth Q1 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jenna McKinney, Director of Finance. Please go ahead. Jenna McKinney: Good morning, everyone, and thank you for joining us today for the CTO Realty Growth First Quarter 2026 Operating Results Conference Call. Participating on the call this morning are John Albright, President and Chief Executive Officer; Philip Mays, Chief Financial Officer; and other members of the executive team that will be available to answer questions during the call. I would like to remind everyone that many of our comments today are considered forward-looking statements under federal securities laws. The company's actual future results may differ significantly from the matters discussed in these forward-looking statements, and we undertake no duty to update these statements. Factors and risks that could cause actual results to differ materially from expectations are discussed from time to time in greater detail in the company's Form 10-K, Form 10-Q and other SEC filings. You can find our SEC reports, earnings release, supplemental and most recent investor presentation on our website at ctoreit.com. With that, I will turn the call over to John. John Albright: Thanks, Jenna, and good morning, everyone. We are pleased to report a strong quarter to start the year, highlighted by a robust leasing and strong same-store NOI growth as well as the $81.6 million acquisition of a high-quality shopping center in Texas. Our strategic focus on shopping centers located along growth corridors primarily in the Southeast and Southwest markets of the United States, along with the proactive asset management and leasing continues to produce strong results. Starting with retail leasing. During the quarter, we executed leases, renewals and extensions totaling 153,000 square feet, including 146,000 square feet of comparable leases at an average cash rent increase of 14%. Our leasing activity for the quarter was spread across our portfolio, but particularly positive at [indiscernible] Crossing in Orlando, where we signed a lease with Williams Sonoma to fill the former Mattress Firm space. And just after quarter end, we signed a lease with Pottery Barn Kids to fill a space that had been vacant since we acquired the property. Combined, this activity has increased [indiscernible] Crossing to 97% leased and improves the quality of the tenant roster and value of the asset. Further, our only shopping center with leased occupancy below 90% is now Carolina Pavilion at 83%, and we are in active negotiations with tenants for all the remaining vacancy. We look forward to providing announcements of this leasing activity at this shopping center in the future. We are also making strong progress with the 6 outparcel opportunities we discussed on our last call. During the quarter, we signed a lease with Swig for a drive-through customized beverage store at Marketplace at Seminole Towne Center located in Orlando. And just after quarter end, we signed a lease with Cooper's Hawk at Ashley Park located in Atlanta market. In addition, we have executed LOIs or in active lease negotiations for the remaining 4 outparcels. We continue to expect these 6 outparcels to generate low double-digit unlevered yield on approximately $30 million of investment. We anticipate that this $30 million will primarily be deployed and begin contributing to earnings in 2027 with the full benefit expected to be recognized in 2028. We also look forward to providing additional announcements related to this initiative in the coming quarters. Reflecting our leasing progress at quarter end, our portfolio was 95.4% leased and our Signed-Not-Open pipeline totaled $6.2 million of annual cash base rent, representing approximately 5.5% of in-place annual cash base rent. We believe this pipeline of new lease revenue will provide a meaningful earnings tailwind beginning as we move through 2026 and into 2027. Further, leasing activity completed over the prior year for which tenants have commenced paying rent is already beginning to benefit NOI. For the quarter, same-property NOI for shopping centers increased 6.8% compared to the comparable prior year period. Excluding the benefit of certain nonrecurring items, same-property NOI for shopping centers grew at a healthy 4.2%. Moving to investment activity. During the quarter, we announced an acquisition of Palms Crossing, a 399,000 square foot open-air center located in McAllen, Texas for $81.6 million. Palms Crossing is anchored by Best Buy, Hobby Lobby, Burlington Coat Factory, Barnes & Noble and Nike and is currently 98% leased and benefits from strong cross-border shopping. This property has also provides the opportunity to develop 2 additional outparcels beyond the 6 discussed earlier. With this acquisition, Texas is now our third largest state by ABR and combined contribution from Georgia, Florida, North Carolina and Texas increased to 85% of total ABR. On the property recycling front, Madison Yards located in Atlanta is under contract with a nonrefundable deposit, and we expect the sale to close in May. Madison Yards is 99% leased and the anticipated sale would enable us to extract value from a stabilized asset while also reducing our AMC Theatres exposure to only 2 locations, which are both high performing. Further, the anticipated sale, along with Palms Crossing acquisition will complete the recycling proceeds at a positive cap rate spread contributing to future earnings growth. As we move forward, we're evaluating additional property sales, focusing on recycling capital from stabilized properties into assets at positive initial yield spread with the potential for value-add opportunities and higher earnings growth in the future. Now turning to our structured investments. During the quarter, we received full repayment of our [indiscernible] $30 million preferred investment in Watters Creek Village. This repayment was expected and represents the only structured investment scheduled to mature in 2026. More notably, just after the quarter end, we completed a $75 million preferred equity investment in a Class A premier retail property located in the Southwest. This preferred investment yields 12% and has a term of 2 years. This activity increased our structured investment portfolio by $45 million to $158 million subsequent to quarter end with a weighted average yield of 11.6%. In summary, 2026 is off to a great start, and we are in a great position to sustain our growth in the quarters ahead. Our portfolio continues to perform well and is supported by embedded growth drivers, including in-place below-market rents, our Signed-Not-Open pipeline, planned outparcel developments and disciplined capital recycling. Collectively, we believe that these initiatives can support meaningful earnings growth for several years to come and contribute to our increased guidance for core FFO and AFFO per diluted share to new ranges that imply approximately 12% growth at the midpoint. And with that, I will now hand the call over to Phil. Philip Mays: Thanks, John. On this call, I will briefly highlight our earnings, provide an update on our balance sheet and discuss our raised 2026 outlook. Starting with operating results. For the first quarter, core FFO was $16.9 million, a $2.5 million increase compared to $14.4 million reported in the comparable quarter of the prior year. And on a diluted share basis was $0.52 per share versus $0.46 per share. AFFO was $18.2 million for the quarter, an increase of $2.7 million compared to $15.5 million reported in the comparable quarter of the prior year and on a diluted share basis was $0.56 per share versus $0.49 per share. The growth in both core FFO and AFFO was primarily driven by leases executed over the past year that have since commenced paying rent, although it did include approximately $0.01 related to nonrecurring recovery benefits from final 2025 CAM, real estate taxes and insurance billings that tenants recorded in this quarter. With regards to property operations, as John mentioned, same-property NOI for shopping centers increased 6.8% in the first quarter compared to the comparable quarter of the prior year. Excluding the nonrecurring recovery benefits discussed earlier, same-property NOI for our shopping centers still increased a healthy 4.2%. Given the relatively small size of our same-property NOI, $200,000 impacts quarterly growth by approximately 100 basis points. Accordingly, unusual and nonrecurring items like this can occasionally skew our same-property NOI, so we want to highlight the impact of such items when appropriate. Notably, shopping center properties represented 97% of total same-property NOI for the quarter. Total same-property NOI, including our few noncore properties, increased 3.4% for the quarter. This growth was impacted by one tenant as previously announced, vacating 98,000 square feet at our Albuquerque property at the beginning of December 2025, which more than offset the nonrecurring recovery benefits recorded. As a reminder, this vacancy has been fully leased to the state of New Mexico, which is expected to commence paying rent in late 2026. Moving to the balance sheet. At March 31, 2026, we had total debt of $651.8 million with a weighted average interest rate of 4.6%. Further, we ended the quarter with approximately $125 million of liquidity and leverage at 6.4x net debt to pro forma adjusted EBITDA, which is consistent with the end of 2025. During the quarter, we opportunistically utilized our common ATM program to issue approximately 733,900 common shares at an average price of $19.59 per share for total net proceeds of $14.2 million. Notably, these proceeds, combined with the repayment of our $30 million Watters Creek preferred investment and higher NOI enabled us to maintain leverage at a consistent level even with the acquisition of Palms Crossing completed in this quarter. Now turning to guidance. For the full year 2026, we are increasing our core FFO outlook to a new range of $2.06 to $2.11 per diluted share and our AFFO outlook to a new range of $2.19 to $2.24 per diluted share. Key assumptions reflected in our guidance include increased investment volume, including structured investments of $175 million to $250 million, same-property NOI growth for shopping centers of 3.5% to 4.5% and general and administrative expenses of $19.7 million to $20.2 million. And with that, operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jay Kornreich with Cantor Fitzgerald & Company. Jay Kornreich: I guess I just want to start out with the new $75 million Southwest preferred equity investment at the 12% yield. I guess what attracted you to that investment? And how do you anticipate, I guess, the draw schedule occurring -- sorry, how do you anticipate the draw schedule occurring going forward? And in terms of funding sources for it, I guess you can use $30 million from the Watters investment, which was prepaid, but how do you think about funding the incremental $45 million? John Albright: Yes. We've already did the investment. So it was like it was one closing. And so as you mentioned, the Watters Creek was recycled into that. And we'll basically have, as we mentioned, an asset sale coming up and so forth, which will bring down leverage. But otherwise, we just use the balance sheet for the balance of it. Jay Kornreich: Okay. And then just going back to the original 10 vacant anchor spaces that we've talked about. I think there's still 3 remaining to be signed. Can you just give an update on how those conversations are progressing and when you think you could get a lease signed and ultimately rent payment beginning? John Albright: Yes. It's going really well as far as terms have been agreed upon moving to leases, but these things with these large national companies go really slow. So I would say, conservatively, I would say, 3 months and hoping to do it before then. But every time you think these things would take 30 days, it drags. So -- but we are -- the good thing is even though the lease may take that long, we're working right away on basically engineering drawings and what needs to be done to outfit the space for the tenants. So that's not going to -- we're not going to wait for the lease to be signed to get that work done. So the lease commencement will kind of stay kind of probably take, call it, 9 months or so to kind of get the tenant in place, but that part won't move even though the lease may drag out. Operator: Our next question comes from the line of Matthew Erdner with Jones Trading. Matthew Erdner: I'm just curious what's going to lead you kind of towards the high range of the investment guidance versus the bottom end? Because I think if you lean towards the bottom end, it will probably be one more structured investment. And given the timing of Madison Yards, should we expect anything to kind of happen in the second half of the year from an investment perspective? John Albright: Phil, I'll let you kind of address that, but I'll start with some of the pipeline. We do have structured investments that we are working on. It's relatively small, but that's something that could happen here in the next 30 days. And as far as acquisition pipeline, we do have our eyes on a couple of things, but they're not going to happen until they're not even out in the market yet. They're being prepared for market. So we hope to be more active probably in the next kind of 4 months. And then we'll -- as mentioned in our prepared remarks, we'll have some recycling going on, which will kind of happen in the next probably 3 months. Philip Mays: Yes, Matt, it's Phil. And you're correct in your assumption. So the small structured investment John referred to would put us right around the low end of the range. And then if we complete some of the larger property acquisitions in the pipeline, it would push us up towards the higher end of the range. Matthew Erdner: Got it. And then kind of as a follow-up to that, are you guys assuming that outparcel at Forsyth, there's 10 extra acres there in the investment guidance for this year? Or would that be additional? Philip Mays: Yes. So they won't contribute to earnings in this year. It's one of the pads that we've identified. So part of the -- where we've discussed $30 million of capital earning low double-digit yield unlevered. It's in that group. But any earnings from that will not be in this year, Matt. Operator: Our next question comes from the line of Craig Kucera with Lucid Capital Markets. Craig Kucera: With the preferred equity investment you made here in the second quarter, I think -- and it sounds like you've got another potential small one. I think that brings CTO's exposure to structured investments to around 11%, maybe closer to 15% when fully funded relative to undepreciated assets. Are you thinking about a cap or target on that as a percentage of the balance sheet similar to PINE? John Albright: Yes. Thanks for the question. So I would say that most likely, the cap will be -- it will definitely be below 20% and maybe more in line with the 15%. And so as you've seen at PINE, sometimes it will go a little higher as we anticipate some payoffs happening. But roughly 15% feels like a good place for us. Craig Kucera: Okay. Great. And thinking about investment guidance, you've done $156 million year-to-date. I think you started out the year guiding to sort of 8% to 8.5%. The preferred equity down here this quarter is 12%. Has that sort of yield range changed at all because of that? John Albright: Yes. So the cap rates, I can kind of go into kind of what we're seeing on cap rates. And then as we see more visibility on what we'll be buying and kind of the structured finance kind of give you a better mix outcome. But in general, the acquisitions that we're seeing are kind of in the 7.5% to 8% range. And then with regards to structured finance, something in the kind of 10% to 13% range. And so you kind of have that little blend. Craig Kucera: Okay. Great. That's very helpful. Just a couple more for me. Looking at your space that's expiring this year, it looks like it's significantly above the average in the portfolio, particularly on the anchor space, are mostly on the anchor space. You had, I think, a 24% cash increase in rent spreads last year. Do you -- I think you had [ 14% ] this quarter. Are you thinking something in the double-digit range is possible this year? Or is that going to be a little tougher? Philip Mays: Yes. I mean I think the spreads, you would see them kind of continue in the range they've been, Craig. Are you referring to '26 when you say this year, right? Craig Kucera: Yes, in '26. Philip Mays: Yes, yes. So the expiring rents are a little higher, right? I think they're closer to [ '25 ] where we've been signing a lot of leases. But we're not only working on '26, we're also working on '27. I mean they start early. So I think while the spreads could come down a little just because the average rent and the leases expiring in '26 could bring it down a little. But generally, it still should be close to where we've historically been recently. Obviously, any one quarter can bounce around a lot just because it's not a lot of [ GLA ] in one quarter, but for the full year, should be pretty good. Craig Kucera: Okay. That's helpful. Just one more for me. Philip Mays: What's driving that? -- there's fewer anchors in there, Craig. So that's what's left is small shop. So a little higher ABR. Craig Kucera: And just one more for me. I think last quarter, the implied ABR recognition in the Signed-Not-Open pipeline was about [ 2.9 ] million for 2026. I think now we're looking at [ 1.8 ] million in the updated deck. Can you give us a sense of how you're anticipating the timing of that [ 1.8 ] million in '26 and sort of how we should think about modeling '27 from a Signed-Not-Open pipeline recognition perspective? Philip Mays: Yes. So about [ 1.5 ] million rolled off the pipeline from last time and got -- and commenced. And then with new leases, we kind of filled that back up, signing about [ 1.5 ] million. So the total the Signed-Not-Open pipeline did not move much. What did go in went in relatively closer to the beginning of the quarter. So it was in there for most of the quarter and it's reflected in the quarter's run rate. With what's left in the Signed-Not-Open pipeline, I think it will be a little more Q3, Q4 weighted. And then generally, almost all of it is in place, albeit maybe later in the year, prior to '27. So you should get pretty much the full impact of the Signed-Not-Open pipeline in '27. I think there's one tenant that pushes to early '28, but almost everything should be recognized in '27. Craig Kucera: I'm sorry, are you saying recognized as of sort of that early '27 or throughout '27? Philip Mays: Early '27. So it should -- just other than one tenant, I think they're all -- you should get the full benefit of the Signed-Not-Open pipeline for '27. There's one tenant you won't get the full benefit of until '28 because they'll open during '27. But what's left for '26 will be later in the year, and then you'll get the full benefit in '27. Operator: Our next question comes from the line of John Massocca with B. Riley Securities. John Massocca: Maybe thinking about the Madison disposition. I know we can kind of back into the numbers a little bit on our own given your disclosure. But is it right to think that that's at about a 6% cap rate? I know it kind of depends a little bit on the NOI margin at that specific asset, but does that sound roughly correct? John Albright: It's a little higher than that because of the AMC Theatres. John Massocca: Okay. All right. And then maybe kind of more big picture as you're thinking about your leasing pipeline and some of the vacancy that's left. And I know a lot of that's been addressed because a lot of it is in Carolina Pavilion. But is there any kind of hesitancy you've seen in retailers and frankly, in recent weeks around signing deals just given some of the macro uncertainty out there, some of the uncertainty about how some of the headline stuff maybe impacts the consumer. Just curious how the kind of leasing trajectory has been on a super recent basis. John Albright: There's been no hesitancy with pushing forward on leases. We have not seen any pullback whatsoever on any category. John Massocca: Okay. And then the in-place portfolio, any new tenants or any kind of notable increase to the watch list? I was just curious if there's any kind of pushes and pulls there. Anything coming out of the watch list even too? John Albright: No. I mean really, as I've said in prior calls, it's really some of the smaller type tenants and maybe restaurant oriented, but there's been no notable change one way or the other on the watch list. John Massocca: Okay. And then last one. There's been a decent amount of M&A in the space in kind of recent years, including a notable comp to you all recently. How does that impact kind of your disposition and acquisition outlook? Is there stuff that maybe comes out of those transactions or a competitor maybe not being in the space that increases the likelihood of you closing certain deals? Does it indicate something you can do on the capital recycling side that is interesting? Just kind of curious if the events outside of your control kind of changed the dynamics around how you're operating the business? John Albright: Yes. I would just say that there's just a lot more capital out there and that price point of that transaction was fairly aggressive. So it's helpful on our recycling side for sure, but not helpful on our acquisition side. So we pride ourselves on being fast to kind of address an acquisition. We can move fast. And the groups that are out there on the acquisition hunt are much larger kind of institutional and they take a lot longer. So just being a little bit nimble is an advantage for us. Operator: Our next question comes from the line of Gaurav Mehta with Alliance Global Partners. Gaurav Mehta: I wanted to ask you on the acquisition that you made, Palms Crossing this quarter. On the value-add upside, can you maybe talk about where the rents are on that property versus where the market rents are? John Albright: Yes. I mean the market rents are below market, but there's not really any sort of play where we're going to get a tenant out and we're going to have a huge mark-to-market on lease-up. I would just say that we do have a little bit of vacancy, and we have an outparcel that we didn't pay any money for that we're working on. So that's where the growth is going to come over and beyond what we bought. But they are below market, but not something that you can kind of get to anytime soon. Gaurav Mehta: Okay. Second question on the guidance, just a clarification. On the Madison Yards, I didn't see that listed in the guidance assumption. Is that included in your guidance, the disposition? Philip Mays: No, we didn't put a disposition volume out there. Currently, that's the only near-term and planned disposition. Operator: So I'm showing no further questions at this time. This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello, and welcome to the Q1 '26 IDEX Corporation Earnings Call. [Operator Instructions] Now I would like to turn the call over to Jim Giannakouros, Vice President of Investor Relations. Please go ahead, Jim. James Giannakouros: Good morning, everyone, and welcome to IDEX's First Quarter 2026 Earnings Conference Call. We released our first quarter financial results earlier this morning, and you can find both our press release and earnings call slide presentation in the Investors section of our website, idexcorp.com. On the call with me today are Eric Ashleman, President and Chief Executive Officer of IDEX; and Sean Gillen, our Chief Financial Officer. Today's call will begin with Eric providing highlights of our first quarter results and an update on our business outlook and strategies. Then Sean will discuss additional financial details and our updated outlook for 2026. Following our prepared remarks, we will open the line for questions. But before we begin, please refer to Slide 2 of our presentation where we note that comments today will include forward-looking statements based on current expectations. Actual results could differ materially from these statements due to a number of risks and uncertainties, which are discussed in our press release and SEC filings. As IDEX provides non-GAAP financial information, we provided reconciliations between GAAP and non-GAAP measures in our press release and in the appendix of our presentation materials, which are available on our website. With that, I will turn the call over to Eric. Eric Ashleman: Thanks, Jim. Good morning, everyone, and thank you for joining us today. Please turn to Slide 3. IDEX delivered a strong first quarter and continue to see our growth strategies gain traction as we expand and integrate capabilities in targeted advantaged markets powered by 8020. I'd like to thank our teams around the world for their disciplined execution, agility and focus as they help drive long-term value creation. In the first quarter, IDEX delivered organic sales growth of 5% and adjusted EBITDA margin of 26%, which reflects a margin expansion of 50 basis points year-over-year. These results were above our expectations and reflects strong performance across each of our segments. Additionally, orders were better than expected, growing 10% organically year-over-year. Strength was most pronounced in our Health & Science Technologies, or HST segment, where secular drivers continue to fuel growth across high-value applications in data center, semiconductor and space and defense markets. The strong backlog build in HST improves our visibility to deliver continued solid growth for the balance of the year and into 2027. Finally, orders in our Fluid & Metering Technologies, or FMT segment, grew 9% organic year-over-year. This was driven by strong order activity in our water platform and our pumps businesses. In our general industrial business units, we are off to a good start to the year, and it's encouraging to see signs of improvement in these end markets. Taking our Q1 performance and backlog build into account, we are raising our full year 2026 financial outlook. Sean will get into greater detail later in the call. Before turning it over to Sean, I'd like to walk through a live example of IDEX's capabilities to drive long-term value as 8020 drives growth, margins and earnings. Please turn to Slide 4. At the highest level, this starts with a very high-quality portfolio of market-leading applied technologies used in environments where performance is critical and failure is not an option. Space and defense is a prime example of faster growing durable end markets where we are increasingly deploying resources in the HST segment to expand our opportunity set. In simple terms, we provide critical components that move, manage, filter, focus and protect data, energy and fluids in space and defense systems. These markets benefit from growing demand for space-based connectivity and breakthrough defense technologies with long program lives and rising system complexity creating a multiyear growth runway. Importantly, our participation spans multiple touch points across the portfolio from optics enabling secure data transmission to Mott's filtration solutions supporting propulsion and thermal management, alongside other engineered components for mission-critical systems. These solutions are co-engineered early with customers, allowing us to move quickly, adapt as requirements evolve and reinforce our role as a trusted partner. Please turn to Slide 5. For more than a decade, 8020 has helped us improve focus, margins and execution. Within our growth platforms, we are increasingly using it as a growth tool, segmenting markets more deliberately, clarifying where we win and actively reallocating capital and talent toward the highest value opportunities. What's different today is the quality and scale of growth emerging from our platform, 80s customers and markets. As demand concentrates in more complex, higher value applications, our pivot toward durable growth areas is reinforcing a stronger overall outlook for IDEX. This momentum also creates a flywheel effect, strengthen our advantaged platforms allows us to further simplify, rationalize and refine the portfolio, driving higher growth, stronger margins and enhance shareholder value over time. It might seem counterintuitive to some, but we grow fastest by focusing and doubling down on fewer customers over time as we help winning customers quickly grow share within advantaged spaces. Our component orientation allows us full flexibility to move right or left into the other application arenas to apply 8020 again, moving up the peaks and valleys of dynamic growth as we compound value. We complement this work with balanced and disciplined capital deployment, maintaining a strong balance sheet for flexibility, investing organically, actively pursuing tuck-in acquisitions and returning capital to shareholders. We repurchased $76 million of IDEX shares in the first quarter and expect to maintain that pace throughout 2026. With that, I'll turn it over to Sean to walk through the quarter in more detail, including segment performance and our updated outlook. Sean Gillen: Thanks, Eric. Good morning, everyone, and thank you for joining us today. Please turn to Slide 6. As Eric mentioned, in the first quarter of 2026, IDEX delivered better-than-expected financial performance. Organic revenue growth of 5% was better than we forecasted, with notable strength in HST. Adjusted EBITDA margin expanded 50 basis points year-over-year on productivity improvements, positive volume leverage and positive price cost, partially offset by mix. And adjusted EPS came in significantly higher than our guided range in the first quarter. Overall, our orders grew approximately 10% organically in the quarter, again, led by HST's organic order growth of 17% year-over-year. FMT orders grew 9% organically in the first quarter and FSDP orders declined 4% organically. As a reminder, we typically enter any given quarter approximately 50% booked overall. But the strong order activity in HST is driving a backlog build that offers greater confidence in our ability to deliver better financial performance than we outlined entering 2026. In FMT and FSDP, the rapid fulfillment nature of those businesses limit our visibility to approximately midway into any given quarter. Touching on some of the more meaningful business demand trends in the quarter, we saw a continuation of strong order activity in areas influenced by AI, which for us is most meaningfully in power generation for data centers, semiconductor manufacturing and optical switching. We also continued to see strength in municipal water, mining, pharma and space and defense. Organic sales in the first quarter grew 5%, with HST growing at 11% and FMT growing at 2%, while FSDP was down slightly. On a consolidated basis, organic sales growth was balanced between volume and price contribution. IDEX adjusted gross margin declined 40 basis points year-over-year to 44.9%, reflecting productivity gains and volume leverage being more than offset by mix. Adjusted EBITDA margin expanded 50 basis points versus last year, reflecting productivity gains, volume leverage and cost discipline more than offsetting negative mix. The first quarter is our seasonally lowest cash flow period. Free cash flow of $86 million declined $5 million versus last year, driven mostly by higher working capital investment due to higher growth. We continue to expect free cash flow conversion of at least 100% on an annual basis. We ended the quarter with strong liquidity of approximately $1.1 billion. And finally, we spent $76 million to repurchase IDEX shares in the quarter, and we remain committed to that quarterly pace for 2026. Now quickly some color on our results by segment. I'm on Slide 7. In HST, organic orders increased 17% and revenue grew 11% organically. Volumes increased in advantaged markets, including semiconductor OE and consumables, data center applications and space and defense. And notably, these exposures are, as Eric mentioned, in the areas we have pivoted the portfolio towards in the last few years and where our integrated growth strategies and platform building reside. Pharma was also an area of strength in the quarter. HST adjusted EBITDA margin expanded 100 basis points year-over-year as positive volume leverage, positive price/cost and productivity benefits more than offset unfavorable mix and acquisitions. Turning to Slide 8. In FMT, organic orders increased 9% and organic sales increased 2%. Orders growth was supported by our intelligent water platform and our mining exposures, partially offset by global softness in chemical end markets. Looking at our leading indicator industrial order rates, they showed growth in the quarter as orders and revenue in these businesses were slightly better than we had expected. Our water platform continued to perform well, contributing to both the order and sales growth in the quarter. FMT's adjusted EBITDA margin declined slightly by 10 basis points year-over-year as productivity benefits were more than offset by mix and volume deleverage. Please turn to Slide 9. FSDP organic orders declined 4% year-over-year and organic sales decreased 1%. Our Fire & Safety franchise grew high single digit in the quarter as we continued to see strong demand for our fire and rescue tools in North America and stable demand in Europe. This growth was offset by an expected decline in dispensing. This decline in dispensing was due to tough comps and project volumes in North America and Asia. We expect to see stability in our dispensing business on a sequential basis. FSDP adjusted EBITDA margin increased 30 basis points year-over-year as strong productivity improvements more than offset mix and volume deleverage influences in the first quarter. Please turn to Slide 10, where I'll touch on capital deployment. Like I mentioned earlier, we drove $86 million of free cash flow in the first quarter, which is our seasonally lowest cash-generating period in a given calendar year. Our gross leverage position as of the end of the first quarter is at roughly 2x. As outlined last quarter, we continue to maintain a balanced approach to capital deployment. In the near term, we will focus on organic investments to drive growth, bolt-on M&A and capital return to shareholders. In the quarter, we paid $53 million in dividends and repurchased $76 million in shares. We plan on maintaining the share repurchase level per quarter through the rest of 2026. Now I'd like to discuss our updated guidance for 2026. Please turn to Slide 11. For the full year 2026, we now expect organic growth in the 3% to 4% range, an increase over our original 1% to 2% organic growth guidance coming into the year. Our overall IDEX organic growth guidance balances approximate high single-digit growth for HST and flattish outlooks for FMT and FSDP. These outlooks reflect HST's strong order book and relative stability in our FMT and FSDP segments. Adjusted EBITDA margin is expected to be in the 26.5% to 27% range in 2026, unchanged from our previous guidance. We continue to expect productivity benefits throughout IDEX businesses and solid leverage and margin expansion at HST this year. However, volume decrementals in FMT and FSDP and mix influences keep our near-term margin expansion expectations unchanged. We are increasing our adjusted EPS guidance for 2026 by $0.20 to $8.35 to $8.55, representing mid- to high single-digit growth year-over-year. For the second quarter of 2026, we expect 3% to 4% organic growth, adjusted EBITDA margin in the 26.5% to 27% range and adjusted EPS of $2.07 to $2.12. Also, I wanted to provide an update on tariffs. We continue to monitor the changes closely and adapt our businesses accordingly. While the IEEPA tariffs have been repealed, the administration has implemented new tariffs in reaction to this. For our businesses, these new tariffs are largely consistent with the ones repealed such that we currently do not anticipate much of a net impact to our financial results. As it relates to the expected IEEPA refunds, we have taken the requisite actions to apply for these and we'll keep you updated, if applicable, as it is expected to play out over the coming months. With that, I'll turn the call back over to Eric. Eric Ashleman: Thanks, Sean. I'm on Slide 12. As we step back, we feel very good about the start to the year and the momentum building across IDEX. Our performance reflects strong execution, increasing traction in our advantaged markets and continued progress as we execute our growth strategies. The demand signals we're seeing within our growing backlog reinforce our confidence in the direction of the portfolio. Many of the demand trends in our advantaged markets are expected to remain robust well beyond 2026. At the core of this progress is 8020. It continues to sharpen our focus, guide where we invest capital and talent and help us scale growth across platforms and applications that matter most. Just as importantly, it is enabled by our teams and our culture, one that emphasizes trust, collaboration and accountability across the organization. We recognize there's still work ahead as we continue to execute our strategy and further enhance the quality of growth across the portfolio, but we are encouraged by what we are seeing, confident in the path forward and excited about the value creation opportunity in front of us. With that, we appreciate your continued interest in IDEX. And I'll turn the call back to the operator for your questions. Operator: [Operator Instructions] And our first question comes from the line of Joe Giordano with TD Cowen. Joseph Giordano: Just curious on how to think about the guide here. So 1Q comes in 5%, 2Q guided 3% to 4%. Given the orders here, why should the second half organic decelerate from the pace that we're on now? Or is this just kind of, look, there's a lot going on in the world and we're just playing it safe? Sean Gillen: Yes. I think to give a little bit of color on that, it's really around -- I think HST should continue at a pretty similar clip, as we mentioned, high single-digit to double-digit growth at HST, and that's really driven by the order backlog, as you referenced, where we've seen that momentum. And I think in FMT, in particular, is where we saw good performance in the quarter. The end of the quarter was stronger than the beginning, seeing some sequential improvement. But as the outlook for the year, still seeing or forecasting a growth outlook that's a bit flat. And that's probably a little bit of the macro world, 1 quarter into the year, some uncertainty in the macro world, and what we're seeing the visibility, keeping that around flat. So that's a little bit of color as first half of the year as we move into the second half. Joseph Giordano: And then what needs to happen at HST to get margins back to like that 30-ish percent range that you were at a couple of years ago? Like which -- is that incumbent on life sciences picking back up? Like what's kind of needed there to get back to historical highs? Sean Gillen: Yes. Good question. And I think there's two pieces to that. One is the acquired -- the recently acquired businesses, which are performing quite well and are driving a lot of the growth as more of the growth in that business has come from the acquired businesses, there still, margins are strong, but they're not quite at the segment average yet. And what we'll take to get there is, as we talked in the last couple of quarters, some continued focus on 8020 to drive margins higher in the acquired businesses. So as they get their margins up and the growth continues to come from them, that will have a mixed benefit. And then the other piece is, as you mentioned, life sciences, kind of flattish to slightly down in the quarter, and that's a nicely profitable business for us, so a little mix there, but would expect growth to return to that as we go forward as well. Operator: Your next question comes from the line of Matt Summerville with D.A. Davidson. Matt Summerville: A couple of questions. Just on one of the last points Sean made. Can you give a bit more context as to why you expect to see what sounded like maybe some sustained inflection from here in the life sciences portion of HST? And then I have a follow-up. Eric Ashleman: So I think, look, the life science business is about exactly where we thought it would be. The core fluidics and optical filters, franchises that drive the bulk of the profits there are still growing low single digits. And honestly, the drivers on both sides remain the same. So pharma really, really strong. And then the pressure points coming largely from both the China market for our end customers and then the funding, NIH funding academic pressures that we've seen for a while now. I think for us in the first quarter, remember, about a year ago, this is just starting to play out. Now we're pretty deep into it. And I think most people are expecting that it will remain at this pressure. And so we had a call here that coming into the year, we thought these customers, some of our customers that depend on us, we're going to be a little guarded in some of the inventory positions of IDEX product. We saw that play out as we thought. But the dynamics here remain exactly as we've been talking about over the last few quarters, and a low single-digit growth, some positives, some negatives and -- but a ton of innovation and things that are going on here that I think longer term will give us a lot of confidence in where this market is going to go. Matt Summerville: Can you also maybe highlight just how you saw incoming orders cadence through the first 3 months of the year, what you're seeing in April thus far across the businesses? And specifically, I'd be curious as to how the general industrial book-to-bill has been trending in both FMT and HST. Eric Ashleman: Yes. I mean it's a little different depending on the segments. The HST side, with the momentum that we're seeing there has less of a nonlinearity profile, it's has been generally pretty strong for a while, and kind of saw it that way -- play out that way in the quarter. On the FMT and FSDP segments, which are certainly more fragmented, broadly indexed to industrial markets, that was interesting. It was pretty soft in the beginning of the year in January, it came back a bit in February, and it was a much stronger March. And then we've kind of stayed at that level here in April. One thing that's interesting, we've talked a lot about the businesses that we use as diagnostics for kind of near-term health. And while those were overall positive, they didn't move positive in a uniform way. So we don't have sort of every member seeing the exact same thing, the little mix, and even the project business that we saw in there, we don't get a lot of it, but that tells us something, too. Almost all of those, you can trace back, the successful ones back to some of the same mega trends that we're referencing in HST, data center work, energy grid, things like that. So I think it's improving. It's better than we had obviously modeled originally for the quarter. But I would still put it in sort of a mixed place. And I think largely that's because of the overhang of the geopolitical situation. Operator: And your next question comes from the line of Nathan Jones with Stifel. Nathan Jones: I guess I'll follow up on the short cycle industrial question. Maybe you can talk a little bit more about the pieces of that, that you -- where you're not seeing some improvement and maybe what you think is required to get those businesses going in the right direction again? Eric Ashleman: Well, in a few places where that played out, I'd say those businesses are a little bit more indexed to chemical markets and some of the ones that we mentioned or kind of core energy. So their exposure there probably explains some of it. They're also probably the most fragmented businesses. A lot of the orders there are 1 or 2 here, and they have really quick lead times. So as somebody is uncertain. They're the kind of businesses that you really don't have to make much of a commitment because we're going to be able to quick turn all of the product. So I would say that's -- those would be the 2 characteristics. Again, this wasn't a lot of businesses, but there is some mix, there is a mixed nature of how these ran out over the last 4 months. Nathan Jones: Fair enough. I'm going to ask the HST margin question a little bit differently. You've seen good positive growth for the last 3 quarters and the incremental margins have been in the low 30s. I think I would have expected, and I think you would expect long term, those incrementals to be higher. Can you maybe just run through the pieces that are keeping those depressed? I know you talked a little bit about acquisitions. There's probably some drag on that. But maybe just some color on what's depressing those a little bit? What it takes to get back to kind of maybe into the 40s on incremental margins? And when you think you'll be able to get those incrementals to move back to a more historically normal level? Sean Gillen: Yes. So for the last quarter or 2, and in this quarter, the flow-through in HST was about 33%, so in that low to mid-30% as you referenced. As you think about kind of the guide for the year, we see that improving slightly, getting to kind of those mid-30%. And all that's really in line with where we expected it to be for the year so far. And then kind of what needs to happen to have it tick up, I think it's a couple of points, which I referenced. It's the acquired businesses, which are below the segment EBITDA margins of kind of 26%, 27%. As we take some 8020 actions, what I mean by that is as we start to prune some pieces of the portfolio within those businesses that are dragged on the margin within the acquired businesses and continue to grow the higher value add, higher margin parts of the acquired businesses. And I'm thinking Muon, Micro-LAM and Mott being some of the ones that have some room for improvement in overall margin. So that's kind of point one. Those acquired businesses. And as you mentioned, a lot of the growth you're seeing are coming from those businesses. So as they continue to provide more of the earnings power, getting their margin up will help increase the flow through towards that 40%. And then part 2 is life sciences, which is a nicely profitable business for us. As that grows, it has strong a leverage and EBITDA flow through. I haven't seen that in the first quarter or 2, but for all the reasons that Eric mentioned, you would expect that to improve as we move through this fiscal year. In terms of getting to 40%, as I mentioned for the year, the guide contemplates kind of mid-30 flow-throughs as I think as we get into next year and some of those 8020 actions take hold and some improvement in some end markets, I think we'll get towards that 40%. Operator: Your next question comes from the line of Deane Dray with RBC. Deane Dray: You called out some strength in the water business in FMT. Just kind of give us a sense of where that demand is. How much of that is kind of the flow business versus projects? And what are your assumptions for the balance of the year? Eric Ashleman: Yes. No, it remains a really strong part of the story. And the municipal-facing side of that, that's kind of our core inspection and analytical software piece has been really good. We had some nice equipment sales in particular, this particular quarter to back that up. So the hardware side was nice. Again, I remind people, it's a really great business that's very, very focused around storm water, storm water flows, so overflow conditions and remediating those are a big part of what they do. That remains really, really relevant as we see given the nature of infrastructure and catastrophic weather events. So it's just really well positioned. The part that's giving it an added boost this year is we do have a component of that platform that is focused on high-purity water, largely for semicon applications. That has actually been headwind for that group in the last year or so, it's flipped over. It's now positive and growing as well. So we've got kind of both of those firing. That accounts for the high single-digit growth that we posted and we continue that to sustain. Deane Dray: Great. And just as a follow-up, I wanted to ask about M&A activity in your sector, but that was done away. And just what the implications are, and what the thoughts might be. So first, we've seen some deals in the storm water space [indiscernible] to overflow. I mean, I think that's just a validation of how much a focus this is. Where do you see growth rates for you all in terms of -- is it M&A? Is it organic? That's the question. And then the second one, there was a really interesting transaction in fire and security recently which I think is a validation of your commitment to this business. So just 2 different sectors, interesting M&A away, what are the implications for IDEX? Eric Ashleman: Yes. Well, certainly, I mean, you're paying on 2 spots where we play, and we do very, very good work with in both cases, very critical technologies applied to get jobs done that are highly valued. So I think both from small deals to large deals in the spaces that you referenced here, you're seeing appreciation for work of that nature and quality. And so I think it's a testament, a continued testament to kind of where we are, where we're positioned and the way that we see those businesses as well. As things play out and businesses change hands, I mean we always kind of look at that and just see if that has a competitive impact on the market, and we're very, very close to those worlds and customers, and we'd respond accordingly in any way we had to. But think bottom line here is it's -- I take it as a testament to the quality of the work that we do. Operator: Your next question comes from the line of Bryan Blair with Oppenheimer. Bryan Blair: Nice start to the year. I was hoping you could offer a little more color on HST's visibility. Starting with backlog expansion. I think last quarter, you had cited around $100 million in year-on-year build. Where does that fit now? And given the investment trends and project orientation of some of the HST's advantaged markets, how are you thinking about underlying demand support through the back half and into 2027? Eric, you had alluded to solid runway in your prepared remarks. I was just curious if you can offer any additional detail. Eric Ashleman: Yes. Well, as you saw, we drove a nice backlog number again, increase for HST this quarter. And it's interesting here. We're getting more visibility than we've typically had for classic IDEX, and you can see that growing in HST, and it's really growing in these faster-growing order wins and application spaces. And the nature of it is these are moving fast. In many cases, these are novel solutions, where we're just kind of bringing them to market. And then you've got customers here that are trying to ramp pretty aggressively. And so they're giving us and as well as other suppliers some good visibility to the road ahead to make sure that we've properly capitalized, we've got labor lined up, we've got materials available. So we get more than we typically would, let's say, in certainly in FMT and other places, even much of the rest of HST. So that accounts for some of it. That being said, it's anything that we are recognizing here, of course, is within a 12-month period, and it's -- you don't -- it's actually pretty linear as it runs. Also, in the discussions that we have with customers as we're booking it and we're working with them, that same spirit runs into discussions about out years. So what comes next in terms of technology is something we talk about, what kind of volume requirements might be needed there so that, again, we get the jump on any capital we and others might need to lay in. That's why we're able to point towards continued growth beyond a 12-month horizon here because of those conversations that kind of look forward, that, again, is a little different from what we've typically experienced in IDEX, but it's something that we had planned to be part of our growth story here, and it's playing out that way, hence the references to confidence both for this year and the out-years. Operator: Sorry for that. Let me go next to Mike Halloran with Baird. Michael Halloran: I'm going to tell you that I have the user error. I might have hung up on you right when Deane was asking his first question, and I came back on. So I apologize ahead of time if I asked anything that's redundant here. So could you help me a little bit with the sequential dynamics you're assuming for the remainder of the year. Obviously, [indiscernible] are really good. As we sit here today, the short-cycle piece seems like it's going in the right direction, all LC tools, a couple of end market headwinds. Eric, maybe simply, do you feel like we're at an inflection point or close enough to an inflection point to be comfortable with the trajectory on those short-cycle pieces yet? Obviously, you just talked about the higher growth areas, the investment areas you feel good there. But maybe more just on the short cycle dynamic trajectories you work through the year and how you think about sequentials? Eric Ashleman: Yes, we did talk about this a little earlier, but I think it's worth restating. We definitely saw a cadence of improvement across really the 4 months of the year, kind of weak in January, a little better in February, pretty strong March, and then it sort of held at that level in April. [indiscernible] actually, I think that's a testament to the resilience of these markets in the face of some pretty concerning or uncertain headlines geopolitically. I did reference though, as you know, we have these diagnostic businesses that could give us some insight into strength of inflection. And that usually comes about when they're all moving in the exact same way. That's the one piece that I pointed to and said, we've got a few that are not moving in the same direction. They're okay. They're stable, but they're not jumping yet. So I think -- and that matches the conversations we're having. You still see an awful lot of references to what might play out in terms of energy, energy pricing, material availability, all the usual suspects when something like this is going on in the world around us. So I think we're better. I believe it is an indicator of how strong maybe that industrial world wants to run here. But I would also say pretty reasonably guarded because of some of the things that are out there. So the way that we have it modeled, we kind of have it probably appropriately conservatively modeled that's flattish running out kind of not too far from our original assumption. But I think that's the right call based on what we're seeing and what we're hearing. Michael Halloran: So is it fair to say then that the delta in the guidance here, obviously, the uptick is partially in the first quarter strength? But it's -- we're tied to the internal growth initiatives, the investments you've made internally and with some of the M&A than it is any real change in the cyclical dynamics? Eric Ashleman: That's absolutely true. Michael Halloran: Okay. And then just quickly, just thoughts on buybacks versus the M&A side of things and how you're thinking about the pipeline and acquisitions as we sit here today? Sean Gillen: Yes. The pipeline on M&A continues to be active and continues to be kind of focused in that bolt-on type size of deal. We have sufficient capacity to take that on while continuing to maintain the current buyback levels. We did $76 million in the quarter. I mentioned that we'd expect that cadence to continue for each of the quarters through this year. And at those levels, we still have more than enough capacity to execute on bolt-on M&A as it comes into focus. So I'd say kind of no change from a capital allocation specifically as it relates to repurchase, and then still focused on M&A with a pipeline that's active and focused on that bolt-on world. Eric Ashleman: And then I would just add, the cultivation for those tuck-ins. I mean it continues to improve. So the more traction we get on our initiatives, largely -- almost all of which involves some integration of units. People see that. They recognize that and increasingly want to be a part of it. Operator: Our next question comes from the line of Bryan Blair with Oppenheimer to continue his follow-up questions. Bryan Blair: I actually cut out a bit. I appreciate you letting me ask a follow-up. I'm not sure if this was just addressed, so apologies if it was the case. I wanted to circle back to FMT trends and just the disconnect between order rates being kind of high single-digit range over the last 4 quarters relative to sales being 1%, give or take, on average. It sounds like trends are generally positive. And there is that disconnect between order and revenue recognition. Just trying to get a sense of how much conservatism you're baking in versus something else that would drive continued delta on that front? Sean Gillen: Yes. Good question. I think that's where -- looking at a quarter or 2 in FMT can be a little bit misleading because a lot of that order activity is consumed within the quarter. If you look over a longer, call it, kind of 4-quarter period, normalize for some of those movements that will help. But in the order activity that we saw in the quarter, which was strong at 9% organic, water really led the way on that performance, and we would expect that performance to continue as we have them pegged in kind of that high single-digit growth. And we saw some notable bright spots in our mining end markets in the quarter as well as in just the overall pumps market. Some of that was a little bit of demand coming in Q1 that we might have expected in Q2. So that probably led to the order growth being at 9% in excess of the sales growth and in excess of what we expect for the balance of the year. But I do think, as you mentioned, there's a touch of conservatism as you think about the guide on flattish growth in FMT. Eric has touched on it. I mentioned it earlier in the call. But there's a piece of that as well, given that we're just 1 quarter in, the world is kind of uncertain. While the trend seems to be reporting in the right direction, not extrapolating that for the balance of the year. Operator: Our next question comes from the line of Andrew Buscaglia with BNP Paribas. Andrew Buscaglia: So sort of a trend we're picking up this earnings season. Just some companies talking about this higher energy prices, the near term may be some volatility, but long term maybe positive impact for their businesses. And I know direct energy exposure is not huge for IDEX, but I'm wondering how you're thinking about your business in that context? Eric Ashleman: Yes. We do have a segment involved in energy. A lot of it's downstream custody transfer. We're kind of a cash register for a lot of the industry. So it never directly correlates. It's not a wellhead kind of business. But I would say, higher energy prices and activity tend to have kind of a derivative impact positively over time. We saw some of that in the first quarter. You'll note we didn't put it -- list energy as a significant pressure point whereas we have in some of the preceding quarters. We've seen certainly more activity there, more money being put to work, U.S. exports, all of that stuff. So as that happens, it generally kind of back feeds into the markets that we're a part of. So we've kind of got that in a slightly better place. We'll watch it as -- obviously, this whole story runs out. There's a lot of volatility there. But the energy exposure at IDEX at least now has moved more to the green. Andrew Buscaglia: Yes. Okay. That's interesting. And then yes, and Eric, the last couple of quarters, the execution has been strong. And you're talking about 8020 and the growth investments you're making. But is there any other subtle changes to the 8020 process that's been going on under the hood? Are you doing anything differently in terms of that process that's driving these better margins? Eric Ashleman: Yes. Well, I think the 2 extensions of the playbook, which we've had in place a long time here, really, it's in the areas where we're growing and acquiring businesses. We're integrating some of the units together into these growth platforms in the way that are a little different from kind of classic IDEX. And so when you do that, it does add another dimension. It's kind of making -- taking a 2-axis story and makes it 3 axis. And so you have to be cognizant of how you define 80s and 20s, how you allocate resources, sometimes crossing business units. So we're doing a lot of work this year to kind of write that code, codify it and train it in those areas because, as I referenced in my opening comments, I mean, what's exciting about it is the scale of opportunity here also grows. And so you're seeing some of that come on to the board here. I had a graph in the slide deck that showed sort of this -- the difference between a customer set that's declining as we focus on the winners, and then sales and margins ramping on the backside of that. That's, that code book, it works, that extension. So very, very exciting piece of it, very much pivoted towards growth. And then, of course, you get almost one-for-one margin support as we grow the company. So that's a great question, and that's sort of the new chapters that are being written right now. Operator: Your next question comes from the line of Dan DiCicco with BMO Capital Markets. Unknown Analyst: Great. Slide 4, space and defense, were a lot of these products already in place? Or have you kind of tweaked and tailored some of these solutions and platforms to better align to these markets? And then is there any more opportunity here down the road? Eric Ashleman: Well, I mean, this whole industry, particularly on the space side, is developing really, really fast. There's almost always something new there. But we're actually leveraging kind of an early incumbency position. We long ago studied this market, kind of helped. Frankly, I'd argue we've helped it develop. And as we've done that, that's given us presence in the rooms with the people that matter to help solve problems along the way. So you have an incumbent position that was very thoughtfully deployed and then that access point allowed us to see where things needed to go from there. And then our innovation stream is actually enabling it. So I'd argue you have some of all of that. And then just as space, there's a reason we highlighted it here, I think it's tremendous in terms of growth, growth potential, both in terms of depth of applications as well as the number of people that are starting to play here. So just couldn't be more excited about it, absolutely. Unknown Analyst: Great. And then just maybe if you could just touch quickly on your overall exposure in just power generation and then more specifically around fuel cell power support? Eric Ashleman: Yes. Well, we mentioned in our data center applications in the pneumatic space, we've long talked about that's some of the work that we do there. It's behind the meter, power gen to power data centers essentially with standby power, and we do a very, very critical job there of thermal management within those applications. And so yes, that is an area that we've capitalized on. We've helped support and are excited about for the future. Operator: Your next question comes from the line of Vlad Bystricky with Citigroup. Vladimir Bystricky: So nice quarter, obviously, and like the positive outlook for '26. I did want to ask you, you mentioned some price cost pressures impacting gross margin in 1Q. So can you just talk about what price cost was in the quarter, how you see it evolving going forward through the year and whether you're expecting to take or need to take incremental price related to tariffs or any other inflationary pressures? Sean Gillen: Yes. Good question. For the quarter, to the EBITDA line, price/cost was a net positive, not to the same magnitude that we saw in a couple of quarters in the last year given tariff pricing actions, but positive to the quarter. I would expect that to continue, kind of be net even a little bit positive. We're not contemplating any second round price actions in the guidance that stands today based on what's happening in the world. If it continues and we need to do those things, those are, of course, actions that we'll continue to do. I think the tariff example is a good one in that it shows that the businesses within IDEX have the ability to move price in accordance with what they're seeing in cost. And so if we do start to see some sustained price pressures or we expect that, on the cost side, we will revisit our price assumptions and actions with our customers. So for the quarter, positive kind of for the guide, I expect that to continue and can be revisited depending on what happens in the businesses. Vladimir Bystricky: Got it. That's helpful. Appreciate that, Sean. And then I think you talked a little bit about life sciences where you're seeing sort of some pressures in China and NIH. I guess could you just talk more about how you're thinking about the potential for a more positive inflection within life sciences in HST over the coming quarters or into '27? Eric Ashleman: Yes. Well, we're going to focus where we can focus, and that's in core innovation with the customers that we've long had relationships with. And there's some -- the team is driving some great things there. We're seeing that now playing out positively largely in the pharma space. There's just a number of things going on in that area. Even some of the questions around geography and how that's going to all play out, given that the world turns in different ways there. I'd say we actually are helping customers think through that, too, because we've got great global scale. And so if people want to position -- reposition assets or target different markets around the globe, we can support that, and we're talking through those situations with customers, too. So for us, we're just going to focus on what we do best, which is kind of double down on the global span that we have, the scale that we have within the business. Remember, those are long been integrated units where people are used to working together and driving that scale of solutions and then bring innovation to bear in the markets that are inflecting the most positively. Operator: Your next question comes from the line of Rob Wertheimer with Melius Research. Robert Wertheimer: I apologize. You've had a lot of success in some of the growth investments you've made. And I'm curious how much kind of remains in the pipeline, products you haven't launched, products you're developing. Maybe you could characterize how far along that curve you are. My second question, I'm not sure you want to answer. But of the total order growth, maybe in dollars, how much was attributable to kind of your new markets or advantaged markets or growth investments you've done versus the general cyclical rebound? Eric Ashleman: Sure. Well, look, I think these spaces have a lot of potential, not just this year, but in later years. It's one of the reasons we've indexed so positively that the years past 2026, we see as being very good for us because we're involved in the discussions. We're working on the technology. We're talking about problems that need to be solved. We know kind of when those would go to market and how they would run out. And obviously, the investment cycle here has got multiple chapters and we're exposed to it. To your second question, it's related actually to the first. I mean I wouldn't give a specific number here, but I mean much of what we're talking about is you can point back to recently acquired units, very specific investments, the choices that we made to link to units of this quality. So a fair amount of it is coming from there. What I particularly like about it is we're kind of pinging these different worlds from multiple points. And so think of those as entrances into really great application spaces, each one of which has their own subsequent chapters to write through our innovation efforts. So we talked about data centers. We talked about kind of behind-the-meter power gen over there. We're also involved in really interesting things related to optical switching and how that's going to play out. We've got valves there that are positioned around liquid cooling and other aspects of thermal management, broad semi exposure, which has been very positive for us. We're involved in everything from consumables to metrology to lithography. You've got these nice little entry points, each one of which, again, just has the sort of extended discussion about here's what we need today, here's what we're going to need tomorrow and here's what we're thinking about in terms of the future. Water in the FMT space, some of those same characteristics. We're providing data and data sets to people that are now starting to think about how that could be comingled with their own AI applications. So really, really like how the investments that we have made linked to advantaged spaces and then have this nice runway potential. Operator: Your next question comes from the line of Robert Jamieson with Vertical Research Partners. Robert Jamieson: Just a quick one on CapEx and just the step-up that we're seeing this year. I know no change in guidance, but is this more related to capacity or automation investment? And is that more specific like the HST segment? Just trying to think about where that bulk of the incremental investments being directed towards? Sean Gillen: Good question. And as you mentioned, we have guided and no change to the guide on that front, an increase in CapEx for the year. And it's really supporting all the growth that you're seeing. So it is overweight towards HST. There's the nature of the business. There's no 1 or 2 really big ticket items in terms of CapEx that we need to drive the growth. It's really across a variety of the businesses. But we are allowing for more growth CapEx to be spent in this year to help support the growth and the demand that we're seeing. And that's in the form of equipment and other things like that to help support the growth. So not a huge step up but a meaningful one. It's still relatively low in terms of kind of the overall size of the business, but budgeted for some growth in CapEx for the year. Eric Ashleman: This is actually an area where 8020 helps us a lot as well in line with our component orientation because if we make choices to, let's say, move on from a small part of the business, very often, it's the same capital or the same technology that we would run faster-growing applications across. So it actually kind of gives us an internal funding source or an offset so that it keeps CapEx increases at a nice level, too. So that's another lever that we have that comes out of 8020 work. Robert Jamieson: That's great. Super helpful. And then just taking a step back, just given the strategy and the pivot over the last couple of years on advantaged markets with secular tailwinds. I mean, what are maybe some of the top 2 or 3 secular themes outside of AI where you think that IDEX is most under indexed today and potentially when to invest more aggressively in? Eric Ashleman: Well, look, I mean, when you step back, what's nice about the changes that we've made is -- I actually start with the things that are constant. So we essentially always have kind of moved either fluids, gas or light. That's basically what we're doing even in these advantaged spaces. So we've got great technologies, great access here. I'm particularly excited in terms from an end market perspective. We highlighted space and defense for a reason. I think that, that's just getting off on the ground, and we were there from the beginning. And so our positioning there is really, really good. Our optics technologies and specifically tie very nicely to that world. And here's where the acquisition work comes in very handy because we're actually kind of moving technologies and joining them across a couple of the businesses here to create solutions that are pretty novel and really could only kind of come from us. And that's part of the thesis, too. So I think how we position MSS, the Material Science Solutions platform, that's where optics sits. I mean that whole thesis really gives us a nice jump-off point into virtually every market that we've talked about here that is advantaged. So continuing to expand it through bolt-on tuck-in work. That's why we're excited about that as well. There are some other things we'd like to bring in as our presence increases. So more to come here, but I think off to a great start and kind of playing out the way that we had hoped and expected. Operator: Your next question comes from the line of Brett Linzey with Mizuho. Brett Linzey: Question regarding your CapEx-intensive businesses. I guess, as you parse through the composition of your growth in activity, how are those performing versus the more OpEx-oriented businesses? And I guess as IDEX has grown in areas like material science and defense and space, what does that mix look like today? And how has that evolved? Sean Gillen: I'd start by saying, I mean, none of the businesses we're in are that capital intensive. And so you're seeing an increase in CapEx, but it's really in line with growth and angle towards the HST segment as well as some other platforms where we're seeing that growth. So I don't think that there's a material shift in the CapEx intensity of the business. We're just allowing for some capital to support the growth that we're seeing. So no material move in terms of what you should expect in terms of CapEx for our businesses going forward. Eric Ashleman: Yes. That continues to be part of the filter set. When we think about it, space, the technology set or acquisitions, I mean we're looking for kind of max innovation at relatively low capitalization requirements. There's -- not just from the economics of it, but that gives us the agility, the optionality of moving the technology fast. So it's all kind of part of the -- for us, it's simply rising here because, frankly, the growth rates are rising. Brett Linzey: And then just shifting over to Fire & Safety, so encouraging to see the strong demand in North America. You noted the relative stability in Europe and Asia. The stable Europe comment, I think, is maybe a change in trend. Perhaps just some color there. Are the local spending priorities maybe firming up and shifting a little bit to the upside here? Eric Ashleman: Yes. I mean I think on the Fire & Safety European front, I recall it was late in the summer last year. We had that turned down kind of unexpectedly. We saw some very specific positioning over to alternate spend. That actually came back to something more normal at the end of the year and it's basically remained there. So it's not widely growing, but it's kind of back in its normal corridor, and I think that was actually kind of a temporal shift. And then we've seen, again, the further from home markets have been stable for a while. And as you said, most of the growth strength on the North American side. Operator: And our final question comes from the line of Joe Giordano with TD Cowen. Joseph Giordano: Appreciate it letting me have the follow-up here. Just like one last kind of bigger picture question on M&A. Eric, as you moved into some of these newer areas like when you bought Mott, you bought Muon, I think from an investor angle, it seemed a little bit more -- are these more complicated? Is this a way from core a little bit more. And then obviously, those businesses started a little slow and now are doing quite well and are directly aligned with what your strategy is. So I'm just curious, as you look back on the last couple of years with these businesses, what's like the takeaway in your head? Does this like reinforce that IDEX knows how to do M&A as a core competency? Does it inform you on timing of when is appropriate to do this and how much work we need to do through the businesses that are in these kind of markets? Just curious like what's your -- I know we're in a good place to talk about it now, but just curious like what you guys kind of like took away from the -- from getting from where you were when you started to where you are today? Eric Ashleman: Yes. No, no. Thanks for that. Well, look, a big part of the thesis here was supporting stronger growth for the company. I mean, that's why we went down this direction. And I think one of the insights that comes out of this, given all that you cited, is actually, I put it -- in the end, I put it into a strength category. I mean these are mission-critical markets where the uptick on growth takes a little longer than maybe we would like out of the gate. But that actually becomes the moat for us once we get through it. So that defensibility of people that are super risk-averse, got to make sure everything is going to work right, make sure that we're a trusted partner. All those things have always been true at IDEX. They're probably even more true in these kind of critical markets. So that delayed some things out of the gate in terms of take-up and adoption. And it was, remember, a pretty crazy world at the same time. But what we're seeing now is the backside of that. And so the same characteristics, I actually think are massively in our favor because that's the deep moat that now surrounds us. We're in the room. We're having a discussion. We are at the table to say, hey, what comes next? Then what can we do? Then what can we do? And now we have more pieces and parts to play with. We're not a single business in there. We're actually a couple of units to [ 3. ] We've got more people in the room. We've got more depth, and we've gained that trusted partner status. So I think that's the insight and I think it's a net positive as we sit here today. Operator: That concludes our question-and-answer session. I will now turn the call back over to Eric Ashleman for any closing remarks. Eric? Eric Ashleman: Yes. Well, thanks, everyone, for your interest and support of IDEX. I'd say to sum up here, we're very pleased with the strong start to the year. HST, in particular, continues to build strong sequential momentum within its target advantaged growth markets. As we said during the call, perhaps most encouraging for us is the fact that many of their wins have long multiyear tails that points to a really nice growth over time. With FMT and FSDP, we saw some encouraging positive signs of early inflection, but we still most likely need to clear the uncertainty of geopolitical stuff to move materially to the next level of support. Our businesses there are really well positioned to capitalize on that strength as it plays out from here. So I think bottom line, our growth strategy is supported by our growth platforms, expanded through thoughtful M&A and operational integration are powering IDEX towards a really bright and successful future, and we look forward to updating you as we go along the way. Thanks so much. Operator: That concludes today's call. You may now disconnect.
Operator: Good afternoon, and welcome to the Carvana First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, after today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Meg Kehan, Investor Relations. Please go ahead. Meg Kehan: Thank you, Gary. Good afternoon, ladies and gentlemen, and thank you for joining us on Carvana's first quarter 2026 earnings conference call. Please note that this call is being webcast and can be accessed along with our Q1 shareholder letter and supplemental financial tables on the Investor Relations section of the company's corporate website at investors.carvana.com. Joining me on the call today are Ernie Garcia, Chief Executive Officer, and Mark Jenkins, Chief Financial Officer. Before we start, I would like to remind you that this discussion contains forward-looking statements within the meaning of the federal securities laws including, but not limited to, Carvana's market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. A detailed discussion of these factors can be found in the Risk section of Carvana's most recent Form 10-Ks. These forward-looking statements are based on current expectations as of today, and Carvana assumes no obligation to update or revise them. Our commentary today will include non-GAAP financial metrics. GAAP reconciliations can be found in the shareholder letter posted on our IR website. And with that said, I would like to turn the call over to Ernie Garcia. Ernie? Ernie Garcia: Thanks, Meg, and thanks, everyone, for joining the call. The first quarter was another outstanding quarter for Carvana. It was another quarter full of records, including a record 187,000 cars sold in a single quarter, a record GAAP operating income of $581 million, and record adjusted EBITDA of $672 million. And it was our ninth straight quarter of being the most profitable and fastest growing automotive retailer, as well as our sixth straight quarter of 40% year-over-year growth. The quality of our customer offering, the fact that it naturally gets better as we get bigger, and our experience over the last thirteen years lead us to believe that demand is available at the speed that we are able to scale the business effectively. As it has been since the beginning, we expect our execution will be the biggest determinant of the speed and degree of our success. Execution in a complex operational scale business like Carvana that is growing at 40% is an inherently difficult problem. While the best case scenario in a vacuum is to avoid bumps in the road, those bumps are a reality of building ambitiously. This means success requires building a better system with better scaling properties, and assembling a team and building a culture that drives intensity, focus, accountability, and resilience. With the right team and culture, the bumps in the road create pressure that makes us better. In the fourth quarter, we hit a bump in recon that gave us another chance to prove that we assembled just such a team. The recon team is using that pressure to make us better. When we realized we were off track a bit, the first thing the team did was turn up the operational intensity across the network, setting higher expectations for each facility and leaning into the operational structures we have built over the last several years. This allowed us to make rapid progress nationwide. In addition, they quickly assessed the underlying cause of the variation in facility performance, most notably newer managers that could use more detailed direction and more powerful tools to help them execute at the level we were aiming for, and adjusted their road map to prioritize building the tools that mattered most immediately. Over the last couple months, they built additional data integrations, developed tools to help managers make faster, higher quality decisions in how they staff their lines and how they optimize flow through their paint lines, and implemented a productivity tracker to ensure feedback reaches the right groups quickly. To accomplish all this and to ensure the tools address real world operational needs, the product team spent weeks on the ground in the facilities that needed it most, rolling out, testing, and iterating with the operators until they were making a real measurable difference. We will continue to iterate on these tools, and we will roll them out to the rest of the facilities over the coming months. The result is that so far in April, we are operating just shy of our all-time best in labor efficiency throughout the network. This will take a little time to flow through to the financials as cars carry the cost of reconditioning at the time they were produced, not at the time they were sold. We still have a ton of work to do across reconditioning and other operational and technology teams, but every time a team reacts that quickly to a problem, it excites us. Once again, the people on Team Carvana have proven that they are exceptional, that they are resilient, that they are up to the challenges we will inevitably face as we scale Carvana to millions of transactions per year. We remain firmly on the path of achieving our mission of changing the way people buy and sell cars, and to selling 3 million cars per year at 13.5% adjusted EBITDA margin by 2030 to 2035. The march continues. Mark. Mark Jenkins: Thank you, Ernie, and thank you all for joining us today. Unless otherwise noted, all comparisons will be on a year-over-year basis. Q1 was a strong quarter driven by our team's continued focus on profitable growth and strong execution. We set new company records for retail units sold, revenue, gross profit, SG&A expense per retail unit sold, GAAP operating income, and adjusted EBITDA. Retail units sold totaled 187,393 in Q1, an increase of 40% and a new company record. Revenue was $6.43 billion, an increase of 52%. Revenue growth exceeded retail units sold growth primarily due to traditional gross revenue treatment for certain vehicles acquired from a large retail marketplace partner. Consistent with past quarters, our growth in the first quarter was driven by our three long term drivers of growth: a continuously improving customer offering; increased awareness, understanding, and trust; and increasing inventory selection and other benefits of scale. The first quarter marked our ninth consecutive quarter of industry-leading retail unit growth and margins. Non-GAAP retail GPU decreased by $58, primarily driven by higher non-vehicle costs and lower shipping fees. Looking ahead to Q2, we expect retail GPU to increase sequentially but to decrease year over year due to approximately $100 tariff-related benefits last year, lower shipping fees and higher non-vehicle costs this year, and approximately $100 to $200 of impact from narrower industry-wide wholesale-to-retail spreads this year. Non-GAAP wholesale GPU decreased by $83, primarily driven by increased wholesale vehicle volume and gross profit per unit that was more than offset by lower wholesale marketplace gross profit and growth in retail units that outpaced wholesale gross profit. Non-GAAP other GPU decreased by $88, primarily driven by our decision to give back to customers in the form of lower interest rates, partially offset by higher finance and VSC attach rates. Q1 was another strong quarter for levering SG&A expenses. Our 40% growth in retail units sold led to a $170 reduction in non-GAAP SG&A expense per retail unit sold, including a $36 reduction in operations expenses and a $226 reduction in overhead expenses. Advertising expense increased by $92 per retail unit sold as we continue to invest in building awareness, understanding, and trust in our customer offering. With a nearly 2% market share in the U.S. used vehicle retail market compared to approximately 20% e-commerce adoption in non-automotive retail verticals, we believe we are in the early days of customer awareness and adoption of our model. We continue to see opportunities for significant SG&A expense leverage over time and as we scale, driven by both continued improvements in operational expenses as well as leverage in the fixed components of our cost structure. Net income was $405 million in Q1, an increase of $32 million. Net income margin was 6.3%, a decrease from 8.8%. Adjusted EBITDA was $672 million, an increase of $184 million and a new company record. Adjusted EBITDA margin was 10.4%, a decrease from 11.5%, primarily driven by increased retail revenue per unit resulting from the traditional gross revenue treatment mentioned previously. GAAP operating income was $581 million, or 86% of adjusted EBITDA, an increase of $187 million and a new company record. As discussed in prior quarters, we continue to drive toward investment-grade quality credit ratios over time. In Q1, we again reduced our net debt to trailing twelve-month adjusted EBITDA ratio to 1.1 times, our strongest financial position ever. Q1 was a record quarter that again demonstrated the significant power of our business model. Looking toward Q2 and assuming the environment remains stable, we expect a sequential increase in both retail units sold and adjusted EBITDA, leading to all-time company records on both metrics. We remain on track to deliver significant growth in both retail units sold and adjusted EBITDA in full year 2026. In conclusion, our Q1 results were outstanding. Our team is intently focused on driving profitable growth, and we remain excited about progressing toward our goals of becoming the largest and most profitable auto retailer and buying and selling millions of cars. Thank you for your attention. We will now open the call for questions. Operator: We will now begin the question and answer session. The first question today is from Christopher Pierce with Needham. Please go ahead. Christopher Pierce: Hey, good afternoon. Ernie, in your remarks, you talked about new tools at underperforming sites where there are new managers. I just want to understand: are these tools brand new, and could they help top-performing sites further improve, or are they to bring those underperforming sites in line with your top-performing sites? Ernie Garcia: Sure. Well, first, I want to start with just giving gratitude and credit to the reconditioning team. I think they took it very personally when we did not have a perfect fourth quarter, and they reacted extremely well. That is why I wanted to make sure that I spent some time in our comments giving them credit. I am extremely impressed and proud of how hard they worked and how quickly they made a difference. I think there were a number of things that were done. The new tools that were discussed are net new tools, and those are tools that we hope will drive additional fundamental gains over time. I think that will take time and we will see how powerful that ends up being, but I think they are fundamentally value-added tools that are not in the vast majority of our facilities yet, so we will roll those out over time. To me, the way that we hope this goes over the next many years is we are scaling a big business that is operationally complex very quickly. We are inevitably going to run into bumps in the road. Every time you run into a bump, it is a chance to reevaluate what you are doing and to try to learn from it and get a little better. I think the team dug in, reevaluated the road map, found opportunities that are potentially bigger, and focused and made a huge difference quickly. We are very excited about those opportunities. I would not want to set expectations too high beyond that we think we are very much back on track, but if we had to pick a direction, the tooling that we are building is exciting and gives us more room for fundamental gains over time. Christopher Pierce: Okay. Perfect. Thank you. And then just a bigger-picture question. With new vehicle prices, tariffs, and gas prices, do you think there is some portion of people tapping out and dropping down to used, and could we see, when off-lease supply and more supply comes back, used go north of 40 million units for a couple of years because of this? And if that did happen, would that affect other GPU as you tilt more prime versus subprime? I would love to hear your thoughts. Ernie Garcia: Sure. Car prices are high. These numbers will not be exactly right, but the last numbers that I remember are kind of pre-pandemic: general consumer goods are up 25% give or take; cars are up 35% to 40%. So car prices, all else constant, are higher, and that has to be impacting people. Generally, the elasticities for cars at the aggregate level are not super high. People need cars to live their lives, and they get tired of the car they own, so aggregate transactions tend to be relatively stable. There is room, though—everything you pointed to is probably a directional positive for the overall market size over time. But realistically, the scale of those positives relative to the scale of our growth is very small. Our view is that most things that happen to the market are going to impact us in a proportionate way, but what we are doing is dramatically more powerful than that, so we stay focused on all the fundamental tools we are building, delivering great customer experiences, and doing the hard operational work to scale effectively. On your last point on rates and the mix between prime and non-prime customers, our balance of customer credit is pretty similar to the market overall. The profitability per retail unit sold for prime versus non-prime is not different enough to where moves in those distributions matter all that much to overall other GPU. Those things can move around; there will always be a little macro effect that moves things around by tens of dollars, give or take, but in general, the most important thing is that we keep delivering great experiences and stay focused on us. That is where our focus remains. Operator: The next question is from Daniela Haigian with Morgan Stanley. Please go ahead. Daniela Haigian: Hi, Ernie and team. Thanks for taking the question. My first one is on SG&A leverage. Most line items this quarter, including logistics, came in lower as a percentage of sales versus the run rate we have seen the last few quarters. How should we be thinking about operating leverage in fixed costs? Mark, you mentioned that. And then more near term, how should investors think about logistics expense in a rising fuel cost environment? Mark Jenkins: Sure. I think it is helpful to break that down into a couple of categories. One, operations expense: that is the expense associated with executing a transaction, providing customer service, fulfilling the transaction via our logistics network and last-mile delivery network, and all of those expenses that are more variable in nature. We had a strong quarter on that front, with operations expenses down slightly year over year. In the longer term, we definitely see an opportunity to march those down further on a per retail unit basis. In any given quarter, they can be impacted—you mentioned fuel prices. That would definitely have an impact because logistics is part of that operations expense. I would not expect that impact to be particularly large, but there is some impact there. The second category is overhead expenses. That is an area where we have shown a lot of strong leverage. Overhead expenses are more fixed in nature. They can grow due to investments that we make—for example, we are making some investments now in additional technology, including AI-related technology. That would be in that overhead expense number. So they can grow, but it is much more fixed in nature, and we do expect to see significant leverage in that overhead line item over time. Just to state the third: we have been marching up advertising spend. Given where we are in our company’s life, we think there is still a lot we can do to continue to raise understanding, awareness, and trust of our offering. We are in the relatively early days of online auto retail adoption. Obviously, we are playing a big role in telling that story, and we think there is a lot of value to us continuing to invest in advertising. Those would be the three big categories and some of the dynamics. Daniela Haigian: Thanks, Mark. That is helpful. Second question, a bit longer term, on CapEx. Recognizing you are only 20% utilized on your current real estate capacity of 3 million, but at this rate of growth, you are going to need to think about builds beyond that over the next few years. You had a helpful exhibit in last quarter's investor letter on eventually building out greenfield production. What would that look like? What is the team’s philosophy on building that capacity? Mark Jenkins: Sure. The way I think about our production growth plan—and a lot of our capital investment is really related to growing production and production facilities—right now, there are multiple ways we are doing that. One is adding staffing into existing facilities—that is no CapEx. Second, we are integrating ADESA locations, which basically means going into existing ADESA buildings that have already been constructed, implementing our Carly proprietary software system to do inventory and reconditioning management in those centers, and adding some equipment. That is a very CapEx-light way to add production capacity. Third is to start doing full build-outs of existing ADESA facilities. We have the land, and we can expand the buildings and structure in order to add more lines into those facilities. We did talk about that in our last letter. We think those are very high-quality investments to be making and expect to start making those investments over the course of this year. Last is greenfield IRCs. That is not a priority at this time. Our bigger priority is executing those first three types of production expansion. Up to this point, we have been really focused on the first two—ramping capacity in existing facilities and integrations. This year is the year where we will start doing some of those full build-outs, which we think make a lot of sense. Operator: The next question is from Rajat Gupta with JPMorgan. Please go ahead. Rajat Gupta: Great. Thanks for taking the question, and congrats on the execution around the reconditioning cost. I had a question on the wholesale-retail spread comment, Mark, that you made in the prepared remarks. Is that impact that you are already feeling in the month of April based on how retail prices are tracking? Or is that more of an expectation around May and June, or baking in some sort of slowdown in demand because of gas prices and sentiment tied to the war? Any more color around that $100 to $200 wholesale-retail spread headwind would be helpful. I have a quick follow-up. Mark Jenkins: Sure. What we are seeing on spreads and what we have seen year to date really starts with a very hot wholesale market in Q1. Wholesale prices really appreciated in Q1. That appreciation can happen in any given year as a lead-up to tax season, but the appreciation we saw early this year both started earlier and was of a larger magnitude than we have typically seen in past Q1s. A strong wholesale market should benefit us—we had one of our highest quarters ever on wholesale vehicle gross profit per wholesale unit sold in Q1, commensurate with that hot wholesale market. But what we are seeing is that wholesale appreciation was not fully passed on into retail prices, and that is causing a little bit of that wholesale-to-retail spread compression that we are pointing to. Rajat Gupta: Got it. And just to follow up on the previous question around SG&A: the sequential pickup in the overhead expenses—it is probably the highest we have seen in a while from 4Q to 1Q, particularly since the turnaround. You mentioned some investments around AI and such. Any way you could double click on that and give a little more detail? Are there any one-timers—maybe some of new car acquisitions—just a little more granularity would be helpful. And any color on overhead expenses for the year would be helpful. Thanks. Mark Jenkins: Yes, sure. There are some seasonal or one-time components in there as well as some investments. We typically see Q1 as a high quarter for payroll expense related to share-based compensation because we typically have large vesting of share-based compensation in Q1, larger than some other quarters. In addition, the weather events in Q1 actually did have some impact on overhead expenses where we spent much more than a typical winter quarter on snow plowing and removal, and so that is in that number. There are ongoing investments—things that I would not think of as seasonal or one-time—including technology investments and some incremental investments in facilities that I think will have us operating at a higher level on overhead expenses than we were in 2025. But I would not expect to see overhead expenses increase at a rate like that. Thinking of Q1 as something more like a new level is probably more appropriate. Operator: The next question is from Sharon Zackfia with William Blair. Please go ahead. Sharon Zackfia: Hi, and congratulations on getting wholesale ops more optimized. With that, it sounds like you might be positioned to hold retail GPU for the full year, and I am curious on your thoughts on that—in terms of seeing improvement in the back half of the year again? Ernie Garcia: Sure. We try to stay away from giving too much precise color there. But the things we have generally said in the past we continue to believe. There is a little bit of seasonality in those numbers, and then there are fundamental gains that we are going to continue to seek to attack. Across the sum of the GPU line items plus expenses, we feel like we have clear visibility to 13.5% adjusted EBITDA margin, which is our goal. There are always a couple of little interesting stories that pop up from time to time—whether it is gas prices or impact from Iran or recon expense or whatever it is. As a general matter, we think we are in an environment that looks similar to the past, and we are just going to keep chugging forward. Sharon Zackfia: Secondarily—sorry, I am losing my voice—for the OBDD, there had been a lot of talk about tax refunds and the benefit that you might see in your business. That happened right around the time the war broke out and gas prices spiked. As you went throughout the quarter, did you see any change in the complexion of your customers across income cohorts, or does it look very similar to what you were seeing in 2025? Ernie Garcia: We grew by 40% in the quarter, so overall I would say we are extremely happy with the way the business performed and the way the team operated during the quarter. It is a little hard to massage out some of those effects. There was an expectation that tax dollars would be larger; data suggests that is true and that may lead to additional vehicle demand. We only see our own data, and that did coincide very closely with the Iran situation. It is hard to disentangle, but our view would be that it probably was not as strong as expectations in terms of converting to vehicle demand and was probably more similar and maybe even a touch softer than years past. Overall, not really a huge event for the quarter and hard to separate the tax season effect from the gas price effect. Since then, it feels like things are operating the way that we would expect, and that is true almost any way you look at the business—whether it is volume, seasonality, distribution of customers, or anything like that. Operator: The next question is from Brian Nagel with Oppenheimer. Please go ahead. Brian Nagel: Hi, good afternoon. Great quarter—congratulations. With respect to gas prices, clearly the company had a very strong quarter and the commentary in Q2 has been very strong as well. As you think about gas prices and potential impacts to the consumer, and looking over time over prior spikes, have you noticed over time that your consumer acts differently when gas prices spike? Ernie Garcia: I think there are two potential impacts. One is what happens to aggregate sales and one is what happens to mix of sales. What we have seen in the past is that the impact to aggregate sales is usually pretty small and, over any reasonable period of time, largely massages out. In terms of mix of sales, we do see some movement—the expected things. Over the last couple of months, we saw large SUVs decrease as a percentage of sales a little bit. We saw EVs increase again as a percent of sales. Even over the last several weeks, we have seen that normalize or go back closer to baseline—not all the way to baseline, but closer. Those things will continue to migrate. The way we try to manage that is to build a system that is adaptive: we put all the cars that customers could want in front of them, and based on the demand signals we see every day, we adjust what we are buying every day to match that demand. Given how quick our turn times are, generally the system adapts very quickly. There will be impacts directionally as would be expected, but we do not expect them to be a central part of the story unless the impacts were to get much, much larger. Brian Nagel: Then my second question, with regard to the narrowing spreads between retail and wholesale. Is this more of a short-term phenomenon where it maybe started a couple of quarters ago and is now correcting? Or do you think there is some longer-term or multi-quarter shift happening within the marketplace? Ernie Garcia: Our pretty strong view is this is a transitory impact. It is hard to know exactly what drives these movements. The wholesale-retail spread generally follows a pretty clear seasonal pattern, and in any given quarter it tends to bounce around a bit around the normal seasonal expectation. This year heading into tax season, the wholesale market was really strong. Normally, the retail market would catch up on a 30- to 60-day lag. It seems like the retail market is catching up, but on a slightly longer lag. There is room for that to normalize relatively quickly, and room for it to kind of hold where it is. Either way, we do not think it will be a central part of the story. As we look at it today, the wholesale market is ahead of the retail market, and that led to the callout. Operator: The next question is from Jeffrey Lick with Stephens Inc. Please go ahead. Jeffrey Lick: Good afternoon. Thanks for taking my question. As you become bigger, you become a bigger part of the entire used ecosystem—not just retail but wholesale. Looking at your wholesale numbers, you wholesaled less as a percentage of your retail, down to 44.6% from 40.4%. Your marketplace units were actually down, and your wholesale GPU was $1,327. I am curious how that dynamic is playing out in terms of your ability to source and your decisions. You would think if you can get that much money wholesaling, you might have wholesaled more, but it appears that you retailed more. Can you talk about the dynamics there? Ernie Garcia: We are extremely excited with how the business is operating overall. One of the central things we are always trying to balance is making sure that we are managing the business as best we can while growing at very high rates. The wholesale side of the business does have operational impacts on the overall business, most notably in last-mile logistics, which is an important part of our system that we have to carefully manage to handle the growth. We are always making trade-offs there and trying to make sure we are doing smart things. In general, all the signs we see are very good; the teams are executing extremely well. The wholesale team continues to unlock fundamental gains and is doing great—you see that in the wholesale vehicle results. In wholesale marketplace, we are also building a lot of fundamental value that feels very exciting. We noted in the letter that we feel like ADECLAIR, our digital auction platform, is now a best-in-class platform. We have a lot of reasons for believing that, and it is pretty exciting. We have built something that is extremely high quality, growing very quickly, and adding value to the ADESA system and to the Carvana system as we buy cars wholesale and dispose of most of them through that platform. We also shared a number of speed stats that are fun—reductions in the rate at which we can move cars through the system. The goal of building the entirety of the Carvana system is to deliver incredible customer experience on both sides of the transaction and to minimize the expense necessary to allow customers to trade cars with each other. If you look at cars that we are buying retail, putting through our system, and selling to a different customer, that entire process, in the fastest case, took place in just under five days. The customer gets a value for their car, goes through verification, title work, schedules drop-off or pickup, we land the car at our hub, put it on a multi-hauler, drive it to an inspection center, inspect it, run it through recon, photograph it, put it up on the site, price it in an automated way, another customer finds it, goes through the entire purchase process, schedules delivery, we put it on a truck, deliver to them—and it is theirs. That took 4.8 days. That is remarkable. We are making a lot of investments to keep the system very tight, and we are getting a lot of fundamental value out of that. We think that is going to unlock a lot of value over time. Overall, we are very excited by how the system is performing. Operator: The next question is from John Colantuoni with Jefferies. Please go ahead. John Colantuoni: Great. Thanks for taking my question. On other GPU, can you give us a sense if you see an opportunity to incrementally invest some of the financing GPU into growth as you have done in recent quarters? Or is that reinvestment largely behind you so that other GPU is more or less at a run-rate level at this point? Ernie Garcia: Thank you. In the quarter, we were at 10.4% adjusted EBITDA margin. In the past, we have provided walks that we think are relatively straightforward to get to our goal of 13.5% that basically include leverage in fixed costs and getting to marketing dollar per unit spend that is similar to our more mature cohorts. If you do that walk, it continues today to be pretty straightforward, and the math is approximately the same. What that leaves from there is room for any place where we make fundamental gains—whether we get more efficient in any of the GPU line items or in any of the variable cost line items—that gives us room to share value with customers. Where we share value with customers will not necessarily always be in the exact place we unlock it, but we are seeking to unlock it in every part of the business. We have projects that we are very excited about in every single one of those line items—every expense line item, every revenue line item—and they are all credible projects that we think can make meaningful differences in the business. We have not done them yet, so we have to go unlock that value. Then, as we unlock it, our plan is to share that with customers. We do think there is going to be value there to share with customers. If we execute really well, it could be significant, and even with doing that, we can hit our goals, which has us excited—but there is a lot of work to do. John Colantuoni: And one on advertising. Mark, you talked about spending more. Could you give a sense for what advertising channels you are seeing the best returns, and how you think about advertising fitting into your broader growth strategy over time? Is there a near-term ramp in spend in a particular market and then, once you hit a level of mind share, you can pull back? Mark Jenkins: Absolutely. Our long-term growth strategy has three pillars. One is continuing to improve the product and customer experience—an area where we have made and hope to continue to make significant gains. Second is building increased awareness, understanding, and trust—that is the pillar where advertising plays a role. Advertising cannot be the only component—great customer experiences, word of mouth, and repeat customers also matter—but advertising is certainly a component. Third is increasing collections and other benefits of scale, including adding more inventory pools to put more cars closer to customers. On advertising, we still feel like we are in the relatively early days of telling our story, so we do see opportunities to continue to advertise more. I would expect that advertising to be very broad-based across many different channels as we seek to reach different audiences and meet them where they are. In the very near term, we have not provided too much commentary on our advertising outlook, but if you look over the last two to three quarters, you will see relatively consistent advertising expense per unit, and I think that is a reasonable way to think about where we are today. Operator: The next question is from Analyst with Northcoast Research. Please go ahead. Analyst: Thanks for taking the question. I wanted to switch gears a bit and talk about your priorities on the new car side. I think you are up maybe six or seven Chrysler or Stellantis dealerships now. Any updated perspective on where you are seeing benefits? I know you have said in the past it is a learning process, but with the pace of these acquisitions continuing, hoping you could provide more context. Ernie Garcia: Thank you. I am going to apologize in advance—you are welcome to ask another question—but our answer remains the same. It is still early. Stay tuned. We will share more when it is time to share more. And as I said, if you have another question, you are more than welcome to ask it. Analyst: Understood. I will stick on the other businesses as well. We continue to see mobility and autonomous offerings rolling out in more cities. You have a really good asset, and we have talked about capacity at the reconditioning centers. Have you game planned how you could facilitate those businesses potentially as a service provider, and any updated thoughts on evolution of the business model? Ernie Garcia: We are always paying attention, and we try to be thoughtful about what opportunities exist given the assets we have built. We balance that with where the best place is to put our focus. We clearly have an opportunity to continue to grow a lot very quickly, and that takes operational discipline and effort. That will continue to be our primary focus for the foreseeable future, but we are always paying attention. Operator: The next question is from Marvin Fong with BTIG. Please go ahead. Marvin Fong: Great. Thanks for taking my question. Congratulations—I think this quarter you are the top used car dealer in the country. Question on inventory. From the Q, it looks like it grew quite a bit less than sales. Was that partly a function of bringing operational efficiency up and getting recon in order? Secondarily, with what looks like pretty lean inventory relative to your sales growth rate, how do we think about your pricing power—acknowledging what you said about spreads? It would seem to me you have pretty good ability to exercise inflation power with this level of input. Thanks. Ernie Garcia: Last quarter, inventory was up approximately 40% year over year. This quarter, it was up a little over 30% year over year. That directional change is correct and implies our turn times have gotten a bit faster. That can be a not-surprising seasonal move as you head out of tax season where you tend to have the biggest discrete change in sales rates, and you can quickly eat through inventory that you are building up prior to that. There is no question that if we could press the inventory button and have tens of thousands more cars, we likely would, and that would probably result in additional sales as long as we were able to manage all the recon and operational complexity. That is part of building this machine. We have to keep building it; as we build it, we will get to bigger scales. As we get to bigger scales, we will have more inventory and more selection for our customers, which will result in better conversion rates. That is the flywheel of the Carvana business that we have to keep working hard to unlock. Marvin Fong: How would you characterize the pricing environment? One competitor is out there discounting. It is a fragmented market, but what is your view on pricing discipline across the industry? Ernie Garcia: Nothing too notable to call out. In a way, that is implicit in the wholesale-retail spread we talk about. When we measure that, we are looking at various wholesale market indicators and various retail market indicators, and that captures where pricing is for the industry in sum total. We noted some mild differences versus average, but I would not associate that with pricing discipline so much as the evolution of the last couple of months. Nothing notable to call out there. Operator: The next question is from Andrew Boone with Citizens. Please go ahead. Andrew Boone: Thanks so much for taking the question. Ernie, I wanted to go back to some of the tools you rolled out this quarter at IRCs—specifically centralized planning. Can you talk about moving some of your lower-performing IRCs more towards best-in-class performance through more centralized planning? What is the unlock, and how do you create more of a uniform system across all IRCs? And in the letter, you called out ADESA Clear as a best-in-class digital auction. Can you speak to the longer-term opportunity of what you may be thinking about for Clear and the broader potential for that asset? Ernie Garcia: We are extremely excited about the way the recon team executed in this last quarter and the tools they built. The tools that enable more centralized planning are very exciting in concept. The early reads are good. We will be rolling them out over the next several months, and then we will get a better sense of the near- and medium-term quantitative benefits. We certainly think there are benefits that can show up over time. One benefit is collapsing the distribution of performance across locations, which is driven by differences in quality of execution and partially by differences in scale. Last quarter, we talked about there being a couple hundred dollars’ spread between our top quartile and bottom quartile of performers. Despite the fact that we improved the overall number this quarter, that spread remains about the same. That opportunity is certainly there, as is getting fundamentally better across the sum of the facilities. Unlocking that takes time, and it is hard to do while simultaneously growing at 40%. It is a clear opportunity and hard to execute fast, but it is something we are always paying close attention to and seeking to unlock as quickly as we can. With Clear, we are very excited by what we have done. To make progress, you have to decide what to focus on. In Clear, we built what we believe is a best-in-class platform by focusing a lot on the buy side. There are seller-side and buyer-side tools. We simplified the problem by using ourselves as the primary seller, so we are not required to build as many sell-side tools. We have been able to build a platform for the buy side that we think is highly differentiated, with room to differentiate further. That is showing up in the results and has positively contributed to our wholesale vehicle gross profit per wholesale unit. In aggregate, the sum of Clear plus our resale platform plus the general ADESA business and our ability to wholesale cars physically means we are, in aggregate, the most economic buyer for cars for any seller that is selling pools of cars. That is fundamentally valuable, that we are well positioned to provide as a service and to benefit from as a business. There will be a long road map of making sure all those tools fit together well and reduce to simple offerings for our customers that result in great business performance. The foundations have been laid and are continuing to be laid, and it is an exciting capability add to our overall system. Operator: The next question is from John Babcock with Barclays. Please go ahead. John Babcock: I want to go back to the discussion on retail GPU. You gave some color for the upcoming quarter, which is helpful. I also want to reconcile how you performed from 4Q into 1Q. Last quarter you talked about headwinds from reconditioning costs and depreciation. How did 1Q end up relative to that? What factors, in addition to those, might have impacted GPU? There was strength on the used vehicle side—did that contribute? Any commentary would be useful. Mark Jenkins: Retail GPU was down slightly year over year in Q1—it was pretty close to flat, but down slightly. A couple of key drivers there are things we talked about in Q4 as well. We are having great success in our logistics network getting cars to customers even faster and with shorter distances. That manifested in Q1 with an all-time low logistics expense per retail unit sold. As we brought down distances for outbound shipping, we also brought down our shipping revenue and passed those gains on to customers. That is great for customers, but it had a negative impact on retail GPU, both in Q4 and Q1. We have also talked a lot about elevated retail reconditioning costs, where we have made lots of progress, as Ernie discussed at length. Those were a couple of the key drivers that applied to both Q4 and Q1. John Babcock: Did the depreciation change much from April to January? Mark Jenkins: I do not think we feel like we had major unusual seasonal patterns there, if I remember correctly. John Babcock: Thanks. And back to reconditioning costs—you talked about centralizing that a little bit. Are you comfortable doing that? Do you think there will be any added bureaucracy or added time? Are you maintaining flexibility at the reconditioning center level to ensure they can make decisions quickly? Mark Jenkins: It is really important to strike a balance. The teams on the ground are there every day, hands-on with the dynamics and cars flowing through and all the people that are there and their various strengths and abilities. It is important to have a lot of on-the-ground input into the way the reconditioning centers function. At the same time, there are a lot of very quantitative decisions that can help the centers run better. For example, if you have a given number of people at the center on any given day with a given distribution of skill sets, what is the optimal way to distribute that team across the various stations in the reconditioning process? You can do that by hand on the ground manually, but it is also a problem that can be solved with algorithms and data. Pairing those two things together—a very strong quantitative focus via software and better use of all the data we are collecting in the centers—with the teams on the ground is where we think the special sauce is. We have been investing in reconditioning technology over several years, but we have not solved that problem yet, and that is a place we have been focusing. Operator: The next question is from Michael McGovern with Bank of America. Please go ahead. Michael McGovern: Hey, thanks for taking my question. On the labor hours per unit metric that you gave, it seems like it is really efficient right now. How much more efficiency can you gain there longer term? Which parts of the chain have decreased the most in terms of labor hours per unit, and how does that flow through into GPU longer term? Ernie Garcia: We have talked in the past about our expense per unit in recon, and the number one driver of those expenses is labor. It is a big part of the direct cost and is highly correlated with the other costs. When we are looking for operational metrics that move very quickly so that we can manage and make quick decisions, that is a metric we tend to look at. It has clearly gotten better. The kind of numbers we discussed in terms of cost drift in Q4 were driven largely by a drift in HPU. We are back now to where we were last year in Q2, which was our all-time best. As we said, there is clearly room for additional improvement from here. That room exists both by improving the sum of all centers and by getting centers to operate more like our best centers. There is opportunity there that can matter—that is meaningful dollars—but it takes time. We do not want to set expectations that it is coming in the next couple quarters. It will take time for us to unlock and get the full benefit, but it is there and it is exciting and meaningful. It just has to be done at the same time that we are also executing well enough to grow at very high rates of speed. Those two things are hard to do together, but I think the team is up to it. Michael McGovern: Got it. Quick follow-up. Recon headcount growth is still pretty elevated. From here, is there some shift in how efficiently you are able to train new reconditioning hires and keep growth elevated in recon headcount while also keeping new employees really efficient? Ernie Garcia: Mark talked a lot about centralization and automation. That can also be thought of as reducing the complexity and the learning curve in many positions. We built these centers in a way where you can take a focused skill set and have people who really know how to do something well do that over and over again, and then you can train them in new skills and move them to different parts of the line. That gives us access to a broader pool of talent than many others trying to provide similar functions, and we think that is an advantage. As we continue to build out Carly—the systems inside Carly that make individual operators more efficient—and as we build out manager tools that make manager decision making more straightforward so they can focus on identifying best performers, keeping people motivated, and keeping the system moving, that generally makes things easier to learn and easier to train. We are also investing in tools that allow us to hire people more quickly and get them up to speed more quickly. That is another area the team has been focused on for a long time. It is all part of continual improvement. We have made a ton of gains over the last many years, but there is clearly a ton of room to continue to make gains, and that is what the team is focused on every day. Operator: The next question is from Michael Montani with Evercore ISI. Please go ahead. Michael Montani: Good afternoon. Thanks for taking the question. First, on the diesel front, could you help us understand any exposure you might have there? Obviously, impressive improvement on logistics this quarter, but we were thinking about it as potentially a low single-digit earnings headwind in isolation. The other question is strategic: you continue to have underlying gains in GPUs. I know there is some quarterly noise, but how should we think about the propensity to reinvest those gains to further accelerate share versus being happy at these levels with this kind of unit growth and passing some of that through? Mark Jenkins: There is an impact of fuel prices on the operations of our business. That takes a couple of forms. One, there is a cost of sales impact for inbound transport. There is also an SG&A expense impact, which is in the operations expense, broader variable cost category in SG&A. I would expect to see some impact from higher fuel prices in the second quarter, but not one that is particularly large. I think of it as being in the normal range of quarter-to-quarter fluctuations as we see things move around. Ernie Garcia: On reinvesting gains, without being too repetitive from previous answers, we do think we have opportunities across the entire business, and the path from where we are today to 13.5% adjusted EBITDA margin is pretty straight with leverage and advertising expense. We think the gains that we make we can largely pass through to customers. The opportunities are many, but like anything hard, we have to actually do it. When we do it, we will find out how fast we can do it and how big those gains are. We do expect to share additional gains with customers over time—hopefully meaningfully—while still marching toward our goal. Operator: This concludes our question and answer session. I would like to turn the conference back over to Ernie Garcia for any closing remarks. Ernie Garcia: Thanks, everyone, for joining the call. Carvana team, awesome job—another great quarter. You have a lot to be proud of. Recon team in particular—awesome, awesome job. Thank you for reacting the way that you did. To everyone across the business, when we hit a bump, let us react the way Recon did. No one can stop us but us. Let us just keep marching. Thanks, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to OGE Energy Corporation 2026 First Quarter Earnings and Business Call Update. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Casey Strange, Investor Relations Senior Manager. Cassandra Strange: Thank you, Stephanie, and good morning, everyone, and welcome to our call. With me today, I have Sean Trauschke, our Chairman, President and CEO; and Chuck Walworth, our CFO. In terms of the call today, we will first hear from Sean, followed by an explanation from Chuck of financial results. And finally, as always, we will answer your questions. I would like to remind you that this conference is being webcast, and you may follow along at oge.com. In addition, the conference call and accompanying slides will be archived following the call on that same website. Before we begin the presentation, I would like to direct your attention to the safe harbor statement regarding forward-looking statements. This is an SEC requirement for financial statements and simply states that we cannot guarantee forward-looking financial results, but this is our best estimate to date. I will now turn the call over to Sean for his opening remarks. Sean? R. Trauschke: Thank you, Casey. Good morning, everyone. Thank you for joining us on today's call. This morning, we reported consolidated earnings of $0.24 per share, and the first quarter typically represents approximately 10% of our company's earnings for the year. Even with milder weather in the first quarter, we remain confident in our 2026 guidance and in the foundation we are building for 2027 and beyond. Chuck will discuss the first quarter financial results in more detail shortly. Looking forward, our planned actions for the remainder of 2026 are setting the course for the rest of this decade. I'm pleased to let you know in the coming days, we will file long-term special contracts with Google to serve multiple previously announced data centers in Oklahoma with the Oklahoma Corporation Commission. Google is the customer previously referred to as customer X and their expected load and ramp rate is consistent with our 2026 IRP. We work closely with Google to ensure broad customer protections, including minimum charges. Google will also pay 100% of the cost to connect to the grid and its fair share to power the data center sites. We've also secured capacity from 2 solar facilities currently under construction. We look forward to creating similar opportunity for communities in the future as we leverage our low electric rates to drive investment and foster economic growth for many years to come. As discussed last quarter, we are continuing to add generation through a thoughtful, measured approach. We commissioned the 98-megawatt tinker power plant in February and expect 450 megawatts of new CTs at Horseshoe Lake to come online in the fourth quarter. While also breaking ground on 2 additional 450-megawatt units. And we're still advancing the 300-megawatt Frontier Energy storage project. So including the aforementioned capacity agreements, this 1.7 gigawatts of capacity strengthens our system today and positions us well for continued growth ahead. These investments reflect a disciplined strategy to support customer growth while maintaining reliability and competitive rates. Continuing on the regulatory front, 2026 remains an active year. In Oklahoma, we are finalizing a stand-alone large load tariff and expect to file it with the Oklahoma Corporation Commission no later than July 1, providing a clear, durable regulatory path for future large load activity. We continue to prepare for a rate review filing later this year with new rates anticipated in '27. In August, we expect preapproval of the Frontier Energy Storage project. And as projects emerging from the RFP process we are -- process are selected and negotiated, we also expect to seek pre-approvals on a rolling basis rather than waiting for the full portfolio of projects to be complete, and we anticipate filing for these preapprovals throughout the balance of this year. In October, we expect to complete the acceptance of the notices to construct on directly assigned SPP transmission projects. So taken together, these investments underscore a deliberate forward-looking strategy to support customer growth and demand. The actions we are taking this year establish a clear foundation for the remainder of the decade while leveraging our low rates as a significant competitive advantage. With respect to competitive dynamics, we continue to believe our in-state pricing is a meaningful advantage in driving new business that we will protect. Importantly, we have not seen the type of price escalation some have pointed to in other markets, and we have the customer protections, oversight and regulatory framework in place to ensure it does not develop that way here. Last quarter, I updated you on recognition the company and our team received for our culture. And today, I can add another one to that list. In addition to being named a top workplace in Oklahoma, we were recently named the National Top Workplace by USA TODAY. We operate in a highly competitive labor market, and it's fulfilling to see our people, our culture, drive results, innovation and belonging. I couldn't be more proud to work alongside my outstanding colleagues. Their commitment to our purpose is evident every day and continues to drive excellence. and our commitment to making Oklahoma and Arkansas better places to live, work and play drives us to our North Star of delivering reliable electricity at low cost. Again, the steps we are taking in '26 will set the stage that drives our future success. So with that, thank you. I'll now turn the call over to Chuck. Chuck? Charles Walworth: Thank you, Sean. Thank you, Casey. Good morning, everyone. I'm pleased to review 2026's first quarter results with you and provide an update on our 2026 financial plan. Let's start on Slide 7 and discuss first quarter results. Consolidated net income was approximately $50 million or $0.24 per diluted share compared to $63 million or $0.31 per share in the same period of 2025. In our core business, the electric company achieved net income of approximately $58 million or $0.28 per diluted share compared to $71 million or $0.35 per share in the same period of 2025. The decrease in net income was primarily driven by mild first quarter weather and the timing of O&M year-over-year, partially offset by lower depreciation and interest expense on assets placed in service. The holding company reported a loss of approximately $8 million or $0.04 per diluted share, consistent with the prior year. Although first quarter weather was soft, there is plenty of runway left in 2026. We expect to achieve our consolidated earnings guidance of $2.43 per share with a range of $2.38 to $2.48, assuming normal weather for the balance of the year. Our service area continues to perform well with customer growth just under 1%. Weather-normalized load was stable year-over-year, reflecting temporary outages at a few large customers, particularly offset by strength in the public authority and oilfield sectors. Looking ahead, today's announcement reinforces a meaningful growth tailwind, building on a historically strong trajectory with approximately 24% load growth over the past 5 years. Underlying demand remains healthy, supported by strong local economies and our low-cost reliable business model. Against that backdrop, we continue to see strong momentum across our service area. As Sean mentioned, we will file energy service agreements with Google to serve its previously announced data center facilities in Muskogee and Stillwater. This is an important milestone and the result of a disciplined approach to structure, terms and risk allocation. The addition of a large high load factor customer allows OG&E to spread fixed system costs over a significantly larger customer base, creating downward pressure on rates for existing customers. Equally important, agreements like these include robust long-term customer protections, including multiyear commitments with minimum charges and exit provisions to mitigate stranded cost risk and strong credit support to fully back customer obligations. Working with Google, we've secured generation capacity from 2 solar facilities that Google had previously announced and that are currently under construction. These facilities will provide 600 megawatts of nameplate capacity, and we will request preapproval from both Oklahoma and Arkansas commissions for these CPAs. Turning to financing. In April, we completed a debt issuance at the electric utility, which satisfies our financing needs for 2026 under the current plan. As a reminder, we issued equity late last year to support incremental capital added to our long-term plan. And together, these actions position us well from a balance sheet perspective. We have flexibility between now and May 2027 to exercise the approximately 4.6 million shares in the forward equity agreements. We continue to target credit supportive metrics and expect to maintain FFO to debt around 17% over the planning horizon. Turning briefly to credit. Last week, Moody's revised the outlooks for both OGE Energy and OG&E to stable from negative and affirmed all ratings. Moody's cited a generally constructive regulatory framework in Oklahoma and Arkansas, including improvements to cost recovery mechanisms. They also pointed to balance sheet actions, including the 2025 equity issuance as supportive amid a growing capital program. Notably and consistent with our planning outlook, Moody's lowered the parent level downgrade threshold to 17%. Later this year, we also expect additional clarity on several important projects. In August, we anticipate an order in our Frontier battery storage pre-approval case. And this October, we plan to accept final notices to construct from SVP for our direct assigned transmission projects. As these projects are approved, we will roll them into our capital plan and communicate our financing strategy just like we did last year. In closing, we remain confident in our financial plan and our ability to execute through 2026. The actions we're taking this year are setting the foundation for the next 5 years of results. We are advancing a disciplined strategy that balances customer affordability and prudent investment, supported by a balance sheet that remains a key strength. With our financing plan for the year complete, important regulatory filings moving forward and guidance affirmed, we believe the company is well positioned to deliver results consistent with our commitments. With that, I'll turn back to Sean, and we'll be happy to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Shar Pourreza. Whitney Mutalemwa: This is Whitney Mutalemwa on for Shar. So just to start off with the legislature process. Since the last update, HB 2992 has moved further along in Oklahoma and now it explicitly requires separate large load tariffs and cost causation protections. Does that legislation materially improve like your negotiating position with large load customers? Or were you already headed towards that substantially the same framework on your own? R. Trauschke: Yes. I would -- Whitney, this is Sean. I think it's clearly supportive of the direction we've been heading in our discussions with not just Google, but other large load providers. Protecting the existing customer base has been paramount to us from day 1. And I think what's important about the legislation is both of the authors of the legislation and the Senate and the House, we have and had for many years, good relationships with them. And we all want the same thing. We want the protection for customers, and we want the continued economic development and growth for the state. And so I think there's great alignment there. Whitney Mutalemwa: Of course. And just like as a mini follow-up, on the regulation side, obviously, you've pointed to an Oklahoma rate case review. Midyear and then potentially some Arkansas activity later in the year. So how are you thinking about just sequencing these rate filings so that you're preserving that like constructive recovery, but you're also avoiding the perception that large load-driven investment is crowding too much on customer bills at once? R. Trauschke: Yes. I think your use of the word sequencing is a good one. We're going to take these bids we're getting back from the RFPs. We're going to look at those and try to file those as quickly as we can. As we said in our remarks, we're not going to provide a full portfolio filing. We're going to file them as the negotiation is complete. And then we're going to have to sequence in there those rate filings in Oklahoma and Arkansas as well. So there's a full agenda for sure. But again, our intention around the large load tariff is to actually protect those customers. Operator: Our next call is Nicholas Campanella of Barclays. Michael Brown: It's Michael Brown on for Nicholas Campanella. My first question is, since you haven't filed the large tariff yet, can you discuss what you're looking for in this tariff? And what type of upfront capital commitments would you be requiring for your customers? And how can that kind of change your financing needs? R. Trauschke: Yes. Michael, I didn't get the middle part of that you [indiscernible] out there. You talked about capital commitments. Can you repeat that? Michael Brown: Okay. Since you haven't filed a large tariff yet, can you discuss what you're looking for in this tariff? And what type of upfront capital commitments would you be requiring for your customers? And how can that change your financing needs? R. Trauschke: Yes. So I think we would fully expect any large load customer to pay all those [indiscernible] payments, make those in advance. I think our tariff is consistent with the legislation in terms of looking for contract terms and security, looking for pricing structures and charge allocations such that you do preserve or protect the existing customer base and really setting a threshold around service eligibility in terms of what is a large load. Is it 75 megawatts? Is it 100 megawatts, things like that. But that's how we're thinking about it. In terms of the initial upfront, the connection to our system, that wouldn't really change our financing plans. Obviously, as we begin adding additional resources to serve this load, that will change our financing plan. And as Chuck mentioned, once we get that approved, he'll share with you exactly how he's going to finance that. Michael Brown: My next question is when taking into account the multifaceted piece of the upside with Google, the transmission and the IRP, how are you thinking about the impacts to your EPS CAGR and when you would be ready to communicate the new plan to investors? Charles Walworth: Yes, Michael, this is Chuck. It's going to be just like the playbook that we did last year. So these catalysts are -- some are coming this year and then some coming maybe early next year. But in terms of the transmission, we should have line of sight to that by Q4 of this year. And that's a pretty substantial opportunity and then coupled with the Frontier battery case as well. So as soon as that's buttoned up in terms of having an order on that, we'll be prepared to layer that into our plan and discuss financing and then how that impacts earnings as well. But again, it's not just a this year event, right? I mean, so those are two big opportunities, but then that will be shortly followed by the outcome of the generation RFP as well. Michael Brown: My last question is, can you provide the short-term and long-term load update? Charles Walworth: Yes. So in terms of short term, we maintain our guidance for the year at 4% to 6%. And then longer term, that's going to be -- we haven't given guidance on that. But clearly, from this Google announcement and the knowledge that it was previously customer X, which was basically a gig in our plan by 2031 in relation to our system, we're somewhere just under a 7-gig system. And I think that can kind of give you an order of magnitude in terms of the size of this. Operator: Our next call is from Julien Dumoulin-Smith of Jefferies. R. Trauschke: I got to tell you, Stephanie is doing a great job with the name. She nailed yours. She named Shar. She's doing a great job. Julien Dumoulin-Smith: Absolutely. I appreciate it very much. It's very kind. Well, look, let me take it from the top here. I mean let me ask you -- I mean, the 5% to 7% here, how are you thinking about that? You're already at the top end through '28 into the base plan. And right, you've got this incremental Frontier, you've got this SPP transmission. And then in theory, then you've got RFP participation, right? So -- and again, I suppose that's a little bit of an unknown in terms of how far that goes. But do you want to remind us here? I mean I didn't hear in your script any comment about 5% to 7%. So I don't mean to needle you here, but it seems like it might have been slightly omitted here. Charles Walworth: Yes. Julien, this is Chuck. Thanks for the opportunity to address that. So you're right. I mean we didn't mention that because it's unchanged in the near term. So 5% to 7% and pointing to the upper end, upper half of that through the next few years. But really, the catalysts that we're talking about, those are going to take us beyond that period, right? So I think your observation is spot on that this really allows us to extend that runway. But again, keeping with our tone and philosophy, we're not really going to get into that until those projects are rolled into the capital plan. But clearly, those catalysts are out there to extend that expectation. Julien Dumoulin-Smith: Right. Absolutely. And actually, Chuck, just sticking with the focus here on the financing plan. How do you think about this Moody's FFO to debt threshold, right? I mean kudos on finally getting that done. I know it's been in the cards for some time, getting that thing down to 17 from 18. You guys didn't blink. You held your line here. But how should we think about the common equity needed to fund the incremental CapEx above the base plan? I mean how do you think about that now and here? How do you think about JSNs at this point? But again, obviously, kudos on the move here in creating capacity? Charles Walworth: Yes. Thanks for that comment, Julien. Yes, I mean, it is great confirmation of our plan. But again, I think it didn't just happen overnight. It's -- I think underlying that is our long-term track record. And so that means the onus is on us to extend that track record into the future and be prudent in that aspect. So it still means we got a lot to live up to, right? But clearly, I think coming at this point, when we've got these large opportunities in front of us, that coupled with our reaffirmed balance sheet strength, that's just -- it's like a multiplier effect, right? So yes, really, really, really pleased with that, and it's just great timing from that standpoint. In terms of your question about forms of equity, look, I mean, we've always maintained that we've got the full toolbox at our disposal. We thought it was very important to do common equity next year. When it comes time for the next round, we'll evaluate that in the context of the market at that time, and we'll do what's right. Julien Dumoulin-Smith: Awesome. Excellent. And then if I can go back a little bit on what you were alluding to earlier, but I just want to clarify this, right? Obviously, kudos on translating Google into a formalized construct. I feel like that's been in the cards for a little bit here. How do you think about the total gigawatts that are incurred there and the opportunity here? I just want to make sure we're hearing this right here. And as much as what is the ramp in gigawatts relative to what you guys have discussed previously? Is there something incremental to this, call it, 1.9 gigawatts, if I'm adding it up right, I mean there's a few different ways to read it. Is there something incremental there that one should be considering that would be ownable? I heard the solar comment about the capacity contracts that would be a purchase agreement. But beyond the 1.9, is there something incremental here with Google that we should be cognizant of? Charles Walworth: So with this announcement, this announcement is consistent with what's in our IRP, okay? So this one by itself is not incremental. It's just consistent with the plan. In terms of the solar contracts, if you recall, the 1.9 was a winter need. It was the winter of [ '31-'32 ]. And the rough math from the SPP is it's going to be somewhere around a 20% accreditation on solar in the winter. So our kind of high-level estimate is that's going to change that 1.9 to 1.8 for that time frame. But that's just with this contract, obviously, anything additional to this would be above and beyond that. Julien Dumoulin-Smith: Got it. Okay. Excellent. Fair enough. And then just specific, I'd love to hear the cadence of conversations, whether that's expanding Google further or other data center contracts. We've heard from some of your peers in adjacent states. Obviously, we saw this ERCOT update recently. How would you characterize the state of conversations for whether it's a further Google expansion or other contracts in as much as you all have been on a roll? Charles Walworth: I would characterize it as continuing and consistent. Operator: Our next call is from Aidan Kelly of JPMorgan. Aidan Kelly: I just wanted to go back on like the large load kind of developments here. And maybe just see if whether you kind of plan to indicate new resources CapEx as they get preapproved even or if they wait for full approval to add to the plan? Charles Walworth: I'm sorry, I'm not sure I totally follow your question there. Could you repeat that? Aidan Kelly: Like do you plan to like telegraph like the new resources CapEx as they get preapproved? Charles Walworth: Yes, yes, 1.5%. Yes. No, clearly, we are in the middle of an RFP right now. So there's not really any detail -- I mean, the bids haven't even been opened on that yet, but they will be soon. But yes, once those do the evaluation, do the selection, then we'll make the filing. So really, you'll have some pretty good indication as to what the possibility is once we make those filings. And then once they're actually formally approved, that's when we'll layer that in. But you'll actually get some pretty good color on that before they're approved. Aidan Kelly: Great. Appreciate the input there. And then just kind of want to go back to the 600 megawatts of nameplate capacity with the solar facilities. Just like a simple question here. Like is that in the plan? Is it separate from the IRP filing? Just any color on how that kind of coalesces with the generation opportunities? Charles Walworth: Yes. So that's where I was going with on that previous question. So it's -- it was not -- it was not included as a resource in the 2026 IRP that showed a need of 1.9. And so again, since that was a winter number, adjusting for that's going to be lower that to about a 1.8 need. So that's kind of the walk forward on that. Operator: Our next question is from Paul Fremont of Ladenburg Thalmann & Company. Paul Fremont: Congratulations. I guess my questions are sort of mostly focused on the Seminole to Shreveport line. The SPP write-up sort of that came out at the end of last year is suggesting an in-service of mid-2028. Is that sort of a realistic time frame that this can all be done in? Or should we look for some delay in that? Charles Walworth: Paul, this is Chuck. That's part of what we're still going through. I mean, yes, that was the SPP's date, but that didn't really -- that was more of a -- from a modeling perspective, that didn't take into account any expectations on an actual construction time line. So that's part of the process we're going through right now is firming that up, and that's what we'll have clarity on by the early Q4 time line this year. Paul Fremont: Great. And would that be built on existing right of way? Or would you need to sort of put into place new rights of way? Charles Walworth: So it's new. And so that's part of the process also is just doing the line routing on that. Paul Fremont: And my understanding is you're still negotiating certain things with AEP. Is that -- how much of the line is going to be sort of Arkansas versus Oklahoma? Or what exactly sort of remains to be negotiated with AEP? Charles Walworth: So on this one, it's really Oklahoma and then probably Texas into Louisiana, but it's -- that's part of what we're working on is where exactly those -- where that crosses state boundary. So that's going to play into that. So still work in progress. Paul Fremont: And then my last question, with respect to the battery, how -- have you determined whether there's an additional equity need that will go with the battery? Charles Walworth: Again, we -- since it's not approved yet, it's not in our plan. So we'll do -- because again, we'll probably have timing clarity on that right around the same time as the transmission. So we'll probably take a holistic view of it at that time. Paul Fremont: So then the CapEx update that we should expect is more likely going to be third quarter versus, let's say, second quarter? Charles Walworth: Yes, I think that's fair. Operator: And at this time, we're going to make a final call for question. [Operator Instructions] And our next question will come from Stephen D’Ambrisi of RBC Capital Markets. Stephen D’Ambrisi: I mean, Julian took like six of them. So I really only have one question left. And I guess what I would say is just given what's happened with some of, call it, the capacity contracts, how do you think you're positioned to effectively win or what percent -- what are you messaging to the commission and to stakeholders about the benefits of having the potential incremental generation as opposed to working with developers and securing capacity contracts and just the risks and benefits that come with that? R. Trauschke: Yes. Thanks, Steve. I think we've been consistent. We've certainly had this discussion with the commissions about this. It's our intent to own and operate these assets. There's reasons from time to time to layer in some of these capacity type agreements to kind of bridge you during construction. But thinking about some of the severe weather events going back to Winter Storm Uri, there was no doubt that the assets that we owned and we operated ran and performed very well. And I think that's what everyone is looking for. So it'd be our expectation that we own and operate these assets, whether we build them ourselves or we were to purchase them from somebody, though, I'm not sure really -- we get too excited about the difference there. What we're focused on is making sure that we're the ones holding the ball, so to speak, when the severe weather comes in. Operator: This concludes -- we don't see any additional questions. So this concludes the question-and-answer session. And I'd like to now turn it back to Sean Trauschke. R. Trauschke: Thank you, Stephanie. Great job today, and thank you all for joining us today and for your continued support. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Greetings. Welcome to the STAG Industrial, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to Steve Xiarhos, Vice President, Investor Relations. Please proceed, sir. Steve Xiarhos: Thank you. Welcome to STAG Industrial's conference call covering the first quarter 2026 results. In addition to the press release distributed yesterday, we have posted an unaudited quarterly supplemental information presentation on the company's website at www.stagindustrial.com, under the Investor Relations section. On today's call, company's prepared remarks and answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties and may cause actual results to differ from those discussed today. Examples of forward-looking statements include forecast of core FFO, same-store NOI, G&A, acquisition and disposition volumes, retention rates and other guidance, leasing prospects, rent collections, industry and economic trends and other matters. We encourage all listeners to review the more detailed discussion related to these forward-looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the company's website. As a reminder, forward-looking statements represent management's estimates as of today. STAG Industrial assumes no obligation to update any forward-looking statements. On today's call, you will hear from Bill Crooker, our Chief Executive Officer; and Matts Pinard, our Chief Financial Officer. Also here with us today are Mike Chase, our Chief Investment Officer; and Steve Kimball, our Chief Operating Officer, who are available to answer questions specific to their areas of focus. I'll now turn the call over to Bill. William Crooker: Thank you, Steve. Good morning, everybody, and welcome to the first quarter earnings call for STAG Industrial. We are pleased to have you join us and look forward to discussing the first quarter 2026 results. Q1 industrial leasing velocity and volume were healthy, both market-wide and within STAG's portfolio. Year-over-year absorption continues to improve. Notably, the multiyear weakness in demand for big box product has reversed with vacancy in larger spaces decreasing in many markets. This has not been limited to larger spaces, however, with strong activity in the 150,000 to 250,000 square foot segment of the sector where STAG's portfolio predominantly sits. The market is benefiting from a more recent demand driver tied to the rapid acceleration of data center construction. 3PLs supporting these data center developments have resulted in a new segment of leasing demand for traditional warehouse facilities. Since the beginning of 2025, we have signed 8 leases totaling 1.6 million square feet to data center-related tenants. New supply also remains subdued with approximately 40% of new supply constructed for build-to-suit projects, above historical averages. We continue to expect national vacancy rates to peak in the coming months with an inflection point in the back half of 2026. Capital markets have remained stable to start the year and industrial product remains 1 of the most liquid asset classes. We see momentum in the transaction market with the pipeline growing and transaction volume increasing. Our internal pipeline has increased to $3.9 billion. In February, we acquired a 750,000 square foot building located in Platte City, Missouri for $80.7 million at a reported cap rate of 6.1%. The newly constructed Class A building features 36-foot clear height, ESFR, ample trailer parking and heavy power. Strategically located within a northwest submarket of Kansas City, the building benefits from close access to highways and the Kansas City International Airport. The building is 100% leased for 12 years with 3.2% annual rental escalators. In terms of our development platform, we have 7 buildings or 1.8 million square feet of development activity that is not in service as of the end of Q1. These buildings are in various stages of development and have an expected stabilized yield of 7.1%. Subsequent to quarter end, we have signed two new development leases. We agreed to a 73,000 square-foot lease at our casual drive development in Greenville. That building is now 100% leased. We also executed a lease totaling 45,000 square feet and 1 of our Charlotte development projects. That building is now 90% leased. With that, I will turn it over to Matts who will cover our remaining results and guidance for 2026. Matts Pinard: Thank you, Bill, and good morning, everyone. Core FFO per share was $0.65 for the quarter, an increase of 6.6% as compared to last year. Leverage remains low, with net debt to annualized run rate adjusted EBITDA equal to 5. Liquidity stood at $806 million at quarter end. During the quarter, we commenced 37 leases across 6 million square feet, generating cash and straight-line leasing spreads of 20.9% and 39.6%, respectively. This is a quarterly record in terms of total operating portfolio square feet leased. Tenant demand is strong and in many industries, including air freight and logistics, retail and containers and packaging. Retention for the quarter was 69.5%, we are maintaining our retention guidance of 70% to 80% for the year. As of today, 79% of our forecasted leasing for 2026 has been addressed at levels consistent with our initial guidance and at levels equal to our previous years at this point. We still expect cash leasing spreads of 18% to 20% this year. Same-store cash NOI grew 4.1% for the quarter. Credit loss was minimal for the first quarter as well. At this point, we are maintaining all guidance for the year. 2026 guidance can be found on Page 21 of our supplemental package, which is available within the Investor Relations section of the website. I will now turn it back over to Bill. William Crooker: Thank you, Matts. I want to thank our team for the great start to 2026. SAG has set the foundation of sustainable growth in 2026 and will continue to benefit from a strong balance sheet, ample liquidity and broad market diversification. We will now turn it back to the operator for questions. Operator: [Operator Instructions]. Our first question comes from Craig Mailman with Citigroup. Craig Mailman: Bill, you noted similar to peers that the leasing market is healthier here today. I'm just kind of curious, you guys did maintain retention guidance and quicker backfills on spaces that have come back to you or anything encouraging on that front because I know you guys were a little bit worried about that as a source of occupancy to outside. William Crooker: Yes. Thanks, Craig. Yes, I mean, it's certainly a higher lease expiration year. And that's driving our guidance -- our occupancy guidance for the year. With respect to what we're budgeting, it's still 9 to 12 months of lease-up time for assets when they go vacant. I will say we had good activity in Q4. That has continued in Q1. We had a large amount of square footage leased in Q1, it was 6 million square feet. So activity is really strong. We're seeing it from multiple industries. We're getting a lot of RFPs. It feels really good. But with all that being said, we have not changed our lease-up assumptions at this time. But the momentum from Q4 has continued into Q1 and into Q2. Craig Mailman: And then just a follow-up here. You mentioned, I think, 8 leases, 1.6 million square feet to data center supply tenants. What markets are you seeing that in predominantly? And do you think that this is concentrated in your portfolio or it grows a little bit as just the proliferation of data centers takes hold? William Crooker: Yes, it certainly feels like it's going to continue to grow. I mean South Carolina, we're seeing a lot of it. We had 3 leases in South Carolina, 2 in the Greenville Spartanburg market. Nashville, 1 of our -- the lease we signed in Nashville was a data center-related tenant. And then we saw some in the Midwest in Wisconsin 1 lease there. We had a lease we signed in Ohio and also in Charlotte. So it's really that Southeast Midwest markets is where we're primarily seeing that demand. And that's where a lot of our portfolio is concentrated. So we anticipate further demand from data center-related tenants. Craig Mailman: Not to ask a third one, but like what type of tests are there 3PLs? Or are they equipment manufacturers or servicers, who are you leasing to? William Crooker: Yes. So one was a 3PL to one of the largest 3PLs in the world serving a meta data center contract. We have some tenants that are distributing generators to data centers. We have some light assembly of racking of power conversion systems in one of them, one is manufacturing battery components. So it's a variety of things supporting data center developments and just the operations. And these are long-term leases. I mean the weighted average lease term is a little over 8 years and the leasing spreads we achieved that 1.6 million square feet, was about 35%. So good economics, long-term leases, strong credits backing these leases as well. Operator: The next question comes from Michael Griffin with Evercore. Michael Griffin: I appreciate the commentary on the leasing front. It seems like it's been a good start to the year. I realize you haven't -- you've maintained your guide across the board. But maybe, Bill, if you can give us a sense of updated thoughts on market rent growth expectations. I think at the beginning of the year, it seemed like you were flat to up 2%. Does it feel like we're above the midpoint on that? I realize things can fluctuate around, but any commentary there would be helpful. William Crooker: Yes. I mean, I think this is part of the theme of Q1 calls, especially with us, where we just put out our annual guidance a couple of months ago, we had pretty good insight into where things were trending to start the year. activity is probably a little bit stronger than what we initially thought. But with all that being said, we maintain our guidance really across all components of that. With respect to market rent growth, our guide was 0% to 2%. That will -- that we're going to maintain that guidance as well at this time. That will likely trend higher on a quarterly basis as we move through the year as we see that vacancy rate -- market vacancy rate peak in the coming months. So everything is panning out as we thought a couple of months ago, maybe a little bit more optimism in the portfolio just given the activity we're seeing and the leases we're signing and the discussions we're having with tenants. So -- but it's still early in the year, right? We're 2 months past our original guidance we put out. Michael Griffin: Great. That's helpful. And then maybe for my follow-up, you're at about 80% of your 2026 leasing goal seems pretty good so far. I don't want to put the cart before the horse, obviously. But as you look to maybe 2027. Are you starting to have those conversations? I mean does it feel like as you look even at the year ahead, you're running maybe ahead of where you were relative to expectations? Or anything you can glean on maybe those '27 conversations would be helpful. William Crooker: Yes. I mean, it's a little -- it's obviously a little early for 2017, but we do -- especially for renewals, we start this conversation typically 12 months in advance. So when you look at leasing plan, we're about 25% through that at this point, and that's pretty comparable to the last few years. Operator: The next question comes from Nick Thillman with Baird. Nicholas Thillman: Maybe I wanted to touch a little bit on what you're seeing on the acquisition front. Is there any sort of change in the pool of assets you're looking at? Are you willing to take on increased demand environment? Are you willing to take a little bit more value add? Or is -- I guess, bucket, the development, value-add versus core acquisitions and what you're underwriting today and how that sort of trended over the last 90 days or so? William Crooker: Yes. I'll let Mike jump in in terms of kind of what we're seeing broad-based. But with respect to identifying a certain profile of asset and focusing on that I mean we're fortunate enough that we've got the people, the processes in place and the systems in place to underwrite a large amount -- a large number of transactions. So we'll look at everything and depending on what meets our criteria and if we can meet the price, then we'll buy it. So it's not like we're going to shift materially into value-add or materially into long-term stabilized leases. We'll acquire what meets our investment criteria at that time, but we'll look at everything. Just one thing on the, call it, the acquisition side, sourcing side, and then I'll pass over to Mike for more of the broader view is we did yesterday just acquire a piece of land adjacent to one of our buildings in Dallas, Texas. It's about a 3 -- it's a land is large enough to fit about a 340,000 square foot facility. So we're going to start development of that facility shortly. So it was good to put that land under contracted shovel-ready that transaction is going to be about $38 million at a 7.4% yield on cost. So excited to get that going. And that's just an example. When we're looking at a number of development opportunities. We're looking at a number of value-add opportunities, stabilized opportunities, some small portfolios. So it really depends on what meets that investment center. And if I didn't mention that transaction, that PSA Land is in Dallas, Texas. So -- and with that, I'll pass over to Mike to share any more commentary on that. Michael Chase: Sure. And I think another thing just to mention on that piece of land, that's a committed fill-to-suit where we already have it tenant committed for that building on the land that we just bought yesterday. Just looking nationally, it was a strong end of '25. So Q4 came in from an investment sales perspective, came in pretty strong. That's carried over into Q1 of '26. So that stability and momentum in the capital markets has resulted in an increase in confidence from both buyers and sellers in the market. So that also resulted in an uptick of deal flow of more buyers coming to the -- coming off the sidelines and into the market. So there's been good deal flow that we've seen in Q1 and that's continuing into Q2. William Crooker: Yes. I mean you see that in our pipeline to our pipeline is $3.9 billion, about 70% of that is single transactions, 30% portfolios. And just on the seller side, I mean, those Empire side bid-ask spreads pretty tight now. So we expect just the overall industrial transaction market to pick up here as we move through Q2. Michael Griffin: That's helpful. And then, Bill, I know you've mentioned just some of these partnerships you've had with regional developers and sounds like Dallas might be an opportunity that you just locked in here as well. But I guess, longer term, are you thinking about getting a little bit more concentrated now that you're building these relationships with these developers I guess, are you guys being a little bit more submarket focused and looking for a little bit more growth in end markets and underwriting that. I guess more commentary there would be helpful because it's something that we've talked about in the past. William Crooker: Yes. So just backing up on the piece of land we bought, that was sourced by us. We had a tenant in our portfolio that's on an adjacent site that wanted to do a build-to-suit. So we were able to source the land, and go through all the approval process. So that was done on balance sheet. That's not being partnered with anybody. With all of our developments, we look at the submarkets and make sure that those buildings fit the submarkets I mean these buildings that we're putting up meet the teeth of the demand in these markets. So that's first and foremost. We appreciate the partnerships we have with our development partners. We want to grow those. We're trying to grow those. In some respects, we are growing those. And there's also some opportunities to expand partnerships with new partners. So all that's on the table. If you were to ask what's our best use of capital today is probably on the development side. I mean, just as one in Dallas, it's a 7.4% yield. So that's our best use of capital is harder to acquire that land and takes longer to develop it. but we like the opportunity, and we'll do it either on balance sheet or with existing partners or with new partners. Operator: Next question comes from Jason Belcher with Wells Fargo. Jason Belcher: I guess, first, Q1 same-store was pretty solid at 4.1%. The guidance was unchanged at 3, suggesting somewhat of a possible slowdown. Can you talk about how you expect that to take shape or how we should be thinking about the cadence of that metric for the rest of the year? Matts Pinard: Yes.So cash same-store of 4.1% in the first quarter is very healthy. But really what we know is talk about the economic impact to occupancy decline. In the first quarter, occupancy decline was only partially reflected in the same-store number, meaning a good portion of the nonrenewals occurred near the end of the quarter. So basically, the second quarter is going to reflect the full impact of that vacancy. So put it a different way, the 4.1% includes impact of the 60 basis points of average occupancy loss, not 120 basis points of actual occupancy loss of period end. So all of that's related to the first quarter. So the 4.1% does not account for the fact that this space is vacant for the entire quarter. But the first quarter cash same-store was fully anticipated. It was included in our guidance. As you said, we continue to expect cash sales or growth of 3% at the midpoint. So no change in the guidance. This was expected. It really comes down to the impact of occupancy over a full period. Jason Belcher: Great. And then secondly, could you just give us an update on where your embedded rent increases are trending for newly signed leases and also remind us what the average escalator is across the portfolio is at this point. Matts Pinard: Yes, absolutely. The weighted average escalator across the portfolio is 2.9%, almost 3%, and that's going to increase every quarter because every lease that we're kind of coming across our desk starts with anywhere in the 3% to 3.5% range, call it, 3.25 on average of the leases that we are signing. So again, just mathematically, that 2.9% will continue to increase. Operator: The next question comes from Eric Borden with BMO. Eric Borden: Matts, you just touched on this a little bit about the same-store, but just on the occupancy front, you started off the year with positive leasing, but had a few known move-outs in the back end of the quarter. how should we be thinking about the quarterly occupancy cadence just for the balance of '26, and as we look to the rest of the year, should we expect any additional known move-outs? Matts Pinard: Yes, exactly. So with the no move outs, we didn't change our guidance. We're at 75% at the midpoint retention, which is basically spot on what we've averaged as a public company and what you can see from any other institutional quality industrial portfolio. But the same store being 60 basis points of average occupancy loss and 120 basis points of period-end occupancy loss. So that resulted in 96.6% occupancy in the same store. And I just want to pause you, that's a very healthy level. As Bill mentioned, our budgets assume 9 to 12 months of lease-up. So space that rolls vacant in our budget lease-up next year, not this year. If we think about the cadence, we expect the trough occupancy to occur in the second quarter with occupancy increasing during the second half of the year. And that basically squares with our view that at the end of this year, we're going to start to see equilibrium in market rent growth acceleration. Again, the change in Oxy's fully anticipated, we had messaged it. It's included in our initial guidance. We continue to expect average occupancy in the same-store pool to be 96.5% with no change to our guidance. Eric Borden: Great. And then just going back to the increasing data center demand, how are you guys thinking about underwriting that tenant base in terms of power availability, building specs CapEx needs and credit duration just versus your traditional warehouse timing? William Crooker: I mean, one of the themes we're seeing across a lot of tenants is they want more power, right? And whether that's today or in 5 years in their lease term, maybe because they plan to automate their facility more or whatnot. But power is certainly something tenants are looking for. with respect to the spaces that we lease to the data center tenants, I mean, some of them had excess power and some did not. So it's your traditional warehouse that is just being used for a different use. It's the same example of we've had warehouses that were regional distribution centers that second tenant was a light assembly tenant and then the third tenant was warehousing, right? So these are can be used for multiple uses. We're just seeing an incremental demand driver from data center peers. Operator: The next question comes from Jessica Zheng with Green Street. Jessica Zheng: Just following up on the data center piece. So for the construction tenants that sized the longer-term basis, do you know if they're surveying like multiple data centers in the area? And if not, do you know if they will be servicing the data centers operations after the construction completes Yes, I'm just curious about the kind of the sustainability of this new tailwind here? William Crooker: Yes. So some of them are servicing the data centers that are already complete, and it's just servicing their ongoing operations. Some are servicing the development of it. and some are servicing multiple data centers and some are servicing just one data center. But where these warehouses are located. There's multiple demand drivers within those markets. I mean, we have at least two of these data center leases in the Greenville Spartanburg market, and we spoke about that market many times. It's one of our top markets, and there's consumption in that market for warehousing and local distribution. There's regional distribution related to the inland port. There's now data center demand there. There's the BMW plant that creates a lot of demand there. So these are functional buildings that can meet many of the demand drivers is just this incremental demand driver of data centers. Jessica Zheng: Okay. And then additionally, I was wondering if you could just kind of walk through your other markets and kind of highlight the ones with relative strengths and weaknesses right now? William Crooker: Yes. I mean if you look at kind of markets that are a little weaker, it's -- we have one asset in San Diego that's proving to be a little challenging now Memphis is a little slower, Pittsburgh a little slower. Let's say, our markets that have probably been improving the most, the Greenville Spartanburg and Charlotte. And then if you want to move a little further to our best markets, Houston has been a great market. Nashville -- and the Midwest big-box distribution markets have really started to perform extremely well. I mean that's a trend we're also seeing is big box leasing has been strong, and a lot of these markets are -- have very low vacancy rates for big box distribution. So that's your Columbus, our Louisville, your Indies. Operator: Next question comes from Henry Newell with RBC Capital Markets. Unknown Analyst: Just wondering about where you're seeing underlying private market valuation trends in your specific markets and if you're seeing them being impacted by really what's going on macroeconomically or geopolitically at the moment? William Crooker: Yes. I mean depending on the transaction, whether it's a -- I assume you're talking cap rates just to clarify the question? Unknown Analyst: Yes. William Crooker: Yes. So I mean, individual transactions, I mean, we just bought one transaction in Q1. We're close to putting a couple of others under LOI. I mean those are transaction transacting at and around where we're buying assets, right? Sometimes 25 basis points or 50 basis points inside of that, and that's why we don't win the deal, right? So they're trading at are a little bit lower than what we're willing to pay. And then portfolios because there's a lot of capital still chasing this asset class. We're still seeing a slight premium for portfolio. So anywhere from a 25 to 50 basis point portfolio premium on private transactions. Operator: At this time, I would like to turn the floor back to Mr. Crooker for closing comments. William Crooker: Thanks, everybody, for participating in the call. We appreciate the questions and look forward to seeing you all soon. Thank you. Operator: You may disconnect your lines at this time. Thank you for your participation, and have a great day.
Operator: Good morning, and welcome to ONEOK's First Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded. [Operator Instructions] With that, it is my pleasure to turn the program over to Megan Patterson, Vice President, Investor Relations. You may now begin. Megan Patterson: Thank you, Angela. Welcome to ONEOK's First Quarter 2026 Earnings Call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are available on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. With that, I'll turn the call over to Pierce Norton, President and Chief Executive Officer. Pierce Norton: Thank you, Megan, and good morning, everyone, and thank you for joining us today. Joining me on the call are Walt Hulse, Chief Financial Officer; Randy Lentz, Chief Operating Officer; and Sheridan Swords, our Chief Commercial Officer. Yesterday, we reported first quarter earnings and raised our 2026 financial guidance, reflecting strong performance and building momentum. Before we get into the quarter, I'd like to take a step back and frame the environment we're operating in and how we think about ONEOK's role within it. Energy markets remain dynamic, but long-term fundamentals are strong. It remains clear that the U.S. energy infrastructure is essential for economic growth, industrial competitiveness, power demand and global energy security. Midstream's role is similar. We connect supply and demand safely and efficiently across cycles, not around them. That's where ONEOK differentiates itself. We built a regionally diversified integrated platform at scale across natural gas liquids, natural gas, crude oil and refined products, anchored by an innovative employee base, the interconnectivity of our assets, customer relationships and a predominantly fee-based model. Our systems sit in and around some of the most resilient basins and durable demand centers, including power generation, industrial demand and export markets. As we look to the remainder of 2026, our high-level priorities remain consistent, operate safely and reliably, execute our capital growth program with discipline, maintain balance sheet strength and financial flexibility and leverage our integrated asset advantage and strong customer relationships to continue driving volume growth across all of our systems. These priorities are grounded in what we see across the U.S. energy landscape where long-term demand remains constructive, both domestically and globally. U.S. natural gas demand is growing, across power generation for emerging data center demand, industrial activity and liquefied natural gas exports. LNG export capacity alone is protected to more than double over the next decade, reinforcing the durable global call on U.S. energy and natural gas infrastructure. 65% of U.S. natural gas production contains recoverable natural gas lipids. That means the infrastructure to handle natural gas liquids must be addressed alongside natural gas. This requires full value chain infrastructure and continued investments in natural gas, natural gas liquids, crude oil and refined product assets by companies like ONEOK. At the same time, NGL demand remains strong globally, driven by petrochemical and international markets, with U.S. supply playing an increasingly critical role. And finally, the resilience and innovation of the U.S. energy industry continues to stand out. through consistent efficiency gains and reliable results. Recent global events have only reinforced the importance of secure, resilient energy supply. -- and the cripple roll U.S. energy plays in providing it. The world has seen that the most expensive energy is the energy that does not show up. As global demand continues to grow, infrastructure not supply is the constraint, and that is exactly where ONEOK is positioned, providing scalable, strategically located infrastructure with capacity and the ability to respond to evolving demand dynamics. I'll now turn the call over to Walt Hulse for our financial update. Walter Hulse: Thank you, Pierce. As Pierce mentioned, we are increasing our 2026 financial guidance, reflecting the strong performance we delivered in the first quarter across ONEOK's integrated systems and our higher expectations for the remainder of the year. We now expect 2026 net income to increase to a midpoint of approximately $3.5 billion, with diluted earnings per share increasing to a midpoint of $5.53. We are also increasing our adjusted EBITDA guidance to a midpoint of $8.25 billion. These updates reflect strong underlying business segment performance as well as increased opportunities across our system. Driven in part by a more constructive market environment that developed late in the first quarter. As we move into the back half of the year, the combination of higher volumes, completed projects and market tailwinds should be reflected more clearly in our results for the balance of this year and into 2027. Our total 2026 capital expenditure guidance remains unchanged at $2.7 billion to $3.2 billion. Turning to the first quarter performance. ONEOK reported net income of $776 million or $1.23 per diluted share, a 12% increase compared with the first quarter of 2025. Results included a noncash impairment of $60 million or $0.07 per diluted share after tax related to our Powder Springs logistics joint venture in the refined products and crude segment. Adjusted EBITDA for the quarter totaled approximately $2 billion, a 13% year-over-year increase driven by higher volumes, and strong segment level performance. As market conditions strengthened towards the end of the quarter, we also saw additional opportunities across our system. We continue to expect the first quarter to be our lowest EBITDA quarter of the year, consistent with our typical annual cadence and seasonal dynamics. Importantly, our balance sheet and capital framework remains strong. We continue to prioritize financial flexibility while investing in the business and returning capital to shareholders. In April, we redeemed nearly $500 million of outstanding notes due July 2026, and we entered into a $1.2 billion term loan further enhancing balance sheet flexibility in a rapidly changing market. Our results reflect the same themes that underpin our strategy: A high-quality largely fee-based earnings mix, strong performance across our integrated systems and disciplined cost and capital management. And our increased financial guidance reflects both this consistent execution year-to-date and improving market dynamics. I'll turn it over to Randy for an operational and large capital projects update. Randy Lentz: Thank you, Walt. From an operational standpoint, our focus remains on safe and reliable performance across our integrated assets. Our teams continue to execute well across all 4 business segments, managing normal seasonality and weather-related impacts. The scale and diversity of our systems allow us to absorb those seasonal dynamics while continuing to provide reliable service to our customers. Winter Storm created temporary wellhead freeze-offs that briefly reduced throughput. But as a reminder, there were no material downtime on our assets on those -- related to those impacts were already reflected in our original 2026 guidance. Turning to capital projects, we've made strong progress so far this year. In the first quarter, we completed the relocation of our 150 million cubic feet per day shadow fax natural gas processing plant from North Texas to Midland Basin. We expect a steady ramp-up of volumes as producer activity remains solid in the area. We're also on track to complete expansions of our Delaware Basin processing assets in the third quarter, increasing our capacity in the basin by 110 million cubic feet per day, in addition to our 300 million cubic feet per day Bighorn processing plant that remains on schedule for completion in mid-2027. In the Powder River Basin, we're on track to complete construction of our 60 million cubic per day in center plant in the fourth quarter of 2026. This plant will increase our processing capacity in the Powder River to more than 100 million cubic feet per day, we expect capacity to deal quickly from wells already drilled and expected to be drilled by our 15% JV Parker plant. Across other segments, our Denver area refined products pipeline expansion will add 35,000 barrels per day of capacity when an inter service midyear and Phase 1 of our Medford NGL fractionator will add 100,000 barrels per day of Mid-Continent fractionation capacity in the fourth quarter. These projects remain on schedule and are positioned to deliver meaningful near-term benefits by improving reliability, expanding connectivity and increasing optionality by also creating long-term durable value across our footprint. I'll now turn it over to Sheridan for a commercial update. Sheridan Swords: Thank you, Randy. Commercially, we continue to see active engagement across our asset portfolio. Demand is supported by downstream particularly from power generation, industrial and petrochemical demand and export linked markets. These dynamics reinforce the importance of strategically located infrastructure and long-term relationships. Looking at the first quarter, we delivered strong year-over-year volume performance across our assets. despite typically seasonal headwinds. Starting with the Natural Gas Liquids segment. Performance was led by broad-based volume growth across all 3 of our core regions. In the Rocky Mountain region, NGL volumes increased 11% year-over-year, driven by higher base volume and increased ethane recovery. In the Mid-Continent, volumes increased 4% year-over-year, driven entirely by C3+ volume, even as the region experienced some temporary impacts of winter storage earlier in the quarter. In the Gulf Coast Permian region, volumes increased more than 30% year-over-year, primarily reflecting base volume growth from newly connected third-party plants that were delayed last as well as higher short-term volume opportunity. From a global perspective, NGL demand remained structurally strong, and recent geopolitical dynamics have further reinforced the attractiveness of the U.S. supply. request for capacity on our announced LPG export dock were already increasing and have accelerated more recently as customers look to do supply toward the U.S. Turning to the refined products and crude segment. Year-over-year refined products volumes increased 12%, supported by strong gasoline and diesel demand, refinery maintenance dynamics, favorable regional basis differentials and wide crack spreads that drove strong refinery utilization. Lending volumes were also strong during the quarter. We entered the spring blending season significantly hedged, which limited our exposure to binding ore -- to butane spreads. Historically wide basis differentials between New York Harbor, where we hedge and the Mid-Continent where we sell product, also impacted realized margins. Looking ahead, we've secured additional hedges on fall volumes at higher prices and extended new hedges into spring 2027. Importantly, lending volumes continue to be driven primarily by system throughput rather than EPA RVP waivers, which typically create only modest incremental opportunities. Increased gasoline throughput and completed synergy projects provide a much greater benefit allowing us to optimize blending activity across our system. More broadly, the reach and flexibility of our refined product systems remain a key advantage. We are the only refined products pipeline system with bidirectional access between the Mid-Continent and the Gulf Coast, which allows us to attract incremental volume and respond to changing market conditions. Demand fundamentals remain strong. We continue to see very strong diesel demand across our system, which we expect to remain as we move into spring agricultural season. We also anticipate a robust summer travel season. supported gasoline demand across our footprint. Additionally, jet fuel supply remains constrained for an extended period, we could see incremental demand for gasoline. Refined products and exports have increased in recent months amid global supply titers, particularly related to diesel, and we are well positioned with dock capacity across multiple Gulf Coast marine facilities, crude dock utilization remained robust at our highly contracted joint venture, and we are in discussions to extend our contract expiring capacity at favorable rates. Finally, higher-margin Permian crude oil gathering volumes increased compared with the fourth quarter as activity in the basin remains favorable of discipline. Moving to the natural Gathering and Processing segment. We delivered strong year-over-year volume growth, led by the Mid-Continent where volumes increased 7%. Mid-Continent producers continue to focus activity across both gas-focused and liquid-rich plays, and we have 11 rigs currently operating at costs more than 1 million dedicated acres in this region. In the Rocky Mountain region, processed volumes increased year-over-year even with winter weather and heater treater impacts. As operating conditions normalize, we expect volumes to strengthen in the second and third quarters. There are currently 11 rigs on our dedicated acreage with producers continue to drive efficiency gains through longer labs. In the Permian basin process volumes increased 4% year-over-year, and we currently have 11 rigs operating across our footprint. As Randy mentioned earlier, our expanded capacity in the Permian enhances system flexibility and positions us well to support producers' development plans across both the Midland and Delaware Basins. Customer activity remains strong, and we are increasingly encouraged by the depth of opportunities the Permian Basin brings to our portfolio. From a financial perspective, realized commodity prices were lower in the first quarter as a result of entering the year fully hedged. Importantly, underlying throughput volumes increased year-over-year across all regions, reinforcing the long-term earning capacity and resilience of our gathering and processing portfolio. Producer behavior remains disciplined and executive focused. We are seeing some acceleration in completion activity, which supports our confidence in the 2026 volume outlook. That confidence is driven by direct visibility into producer plans rather than an expectation of higher commodity prices. This view is consistent with recent earnings commentary for oilfield services companies, the noted early signs of increasing activity. particularly among private and single basin operators. Doug inventories can also provide an avenue for this acceleration. Our producer base across ONEOK's approximately 7 Bcf per day system is well balanced among large public companies, private operators and private equity-backed producers. That diversity provides both scale and durability while allowing activity to adjust incrementally. I'll close with our Natural Gas Pipeline segment, where strong results continued in the first quarter with all regions outperforming expectations. Results benefited from wider than planned Waha to Katy location price differentials as well as incremental marketing opportunities created by winter storm firm across our Louisiana assets. Looking ahead, we expect Waha to Katy differentials to normalize as new pipeline egress comes online in the second half of the year. Firm transportation demand remains strong, with high contracted capacity and strong utilization of the system. We also continue to see significant interest from added center-related opportunities in Oklahoma and Texas and we remain in advanced discussions with several counterpoints. Additionally, LNG-related demand remains strong, both near term and long term, reinforcing the durability of demand of our natural gas pipeline assets. Pierce, that concludes my remarks. Pierce Norton: Thank you, Sheridan, Randy and Walt for those comments. To close, I'll come back to where I started. The energy landscape will continue to evolve, but the need for reliable, scalable U.S. energy infrastructure is not cyclical. It is driven by long-term demand fundamentals. ONEOK is built for this environment, having an integrated platform with capacity, a strong balance sheet and disciplined execution. Results, durable long-term value creation. Most importantly, none of this happens without our people. I want to thank our employees for their continued focus on safety, operational excellence, innovation and service. And thank you to our investors for your continued trust and support in ONEOK. With that, operator, we're now ready to take questions. Operator: [Operator Instructions] And our first question will come from Spiro Dounis with Citi. Spiro Dounis: Maybe let us start with the improved outlook, just for a little more granularity on how much of that $150 million move is maybe early realized here in the first quarter? I guess, what level of visibility you have on the remaining forward component Sheridan, you mentioned sort of hedging out butane through '27. Just curious how much of that forward look is locked in? Walter Hulse: Spiro, it's Walt. So first of all, I just want to clarify, picture that -- it's clear that winter storm turn was already in our guidance. So we had zero impact from that as it related to the increase. The increase was really a blend of stronger volume expectations driven by higher commodity prices, continued expected differential opportunities, and then we, of course, expect to realize some benefit from the higher commodity prices. So though we are hedged. And typically, we're hedged about 75% going into a year. But with the higher volume expectations, any volumes we receive going forward will enjoy the full benefit of these higher commodity prices. Spiro Dounis: Understood. Well, second one maybe for you as well, just pivoting to capital allocation. So once again, you're trending a little bit stronger than expected. Could you just level set us I know you're thinking about the timing to sort of reach your leverage targets here. And when you do free up that cash flow, just where your head on buybacks or any other uses of that free cash? Walter Hulse: Sure. Well, nothing's really changed from our capital expenditure plan, as you know, and Randy mentioned, our projects are on time and right on budget. So we expect to start completing those this year with the Denver project finishing up and Bedford first phase finishing up, as well as some of the smaller things. As those wind down, as we've stated in the past, most of our CapEx -- larger CapEx will be completed by midyear of 2027. And that's when we'll really see the free cash flow kicking in. We're headed towards our leverage targets. Clearly, with the increased EBITDA expectations as that denominator rises, we'll get there faster. But we continue to pay down debt and we'll be in a position to meet our targets and return capital to shareholders appropriately. But I want to make sure that everybody stands our first objective is always to get high return capital projects. So as we see those come in, we'll definitely try to prioritize those. But our expectation is free cash flow, there will be funny for those. Our dividend our debt repayment as well as other forms of returning to shareholders. Operator: Our next question comes from Theresa Chen with Barclays. Theresa Chen: Going back to your comments on the upstream outlook, though it's still early on. Can you elaborate further on recent conversations with your producer customers? What are your near- and medium-term expectations for upstream activity in your areas of service? And where do you think prices will need to stabilize in the outer years to stimulate a material uptick in production? And how long would it take to see these volumes potentially materialize on your system? Sheridan Swords: Theresa, this is Sheridan. The first thing we're seeing with producers is what we call kind of leaning in to production. And that starts with the first 1 starts with -- if there's anything that goes down there quickly getting that back up quicker than they do in a much more lower price environment. We also see them bringing on more completion crews. So that's kind of impacting your DUCs. They go forward or bringing things on quicker than they've already drilled. And the other thing, as I said in my remarks, we are starting to see some producers looking for additional rigs to bring online. And as we see the environment we are today, where a lot of people see the back end of the curve coming up, people are getting more excited about what the price environment is going to be going forward. Obviously, when we bring on rigs that the rig volume is a little more delayed into the back half of '26 and earlier. But as I said earlier, pretty more completion crews on and when they have any downtime getting that back on will be the more near-term effect on volumes. Theresa Chen: And the second question is related to your export infrastructure and your outlook there, given the call on U.S. Energy Resources and export infrastructure, in particular, within your existing liquids export docks on the heels of recently building out the connectivity between going to park, East Houston and your Pasadena and VP joint venture, what kind of upside -- could you potentially furbish whether it be optimization on utilization or spot cargoes or even additional brownfield investment in Pasadena? And then on the LPG front, can you just talk through the commercialization process at this point? And have those conversations with potential counterparties accelerated? Sheridan Swords: Yes. Starting with our existing facilities. We have -- as you mentioned, we have 2 marine export facilities refined products on the Houston Ship Channel market and MVP. We have seen increased activity across those docks going forward. We still have more room that we could expand for and we are in conversations with customers around that. So there could be a little bit of upside in that area. -- on our crude dock, it is highly utilized right now. We have a lot more interest in there. And what we're seeing is the opportunity to extend contracts or more turn at more favorable rates than we historically have seen. So we see some tailwinds not only in '26, but beyond in both of our export facilities. Concerns our LPG dock, yes, we are seeing an acceleration of interest. We are sowing interest before the Middle East conflict, we're seeing even more of that interest. And right now, we are not concerned at all about finishing the contracting of our targeted utilization of that dock here in the relative near future. Pierce Norton: Theresa, this is Pierce. I want to add something to what Sheridan said, just to remind everybody on this call and prior to the Iran War, the U.S. and the Middle East were the only ones -- only two countries that we're actually going to expand LNG facilities over the next 5 years. And then if you fast forward to today, you look at the damage that was done to Qatar's LNG facilities, more than likely the equipment that was ordered to do those expansions, we'll probably go to rebuilding some of the damage that was done during these war efforts. So that means that the incremental capacity is going to really land back in the United States. And with LNG going from 18 Bcf to 30 Bcf basically by 2030, and I'd like to remind everybody, 65% plus of all the U.S. gas has recoverable NGLs with it. So that's really going to drive a lot of the NGL growth here in the United States, and we're well positioned for that. Think Sheridan did a great job of explaining the LPG exports, but it's providing a very constructive backdrop for the future volume growth here at ONEOK . Theresa Chen: And if I could just squeeze in a final one. Your funding say, splitter in the Gulf Coast, what utilization is that seeing currently? And what's your recontracting time line for that? Sheridan Swords: It's highly utilized right now, especially with the spreads that we're seeing. And we have just recently recontracted that for term. So that will be contracted here for the foreseeable future. And we will be running at high utilization rates. Operator: Our next question comes from Michael Blum with Wells Fargo. Michael Blum: I wanted to go back to your comment on hedges. You said you entered the year about 75% hedged. Wondering if you can give us a sense specifically on butane blending, if that's the case as well, if you're 75% hedged going into the year? And then is there any kind of seasonality to these hedges? Are they sort of more back-end weighted, front end loaded or how that plays out? Michael Lapides: Yes, Michael, this is Sheridan. We came in highly hedged for the first quarter on the butane to RBOB hedges. We do have some -- had some space to hedge further out into the fourth quarter that we have done that at much higher prices after the Middle East complex going forward. The thing we're really seeing on butane that's really exciting for us right now is that we're seeing, as I mentioned in my remarks, an increased gasoline volume across our system. That gives us even more opportunity to blend. And you couple that with our synergy projects that we brought online that we think we have some really good tailwinds behind our blending operation, both here in the first quarter when you see a lot of blending and in the fourth quarter when we see the fall blending season come about. Michael Blum: Okay. Great. I appreciate that. And then I just wanted to ask the status of the potential Sunbelt Connector project. As I'm sure you're aware, Western Gateway appears close to moving forward. So wondering if there's a possibility that you could somehow join that project in some capacity if it does reach FID or if there's a path for both projects? Sheridan Swords: Yes, Michael, this is Sheridan, again. As I've said before, there's -- we think there's only room for one project. And what we've said before is if either 1 of these projects go forward, we think it will benefit 1 of from us being able to bring volume out of the Gulf Coast into the Mid-Continent as long leave that to go to Arizona on the P66 project. And we also think that we have the ability to supply it coming out of the Gulf Coast with with us being connected to all the refiners on the Gulf Coast and the ease of getting it into the El Paso area. Operator: Our next question comes from Jean Ann Salisbury with Bank of America. Indraneel Mitra: You touched on [Technical Difficulty] Can you give a little bit more color about how 1 possible in your systems in 2025 and just fit with your portion and something that you would consider to increase that volume... Walter Hulse: Jean, you were breaking up quite badly there. It's very difficult to understand what you're saying. Could you try that again, maybe pick up your handset? Jean Ann Salisbury: Yes, sorry about that. I was asking about U.K. volumes and what it would take for to increase on your system? Sheridan Swords: I mean the butane or volumes is related to blending. We've been increasing that for the last 3 years. I think every season, we've been able to blend more and more on our system as we continue to go forward, especially as we brought these synergy projects online. So to see a meaningful uptick in our system. What we need is more volume across our system on gasoline. And we are seeing that right now. And we can even see that grow. As I mentioned in there, the rest of the year into the fourth quarter, if you see jet fuel continue to be tightening -- prices continue to rise people to be able to travel by airplane and move more to traveling by vehicle... Jean Ann Salisbury: Okay. [Technical Difficulty] Hopefully is it more clear. Sorry about that. And my other was that aspire 1 than expected this year. Can you remind us if you use that exposure over the course of the year or if it's all in 2027... Sheridan Swords: Breaking up a little bit, Jean, but I think you said is that the Waha to Katy spread was wider this year in the first quarter than we anticipated, and we were able to capture that. We see that continue through the second quarter into the third quarter when additional pipeline capacity will come online and then it will go back to be more normalized at that time. Operator: And our next question comes from Jeremy Tonet with JPMorgan. Jeremy Tonet: Just wanted to touch on, I guess, the guidance thoughts on EBITDA for the year. If I look at 1Q results and granted there were items that might not repeat. But if I annualize that, that would pretty much get you to the bottom end of the guide. And if I look at last year, I look at the difference between 1Q and 4Q, it's a pretty big step up and you talk about seasonality over the course of the year. I was wondering, if you could just help us think about shaping of the year, EBITDA by quarter, if that's going to vary from your pattern before? Or is there kind of conservatism built into your guidance expectations at this point? Walter Hulse: Jeremy, I'll just point you back to the earnings presentation, I think it's Page 5 in there where we've try to reflect the shape of that as well as demonstrate how the first quarter was the lowest. So we expect the shape of that curve to continue -- the only thing that might change a little bit might be upward slope if we see some enhanced volume in the later part of the year. So no change on the front end and hopefully a big change on the back end. Jeremy Tonet: Got it. So annualized in the first quarter would and does that slope will put you over the top end, it seems like. So it seems like a good year shaping up there. I was wondering, as we think about the uplift in the '26 guide, how much of that do you see recurring in '27? Walter Hulse: I think we're positioned very well to go into '27 with a great tailwind behind us and really have some nice volume growth and strength. And I'd remind you that we have a significant amount of operating leverage on our Bakken pipeline on the West Texas LPG pipeline out of the Mid-Continent. So as volumes pick up in the basins we serve, we don't have any incremental CapEx that needs to be spent. All that's going to drop to the bottom line. So we're looking pretty positively as we go into '27. Clearly, we've had some benefit from the differential on the -- well ahead that may not be there next year. But our system is diverse, and we find differentials all the time. As we bring on Medford, we might see a pickup in the north-south differentials as well. So were they positioned to capture those across our integrated system whenever they present themselves. Operator: Our next question comes from Manav Gupta with UBS. Manav Gupta: [Technical Difficulty] A little bit wet spread in terms of a thereof pipelines coming on. with involvement also, which obviously drives higher prices, which for your volumes, but if this gas gets to [Technical Difficulty] possibility you could see somewhat of a gas not over there. And I'm trying to understand if that does happen in that South Texas part, it starts to dislocate from Are there ways to capitalize on that opportunity? Sheridan Swords: I think it's more volume. I think what you're asking about is could there be a cut in natural gas as we see more volume come on, especially as we see more pipelines down into the Gulf Coast area. Obviously, we're seeing more LNG assets being brought online that will take that volume up. So we don't think we're going to see an overall in the Katy area as these LNG projects come on and also as we see more AI projects coming online as well. Operator: And our next question comes from Julien Dumoulin-Smith with Jefferies. Robert Mosca: This is Rob Mosca on for Julien. Most like the final FERC oil pipeline index came in better than expected. Can you help contextualize maybe what this means for your RPC segment and a refresh on how much of that segment is actually exposed to those FERC index interstate oil pipeline rates? And does this outcome meaningfully change your earnings outlook for RPC over the next 5 years? Sheridan Swords: This is Sheridan, a little bit. Yes. Remember that the spread did come in better than expected, which is beneficial to us. I'll remind you that 70% of our volume on the RPC system is market-based rates, not FERC index. So the impact in 2026 is going to be very marginal, as we go in there. But there's a compounding effect as we continue to go forward that, that will build out every year in a little bit more as we go forward. But it's a nice little tailwind, but it's not substantially change our outlook for the RPC segment. Robert Mosca: Yes, understood. And then maybe just turning back to the guide. I guess wondering if the current commodity -- environment simply holds and -- should we think about there being upside or something additive to guidance for the remainder of the year? I'm just trying to think through how much of that impact you're already factoring into your rest of your outlook? Walter Hulse: Well, I think that one of the things that you hear quite a few of -- especially the larger producers talk about is that the back end of the curve right now probably isn't really reflecting the actual physical damage that's been done over in the Middle East. So our expectations would be today that that curve should strengthen throughout the year. We have not factored any of that into our thinking when it comes to guidance. So should that happen, we'll enjoy that benefit going forward. Clearly, if that results in more volume, that's a positive for us. It takes time to bring on rigs. So maybe we get a little impact in the fourth quarter, but that's going to send us into '27 with a lot of momentum going forward. Operator: Our next question comes from Jackie Koletas with Goldman Sachs. Jacqueline Koletas: Just going back to the guide, one more really quickly. How would you frame up kind of the magnitude of the optimization upside that's now expected relative to that $150 million of year-over-year headwinds that was previously assumed. Walter Hulse: Well, clearly, we knew going into our guidance that these pipes were going to be constrained throughout -- at least the first 2 quarters and into the third, so that was factored into our guidance. So as it relates to the win spread, a good portion of that. It's been a little stronger than we had expected. So we've gotten some incremental benefit. But a good portion of that was already there. When you look at the the bridge last year from '25 into '26, there was -- a portion of that was really the the hedging that was done in '25 or '26 as it compared to '25 was at some lower pricing. So that was factored into our guidance as well. So really, the potential changes to the upside if we get more volume and enjoy these higher rates on all of that. And then there's still 25% that is unhedged that we will enjoy the higher benefits. Jacqueline Koletas: That's clear. And then just another -- can you touch on the incremental opportunities within the natural gas segment maybe longer term? I benefiting from price differentials today, how are you thinking about your exposure to power demand and how those commercial discussions trended recently? Sheridan Swords: This is Sheridan. We have been -- we are in advanced discussions with both AI and power demand right now. We have some very nice projects that are in the queue, and then we actually have projects behind that, that we're even working on as well as they continue to move forward. So we are very excited about what we see in the natural gas demand sector and where our assets sit, especially in the Oklahoma, Texas region for the power and AI demand going forward, and we'll have these projects in the 2026 and '27. So it is a good time to be in the natural gas segment for sure. Pierce Norton: So what I would add, I know set the same thing is -- when we first started talking about AI opportunities as related to power generation. We originally saw those. It's kind of short lays smaller volumes, so not necessarily that much of a material impact. As we've now gone through time and we're talking to more and more of these hyperscalers, the volumes that they're requiring that it's going to require us to reach back further into our systems and lay larger pipelines. So I think that's the big change that I see from where I sit versus where we were maybe 1.5 years, 2 years ago. Operator: Our next question comes from Keith Stanley with Wolfe Research. Keith Stanley: Wanted to follow up on Western Gateway. As you assess what that project could do to the market, do you see it mainly as an opportunity for longer haul volumes on your system out of the Gulf Coast? Or do you think this could create constraints and meaningful new growth investments like the Denver project to expand pipeline capacity? Sheridan Swords: Yes. I think it's a little bit of both. Obviously, if we if we start shipping volume out of the Gulf Coast up into the Mid-Continent to fulfill volume that's leaving the Mid-Continent to go on that Western Gateway project. That's going to mean we're going to get a longer tariff because we're moving the volume from a much longer distance away. Also is our -- the tariff from Gulf Coast out to El Paso. It's a very long term, one of our higher tariffs. If we increase that volume as well, that's going to have a very nice impact on when it can continue to go forward. And obviously, as we get more demand, will we see more expansion of product on our system? Yes, we will, as people are going to shift out the Gulf Coast more over to our system to be able to get it out to the -- out to El Paso and to meet the access into the Phoenix and California markets. Keith Stanley: Second question, the Bakken volumes were only down 2% to 3% versus Q4, that seemed a lot better than the seasonal guidance that you had pointed to last quarter on what's typical in Q1. So would you say volumes in the Bakken surprised to the upside in Q1 versus what you were expecting? Sheridan Swords: Yes, a little bit. I mean, the winter is always a little bit. We try to average it out over the 4 months and everything else. So it can be a little bit surprising to us where where the winter actually hits and when we see the volume come online. So I would say outside of winter storm and firm, we have seen -- we've been surprised with our volumes in the Bakken. Operator: Our next question comes from Brandon Bingham with Scotiabank. Brandon Bingham: I wanted to maybe talk about your Permian processing capacity portfolio and how you see that sort of evolving in light of all this resilient gas production? And just seeing some other operators in the basin discuss a more optimistic outlook for run rate capacity additions on an annual basis? How do you that being incorporated into your portfolio moving forward? Sheridan Swords: Well, I think Randy had mentioned already right now, we just put in 150 million a day, the Shaderfax plant that we moved out of the Barnett into the Midland Basin. So we brought another 150 million a day on there that we see that ramping up over time. And right behind that, we have some low-cost capacity expansions in the Delaware, 110 million a day that will come up later this year. And then we've already announced the 300 million a day plant that we'll be putting in the Delaware beyond that. Those are what we have announced. We continue to look forward. We see a lot of opportunity in the Permian Basin. We're in a lot of discussions on RFPs, especially in the Delaware that we would have the potential to even expand that capacity even more. beyond what we see today. I think we see that and also expect that to happen as we get into the -- as we get further into 2017, we hope there's opportunities as well. So we are, as like everybody else, very optimistic on the growth out of the... Brandon Bingham: Okay. Great. And then I just wanted to go back to some comments made earlier about better volume expectations this year as part of the guidance increase. Could you help frame up how the new volumes expectations compared to maybe the various midpoints within the businesses? I noticed the ranges didn't necessarily change, but it sounds like within those ranges, the expectation is definitely better now. Walter Hulse: As I said, our increase in guidance was balanced across what we've seen in volumes. And Sheridan just mentioned that we did have a little bit stronger first quarter volumes in some areas than we might have historically expected given what the or treater impact and that sort of thing would have been -- so as we go forward, we hope that builds, and we've taken that kind of projected it forward. Clearly, I think it still has to be seen what these higher commodity prices are going to do from producer activity. Some of our smaller producers, private equity or smaller independents seem to be a little bit quicker to think about rigs, and getting them fired up. So we could see some of that impact a little quicker. But I think the larger exploration companies are waiting for that curve to reflect what they think the fundamentals are and then they'll make their decisions. So -- we're not trying to get too far ahead of our volume expectations. We'll let that play out. But we do think in this commodity environment and how it's going to look into '27 that we would expect to go into '27 with a really nice tailwind behind us. Operator: And our next question comes from Sunil Sibal with Seaport Global Securities. Sunil Sibal: And hopefully, you can hear me all right. So my first question was related to the hedging. I think you mentioned on the call that you put in some hedges for '27 also. Could you indicate how much of your total 2027 commodity price exposure is hedged now? Walter Hulse: No, we're not going to get into specifics, but we've taken opportunities to make sure that we've captured at least a portion of what we see in '27. We clearly have been focused on the tail end of '26. So across our various businesses, we cleared in some portion of '27 at this point. In the markets that we can, it's probably important to know that in many of the markets that we are serving, there's just not a lot of liquidity in '27 or the backwardation is just so significant that we wouldn't want to do that. So we've been opportunistic, but where we think it makes sense. We've looked at it, and we're going to continue to look at it throughout the year. Pierce Norton: Sunil, this is Pierce. The only thing I'd add to that is that we have a what we call a programmatic hedging program where we just automatically hedge a certain percentage as the year goes back out. So it's not until we see some of these opportunistic opportunities that we go out and do anything like an just described. But there is a -- we don't try to time the market is sitting here, wait knowing something that happened that didn't move. We just methodically go through the year. And we do that because we're 90% volume times rate anyway, and so we just want to make sure we're not speculating too much on the hedging. Sunil Sibal: Understood. And then one clarification on the potential projects that you're looking on. I think you mentioned in Texas and Oklahoma with the data center clients. Should we think about those as significant CapEx opportunities with some midstream people -- midstream players undertaking? Or is it -- should we think about more like incremental CapEx or small incremental CapEx for those opportunities? Walter Hulse: Yes. I think as we've gone through and given you some thoughts about '27 and beyond '27 into '28, '29 and a run rate. We've looked at kind of a run rate of around $600 million of maintenance, about $1 billion, give or take, of what we call routine growth and a portion of this would be in that routine growth. And then we left kind of another $500 million to $600 million to get you around that 2 -- a little bit over $2 billion kind of run rate going forward. basically unallocated. So these types of projects, while they're bigger than our expectation, we originally thought they'd be $50 million projects are turning out to be $400 million to $700 million project. So they'll fit right in that window that we had left open, and they're coming in at really nice returns. Operator: Our next question comes from Gabe Moreen with Mizuho. Gabriel Moreen: If I could just ask about head chem economics, having improved quite a great deal here over the last month or 2, are you seeing any change in behavior on ethane extraction as it relates to either the Bakken or cadence going into Louisiana? I'm just curious if things have changed on that end at all? Sheridan Swords: Well, Gabe, you're right. I mean, obviously, what's going on in the world right now, the ethane economics in the United States are very strong, and we're seeing our petrochemical customers operating at very high utilization rates. But it has had due is we are seeing the ability for discretionary ethane out of the Bakken and at times out of Oklahoma to be good, be strong, and that's driving some of -- we see in volumes, so we mentioned. Going into -- that's coming off of coming out of the Mid-Continent and out of the Bakken as we draw feet over into our Louisiana crackers or Louisiana fractionators that hasn't really changed that amount on that piece. But as I said before, I think we will see some pretty good tailwinds on ethane coming out of the Bakken and then coming out through the rest of the year with the demand we're seeing from the petrochemical facilities. Gabriel Moreen: Great. And then if I could ask a quick follow-up. The PRB new plant there sounds like it's still pretty quickly any visibility to more capacity there. And then I think there was also a call out for Northern Border performance during the quarter. Was that onetime in nature or kind of there's a step-up on ratable earnings there? Sheridan Swords: We'll see on the Powder River, we've been working on that plant for a period of time. It's a 60 million a day plant. So we mentioned we have a JV partner that's a producer up in that area, coming along with us. We are getting more and more excited what we're seeing there. That's going to feel fairly quickly. Do we see there's opportunity for more volume? Yes, we hope so. And discussions with them. We'll continue to evaluate that, but we do think there's possibility to put some more capacity up there as we look forward. Northern Border, Northern Border is pretty steady. Outperformance is a little bit. Frankly, we see that kind of every year a little bit that they come in a little bit higher than what they had predicted. We continue to see this year, and we continue -- we expect to continue to see that throughout the year. Pierce Norton: [indiscernible] In the volumes is the amount of area and dedication. So there's plenty of running room up there to continue to drill there in the powder. Operator: Our next question comes from Jason Gabelman with TD Cowen. Jason Gabelman: I wanted to go back to full year guidance. And I guess when I look at your slide deck from 4Q from last quarter, you showed that at the time of your initial, I guess, '26 outlook, was predicated at $75 oil. That was, call it, $8.7 billion-ish, maybe a little higher of EBITDA for '26. Oil moved down, so your '26 EBITDA outlook move lower, but we've seen oil now move higher, and I understand the hedging dynamics mean maybe you don't capture all of the upside this year. But would you expect to kind of get back to capturing that upside next year based on where the commodity curves are right now? Walter Hulse: So what I would say there is you're absolutely right that clearly, we've got a different realized price environment, so that is going to take some time to work its way through and also takes some time for rigs to get up and moving. So when you didn't have quite as much rig activity as we had expected, that has an impact that you're starting from a different point as you exit '26. But we think we are going to see that type of strength. I'm not going to give you an actual guide to a number. But we're going to see that type of strength that we expected as volumes pick up if these prices stay or go higher, especially in the back end of the curve, there's a pretty big difference between the prompt month and as you go out towards '27. So that's going to be the story to tell as that plays out coming forward. Jason Gabelman: Great. And just a quick follow-up on a comment you just made. Did I hear you right that the -- some of the data center-related projects you're pursuing you thought they were going to be in the $50 million range and they're coming in more like $400 million to $700 million, those are the right figures? Walter Hulse: Yes. The thing is, originally, when we go back to that $50 million, that was couple of years ago when we first started seeing opportunities and people talked about citing these facilities, they were dropping them right next to pipelines, thinking that they could take the gas off of those pipelines. Well, when they were doing that, there were a lot of them were in the development stage. You didn't have a lot of hyperscalers involved. So some of the specs might not have been quite as realistic. On the hyperscalers talk about 5 gigawatt facilities, you can't just take that kind of gas off of a fully contracted pipe. So what it's caused is pure sites for us to need to look at reaching back into our system where the gas is available and building bigger pipe, and that's why the size of the projects have gone up. But at the end of the day, the value of getting these projects down to the hyperscalers is still well above their concern about price. So they're very pleased to provide good economics to make sure that speed and reliability are there. Operator: And our final question comes from Gabe Dowd with Truist. Unknown Analyst: Just quickly back to the upstream conversations. Just curious if there's any notable difference in behavior or price that operators need to see on the screen as you talk to public versus private. Just curious, especially as it looks like current rig activity is largely dominated by private in the Bakken for your footprint? Sheridan Swords: Yes, Gabe, this is Sheridan. We're definitely seeing more on the private sector more activity or talking about more activity that we're seeing on the public sector. especially with the large integrated large integrators are still being very disciplined. And looking at the price environment in front of what we are seeing, especially on the private equity side, starting to look more at rigs, more completion, trying to move production up that's where the majority of the activities happen. I think as we've stated here, as we continue to go throughout the year and everybody expects the the back end of this curve to move up as the paper is not reflecting what we're seeing in the physical world, when that happens, I think you could see -- start seeing some of more of the integrated and larger companies lean in more at that time. We'll start bringing rigs on that time. We still are seeing even with the larger, we are seeing them, making sure they get anytime they're down, they get things back up and looking to complete wells quicker than they had been in the past, but really concerning rig deployment that is more into the private sector. Pierce Norton: And there's one other element, I think is worth mentioning here is that they are really leaning into the efficiency of their drilling and how they're completing at the length of these laterals. So I don't think we need to get too hung up on like the numbers of rigs because the ones that are running, they're really putting a lot of emphasis on how efficient those rigs are to make them more profitable per well. Operator: That concludes our question-and-answer session. I would now like to turn the call back over to Megan Patterson for closing remarks. Megan Patterson: Our current period for the second quarter starts when we close our books in early July and extends until we release earnings in early August. We'll provide details for that conference call at a later date. Our IR team will be available throughout the day for any follow-up. Thank you for joining us, and have a great day. Operator: Thank you. That concludes today's call. You may now disconnect your lines at this time, and have a wonderful day.
Operator: Good day, and welcome to the Brinker International's Q3 F '26 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Kim Sanders, Vice President of Investor Relations. Ma'am, the floor is yours. Kim Sanders: Thank you, Holly, and good morning, everyone, and thank you for joining us on today's call. Here with me today are Kevin Hochman, Chief Executive Officer and President of Brinker International and President of Chili's; and Mika Ware, Chief Financial Officer. Results for our third quarter were released earlier this morning and are available on our website at brinker.com. As usual, Kevin and Mika will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our safe harbor regarding forward-looking statements. During our call, management may discuss certain items, which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. And with that said, I will turn the call over to Kevin. Kevin Hochman: Thank you, Kim, and good morning, everyone. Thank you for joining us as we discuss our financial and operating performance for the third quarter as well as our outlook on the remainder of fiscal '26. Q3 Chili's same-store sales of plus 4% marked our 20th consecutive quarter of same-store sales growth and outpaced the casual dining industry by 420 basis points. This strong result was rolling a plus 31% from last year for a 2-year cumulative comp of 37%. A list of the top 500 largest restaurant chains for all of 2025 just came out, and I'm proud to say Chili's is now the #2 casual dining brand for sales in addition to maintaining our status as the #1 casual dining traffic brand. To put our sustained growth into perspective, if Chili's nearly $1 billion of sales growth in calendar '25 was its own business, it would be larger than most of the restaurant chains on the list. After delivering a plus 15% in calendar '24, we often were getting asked what's going to be the next Chili's? With the 21% we posted in calendar '25, the answer was resoundingly Chili's. And in 2026, our sales growth has consistently outpaced the industry with our outperformance continuing to accelerate from 320 basis points better in February to 550 points in March and now 560 points month-to-date through April. Chili's momentum is sustaining, driven by quarterly improvements in food service and atmosphere as well as continuing to make Chili's more fun, more easy, and more rewarding for our team members. These experience improvements, coupled with our everyday value leadership, represented by a per person average guest check that is $3 to $4 below competition, are supporting a powerful flywheel of traffic, sales, growth margin expansion, and reinvestment into our business. Now I'll give some updates on the Chili's business. We spent Q3 continuing to work on the fundamentals, preparing for our new chicken sandwich platform launch and bringing in new guests with relevant marketing to experience Chili's. In Q3, our restaurant teams remain squarely focused on the fundamentals of the guest experience. From a food standpoint, our primary focus was chicken breading and cooking perfection, which involved retraining the teams on perfect execution of hand-breading our chicken crispper and chicken sandwich lineup, which will ensure those items are freshly cooked, hot and crispy. A key differentiator of our chicken sandwich is that we hand bread the chicken in restaurant. We believe a freshly breaded filet tastes better than chicken that has been breaded and fried by machines in a factory, frozen, shipped hundreds of miles and then refried in a restaurant. And in anticipation of our Q4 chicken sandwich launch, our teams were busy ensuring restaurants were ready for the guests that will come in, including reinforcing daily procedures for sparkling clean restaurants and emphasizing key areas to double down on Chilihead Hospitality, our differentiated customer service that drives memorable experiences to grow sales and traffic over time. While our competitors ramp up limited time offers, we spent the quarter investing time in operations, training and culinary resources into everyday capability that more closely correlates with long-term sustainable traffic growth. We believe doing fewer things bigger and better is a more sustainable way to build traffic and grow our business over time. The result is continued momentum on the business, attracting new guests in and retaining the ones we have converted. Dine and GWAP or Guests With A Problem continued its 3-year decline, finishing the quarter at 1.9%. Food grade finished at 75% and intent to return was also an all-time best at 79%. Our operational improvements continue to deliver better experiences for our guests, and our tokenized cohort tracking yielded similar results from previous quarters. New guests are coming into the restaurants and following the pattern of existing guests on frequency, which gives us confidence growth will continue to sustain. Our chicken sandwich platform launched on April 14, with our new menu drop. The lineup features 2 sandwiches at our $10.99 3 for Me opening price point, the Big Crispy and the Spicy Big Crispy, which includes fries, a bottomless Coca-Cola drink and bottomless chips and salsa. Given a wide range of guest preferences, we also offer 3 flavored chicken sandwiches, Nashville Hot, Signature Honey Chipotle, and Buffalo with 2 sides as well as well as the Big Crispy Deluxe with lettuce, tomato and bacon. All sandwiches are served with our Chili's Signature house-made ranch for dipping and dunking that our guests absolutely love and pour on everything. This adds an additional point of differentiation you can only get at Chili's. The sandwich platform was launched behind our Better Than Fast Food Campaign, this time tapping into an insight we have seen among consumers frustrated with what they call shrinkflation, where portion size is reduced to offset rising input costs. For example, a post went viral a few months ago when someone posted a photo where a famous fast food chain's burger pickle was actually thicker than the burger patty itself. We believe Chili's over-the-top generous portions are a great way to resolve the biggest challenge facing our customers today. In a world of rising inflation, how do I get the best value for my money? Our TV ads both show and tell our chicken sandwich is way bigger than the leading fast-food restaurants most premium chicken sandwich. And at $10.99, this addition to the 3 for Me platform is the perfect antidote for corporate shrinkflation. The launch campaign geared a before your eyes demo of a balancing scale holding our Chili's Big Crispy in one pan with its lighter fast food foil in the other. The scale is not in balance with the new Big Crispy demonstrating it is the exact opposite of shrinkflation, weighing down the scale heavily. In fact, our test conducted in the Dallas-Fort Worth area, weighing a large sample size of sandwiches, the new Big Crispy filet was over 80% bigger than the leading fast food restaurants premium chicken sandwich filet. I know many of you are interested in specifics on how the launch is performing. And while it's only been 2 weeks in market with only 1 week on TV, initial response to the new sandwich platform has been encouraging. So far, the overall platform is selling 161% more sandwiches than prelaunch and is significantly outpacing the numbers we saw in the 200 test locations. From a total business standpoint, we have been comping in mid-single-digit sales in April with positive traffic, which is rolling a plus 29% in April, driven by the Big QP launch in the prior year. As I said earlier, we have accelerated our sales outperformance versus the industry to 560 basis points in April, which only includes 2 weeks of chicken sandwiches. So while it's still early, the initial results on both the platform and the total business are both encouraging. I also want to give an update on our north of 6 initiative and how it will be a key to continued sustainable comp growth. A question we get asked a lot is with all the traffic growth you've had in the past few years, do you still have capacity for more? So let me start with the numbers. Our average traffic is now back to 2013 traffic levels, but that's still about 20% less weekly guests from our peak in 2000 to 2005. And our north of 6 restaurants serve anywhere from 20% to 80% more guests than our current average restaurant traffic. So the first point is we know we have a lot more capacity in the buildings. The second question is, what are we learning from the north of 6 restaurants? And first of all, the dramatic business simplification has been a huge enabler for our restaurants and the direction we are getting from the managers of north of 6 restaurants is we need more simplification. So our teams are going to challenge every requirement that slows down our restaurant teams. We'll continue to remove items and processes that don't help the guests or team members. And the new initiative I'm most bullish about is speeding up cycle time, meaning looking at everything that goes into the total time of kitchen prep and the dining experience and finding ways to simply remove time. For example, if one of our restaurants are on a wait on the weekend, the average wait time is about 15 to 20 minutes. That number is pretty good. But remember, that's just an average, which means there are about half our restaurants with longer waits. If we have enterprise project teams studying every bit of that wait to understand what are the bottlenecks we need to remove to reduce that cycle time, whether it be at the host stand, taking orders, kitchen ticket times, checking out with the Ziosk payment system and ultimately resetting tables for the next wave of guests. Chief Operating Officer, Aaron White, and our cross-functional teams are hard at work to reduce cycle times across the entire dining experience. I look forward to sharing new additional initiatives, which should be a continual tailwind for traffic on future earnings calls. On the Maggiano's business, we are continuing to make progress in its turnaround. When you adjust for Christmas Day falling in Q3 of this fiscal and the January weather, we did see sequential improvement in traffic and comp sales. Customers are noticing more abundant portions, more generous family style and the return of classic Maggiano's dishes like eggplant parm and Gigi's butter cake. Value scores are improving. We still have a lot more opportunity ahead of us with service and removing non-value-added process to improve Maggiano's dine-in times. But the important thing to know is we are making sequential progress. This turnaround, like the Chili's turnaround, will take time. But as long as we focus on important areas of food service and atmosphere and make progress every quarter, I'm confident we'll return this business to growth. As a reminder, Maggiano's is only 8% of our company sales and low single-digit percentage of our profit contribution, but it can be a source of growth in the future given the white space opportunities. To close out, I want to do some recognition of our integrated marketing team and our supplier partners on industry recognition. The industry-leading publication Ad Age named Chili's the brand of the year for the second straight year, an award that has never ever been awarded to the same brand 2 years in a row. This is an award recognizing the best work in all industries, not just restaurants. In addition to Chief Marketing Officer, George Felix and our Marketing Vice Presidents, Jesse Johnson and Steve Kelly, we have developed a deep bench of directors, managers and a collection of world-class agencies in various disciplines who have delivered the results over the past 3 years to earn this industry recognition. And the last bit of recognition I want to do is to congratulate our driver, Carson Hocevar, and the entire Spire race team for their first ever NASCAR Cup series win in Talladega last Sunday, driving the #77 Chili's car. Carson is a servant leader to his team and his fans and always makes those around him feel special. He's a perfect representative of what we like to call Chilihead hospitality that our guests experience in our restaurants. And hats off to our Mooresville, North Carolina, Chili's restaurant team and Area Director, Rachel Austin, who stayed open late Sunday night for Carson and the Spire team to celebrate their victory with a lot of triple dippers and a few Presidentes. To close, Chili's delivered another strong quarter, rolling big numbers from prior year. The quarter got stronger as we moved out of January, and we accelerated our market share growth as the quarter closed and now into April, driven by the chicken sandwich launch. Yes, there are macro headwinds the industry is experiencing, but Chili's is well-positioned to continue winning in this environment given the improvements in food service and atmosphere and our industry-leading everyday value. That formula has proven quarter after quarter to be resilient in driving traffic and outperforming the industry. Now I'll hand the call over to Mika to walk you through fiscal '26 third quarter numbers. Go ahead, Mika. Mika Ware: This quarter marks our 20th consecutive quarter of same-store sales growth and our second year of traffic gains, evidence of the durability of our results and the sustainability of our strategy. With the end of fiscal '26 in sight, we expect average annual unit volumes for the year to approach $5 million. These higher sales levels and strong unit economics continue to support our Invest to Grow strategy. We maintained strong business momentum this quarter, achieving positive same-store sales despite last year's positive 31% comparison, including 4% growth at Chili's. While winter storm burn affected Chili's January sales, growth returned to mid-single digits after weather conditions improved. In both February and March, Chili's comparable restaurant sales increased 5.9% with positive traffic, reflecting the underlying strength and momentum in our business, which we expect to continue throughout the rest of fiscal '26. Turning to our financial results. In the third quarter, Brinker reported total revenues of $1.47 billion, an increase of 3.2% over the prior year, with consolidated comp sales of positive 3.3%. Our adjusted diluted EPS for the quarter was $2.90, up from $2.66 last year. Chili's top line sales growth was driven by price of 4.6% and positive mix of 0.6%, offset by negative traffic of 1.2%. Weather and a holiday shift negatively impacted sales and traffic at Chili's by approximately 2.1% during the quarter. For Maggiano's, the brand reported comp sales for the quarter of negative 4.6% with negative 10.4% traffic, partially offset by positive mix of 0.6% and price of 5.2%. Weather and a holiday shift negatively impacted sales and traffic at Maggiano's by approximately 2.1% during the quarter. At the Brinker level, restaurant operating margins were 18.4% for the quarter compared to 18.9% in the prior year due to higher food and beverage costs and higher restaurant expenses, partially offset by sales leverage. At Chili's, we continue to make investments in food by upgrading the quality of ingredients and making recipe improvements for items such as ribs, frozen margaritas, queso, nachos and our bacon cheeseburger to improve the guest experience and ensure value across our entire menu. In addition, we prioritize actively repairing and maintaining our facilities to provide a comfortable and fun atmosphere. At Maggiano's, we continue to execute the Back to Maggiano's strategy, which is designed to improve our value proposition, optimize our service model and ensure our atmosphere is clean and well-maintained by making the investments needed to improve the business. Food and beverage costs for the quarter were unfavorable by 60 basis points year-over-year due to unfavorable menu mix with 4.6% commodity inflation, mainly due to beef offset by price. Labor for the quarter was favorable 60 basis points year-over-year. Top line sales growth offset wage rate inflation of approximately 3.4%, additional investments in labor and higher health insurance costs. Restaurant expense for the quarter were unfavorable 50 basis points year-over-year due to higher repair and maintenance costs and general inflation impacting expenses such as utilities, rent, to-go supplies and delivery fees offset -- partially offset by sales leverage. Advertising expenses for the quarter were lower than expected and flat to the prior year at 2.9% of sales due to a portion of spend that shifted from the third quarter to the fourth quarter of this fiscal year. G&A for the quarter came in at 4.0% of total revenues, 10 basis points favorable to prior year due to sales leverage and lower performance bonus accruals, partially offset by an increase in restaurant center support resources to support our growth. Depreciation and amortization for the quarter came in at 3.7% of total revenues and decreased 10 basis points year-over-year due to sales leverage and lapping accelerated depreciation from the prior year due to the retirement of the CTX and Impinger ovens. This was partially offset by an increase in our asset base from new equipment purchases. Third quarter adjusted EBITDA was $223.7 million, a 1.4% increase from the prior year. Our adjusted tax rate declined year-over-year to 18.7% compared to 19.3% in the prior year, largely due to the impact of a prior year tax catch-up associated with stronger-than-expected performance. Capital expenditures for the quarter were $51.2 million, driven by capital maintenance spend. At the end of the second quarter, we completed our first 4 reimages at Chili's, and the learnings were used to inform our long-term reimage and new unit growth strategy. As we shared last quarter, we plan to complete another 8 to 10 reimages during the remainder of this fiscal year and another 60 to 80 during fiscal 2027 before getting to a planned cadence of 10% of the fleet every year starting in 2028. Regarding new unit growth plans, our goal is to continue to ramp up to a new run rate by fiscal 2029, and we expect to share more details on our strategy and plans at our Investor Day later this year. At Maggiano's, our main focus areas will continue to be guest-facing repairs and maintenance, supplemented by a smaller reimage program. Our strong free cash flow provides sufficient liquidity to maintain our disciplined capital allocation strategy, allowing us to invest in restaurants, keep debt levels low and return excess cash to shareholders. We continue to support this approach by repurchasing $108 million of common stock under our share repurchase program in the third quarter. In addition, we are planning to call our $350 million 8.25% bonds early in fiscal 2027 using the liquidity of our $1 billion revolver, which would provide interest expense savings in fiscal 2027 and the flexibility to continue reducing leverage if we choose. In terms of our expectations for the balance of the year, as noted in this morning's press release, we're updating our guidance for fiscal 2026 to include the following: annual revenues in the range of $5.78 billion to $5.82 billion, adjusted diluted EPS in the range of $10.60 to $10.85. Capital expenditures in the range of $240 million to $250 million; weighted average shares in the range of $44.7 million to 45 million. Our guidance assumes wage and commodity inflation in the low single digits and a tax rate of approximately 19%. April started the quarter on a strong note with continued mid-single-digit sales growth and positive traffic. In addition, our outperformance versus the industry is accelerating, and we remain confident we will lap the fourth quarter with mid-single-digit sales and positive traffic at Chili's. Looking ahead, our results show that our strategy is sustainable and that we're positioned for continued growth. At Chili's, we will build on our momentum by continuing to bring in new guests and drive loyalty through relevant and innovative marketing, menu innovation and strong operations and our industry-leading everyday value. We're confident these strategies will support our ability to drive growth, invest strategically in the business and deliver value to shareholders. I look forward to providing further details at our upcoming Investor Day scheduled in Dallas for Thursday, September 17. With our comments now complete, I will turn the call back to Holly to moderate questions. Operator: [Operator Instructions] Your first question for today is from David Palmer with Evercore ISI. David Palmer: Two questions, if I could. Just I know you said some stats on the chicken sandwich, but if you wouldn't mind, so forgive me if I'm making you repeat yourself, but any stats on that would be helpful, the mix of the product, the perceived lift to same-store sales when you exclude any of the noise that might be out there, new guest repeat, customer sat scores associated with it? And then is your experience that the lift from that -- a product like that will rise over time with the TV campaign, consumer trial for a product like that? And then just a big picture question. As Chili's approaches $5 million in AUV, and I'm not asking you to front run your Analyst Day out in September, but how are you thinking about the big levers from here and how they'll be different to get the next $1 million or $2 million? How should we be thinking about your big hairy goals here from here and how you get there? Kevin Hochman: Okay. So 2 big pack questions. So I'm going to start with the chicken sandwich first, and then I'll address the second one about sustainable growth in the second. So from a chicken sandwich standpoint, we don't have really much more to share because it's only been 2 weeks of launch. We've had 1 week of merchandising only and then 1 week of TV. And we're seeing 161% more chicken sandwiches today than we did pre the launch, which is significantly higher than what we saw in the merchandising-only test market. So -- and in fact, the first week where we were merchandising only, we did see higher lifts than we saw in the test market. So that's all good. As far as like what's the feedback been, anecdotally, we've heard mostly very, very positive, both in the reviews that we see online as well as in talking to our team members. The first thing that people tend to say when they see it is, "Oh my goodness, this is a really big sandwich," which is exactly what we're going for. Inflation is how we position the sandwich and the price point and the size, especially when we compare to our fast-food foil. So that's all working. Over time, we're going to see whether it continues to maintain. So we'll be able to answer your questions about repeat rates and we have all that tokenized data, but that's going to take a few quarters to really understand that. But right now, we feel very, very bullish about it. Typically, when things mix a lot, they tend to be generally overall more incremental from a magnitude standpoint. So the fact that we're beating the test market is very encouraging. And then we obviously saw some acceleration in traffic driven by the sandwich over the past 2 weeks, which feels good, too. So it's too early to declare this thing is successful. But so far, we're really encouraged by the data that we're seeing. Now on the second question, David, on what are the next drivers of sales over the next 3 years, we're kind of a repeat record on this. There will be new initiatives behind this, but it's still going to be focused on food service and atmosphere. So from a food standpoint, we talk about the other menu categories that still need renovation, plus we'll have some innovation on the core categories that we've already renovated. So that will continue. From a service standpoint, I think the big unlock of north of 6 that we're understanding over the past 3 months is this idea of cycle time. So the idea of how do we take the throughput that we're seeing in the north of 6 restaurants and expand that throughout the system. They do a lot of things differently to get higher throughput. So like the example I gave in the prepared script, was at the host stand, right? So typically, in a north of 6 restaurant, they either have more staffing at the host stand than what the labor card says and/or they have more senior level of staffing, either paying a more senior host or sometimes having a manager be in the door during busy peak times, right? In addition to that, there's software behind that when we use the seating system that we need to make sure the teams are trained on, they're using consistently so that when we quote wait times, they're more accurate because we need to use that all the time. So there's a bunch of work that we need to do for the host rollout that we're learning from the north of 6 restaurant. That will go in Q2 of next fiscal, but that's like one example of reducing cycle time, which I think is going to improve throughput, not just for north of 6 restaurants, but more importantly, the entire system. And then on atmosphere, the big thing is the reimage. And you're going to be able to see that when you're here for the Investor Day. We're going to take you out to the restaurants, so you can see them for yourselves of what we're doing. The next 8 to 10 that we're doing in these 3 months is really going to be finalizing what are the things that we want to invest and what are the things that we don't want to invest in so that when we start with 60% to 80% next fiscal and obviously get to the 10% run rate in fiscal '28, we're off and running with the best possible package with the best possible payback. So we're very bullish about the growth levers in front of us. And obviously, I even talked about our world-class marketing, which continues to get stronger and stronger and bring new guests in. So we're very, very bullish about the continued sustained growth of this business. Operator: Your next question is from Chris O'Cull with Stifel. Christopher O'Cull: Kevin, just given the recent volatility in consumer sentiment, have you observed any canary in the coal mine type behaviors such as check management or softness in lower income spending? Kevin Hochman: The answer is we're seeing a little bit of check management. So as we've seen traffic accelerate behind Chicken Sando launch, we've seen a little bit of check management in desserts and in alcohol. Our alcohol sales are still way up with the growth that we've had with the business, but we are seeing some incidents start to slow. And here's what I would tell the team is let's control what we can control. So we can continue to win market share with the best food service and atmosphere in the industry with industry-leading value, and we need to stay focused on that. Whatever happens to gas prices in the macro, that's out of our control. But what we can control is staffing our restaurants for peak. We can control serving great food and with wonderful service in a clean and inviting environment. And if we continue to do that, we'll continue to grow market share, we'll be able to hang on to our business. And then obviously, if the macro gets any better, we'll be able to grow even faster behind that. So I'm kind of like a broken record on it. It doesn't matter what happens with the macro. It doesn't matter what happens with external factors. Our indicated action for this team is improved food service and atmosphere and good things will happen, and we're just going to stay focused on that. Christopher O'Cull: Makes sense. And then, Mika, I know margin flow-through was impacted, I think, by R&M expense this quarter. Can you help us walk us through how to think about flow-through in the fourth quarter? And were there any significant headwinds on any line items that we should be aware of? And then maybe whether the new sandwiches to the platform are margin accretive or margin neutral? Any color would be helpful. Mika Ware: Okay. Great. Yes. So I know the flow-through, we continue to invest back in the business with this invest to grow strategy. So that's part of it is that we don't flow it all through when we put it back in. We saw that food and beverage was up a little bit year-over-year. We continue to invest in labor. And then our restaurant expense, like I said, the R&M, we caught up with a lot of the deferred maintenance. Now we're shifting to preventative maintenance, which takes a little bit of time for that to start really coming through that you can see some opportunities or some reduction in future expenses. But we are seeing a lot of give and take in there. If you look at our R&M just over the first 3 quarters, you can really see that we've kind of established a run rate. So it's pretty steady. I think some of the volatility is really lapping the prior year. And we'll continue to look at that and get more efficient in our spend, but that's kind of one of the drivers there. Looking forward on margins, I think in the fourth quarter, you're going to see probably similar margins. Maybe food and beverage are going to creep up a little bit. We have a beef contract that came due, a state contract that's going to be a little bit more. I think we'll continue to leverage the labor that will probably offset any of that increase. And then you'll see very similar, I think, to restaurant expense this quarter as a percent of company sales. I think you'll see something there. So I expect margins to be similar from Q3 to Q4, and I expect margin growth to happen, return to margin growth in Q4. And I'm very confident in what I stated at the beginning of the year is that, taking a step back, we're going to grow our margins year-over-year at 30 to 40 basis points. I'm very confident about that moving forward. Operator: Your next question for today is from Dennis Geiger with UBS. Dennis Geiger: With all the focus on the chicken sandwich, all 6 varieties of which are delicious, as you know, you put up great results in April, even with just a couple of weeks of the sandwich seemingly, even as you talked about that acceleration in traffic with the sandwich. But I'm curious if you could talk a little more about sort of ex the sandwich, some of the key drivers of that momentum that you've been seeing, especially as we kind of go into 2027? Or said differently, even if, let's say, the sandwich incrementality is not a significant step change in trend, do you think that sort of the mid-single-digit type of comp trajectory is still within view? Kevin Hochman: Well, the answer to your last part of the question is yes. I still think that mid-single comp is still within purview. The recipe for success for us is just to continue to improve the fundamentals, so foodservice and atmosphere. That's why every earnings call, I talk about the improvement on Guest With A Problem and GWAP and food grade and intent to return because what I tell my team is if it's not better than the previous year, what belief do we have that we're going to continue to grow. So we have to continue to improve those things because we're not going to like LTO our way to growth that we see others do. So we want to use those resources on the things that drive long-term traffic and sustainable growth. And if we believe in that, those metrics have to continue to improve. And that's why when we budget the year, we have some food news that has to do with upgrading the permanent menu, but most of our initiatives have to do with improving food service and atmosphere on the kind of the core thing, like the thing like Q2 hosting, what we're going to launch for next fiscal. That's all about throughput and driving traffic. That's not a new piece of food that's necessarily going to drive traffic. It's going to drive traffic through taking the demand that we're already having come to the restaurants and making sure they don't leave, right? So the recipe for success right now is to continue to improve food service and atmosphere, continue to improve the fundamental metrics, right, and then let the world-class marketing team create excitement so that people come into the restaurant and try it for the first time. And that's why we also share the token data because the idea is, hey, we are bringing -- we are putting new guests into the funnel every quarter. And then when we look back over the next 6 to 12 months, they start looking like existing guests. And that's the key. If the fundamentals continue to improve, then the new guests that come in will start looking like existing guests, and we've just got to keep that flywheel going. That traffic growth obviously drives sales growth. Sales growth drives revenue growth -- drives profit growth. We're able to reinvest some of that back into the business to continue the flywheel and drive traffic growth, right? That's the recipe that's worked the last couple of years, and that's the plan for the next 3 years. Operator: Your next question is from Jeff Farmer with Gordon Haskett. Jeffrey Farmer: Mika, I think you just said that there's an expectation that you can grow margins by 30 to 40 basis points sort of on a go-forward basis or at least in '27. But beyond continued same-store sales momentum, what dynamics do you see contributing to that level of margin expansion? And hopefully, I got that 30% to 40% -- or 30 to 40 basis point number correct in the question. Mika Ware: Yes. Well, the 30 to 40 basis points was referencing this fiscal year, what we guided, very confident in that. But I do think that we will be able to grow margins over time. And it will primarily be from sales leverage because that's our strategy is to grow the top line. But we do think there can be opportunities now that we have gotten through the turnaround, we've stabilized the teams. We've attracted better talent. This does give you an opportunity to just be more efficient in your spend, and I think we'll look for ways as we move forward to do that as well. But even with the sales growth, I do think that we can continue to leverage margins. Jeffrey Farmer: Okay. And then just one quick follow-up. As it relates to menu pricing moving into FY '27. I think you guys have been back-to-back mid-4% in '25 and '26. How are you thinking about menu pricing as you move into FY '27? Mika Ware: Yes. So the very first thing, most important thing for us is to protect our value proposition. We're going to protect that $10.99 industry-leading value, have it there for those that need it. And then we also want to make sure we have value across the entire menu for everyone. And with that being said, moving forward, I do think that we'll continue to invest in food service and atmosphere, but we will probably be on the lower end of our stated pricing range. So moving forward, we'll have to -- we're always going to make sure that we can price for inflation, but we're going to make sure we balance that with making sure value is there for our guests. Operator: Your next question for today is from Andrew Strelzik with BMO. Andrew Strelzik: I know there's a lot of focus on the food initiatives and the menu initiatives that you guys have planned. But I was hoping you could talk a little bit more about the operational and service improvements and those kind of legs of the stool there. How much more room for improvement is there? What are kind of some of the bigger opportunities that you see kind of going forward to drive that? Kevin Hochman: Yes. It's frustrating, but it's also really exciting how much more opportunity we have. So look, we didn't even touch on the technology initiatives that are happening from an operational standpoint. We continue to improve our KDS system. We have a -- we're just kicking off now an entire back office redo, basically taking all these antiquated systems and getting to -- it's not an ERP system, but the idea that all the back-office systems could be connected. So it's going to be way more usable for the team members, hopefully, help for throughput as well as retention. That's the big one. We still are working on -- we're rolling out right now our team member handheld initiative, which is a complete upgrade to the interface. That's gone a little slower as we rolled it out just as we've seen some glitches. We paused it to get it fixed and it's rolling back out now, which should be done by next quarter, which is a huge one. So that's all the technology initiatives and there's a lot more than that. We have what we call Supermarket Simple that's going to be rolling out in the next quarter, which is all about removing the friction that happens at the end payment with the Ziosk where either a discount didn't come off that the guest expected or they accidentally left a different type of tip and we need to get that reversed. These are all things that hold the tables. I'll give one example. This one simple example that happens about 7 times a day where we've got to reverse something out on the Ziosk. We added it up. It was like over 20 years where the tables tied up for the guests waiting for that to get reversed by a manager. And that's an example where we can fix that very quickly with an update from Ziosk. So there's a huge amount of technology initiatives. And then from an operational standpoint, really the big push now has been the north of 6. So we're moving from kind of defense of just removing a bunch of stuff and making it much easier for our team members to operate. We're now moving to offense on accelerating cycle time. So whether that's the host stand, whether that's ticket times, a great example we'll see in very busy restaurants is their ticket times will be a little bit inflated. We'll go to the labor card to understand are they scheduling enough cooks. The answer is no. And it's like that's a clear indicated action that we can continue to take on more traffic and get those ticket times down. So ticket times, even the checkout time that we talked about earlier. So there's a ton of initiatives that are coming. We'll be giving a lot more detail at Investor Day on the new things that we haven't talked about before. But I remain very, very bullish about our ability to improve the operations, continue to get GWAP and intend to return scores better and better as well as the most important thing right now is to get throughput going. Andrew Strelzik: Great. Okay. And then I wanted to ask also on the remodels, and I know it's very early days, but can you just remind us kind of spend levels? How should we think about the types of lifts that we might be able to expect there as that continues to build? Or maybe kind of are there different levels that you're testing? How should we think about that? Mika Ware: Andrew, yes, so it's really early with only 4 restaurants that we've done so far. But we are optimizing the spend. The good news is we did 4 different levels of spend and the lowest level of spend is getting the same sales lift. So we are getting a sales lift in these restaurants. We're optimizing the spend. But we'll have more of that to share once we have a bigger test group with the 8 to 10 and then the 60 to 80. So more of that, again, will come in September when we just have a little bit more time to read the test, but very encouraged with the spend and the sales lift that we're getting in the early 4. Operator: Your next question is from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: The first question is just on the new unit opportunity. Clearly, new unit growth is more of a stable driver of top line than comps. But can you talk maybe a little bit about the changes in the new units you anticipate versus existing, maybe the cost to build and return requirements. I know the Investor Day will offer more color, but just how you think about the U.S. total addressable market for a brand that most people view as fairly mature. And then I had one follow-up. Mika Ware: Okay. Thank you, Jeff. Yes. No, we're really excited about our new unit growth strategy. So our first step was to really build up the team. We have a great leader with Richard Ingram. We have a lot more insights, a lot more analytics. Just the whole team is phenomenal. So we've really started gearing that up. Primarily in the past, we've really stuck to some of the states, our biggest states that we always have done a great job in California, Texas, Florida. We continue to build there. We've been very successful, and we'll still build there. But there's a lot more opportunity across the United States for us to build in different markets. So it seems like Chili's is everywhere, but Chili's is not everywhere. So again, we'll kind of spell that out and give more detail on how and why we think we have a much larger addressable market, but we are going to be able to ramp up our unit growth. And so next year, you won't see it next year just because there's usually about an 18- to 24-month cycle, but we can already see the teams are ramping up for F '28, and we expect to get to our new growth run rate in F '29. As far as the units go, we're making sure we're using a lot of the fun elements from the reimage. And then we're working with the operators and all the insights we have, again, with the north of 6 restaurants just to make sure that we have these restaurants exactly how we want them, especially with the new unit volumes that we're experiencing to make sure that they are designed for optimal throughput. So a lot of exciting things to come. We have a very strong team. We're ramping up the growth, and that's going to be a great lever for us as we move forward. Jeffrey Bernstein: Understood. And the follow-up, just Kevin, I think you noted that Maggiano's was -- I think it was high single-digit percentage of sales, low single-digit percentage of operating profits. I know the turnaround is on track, but seemingly take time. Just wondering whether there's any incremental interest in adding a second brand of greater scale, maybe something more meaningful in terms of sales and profit contribution. Clearly, you have the credibility, you have the playbook to strengthen maybe more of a national brand now that Chili's is seemingly in a much more stable and consistent growth position. Just wondering whether there's any incremental interest or what it would take to maybe get you to think about a potential brand of more scale to add to the portfolio. Kevin Hochman: Jeff, we get asked that question a lot. What I tell my team is we need to be able to turn around a smaller brand first before we take on more risk of a bigger brand. So it's -- just because we have the playbook on Chili's doesn't necessarily mean that the same leadership team can do the same thing on other brands. And I'd rather prove it on a pretty risk-free opportunity like Maggiano's versus take the big swing for the first time on something a lot bigger that could put more -- put undue risk on the business that we don't really need to do right now. We're very bullish in continuing to be able to grow Chili's and do that profitably. And so we can prove out our beliefs about our ability to turn around other brands with Maggiano's. Right now, part of the Maggiano's turnaround is also just unifying the system so that we could be ready for a third brand should we be able to turn around Maggiano's. So for example, one of the big issues in Maggiano's is its kitchen throughput. It has a very antiquated kitchen display system. We're now in process of putting them on the Chili's kitchen display system. If we're able to do that successfully, which we should be, it's pretty easy, then as we do updates as we learn more about the Maggiano's business, it's much easier because they can use the same team. It's much easier than having them to have to learn a completely different system, right? So part of the Maggiano's turnaround is not just the financial improvements of Maggiano's, which is we all want, right? It's also proving to ourselves that we could have a model like some of our biggest competitor in casual dining does an exceptional job being structured to be able to plug in new brands. And so that's a big part of the Maggiano's turnaround, not just the financials, but actually structuring the company to be able to do that. But I will tell you, until we are able to do that, I would caution us from trying to get a third brand. We have no business doing that until we can prove that we can handle our second brand. Operator: Your next question is from Jon Tower with Citi. Jon Tower: On the north of 6 initiative that you're going after, I'm just curious, it sounds like there's a need to invest in some labor. So I'm curious if you could speak to where you see and think labor needs to go over time across the system? And then I've got a follow-up. Kevin Hochman: Yes. So right now, when we look at the north of 6 restaurants, they don't all invest labor in the same places. I mean generally a trend for the extremely high-volume restaurants, they do invest more labor than what the model tells them. The typical positions are either in buster or server assistant. Sometimes it's servers and then sometimes it's hosts. Once in a while, it's cooks too. to get throughput there. So it really depends on the restaurant and what they need and the types of experience of people that are in the restaurant. So it's not a one size fits all. As we think about the budgets that we're setting for our fiscal '27, there are some north of 6 investments baked into the numbers that we'll be sharing as part of our guidance when we come out with that a quarter from now. So just to be very clear, there will be some investments that they will be baked into the guidance that we provide. And then beyond that, there's a lot of other things that we're working on. Some of them don't really have to do with investments, just deploying different types of labor deployment or instruction. So we'll make sure that all of that is clear for you guys and that nothing is surprising. Mika Ware: So I would like to add on to that. So also remember, with our labor model and especially the north of 6, as we have more guests in the restaurant, it naturally scales up. So I don't know that it's a true -- really -- it's not going to be like -- I'm not anticipating it to be a really big investment. Also, when Kevin talks about some people are already spending more than our labor card, that's not just the north of 6. We have scaled that back to a lot of the restaurants, we're saying staff for the traffic you want. So a lot of that is built in our current run rate. We're going to formalize it next year. It will be an investment. There will be some investment, but it's not going to be as material as it has been in the last few years when we really had to staff up to just get that base model right. I feel now it's more of a lot of fine-tuning on the investment side. Jon Tower: Got it. I appreciate all that color. Maybe just flipping to the remodels. I know it's early in the process. But I'm just curious, as you're going through with the first 4 stores and now the planned, I believe, 8 to 10 more coming, are you seeing an opportunity to maybe do anything different in the back of the house as well with respect to either equipment or any of the processes that you've got -- or the build, hence, the processes get better in the back of the house? Mika Ware: Yes. So -- and it may not necessarily be tied directly to the reimage program, but we're always looking at the heart of house. We have a whole cross-functional team that is dedicated to looking at the equipment. Again, north of 6, part of that is to optimize the heart of house equipment packages. Do we need to add an extra fryer? Where do we need? At what levels do we add a separate combi oven? So we're looking at all of that. We're also thinking about that as we design the new prototypes on making sure that we have the space laid out just right and that we have the model built for those higher volumes and the equipment that we'll need moving forward. So it's absolutely a focus that we continue to look at different pieces of equipment, how do we improve either the quality of the food or the speed of our service. And so we have a whole team just working on that at all times that we could deploy. Operator: Your next question for today is from Brian Harbour with Morgan Stanley. Brian Harbour: With the reimages, are there elements of that, that sort of help with throughput? Or is that more of just like an aesthetic thing? Could you talk about that a little bit? Mika Ware: Yes. So right now, it's more of the exterior, the inside is paint and just how the look and the feel of the restaurant. But we're always looking at our tables where, for example, in one of the previous reimages, we put in some big community tables in the bar. Well, we realize a lot of people don't like sitting at the community table. So as we go through, we make sure that those community tables are gone, those are separate tables. So any time we have the opportunity to update the tables or optimize the tables, we're doing that. And we're making sure we look at that really not necessarily in the reimages, but in the new units as well that we have the optimized tables and we have the most tables to help with throughput. Kevin Hochman: Yes. But it's other than the tables, it's mostly cosmetic throughput. Our 2030, Heart of the House restaurant team is focused on what is the equipment that can improve throughput. So like an example that we're looking at right now is a new type of grill. A flat top that all of the space is usable. It's really consistent in terms of heat across the grill. So you can put more burgers and they cook more evenly. That's an example that would have improved throughput. In addition, there's -- they have a manual clamshell attachment that would be able to cook on both sides. We tested computer clamshells a few years ago and thought they were not as reliable as they need to be, but this one likely would be more reliable. So that's an example where the equipment would give us more throughput and lower ticket times on burgers, which is obviously a huge part of our business. But I would consider that kind of separate from the reimage program. Brian Harbour: Okay. Got it. Makes sense. Mika, how are you feeling about food inflation at this, I guess, more as we think about like fiscal '27, do you expect that to sort of reset higher? Is it something you'll sort of address with price when the time comes? Or could you talk about that? Mika Ware: Yes. So I mean, it's -- we'll probably give you more -- I'm going to give you more details in next quarter when we set guidance for next year. But there's always puts and takes, but there is going to be pressure with beef. I mean that's clearly out there. Luckily, that's not the total basket for us. We're a varied menu, so we have different opportunities. Obviously, we sell a lot of chicken as well. But yes, we're going to continue to see pressure in commodities as we move forward. It will probably be similar levels that you've seen us in the past or this last half of the year, we've had that mid-single-digit inflation. So I'm anticipating that will be something similar as we move forward into F '27. Operator: Your next question is from Brian Vaccaro with Raymond James. Brian Vaccaro: Congrats on the continued strong momentum. Mika, just following up on that last question on commodity inflation. Did I hear correctly that you do expect low single-digit inflation in the fourth quarter? And maybe just any clarity on what's breaking a little bit more favorably for you even in the near term compared to the mid-4s you did in the last quarter? Mika Ware: No. So it's mid-single digits in the fourth quarter, and that's what I expect to continue into next year, Brian. And so beef will continue to be a pressure for us. I was just saying there could be some gives and takes out there on different contracts. But in general, we're going to have inflation. It will probably be in the mid-single digits next year as well is what I'm anticipating now. More specific details to come as I give guidance next year. I'm just kind of giving a guideline now. We'll give more information on that next quarter. Brian Vaccaro: Okay. Sorry, I thought I misheard the lows. So that's helpful clarity. Advertising. Yes, that's great. On the advertising front, I think you said it was flattish year-on-year as a percent of sales in Q3. Just ballpark, how much do you expect ad spend to be up year-on-year in the fourth quarter? Mika Ware: So in the fourth quarter, it will probably be in the $5 million to $6 million range for the fourth quarter. Brian Vaccaro: Okay. All right. That's helpful. And then just a bookkeeping one for me. Can you share the sales mix of 3 for Me, kind of how that splits between $10.99 and the higher tiers and also on Triple Dipper? Mika Ware: Absolutely. So we continue to have about 20% of our guests eat on the 3 for Me platform. Approximately 40% or a little bit less are eating on the $10.99. That converts to total 3 for Me is about 12% or almost 13% of our guests. But on the $10.99 version, less than 5% are actually eating -- of our total sales is $10.99. So that's being pretty steady for us, I would say, as we move through. What was the second piece of your question, Brian? Brian Vaccaro: Triple Dipper. Mika Ware: Triple Dipper. Yes, they're hanging in there. So last quarter, it was right at 16%, and that's where it is now. So hanging in there with the Triple Dipper. Operator: Your next question for today is from Nick Setyan with Mizuho Securities. Nerses Setyan: I think I heard you guys say ad spending went a little bit into Q4 from Q3. Can you just remind us what the year-over-year growth was in Q3, what it will be in Q4? And then how are you thinking about ad spend in fiscal '27? Can that grow as a percentage of sales? Is it going to be flattish? And in terms of just spending by quarter, that would be great or at least directionally. Any color there would be very helpful. Mika Ware: All right. Sure. So advertising in the third quarter ended up being fairly flat year-over-year on a dollar basis and a percent of sales basis. It will pop up a little bit. We had to move some things into the fourth quarter just some timing of some things, how they happened. So in the fourth quarter, I expect that to be a little bit higher as a percent of sales and probably, like I said, $5 million to $6 million up year-over-year. Next year, again, more color when I give guidance for next year, but I would expect it to be similar as a percent of sales, a similar amount there. There's always inflation on ad spend. So we will be spending some more dollars, but probably a similar percent of sales as we move forward. I don't have the cadence yet, Nick, to share on quarter-to-quarter in F '27. Again, we'll get into more of that at the end of this fiscal year as we kind of guide for next fiscal year. Operator: Your next question is from Andrew Charles with TD Cowen. Andrew Charles: Great. Mika, you talked about the likely mid-single-digit inflation in 2027 led by beef and plans to roll off price as you're prioritizing value. And so I know we're going to give the specific guidance next quarter, but I'm just thinking qualitatively, what are the opportunities to drive margins just beyond sales leverage while you cited that you're not immune from the industry's contracting alcohol mix as well? Mika Ware: Right. So moving forward, again, we feel like our strategy is a top line strategy. So we will get margin leverage from that. But we will look into ways, I think, as the brand -- we've kind of been in this turnaround mode. We're getting more into the stabilized mode where we have, again, a lot more talent, stabilized teams. And what we've seen over time is as turnover goes down, you have better talent, you always get more efficient in whatever you do. That could be labor, that could be how we spend the dollars. For example, R&M is one that we spent a ton of money in over time. We do think, like I said, we had a lot of deferred maintenance. Now we're moving into preventative maintenance. We also think there's going to be opportunity now to just find ways to have more efficient spend as we move forward. And we have a lot of initiatives kind of behind the scenes working on that. So there'll be just different areas of the business. Again, labor. I think labor is one that as the teams continue, turnover goes down, productivity goes up. Like we said, we may have to invest in some pockets. But at the same time, we're having teams that just get better and better at what they do and you have some natural opportunities there. So we'll continue to look across the whole brand. We've had a lot of growth the last 3 years. There's probably a lot of opportunity to optimize some of those expenses as we move forward. So that will -- again, will be more things that we look at in the future, but I think there will be opportunity there. But even excluding any margin initiatives, I still think we can expand margins and grow the top line. We feel really great about our mid-single-digit same-store sales and mid-single-digit growth over time as we move forward. Andrew Charles: That's helpful. And then as we think about the ramp in new stores, and you talked about how 2029 more of a steady rate. And again, we'll hear more about this at Investor Day on the specifics. But just kind of curious, I mean, are you piloting opportunities to lower the cost of the box as we get ahead of this to better understand kind of what the Chili's of the future really looks like? Mika Ware: Yes. I mean, absolutely, we always look at how can we optimize costs in the box. I mean I will say just over time, especially post-COVID, there has been inflation in how you build the restaurants. The great news is we took our AUVs from around $3 million to we talked about approaching $5 million. So that gives us a lot more opportunity. With our improving AUVs, that doesn't give us a lot of opportunity to necessarily shrink the box because we're trying to accommodate more guests, but we are always looking at that. But what I will tell you is the returns we've seen even on the restaurants we've been growing over the last few years have been great. We feel really confident in that, and we're really set up to build some restaurants with some great returns as we move forward. But we're always looking to see if there's opportunities to optimize the box and our spend. Operator: Your next question for today is from Chris Carril with KeyBanc Capital Markets. Christopher Carril: So I guess just following up on earlier questions about the check. Can you update us more specifically on how you're thinking about the mix component of check moving forward here over the near to medium term? And Kevin, I believe you mentioned the $3 to $4 check gap to the competition. So any additional thoughts on the long-term check opportunity would be helpful. Mika Ware: So Chris, do you mean on the check? Just we're always looking for opportunities to grow mix. But right now, like Kevin said, just recently, we've seen some softness in mix, though it was very interesting that as soon as we saw softness in mix, we saw our traffic start to accelerate. So again, that's why we feel very confident about mid-single digits and positive traffic as we finish up this fiscal year. Now moving forward, we're always looking for opportunities to grow check. We've done a great job of it over the last 3 years. We'll look to continue to optimize. But if I'm thinking longer term, we know what that pricing strategy is with the same-store sales, we talked about that range. And then I think we're really going to be focused on growing traffic on top of that. Kevin Hochman: Yes. As far as like what guidance we give the teams on $3 to $4 below category, we don't think about it that way. That's more of an output that we report out to everybody about -- it's a verifiable demo that we're lower priced than our competitors. The way we think about value is -- and we need this across the entire menu is how do we create abundant value everywhere in our menu so that when people leave Chili's, they're like, wow, that was an incredible value. And we've been slowly renovating our menu to get to that value across the entire menu. We started with burgers and fries and fajitas, and we have it in margaritas. And now we obviously did in chicken crispers. Now we're doing chicken sandwiches. The next to go will be salads and steaks, and we did it with ribs actually last year, where it's a much more abundant value. Even if the price is a little higher, you get 50% more ribs that are meatier and it's a bigger plate. So that's the way we think about it. It's like when we're in the test kitchen with our operators, we're like, hey, is this something that's going to be wow value? And if it's not, we got to continue to work on it. And then the outcome is the things that we report to you on price and how we're lower than the competitor. But the important thing is when I get a plate at Chili's, do I feel like that was wow value that I want to come back for. Christopher Carril: Got it. That's helpful. And then just turning to Maggiano's. Now that George is overseeing marketing for Maggiano's in addition to Chili's, can you maybe speak to how you're thinking about marketing for the brand and what that could look like when you do begin to see signs of traffic stability and growth? Kevin Hochman: Yes. It's -- we're less than 50 restaurants. So it's never going to be this big national TV thing that like Chili's has. So what George -- the lens that George is bringing to the business right now is empathy for the guest experience because at the end of the day, we've got to improve food service and atmosphere at Maggiano's if we want to grow traffic over time. So he's looking at things like menu presentation, family style, the entire guest experience from the time you get into the lobby to when you sit down to when you check out. These are all things that we need to bring a guest empathy lens to, and that's primarily what he's focused on right now. Should we get that into a place that we're really excited about, will we do some demand creation? Probably. But given that it's -- we're not a national brand, we don't have Maggiano's everywhere, it's never going to be like what you see at Chili's. Operator: Your next question for today is from Christine Cho with Goldman Sachs. Hyun Jin Cho: Could you give us a quick update on the off-premise trends and whether that channel has proven more resilient in the increased kind of check management standpoint? And I know there has been clearly a stronger emphasis on elevating the in-restaurant experience. But do you see an opportunity to lean further into the off-premise channel going forward? Mika Ware: Yes. So our off-premise, it's been hanging in there. it's usually been about, what, 23%, 24% of total sales. So it's been pretty steady. It did have the same negative traffic that the dine-in did or the overall brand did this last period. But with that being said, we do think there's opportunity. We've really been focused on the dine-in experience, and we think there is opportunity to, again, take friction out of that whole guest experience with off-premise. We can think -- we think that we can improve that experience, get better throughput. So it will be a focus as we move forward. Kevin Hochman: Yes. I mean the big opportunity is just the overall experience of picking up. It's not -- the improvement that we've made from the dine-in, we still have opportunity to do on to go. Our quote time calculator hasn't been updated in a while. And since our ticket times are so much faster, a lot of times we quote times that are way longer than when the food is actually made. So we've got to get that thing updated. We've got to make the experience for pickup a lot more seamless, ideally with some order boards, so you would know where your order is and whether it's ready to be picked up. And then we just made some investments in packaging that are already in all the numbers that you guys have to make the actual experience, getting the food at home a whole lot better. So to me, the important thing is let's get the fundamentals right before we go try to put any kind of gas on it, and we've got some work to do there. Operator: We have reached the end of the question-and-answer session. And I will now turn the call back over to Kim Sanders for closing remarks. Kim Sanders: Thank you, Holly. That concludes our call for today. We appreciate everyone joining us and look forward to updating you on our fourth quarter and fiscal year 2026 results in August. Have a wonderful day. Kevin Hochman: Thank you. Mika Ware: Thanks, everyone. Operator: Thank you. This concludes today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Wingstop Inc.'s Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, Wednesday, April 29, 2026. On the call today are Michael Skipworth, President and Chief Executive Officer; Alex Kaleida, Senior Vice President and Chief Financial Officer; and Sarah Niehaus, Senior Director of Investor Relations. I would now like to turn the conference over to Sarah. Please go ahead. Sarah Niehaus: Thank you, and welcome to the Fiscal First Quarter 2026 Earnings Conference Call for Wingstop. Our results were published earlier this morning and are available on our Investor Relations website at ir.wingstop.com. Our discussion today includes forward-looking statements. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties that could cause our actual results to differ materially from what we currently expect. Our SEC filings describe various risks that could affect our future operating results and financial condition. We use certain non-GAAP financial measures that we believe can be useful in evaluating our performance. Presentation of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are contained in our earnings release. Lastly, for the Q&A session, we ask that each of you please keep to one question and a follow-up to allow as many participants as possible to ask a question. With that, I would like to turn the call over to Michael. Michael Skipworth: Thank you, Sarah, and good morning, everyone. We appreciate you joining the call. We believe 2026 is going to be a transformational year for Wingstop and remain extremely confident in the long-term opportunity in front of us. Our focus is on execution. Execution against unique brand-specific strategies, which include strengthening our operations through the Wingstop Smart Kitchen, expanding our reach to new guests and launching our new and highly differentiated loyalty program each of which we believe are structural changes that will drive sustained growth towards our AUV target of $3 million. As I step back and assess the current state of the business, we are making significant progress against our strategic priorities. We are seeing measurable improvements in speed, accuracy and consistency that are being enabled by the Wingstop Smart Kitchen along with early signals that our marketing is reaching new guests and driving deeper engagement. That said, our same-store sales result in Q1 was disappointing and fell below our expectations. As we started the year, domestic same-store sales trends from Q4 carried into the first month of Q1, suggesting more consistency in the trend. However, as the quarter progressed, 2 factors came into play. The first was atypical winter weather resulting in temporary restaurant closures in over 700 restaurants. And secondly, elevated gas prices as a result of the conflict in the Middle East. Not too dissimilar to what we experienced in 2022, rapidly rising gas prices stress the balance sheet of the lower-income consumer that our business overindexes to. As a result, our same-store sales trend worsened during the quarter and resulted in a decline of 8.7%. If you exclude these unusual external factors, performance would have broadly been in line with our expectations. We have updated our full year outlook to reflect our results for Q1 and now anticipate same-store sales to be down low single digits, but we believe our business can return to growth in the second half of the year as these strategies we are executing all come together. While the macro backdrop is masking some of the near-term impact, we can see measurable progress across our key initiatives. Our asset-light, highly franchised model continues to demonstrate its resilience. In the quarter, we delivered double-digit adjusted EBITDA growth, and we opened 97 net new restaurants translating into 17% unit growth. This performance reinforces the strength of our model. Central to our strategies is our disciplined focus on protecting our brand partners' margins and maintaining strong unit economics, which we believe is foundational to sustaining long-term unit growth. And despite the challenging macro backdrop, we saw brand partner margins strengthen in Q1. And we believe this helps reinforce the strength of our development pipeline, a pipeline that remains one of the strongest in the industry, showcasing the durability of our model and confidence of our brand partners who continue to invest in the long-term growth of the brand. We believe we have significant opportunity in front of us to scale Wingstop to over 10,000 restaurants globally. We remain focused on what we can control, and our strategy remains unchanged. Let me start with the Wingstop Smart Kitchen. The West market is a meaningful operational transformation, requiring fundamental changes to how our restaurants execute day-to-day. We are making clear progress in strengthening our operations with improvements in speed, accuracy and consistency across the system. And while the full benefits from our new back-of-house technology have not scaled to the entire Wingstop system yet, we are seeing clear evidence it is working. Last quarter, we discussed the need to focus on Friday and Saturday dinner dayparts, where we see the highest volume of new guests entering the brand, with approximately 50% of new guest trying us for the first time during those windows. Within these dayparts, we are now seeing an approximately 16-point improvement in the number of restaurants hitting our targeted speed of service in Q1 compared to Q4, along with a roughly 5 percentage point improvement in accuracy. Restaurants are driving greater consistency during these peak periods, ensuring we deliver on those moments that matter most for both new and existing guests. In addition, customer satisfaction improved across both digital carryout and delivery in the quarter with delivery improving approximately 17 percentage points in customer satisfaction driven by gains in need and execution. We are also seeing in restaurants consistently achieving our 10-minute speed of service standard. Delivery times are now moving closer to our goal of less than 30 minutes, reinforcing that stronger execution translates into a better end-to-end guest experience. The most pronounced impact is in our lowest performing restaurants, reinforcing that we are raising the floor of performance across the system. This is a significant operational transformation and scaling consistent execution across the system of our size is a deliberate ongoing focus. As we continue to build consistency across restaurants, dayparts and channels, we expect to more fully unlock the demand and conversion benefits of the platform. To further highlight the progress we are making on speed of service, we're targeting a launch of our order ready tracker by the end of Q2 and that is designed to reinforce our speed of service through enhanced communication to our guests and drive measurable impacts in guest satisfaction. This feature directly connects into the Wingstop Smart Kitchen with real-time status updates, guiding the guests through the cook-to-order high-quality experience only Wingstop can deliver. In early testing, the order tracking feature created greater confidence into the guest quote time, better highlighted the craft associated with each Wingstop order and reduced status-related complaints and improved accuracy. The takeaway is clear. When we deliver that high-quality cook-to-order Wingstop experience and execute with speed, accuracy and consistency, we drive stronger conversion, improved retention and incremental sales. As we closely analyze the data, it is what we see in the data and the results that gives us strong conviction in the Wingstop Smart Kitchen as a key unlock for our restaurants. We are building momentum. And as we execute at a high level, consistently across the system, we expect the Wingstop Smart Kitchen to be a meaningful contributor to scaling AUVs towards our target of $3 million. Another key strategy in 2026 that we believe can position Wingstop for sustained growth is the launch of our loyalty program, which we are referring to as Club Wingstop. This is not a traditional discount-driven rewards program. Club Wingstop is built around a simple premise, members eat first. Given our most engaged guests, access, experiences and benefits that go beyond points and discounts. What differentiates the platform is how it enhances the guest interaction through capabilities like group ordering, point sharing and personalized offers that adapt based on behavior. As part of the latent design of this platform, we built an AI-enabled tool that will allow us to achieve personalization at scale. This includes generating hundreds of pieces of content that drive relevant and adaptable messages to specific segments in our database. We have features embedded in our Club Wingstop technology that are designed to strengthen the emotional connection to our brand and drive sustained frequency over time. In our pilot market, we are seeing this translate into improved retention, higher reactivation of lapsed users and increased engagement from our most valuable guests. Engagement is strong, with roughly half of active guests enrolled and approximately 40% of new guests are signing up. Members are also demonstrating higher check and stronger retention relative to nonmembers. Results in our pilot market are being achieved with limited marketing support. And only a partial feature set, which to us reinforces the strength of the platform and the opportunity as we scale. We are preparing for a national launch by the end of Q2, supported by a full 360-degree marketing strategy and a robust pipeline of features, including personalization, merchandise and experiential elements that extend well beyond traditional points-based programs. We believe loyalty will be a meaningful driver over time, particularly as we scale nationally and integrate more deeply into our digital ecosystem. Widening the top of the funnel and capturing our fair share of our demand space is another key priority for us in 2026. We estimate we are capturing only about 2% share in a demand space, we believe we can win a 20% share, highlighting the significant runway ahead, but execution is foundational to this effort. It starts with driving acquisition through brand awareness and innovation, particularly flavor-led innovation, which we know is a key driver of consideration, especially among the consumers we are targeting in our demand space. Our Wingstop is Here advertising campaign is designed to expand the top of the funnel, and we are beginning to see early signs that it is working. New guests are increasingly skewing towards higher income cohorts, particularly in the $50,000 to $100,000 range, one of the fastest-growing segments among new guests we're acquiring. This gives us confidence that our marketing is resonating with a broader audience and is reflective of the opportunity we're targeting in our demand space. Looking ahead, we have a strong pipeline of innovation and marketing initiatives, including continued flavor-led innovation in the next phase of Wingstop is Here, which we believe will showcase the quality and premium experience our guests have come to love. Together with the Wingstop Smart Kitchen and Club Wingstop, these efforts are designed to strengthen acquisition, improve conversion and support sustained traffic growth over time. Another significant factor for building brand awareness and acquiring new guests is what we've been able to accomplish in expansion of our footprint. Our unit growth is supported by the strength of our unit economics underpinning the strong demand from our brand partners. In the first quarter, we opened 97 restaurants globally at a more than 17% growth rate versus the year. As we grow our restaurant base, development itself becomes a demand driver, expanding brand awareness and amplifying the impact of our marketing, reinforcing the flywheel across the system. We continue to scale Wingstop in a disciplined manner and believe our market level strategies will allow us to do so in the most sustainable way. Outside of the U.S., momentum remains strong, with newer markets such as Ireland and Thailand thriving and already delivering attractive unit economics as well as reinforcing the portability of the brand. Looking ahead, we remain on track to enter our largest new market to date, India, in 2026, representing a significant long-term opportunity. What fuels our growth is our brand partners' returns, which we believe are industry leading. It's why we believe addressing near-term challenges for our core consumer should not compromise our long-term fundamentals. That mindset has translated into incredible growth. Since the beginning of 2023, we have opened over 1,000 restaurants and more than doubled system-wide sales to over $5.4 billion on a trailing 12-month basis, all while systematically growing our global pipeline to a record level. While the level of uncertainty in the current operating environment remains high, our path forward and strategies are very clear. We are focused on strengthening our operations through the Wingstop Smart Kitchen, expanding our reach to new guests and launching Club Wingstop, each of which we believe will drive a return to same-store sales growth and further strengthen brand partner profitability and returns. We are confident in the strength of our asset-light model, the resilience of our brand and the significant runway ahead. Together, we believe these position us to scale average unit volumes towards $3 million, expand our global footprint and continue advancing our ambition to become a top 10 global restaurant brand. And it is important to note that none of this would be possible without the dedication of our team members and the continued commitment of our brand partners who are executing every day to deliver a great guest experience and grow the Wingstop brand around the world. With that, I'll turn the call over to Alex. Alex Kaleida: Thanks, Michael, and good morning. Our first quarter results reflect the resiliency of our highly franchised, asset-light model. In a more pressured consumer environment, we delivered system-wide sales growth, double-digit adjusted EBITDA growth and unit growth that well exceeded our long-term algorithm. Development continues to be one of the most compelling proof points in our model and the long-term opportunity to scale Wingstop into a top 10 global restaurant brand. We opened 97 net new restaurants in the first quarter, a 17% growth rate. And with domestic AUVs at approximately $2 million on a roughly $580,000 upfront investment to build a Wingstop, our brand partners are seeing, on average, a payback of less than 2 years. Our unit economics are what drive the demand we see in our pipeline, which is evident in a pipeline that stands at more than 2,200 restaurant commitments under development agreements, and that demand remains broad-based across our brand partners. System-wide sales increased 5.9% to $1.4 billion in the quarter, fueled by net new unit development and more than offset the 8.7% decline in same-store sales. As a result of our system-wide sales growth, total revenue increased 7.4% to $183.7 million versus the prior year. Royalty revenue, franchise fees and other increased $8.7 million to $87.5 million. Company-owned restaurant sales increased by $2.9 million to $33 million, driven by 6 additional corporate stores opened or acquired since the prior year comparable period. Company-owned restaurant cost of sales decreased 110 basis points versus the prior year to 74.9% of company-owned restaurant sales, primarily driven by a 160 basis point decline in food, beverage and packaging costs. Our supply chain strategy continues to provide great visibility and predictability into food costs for our brand partners throughout 2026. With this current operating environment, we are encouraged by how our strategies improved profitability for our brand partners this quarter. SG&A increased $3 million versus the prior year to $34.4 million, primarily driven by a $2.4 million nonrecurring restructuring charge related to the corporate realignment announced in January this year. This was partially offset by lower system implementation costs. We continue to take a disciplined approach with our SG&A investments, ensuring we are investing appropriately in people, capabilities and technology to support our long-term aspirations. Adjusted EBITDA, a non-GAAP measure, was $65.4 million during the quarter, an increase of 9.9% versus the prior year. Q1 net income was $30 million or $1.08 per diluted share, a decline of $62.4 million in net income versus the prior year. This was driven by a nonrecurring gain of $92.5 million recognized in the prior year associated with the sale of our U.K. brand partner, Lemon Pepper Holdings. As we disclosed in Q1 last year, we reinvested $75 million of the proceeds from the sale of LPH into the newly formed entity, which we believe will strengthen returns for shareholders. On an adjusted basis, excluding the impact from this nonrecurring gain in the prior year, earnings per diluted share was $1.18, a 19.2% increase versus Q1 2025. In recognition of our strong free cash flow generation and our commitment to returning capital to shareholders on April 28, 2026 and our Board of Directors authorized and declared a quarterly dividend of $0.30 per share of common stock to be paid on June 5, 2026 to stockholders of record as of May 15, 2026, totaling approximately $8.2 million. On March 11, 2026, the Board of Directors also authorized an additional $300 million available for share repurchases. During the first quarter, we repurchased and retired 374,324 shares of our common stock at an average price of $208.08 per share. As of March 28, 2026, $313.4 million remained available under our existing share repurchase program. Since the inception of our share repurchase program in August of 2023, we have repurchased and retired more than 2.9 million shares of common stock. Our ability to consistently return capital to shareholders remains an important component of our strategy to maximize shareholder returns. Turning to our outlook for 2026. We updated our domestic same-store sales guidance to a low single-digit decline, reflecting what we have seen year-to-date and the more significant pressure on our core consumer from elevated fuel prices. We estimate that higher fuel prices and the unusual winter weather in January which caused a high rate of weather-related restaurant closures contributed to an approximately 4 percentage point headwind to domestic same-store sales in the first quarter. We are also updating our full year SG&A outlook to a range of $146 million to $149 million, which includes $3 million of restructuring charges related to the corporate realignment and $28 million of stock-based compensation expense. Additionally, we are reiterating the following guidance for 2026, global unit growth of 15% to 16% and which is based on the visibility we have into the pipeline today, net interest expense of approximately $43 million, depreciation and amortization of approximately $30 million. As we look ahead, our focus remains on the strategy that will return Wingstop to same-store sales growth, improving operational execution through the Wingstop Smart Kitchen, scaling our new loyalty platform with the upcoming national launch of Club Wingstop, acquiring new guests into the brand and continuing to expand our global footprint. I'd like to close by thanking our restaurant team members, supplier partners and brand partners for their efforts in driving Wingstop toward a top 10 global restaurant brand. With that, operator, please open the line for questions. Operator: [Operator Instructions] The first question today comes from David Tarantino with Baird. David Tarantino: Michael, I was hoping you could help to clarify where you're seeing some of the traffic loss in your business. And it seems like you picked up a lot of traditional quick-service customers during that 2022 to 2024 time frame. And as we got to kind of the middle of 2024 and the environment got a bit tougher for that consumer and quick service restaurants got more promotional. It seems like your business has been decelerating since that point. So I guess the question is, is it that traditional consumer you gain that you're now losing? And I was wondering if there's any tactical response that you could have to stop the bleeding in the bottom of the funnel, so to speak? Michael Skipworth: David, I appreciate the question. I think maybe it's -- the way we're looking at it, it might be somewhat similar to how you phrased the question, but we've talked about over the past year, how much our business compared to other restaurants does over-index a little bit to the lower-income consumer. And so those could be one and the same. And I think what we saw in Q1 was the start of the quarter, we saw some stability within the trend and then obviously, we're hit by a couple of events that were outside of our control. And when we looked at the data, particularly within March, we look back at kind of how our business responded and how our core consumer responded to when gas prices reached similar levels in 2022, we saw a pretty similar reaction this year in March in our business. And so we do think that that's attributed to a little bit of the near-term or more pronounced immediate reaction to gas prices when they reach these levels. But we do see that normalize pretty quickly. And I think we did see that in the trends as we exited the quarter and started Q2. David Tarantino: Great. And I guess the second part of my question, is there a tactical response, maybe a bit more focus on value to be more competitive with that consumer that you appear to be losing, I guess, is there anything you're considering there? Michael Skipworth: Yes, David, I would say we're obviously focused on executing against the strategies that we believe are going to position the brand for this next phase of growth and what's in front of us. But I would say a couple of things. Obviously, with the data that we have and what we know about our consumer we can be very targeted with the messaging that we present. And I think you saw us do that a little bit. And this is really us showcasing existing value that's on our menu and us not necessarily discounting or anything like that or being overly promotional. And we did that in ways of highlighting flavor under $10, where we have our chicken sandwich combo and a tender combo that is incredible value. And we are able to present value not only just through price point, but we think what's really important is to deliver it through quality, through abundance, through the experience. Ultimately, delivering an experience to the guest that's worth it. And so we can do that in a very targeted way. But what we're seeing and what the opportunity for us is really around what we're doing to expand the top of the funnel and bring in new guests. These guests look a little bit different than our traditional guests. And while it might be masked a little bit by some of the macro events that impacted our business in the first quarter, we're really encouraged by what we're seeing. We're seeing some early signs that the strategy is working. We're seeing the highest income cohort growth within the highest income cohort for us is that $50,000 to $100,000. We're seeing improvement in awareness and conversion. And we're actually seeing some really encouraging signals around the reactivation of laps. And so we think the strategies we're executing are working, but where it is important and where it is relevant to showcase value, we're doing that in a very targeted way, but obviously focusing on these strategies that we're executing against that we're really excited about what that could translate to for the back half of the year. Operator: The next question comes from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. First, I just wanted to follow up on that topic regarding the comp trend. You lowered the full year guidance. I think you just mentioned that in April, maybe trends have improved or normalized. So wondering if you could just clarify for us what maybe you're seeing was the exit to the first quarter and maybe what you're seeing in April and whether or not a concern at all related to the return to positive in the second half. It does seem like not necessarily our compare is getting a lot easier. So presumably, you're talking about some initiatives within your control, maybe the loyalty program. maybe what kind of assumption you're assuming for that loyalty program. But April and then kind of your confidence in turning back to positive in the back half of the year, kind of the biggest drivers? And then I had one follow-up. Michael Skipworth: Jeff, yes, we did see an improvement in the trend to start Q2. And I'll tie back a little bit to my previous comment around a little bit of that more pronounced near-term reaction to fuel prices, and that does normalize pretty quickly. But we saw an improvement. And I think as we updated our full year we obviously took into consideration our actual results for Q1, but we did adjust down our expectations for Q2, which are somewhat related to our expectation of some near-term pressure on the consumer with elevated gas prices. Obviously, it's extremely difficult for anyone to predict this macro environment that we're in. But what we're really focused on, Jeff, is we are seeing some really positive signals in our business, whether it's as it relates to Smart Kitchen, we talked about that Friday and Saturday night daypart that we're focused on, we saw a 16 percentage point improvement and the number of restaurants that are delivering on that 10-minute speed of service on Friday and Saturday night. Our bottom quartile of restaurants, we saw a 3-minute improvement in overall speed within those and we're measuring significant progress and improvements within guest satisfaction scores. All strong signals that give us a lot of excitement and confidence about the impact that Wingstop Smart Kitchen will have on our business over time. I mentioned the marketing. We feel like our marketing is resonating. We're seeing reactivation of laps. We're seeing that fastest growing cohort at $50,000 to $100,000. We're seeing improvements in awareness and conversion, all really strong signals that it's resonating, and we have some exciting things coming within our pipeline as it relates to innovation that we're really excited about that we know based on the research that we've done, is one of the #1 drivers for this target that we're targeting within our demand space. So one of the number one is really around innovation. And so I think that's going to position us well. And then Club Wingstop, it's a big one for us. We're excited about it. Our pilot results continue to strengthen. We're seeing improvements in retention in reactivation in frequency, all really strong signals and again, without the support of our national advertising and without really leveraging that platform at scale. And so the combination of those things do give us confidence in the early signals that we're seeing in the business, we expect over time to return to growth in the second half of the year. Alex Kaleida: Yes. And Jeff, this is Alex. I could help translate a little bit on what we anticipate on the shape of the year. With what we're seeing in the April trends and kind of knowing that this is a little bit of, hopefully, the peak on fuel prices that consumers seeing. We're anticipating somewhere in the mid-single-digit decline range for comps in the second quarter, followed by a gradual improvement into that low to mid-single-digit positive range for the second half as these strategies come together and what Michael mentioned. And I think these are informed by just some ways that we've been able to see results in top-performing restaurants on Smart Kitchen, what they're seeing in their business comp performance also what we're seeing in our pilot market, again, with very limited features and marketing behind it and measure and seen a measurable comp impact. So that's how we got to -- the shape of the outlook, very similar to what we said last quarter, we anticipate a return to growth in the second half. Near term, we have brought forward a little bit of that inflation challenge that we're seeing from the war that took place at the start of March. But we have a high degree of confidence in this outlook and in fact, are working to exceed it. Jeffrey Bernstein: Understood. And then my follow-up. Michael, franchisees, just based on your commentary seem very happy. Obviously, the comp growth isn't where they want it to be, but [ because ] a couple of years sales growth the 70% type returns they're generating, all that supports the outsize unit growth. But clearly, the current macro is challenged. I'm wondering if you could talk a little bit about the recent conversations with franchisees, what they're most focused on and whether it ever becomes a discussion internally about considering maybe tempering unit growth. Clearly, you're running well above the 10% long-term algo with your 15% to 16% growth this year. Maybe there's some risk that is cannibalizing, maybe makes sense to try and control or limit the outsized unit growth? Any thoughts there would be great. Michael Skipworth: Yes, Jeff, we mentioned this in our prepared remarks, but I think it's really important to say it again. And we actually saw our brand partner margins and profitability improved in the first quarter. And we talked about that's about -- that's us making really intentional and strategic decisions about what's right for the business long term. And obviously, continued progress with our supply chain strategy and continuing to protect and, in some cases, enhance those industry-leading returns in unit economics. And they remain strong. The sentiment and the conversations with our brand partners, it's really a lot about acknowledgment that over the last few years, our AUVs have grown close to $500,000. And that, combined with just continued focus and execution against protecting profitability has been pretty positive. But then when you layer on top of that, us working with them and talking to them about these strategies that we're executing and what's in front of us. There's a pretty high level of excitement around Wingstop and to continue to grow and to continue to expand. We feel like we're growing at the right pace. We're obviously executing against our market level playbooks, which are very intentional and very clearly defined around where we open restaurants and at what pace and when we open those restaurants. But -- we mentioned it as well in our prepared remarks, our pipeline sits at a record level, which I think showcases the demand and excitement for growth. And based on the visibility we have in the pipeline today, we're able to reiterate our outlook this year, which is another industry-leading year of unit growth at 15% to 16%. Operator: The next question comes from Andy Barish with Jefferies. Andrew Barish: Guys. Just wondering on kind of thoughts as you look out in terms of becoming a more mainstream brand, do you think kind of marketing has to evolve as we look out maybe to '27, particularly given the size and scale of your spend to more kind of traditional windows and promotions that are laid out. And then kind of also wondering, just on the move to $3 million AUVs. If you could kind of frame up how much of that is maybe related to incremental chicken sandwich and tenders occasions, just given how strong your share is in the traditional wings business. Michael Skipworth: Andy, I think that's a great question. And if you go back 4 or 5 years, we were able to be a little bit more of what I would characterize as a marketing strategy that was almost a one size fits all. And as we look at how our business has grown and scaled and diversified to some degree, we are 100% aligned with the question you asked, and that is we have to be very targeted. Messages need to be different based on audience based on channel. And I think that can go from linear TV all the way down to the social platforms, and that's exactly the playbook that we're executing is making sure our message is tailored specifically to the targeted audience that we're trying to reach. And I think you'll see more of that come to life as we talked about some of the next phase or next chapter of Wingstop this year. You're going to see a little bit more variation in the messages that we're putting in front of consumers, a little bit more targeted messaging as it relates to calls to action. But that's exactly the playbook that we're executing. And as we think about our path to $3 million AUVs. We do think there are a ton of chicken sandwich occasions that we are positioned to win and we will win and tenders are the same. But we also think there's a lot of group occasions, our halo product, bone and chicken wings, that we're going to win as well as we educate more of these consumers who don't know about us or maybe don't consider Wingstop today. And that's what we're excited about as it relates to our Q1 results is we're seeing early signals in the business that we're making progress against all of those initiatives. Alex Kaleida: And Andy, I'd add, too, that we've historically anchored as an example, on social media and as area like TikTok, we now are diversifying more messaging in personalizing content to those channels across Meta, Instagram, X, other areas where we can really speak to that new guests we're looking to acquire. So we think the timing is right to start to move more into those various social channels alongside the level of content we're able to produce and the relevance we can drive at the messaging in those channels. Andrew Barish: Congrats on #500 internationally. Alex Kaleida: Thank you. Michael Skipworth: Thank you. Operator: The next question comes from Chris O'Cull with Stifel. Christopher O'Cull: I had a couple of follow-up questions from earlier ones. And Michael, has the company -- the company has guided to, I think, 15%, 16% unit growth this year, which continues to pace well ahead of the 10% long-term algo. But to what extent is this growth being driven by brand partners voluntarily developing ahead of their contractual mandates? And franchisees reverted to the minimum requirements of the development agreements, what would that base unit growth rate look like? Michael Skipworth: Chris, I wouldn't say there's anything to call out as it relates to brand partners developing ahead of their schedule. In fact, I would say it's it goes back to these market-level playbooks. And that informs how we write these agreements. And we're writing these development agreements in a very targeted and intentional way that we believe is kind of really helping us have our hand on the dial and manage the pace of development. So I would almost go so far as to say we discourage brand partners from developing ahead of that contractual commitment because we've been very intentional with how we design these agreements. And we believe we've got a strategy that we're executing against. Christopher O'Cull: Okay. That's helpful. And then we've noticed the sub-$10 combos, which you mentioned earlier, being pulse through social and CRM channels. But what is the reluctance to pivot linear TV towards these offers since it would seem to be a better medium to drive new and lapsed users than maybe targeting some of the existing users to increase frequency. Michael Skipworth: Yes, Chris. That's a little bit of what I hit on earlier. I think you're going to see that come to life as we progress through the year. And while linear is obviously continues to be an efficient platform, you're going to see us leaning a lot more into OTT and streaming, which allows us to be very targeted because some people -- the relevant message that we're targeting might be this new group pack bundle, where we preconfigured a bundle at a compelling value to serve 3 or 4 people, and we've preselected the flavors, highlighting convenience, highlighting ease, but obviously, the flavor and quality associated Wingstop, and they can order that with one click. And so that could be the right message that we highlight in a targeted way, or it could be someone who's more value-sensitive. And in that case, we can target them with the message that profiles this lunchtime offer that we have that is pretty compelling value to get our cook-to-order, [ hand-tossed ] sandwich or tender combos for under $10. So that's exactly something we're leading into. Operator: The next question comes from Sara Senatore with Bank of America. Sara Senatore: Just, I guess, maybe one quick follow-up and then one quick question. Just you mentioned the lower-income consumer. I think in the past, you've said that's roughly 1/4 of your sales, but that maybe has been trending down. So if you if you could update on what that mix is? Because I do think that's obviously much higher than I think what we've seen from others. So that's just a data point. But the question is on value. You mentioned value for the money, which I think is obviously clearly embedded in your menu. But some of what we're seeing that is very successful, especially for lower-income consumers is very low price point value. And I think in the past, in 2023, relative value is a big part of what you're able to offer because wing prices were down so much. Is there -- I know your emphasis on visibility in terms of wing prices as opposed to kind of maximizing the benefit from the recent decline. But is there an opportunity to do more price point value below that $10? Or is it the margin structure just really doesn't support that? We have seen some other higher ticket concepts, maybe do things on the app only to really kind of introduce people to the brand at very accessible price points, just as budgets are really constrained. So just trying to understand if there is that opportunity either through the app or through your loyalty because these sort of entry-level price points you seem to be working very well right now. Alex Kaleida: Sara, this is Alex. I can jump in first. The low income percent still has been about that mix of about 25% within our database. And we still are acquiring low-income guests. What we have seen in their behaviors is more they're actually trading up into larger bundles. We've seen the ticket increase, but the items that they're attaching per ticket has changed. That's come down a little bit. So they're almost kind of looking for that abundance, quality that we can deliver inherent value. And I think we've said this in prior calls, too, that that consumer is still telling us we're doing the right things in terms of messaging value, delivery and quality. And we really think about that overall value proposition that we deliver to guests beyond just the price point. So we're focused on some areas to showcase our menu differently flavor lists value as well. And then loyalty is a way for us, we believe we can strengthen the value proposition. And one difference that we're seeing among low-income consumers is in our market where we're testing loyalty, their engagement, their frequency has been sustaining. We're not quite seeing what we're seeing in the rest of the U.S. And we think we've brought some areas and examples for it for them that's really showcasing that value proposition, how loyalty can come into play there. Sara Senatore: Great. And just is it the 7% increase? Is that roughly the same that you've been seeing in these sort of loyalty frequency as in the past? Alex Kaleida: Yes. Actually, loyalty members are outperforming nonloyalty members in terms of -- across a number of metrics, including frequency, new guest retention. We're also seeing reactivation of lapsed users come back in at a rate of 2x nonloyalty members in there. So there's a variety of metrics were really -- which has given us that confidence in the path to growth in the second half based on this data we're seeing. But yes, it continues to be more elevated in the pilot market. Operator: The next question comes from Brian Harbour with Morgan Stanley. Brian Harbour: Could you comment on how your 2 biggest markets, California and Texas are doing relative to the rest of the country? Michael Skipworth: Brian. I would say, obviously, California, I wouldn't say the trend has really improved as inflation like kind of the consumer macro backdrop has remained pretty consistent there. I would say, as it relates to the Texas market, we have obviously a lot of corporate restaurants there. And so our corporate results give you a little bit of an indication. But as we look at DFW as an example, or even broader Texas, where we have had more tenure with the Smart Kitchen, those markets are performing a little bit better than the rest of the country. But I would say it's really something that we pointed to in our prepared remarks, which has to do with those restaurants that are consistently delivering on our 10-minute speed of service target. And I think that applies outside of Texas, where those restaurants that are doing that -- we continue to see higher new guest retention rates, better frequency, higher guest acquisition -- or guest satisfaction scores and ultimately better same-store sales. Brian Harbour: Okay. and on Smart Kitchen, I mean, it is fully rolled out at this point, right? So I guess the question is like for the earliest adopters, are you still seeing a same-store sales gap consistent with what you've talked about before. I guess I might conclude at a high level that customers don't really care about this yet, like I think we understand the operational benefit in the theory, but is it necessarily showing up for customers in faster delivery times? Or are you seeing kind of more like walk-up business in response to this? I mean at what point do you think it actually is more of a mover for customers? Michael Skipworth: Yes. Brian, I would say -- and we mentioned this in our prepared remarks, but we can see it in the data. And we know what good looks like -- and when it is delivered, and we are delivering on that 10-minute speed of service, you can measure it in the results and in the data. One of the things we highlighted in our prepared remarks was the kind of bottom quartile restaurants where we've really been focused on execution there, and we've reduced speed by 3 minutes and seeing some pretty meaningful improvements in get satisfaction score, so the guests are noticing and giving us credit for that. I would say one of the areas where the most noticeable improvement was in delivery times and guest satisfaction within the delivery channel, where we measured a 17 percentage point improvement in guest satisfaction scores in the delivery channel, and that channel outperformed versus the rest of the system. And so there are some really strong signals that we're seeing in the business and the progress we're making. But I think it's important just to highlight that this is a really big operational change. It may be bigger than we even anticipated. And one of the things we've learned as we're continuing to focus and drive execution is we have to also guard against being too fast. We're updating -- we talked earlier this year about the new op scorecard that we rolled out. We're actually updating our scorecard, just to make sure we're measuring performance against our targeted speed of service of 10 minutes, but we're also not rewarding the wrong behavior. But progress is being made across the board. We are getting credit from the consumer and the opportunity in front of us, and I think the long-term impact here continues to be really big. Operator: The next question comes from Danilo Gargiulo with Bernstein. Danilo Gargiulo: Michael, first of all, I'd like to expand on the comment you just made on this being an operational lift of high magnitude. I guess I'm trying to understand what is the impediment for all the stores to deliver within 10 minutes, even during peak times of Friday and Saturday, you're updating the scorecard. But I think for most operators, this market is translating into better operations. So what's the impairment on the ground for a better adherence to the high standards. Michael Skipworth: Yes. I mean I think, Danilo, if you take a step back and think about and just remember, particularly with these more tenured restaurants and tenured team members the change is pretty drastic to go from an operating model that relied on paper kitchen tickets and a lot of voice command to now leveraging a technology platform, interaction with the screens and ultimately relying on in leveraging an AI-enabled demand forecast bespoke to every single restaurant that's being delivered in 15-minute increments. It's a fundamental change. And I agree with your statement that it is a better team member experience, and it does result in overall improvement in operations, but it is still a big change, particularly when you think about -- we often reference our standard quote time of 20 minutes on average, but when you think about Friday and Saturday night, when restaurants are experiencing high volume, those tickets -- the speed times could be on average 45 minutes. And we've taken that down significantly. And in some cases, we're not at that 10-minute yet, but we're materially faster than we used to be. And so it's a balance of ensuring we're executing and delivering on the speed that consumers expect but also making sure we're not rewarding the wrong behavior or driving the wrong behavior. That could translate to some unintended consequences around being too fast. And so it is a balance, and it's something we're focused on and the team is executing against a plan, and we're confident based on the data that we see and the progress that we're making that we will get the entire system to deliver on a consistent tenement speed of service. But it is taking time. It is taking focus. It's taking some revisions to our scorecard that I mentioned, but the progress is clear in the data that we see. Danilo Gargiulo: And if I may, with increased uncertainty on macro geopolitical and even the demand environment, why is the best option to continue to do share repurchases versus maybe driving down the leverage to 3 to 4x over time in anticipation of high volatility rates? Alex Kaleida: I think, Danilo, great question. I think as we've shared in the past, we want to demonstrate our commitment to our buyback strategy because we believe in the long-term value creation it has for shareholders. And I think what you'll see as we manage through this is not accessing near-term outside capital to support the strategy, leverage this free cash flow generation that we have in our business and in combination of seeing some deleverage. But we do see ourselves in a place that's closer to that 4x leverage range as opposed to where we've been historically in 5 to 7x. Operator: The next question comes from Sharon Zackfia with William Blair. Sharon Zackfia: Yes, I want to [ delve into ] [indiscernible] early. I think you guys [ point and speed ] or execution, maybe I missed that on Saturday nights. But can you just give us kind of broadly speaking, what percent of the system is hitting the 10-minute speed? And then I think secondarily, you had talked last quarter about some challenges with the delivery providers getting under 30 minutes. Can you talk about kind of what percent are now consistently under progress is moving [indiscernible] kind of move that towards the goal line? Michael Skipworth: Sharon, you bet. You were breaking up a little bit, but I think I caught the gist of your question. As it relates to Friday, Saturday and dinner daypart, I think one of the things is, obviously, it's important to highlight those are 2 of our busiest or peak dayparts within the week. But it's also the dayparts where about 50% of our new guests visit the brand for the first time. And so obviously, extremely important as we think about the marketing strategies that we're executing and broadening the top of the funnel and bringing in new guests that we deliver on their expectations and retain them. And so that's a big focus for us. And when we entered this year, about 30% of the restaurants were delivering on that targeted 10-minute speed of service within the Friday and Saturday dinner daypart. And we've made meaningful progress on execution within our restaurants. And it's due to the incredible work of our ops team, of our brand partners, of our teams and their teams and the restaurants. And so kudos to them, but we've seen a 16 percentage point improvement just in 1 quarter in the number of restaurants that are delivering. And so that's meaningful progress that's super encouraging and we're going to continue to chip away at it, and I'm confident that we'll get the entire system there over time. And then I think the other part of your question, could you repeat that part again for me? I lost you at the very end of it. Sharon Zackfia: Yes, sure. Sorry about the cell phone. On the delivery providers, I think there were some challenges getting them under 30 minutes even when you were at 10 minutes. Can you talk about kind of where you stand at the 30-minute threshold system-wide and how those discussions and how that progress is going? Michael Skipworth: Yes. We're really encouraged with how our partners on the third party have leaned in. We obviously have had some meetings with their leadership team, their teams leaned in with our teams. We've implemented a few things that are helping send the right signals to their drivers at the right time to make sure they're getting there to the restaurant when the order is ready and we mentioned it, but we're seeing a meaningful improvement in the performance there. And we actually highlighted this within that bottom quartile of restaurants, just the improvement within the delivery channel that we're seeing there is pretty meaningful. And I think it speaks to the opportunity we have within that channel. But to see 1 percentage point improvement in guest satisfaction within the delivery channel is pretty pronounced. And so we're encouraged by the progress we're making. Operator: The next question comes from Jon Tower with Citi. Jon Tower: I know you mentioned that protecting and growing franchisee profits and cash flows is frankly a priority for the company? And kind of following up to Sara's question earlier around value. In your conversations with them, are they reluctant to move down on price points on the menu over time? I'm just curious if that's been pushed back from that community specifically. Alex Kaleida: Jon, this is Alex. No, I think we're lockstep with our brand partners in terms of really even in this environment, protecting the unit economics. And we don't believe it's a little bit more of our perception that training a guest to come to you for a $3 menu item as an example, is not who Wingstop is. Our demand space target that group occasion. Again, our guest has given us feedback that we're doing all the right things on overall satisfaction. We've improved quality 6% versus last year. Consideration is up 4% versus last year. And even at lower income consumer isn't saying that we have a value issue with us. So we're focused on that and really building that top of the funnel, attracting those new guests and keeping our brand partners focus on that long-term opportunity for Wingstop to build towards 6,000-plus restaurants in the U.S. Jon Tower: Got it. And I know, Michael, you earlier in the conversation, you had mentioned that innovation is kind of top of mind for most guests in terms of what they want to see from the brand. It sounds like you're focused primarily on flavor. I mean any form factor changes that you're thinking about going forward? Michael Skipworth: Jon, yes, it's super clear to us when we studied our demand space, the consumer and who we're going after, who really doesn't engage with our brand today, but represents a huge opportunity for us. And our brand hits on the top emotional and functional needs of that guest and is best positioned to win. It's really about just driving awareness and then making Winstotop-of mind and relevant to them. But the #1 driver for these guests we are targeting to bring in to the brand is innovation and it's innovation through flavor. And this is a proven playbook for us. We go back to 2024, and when we launched Hot Honey. But we launched Hot Honey when everyone else was doing it as a wet sauce, we did the way that only Wingstop can do and did it as a driver of, and that is a great example of how we can lean into innovation, lean in to flavor and drive relevance and bring new guests into the brand. In Q1, we launched a Hot Honey Trio, 3 ways to Hot Honey. That actually performed a lot better than we anticipated. In fact, we sold out of 2 of the flavors within about 2 weeks. Another example I will point to is our current LTO flavor, Citrus Mojo. A lot of guests have kind of said it's a play on our iconic lemon pepper where it's a fresh garlic herb, a bright splash of citrus. But what we're seeing with the performance of Citrus Mojo, over-indexing to the reactivation of lapsed guests. It's bringing in new guests. And so we have an innovation pipeline built out for the rest of the year that we're super excited about. This includes a lot of really unique flavors that only Wingstop can do, but it also includes some unique dips as well. And so we're excited about this innovation pipeline and how that's going to drive relevance and I think continue to really bring in these new guests that we're targeting. Operator: This concludes our question-and-answer session and concludes our conference call today. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Nabors Industries Ltd. First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead. William Conroy: Good morning, everyone. Thank you for joining Nabors' first quarter 2026 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President, and Chief Executive Officer, and Miguel Rodriguez, our Chief Financial Officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks, the slide deck is available both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, Miguel, and me, are other members of the senior management team. Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties, as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may vary materially from those indicated or implied by such forward-looking statements. Also, during the call, we may discuss certain non-GAAP financial measures such as net debt, adjusted operating income, adjusted EBITDA, and adjusted free cash flow. All references to EBITDA made by either Tony or Miguel during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings release. Likewise, unless the context clearly indicates otherwise, references to cash flow mean adjusted free cash flow, as that non-GAAP measure is defined in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. With that, I will turn the call over to Tony to begin. Tony Petrello: Good morning, thank you for joining us to review our first quarter results. The quarter included several important operational and strategic milestones. I will highlight those today. I will begin with the situation in the Middle East and its effects on our business. Today, our rig footprint in the Gulf region consists of 53 rigs operating under our SANAD land drilling joint venture in Saudi Arabia, four rigs working in Oman, three rigs in Kuwait. We conduct large casing running operations in both Saudi Arabia and Abu Dhabi. Our Canrig subsidiary is also active across the region. It operates with manufacturing and repair facilities in Saudi Arabia and Dubai. Across the region, our staff number is approximately 7,000 including SANAD. Today, we have maintained our pre-conflict operating tempo across each of these operations. Our clients in the region continue to follow through on planned activity. Importantly, they have not communicated any material change to their forward plans. The impact on our financial results so far has been limited. Miguel will address the financial implications in his remarks. Many of you have asked, whether Lower 48 operators have increased their activity in response to higher oil prices. First, oil futures are steeply backwardated. While supported for incremental production, forward pricing remains below current front-month levels. This tempers the near-term activity expectations. Second, changes in drilling plans require confidence in sustained pricing. Given current volatility, it remains early for broad-based revisions to existing drilling programs. In the Middle East, approximately 7.5 million barrels a day of production was shut in according to the EIA. This total could actually increase in April. Restoring this shut-in production will require time, capital, and operational execution. As a result, supply disruptions in the Middle East may persist beyond the near term. This dynamic should provide underlying support for both commodity prices and activity levels in other regions including the United States. In short, we see tightening supply. We see durable demand. Markets will adjust. Let me now turn to our financial results for the quarter. Adjusted EBITDA totaled [inaudible]. Notwithstanding the financial consequences from the conflict, our performance was essentially in line with the expectations we outlined on our last earnings call. This outcome reflects progress across our key strategic priorities: operational excellence in the Lower 48, measured growth in the international markets, technology that improves returns for our customers and for Nabors. We expect them to drive further improvement through the year. Let me turn to the market environment and our positioning. The oil market shifted sharply in early March as the hostilities began. Since then, near-month WTI has remained volatile around $90. The current oil market is more constructive than in 2025. However, operators have not broadly adjusted activity in response to these price levels. As I noted earlier, the futures curve remains backwardated. We remain aware of global supply and demand balances alongside inventory trends. These trends may offer the opportunity for additional drilling activity which we are positioned to capture. Next, let me address Venezuela. We have five rigs in the country. While our fleet remains idle, we have maintained a small local staff. We have operated in the country since the 1940s. The resource base remains significant, and the long-term opportunity is substantial. Under the right circumstances, Venezuela presents a meaningful opportunity. Recently, a number of operators have expressed urgency to expand their operations in Venezuela. We are ready to support their activity. Discussions are underway to determine suitable commercial terms. We will structure these agreements to protect our capital in-country. Turning to the US market. Operators are evaluating the global dynamics we discussed earlier. For the most part, large public operators are not moving quickly to increase capital spending even with higher oil prices. Resolution of the conflict along with a clear view of its impact on global supply would allow operators to adjust their plans with greater confidence. Since February, near-month WTI has moved more than 10% on seven trading days. This level of volatility complicates planning and capital allocation. Our approach in this market is to continue doing what we have been doing: deploy advanced technology that increases efficiency and improves operator EURs and returns; pair this with tight cost control and capital discipline. Turning to natural gas. Several factors are shaping its near-term outlook. The conflict is affecting global LNG flows, with disruptions to exports through the Strait of Hormuz. This may increase LNG exports from the United States. Also, in the US, year over year, natural gas demand for electricity generation declined in 11 of the past 12 months. Renewables have displaced some gas-fired generation. These dynamics are reflected in current natural gas pricing. Over the longer term, US LNG exports and domestic consumption are expected to increase. Additional Gulf Coast LNG export capacity will come online, including projects such as Golden Pass, Port Arthur, and CP2. Data center power generation requirements continue to expand. These could add up to 6 Bcf a day of natural gas demand by 2030. In international markets, including the Middle East and Latin America, expanding gas development continues to support drilling activity. In the Lower 48, gas-directed activity currently comprises more than 20% of our working rig count. We can respond quickly to increased demands across gas-producing basins. Next, I will share a few perspectives on Nabors' current business. In the Lower 48, the momentum that started toward the end of 2025 has continued through the first quarter. We added four rigs during the first quarter and a total of eight rigs since November 2025. This progression was a positive surprise that brought our rig count to 66 at quarter end. Our count currently stands at 66. Since the beginning of the year, these incremental rigs have primarily come from public operators. They are spread across producing areas with four in the Permian, three in the Haynesville, one in the Eagle Ford. We believe this diversity across basins is healthy. Turning to SANAD, the newbuild fleet in Saudi Arabia continues to expand. SANAD deployed the fifteenth newbuild during the first quarter. Four more new rigs are planned to commence working during 2026, bringing the newbuild total to 19. The twentieth should start up in early 2027 as planned. Notwithstanding the current conflict, SANAD has also resumed operations on one of its suspended rigs. The second is scheduled to start up late this quarter. These additions, both occurring in March, are a testament to the capability of our workforce in the kingdom. While conditions in the Middle East remain fluid, this level of activity reflects the customer's commitment to its prior development plans. Operators across the Eastern Hemisphere are advancing plans to expand activity. In Latin America, the activity improvement in Mexico continued in the quarter. Late in the first quarter, we restarted a rig there earlier than planned. That brings our total to four working. All of these are offshore platform rigs. They are large high-spec units with economics above the segment average. In Argentina, we started one rig in the first quarter as planned. We have another rig scheduled to work there in the third quarter. The second rig should bring our rig count in the country to 14. This further strengthens our position as the leading drilling contractor in Argentina. Now I will turn to the US market. Since the beginning of this calendar year, the Baker Hughes weekly Lower 48 land rig count has declined by three rigs. Nabors’ rig count in this market has increased by four. To date, higher oil prices have had limited impact on overall market activity or our rig count. Over the same period, our return has moderated. Let me add some context on our Lower 48 performance. Our count began rising in December, supported by groundwork laid earlier in the year. This performance reflects our high-spec rigs, advanced technology, experienced crews, and strong field performance. We have also grown our rig count while maintaining pricing discipline. Looking ahead, we are increasing our forecast to reflect more rigs in the current quarter. We expect to maintain a higher level through the second half of the year. We also surveyed the expected drilling activity of the largest Lower 48 operators; the group accounted for approximately 44% of this market's working rig count at the end of the quarter. The first quarter data reflects announced M&A activity. The results provide useful insight into operator behavior. In aggregate, these operators reduced their rig count during the first quarter. This is consistent with broader market trends. Looking ahead, the group expects to add approximately 15 rigs through the end of the year. These additions are concentrated among two operators. Both have indicated they are responding to current market conditions. Beyond these operators, the overall sentiment generally favors incremental activity, though this tone is not expressed in expected rig counts. We continue to improve our ability to execute commercially and operationally. Now the survey shows Lower 48 industry utilization is headed higher. With this combination, we believe our rig pricing will increase progressively through 2026 and into 2027, reaching the mid-thirties. I will now comment on the key drivers of our results. I will begin with our International Drilling segment. Notwithstanding disruptions in several markets, this business continues to expand. For perspective, since 2023, the Baker lower 48 rig count has declined by approximately 12%. Nabors' international rig count increased by 16% over the same period. The rig count in markets where we operate was essentially flat during this time. We achieved our growth even as we wound down operations in several countries. SANAD also had rigs suspended and it elected not to renew certain contracts. This performance demonstrates the value of our geographically diversified portfolio of businesses. Today, we see additional prospects across the Middle East, Asia Pacific, and in Latin America. In the Eastern Hemisphere, we see approximately 20 opportunities in markets where we operate or which we consider attractive. Beyond Venezuela, where I mentioned prospects to resume operations are improving, we see additional opportunities across Latin America, primarily in Argentina with a smaller number in Colombia. We prioritize operations that utilize our innovative technology, offer multiyear term contracts, and generate attractive financial returns. In Saudi Arabia, in addition to the planned rig starts through early 2027, SANAD is advancing discussions with the client for the next group of five newbuild rigs. We expect to conclude these discussions in the coming months. That group will bring the total number of newbuilds to 25. Turning to performance in the US. On our previous earnings conference call, we suggested our daily gross margin in the Lower 48 was stabilizing. That proved to be the case in the first quarter. For the second quarter, we expect a modest uptick. Commercial and operational performance support this outlook. We maintain pricing integrity and control costs. Our rig count is outperforming the industry. We are well positioned to capitalize on future opportunities to add to our working rig fleet. Let me briefly update you on our high-end rigs including the PaceX Ultra. The PaceX Ultra rig established the benchmark as the industry's first rig with a 10k PSI mud system. It is also equipped with expanded setback, upgraded rig components. The first unit continues to work for a catalyst in South Texas. It delivers the high performance that our client and we expected. We have agreements to deploy two more PaceX Ultras later this year, and we are in discussions with multiple operators to upgrade specific rig capabilities. These upgrades enable them to drill increasingly challenging wells. The PaceX Ultra's economics reflect the rig's market-leading capabilities and value proposition. Including the NDS content, on these rigs daily revenue is well above the $40,000 mark, and they work on term contracts. These developments reinforce the value of our rigs. Our solutions contribute directly to customer performance while generating attractive returns for Nabors. Next, let me discuss our technology and innovation. We include a full drilling automation package from NDS on our PaceX Ultra rig and also include our integrated MPD package. This combination positions the PaceX Ultra as the most capable drilling system in the US market. We are committed to expanding NDS' services globally, particularly among the NOC customer base. During this quarter, we had modest international growth. We believe there is a strong appetite as operators follow the US by prioritizing efficiency performance gains. I will conclude with our capital structure. To be clear, our highest priority remains debt reduction. On top of the substantial progress we made in 2025, during the first quarter we redeemed the balance of the notes due in 2028. This action reduces future interest expense and supports free cash flow generation. As Miguel will detail, we outperformed our free cash flow expectation for the first quarter largely outside of SANAD. This cash flow provides capacity to further reduce debt and strengthen the balance sheet. To summarize before turning over to Miguel, the first quarter brought unexpected volatility to the global energy industry. Our diversified portfolio across businesses and geographies helps us manage that volatility and continue to perform. Now let me turn to Miguel to discuss our financial results in detail. Miguel Rodriguez: Thank you, Tony, and good morning, everyone. Before turning to our results, I want to briefly address the evolving market backdrop, particularly in light of the Middle East conflict. From an operational perspective, our business in the region has remained stable. We continue to operate in Saudi Arabia, Kuwait, Oman, and the Emirates without disruption, maintaining a consistent cadence of activity. As planned, our SANAD joint venture added rigs in Saudi Arabia during the first quarter. That said, the conflict did introduce some operational friction during the quarter, primarily affecting logistics, supply chain, and crew rotations. In the US, our customers, especially the majors and public E&Ps, have remained disciplined in their approach to activity levels. We are encouraged by the progress of our rig additions in the Lower 48. These gains reflect strong commercial execution from the fourth quarter rather than a broad-based shift in customer behavior. While we believe the Lower 48 market is showing early signs of improvement, overall activity levels have not yet changed meaningfully. With that context, I will review our first quarter performance and outline our guidance for the second quarter. I will then conclude with updates on capital allocation, adjusted free cash flow, and capital structure. Now turning to the first quarter. Our consolidated revenue was $784 million. The sequential decline was driven by two main factors. First, the expected seasonal reduction in our Rig Technologies segment reflecting lower capital equipment deliveries and parts sales. This was compounded by approximately $3 million of logistics disruptions in the Middle East. Second, the previously announced step down in dayrate for our marquee rig in the Gulf of Mexico, which transitioned to a workover rate at the start of the year. Consolidated EBITDA was [inaudible], representing an EBITDA margin of 26.1%, down 164 basis points sequentially. The decline was driven primarily by our International Drilling and Rig Technologies segments. Importantly, our EBITDA was consistent with the expectations we communicated during our previous earnings call. Our EBITDA results include approximately $3.5 million of adverse impact related to the Middle East conflict across our International Drilling and Rig Technologies segments. Now I will provide you with details for each of the segment results. International Drilling revenue was $419 million, a decline of $4 million or 1% sequentially. EBITDA was $121 million, decreasing $10 million or 7.6% quarter over quarter, yielding an EBITDA margin of 28.9%. The sequential decline in EBITDA reflects anticipated labor costs in Saudi Arabia associated with Ramadan and the Eid holiday, in addition to time-related impacts from the unplanned transition of two rigs moving from oil-directed to gas-directed drilling. Results were also impacted by the previously announced conclusion of certain short-term high-margin activities in the Eastern Hemisphere during the fourth quarter, continued activity disruptions in Colombia, and incremental costs related to the Middle East conflict. Our average daily gross margin was $16,880, which fell below our guidance range. This was driven by several factors: the aforementioned transition of two SANAD JV rigs from oil to gas drilling, which required contractor inspections and acceptance procedures temporarily disrupting the planned drilling schedules. While strategically beneficial, these transitions weighed on our first quarter results; operational challenges related to the Middle East conflict including impacts on logistics, supply chain, and crew rotations, resulting in a shortfall of approximately $2 million; and the continuation of activity disruptions in Colombia combined with the adverse impact of a stronger Colombian peso weighing on our cost structure. Average rig count for the quarter was 92.6, slightly above the high end of our guidance range. Our exit rig count was 93 rigs. The fifteenth newbuild rig in Saudi Arabia, the resumption of one previously suspended rig also in the kingdom, the redeployment of one rig in Argentina, and the earlier-than-planned reactivation of an offshore platform rig in Mexico late in the quarter. These additions were partially offset by the previously announced roll-off of three very low-margin workover jobs in Saudi Arabia, which SANAD elected not to renew for economic reasons, and a small number of contract expirations in other international markets during the quarter. Moving on to US Drilling. Revenue was $241 million, essentially flat sequentially. EBITDA was $88 million, representing a margin of 36.5%. EBITDA exceeded our guidance, driven by stronger-than-expected activity in the Lower 48. Alaska and offshore results were in line with expectations. Looking specifically at the Lower 48, revenue was $192 million, an increase of $11 million, up 5.9% sequentially reflecting higher activity. Average rig count increased by 5.5 to 65.3 rigs, above the top of our guidance range. During the quarter, we added rigs across several basins. The continued robust progress in our rig additions reflects strong coordination between our commercial and operations teams, combined with pricing discipline, excellent service quality, and rigorous execution, which all have been well supported by our high-quality customer portfolio. Currently, we have 66 rigs working. Average daily revenue declined to $32,650, reflecting some repricing as rigs rolled onto new contracts. Leading edge daily revenue remains in the low-$30,000 range. Average daily margin was $13,177, in line with our expectations. Turning to Alaska and US offshore. On a combined basis, revenue was $49 million; EBITDA was $17 million, a decline of $9 million sequentially with EBITDA margin of 34.7%. These results were in line with our guidance and primarily reflect changes in the work scope and mix. Now turning to Drilling Solutions. NDS revenue was $106 million, largely flat sequentially. EBITDA was $39 million resulting in a margin of 36.4%. These results were in line with our guidance, reflecting growth in our international markets offset by a modest decline in the US from third-party rigs. Importantly, the segment converted approximately 94% of EBITDA to free cash flow during the quarter, a new record and underscoring its low capital intensity. Now on to Rig Technologies. Revenue was $27 million, down $11 million sequentially. EBITDA was approximately $5 million, a decrease of $4 million from the prior quarter and below our guidance. The sequential decline was expected following strong year-end sales in the prior quarter. EBITDA was further impacted by parts delivery delays related to the Middle East conflict, representing approximately $1.5 million or roughly 50% incrementals. Turning to the second quarter, our EBITDA guidance assumes $6 million to $8 million impact considering that the inefficiencies in the Middle East will persist through the quarter across all segments, but primarily within International Drilling. In International Drilling, we expect average rig count to range from 93 to 95 rigs. This reflects the addition of two rigs in Saudi Arabia including the commencement of the sixteenth newbuild rig and the redeployment of a second rig previously suspended, as well as the contribution from rigs that commenced activity in Q1. Average daily gross margin is expected to improve to a range of $17,400 to $17,500. This increase reflects the benefit of the incremental rigs and a full recovery from the first-quarter impacts related to Ramadan and Eid, along with a return to more stable drilling activity. Our outlook, however, does not demonstrate the full earnings power of our international franchise, as it incorporates the estimated impact from inefficiencies related to the Middle East conflict. While we remain cautious regarding the evolving situation in the region, the quality of our fleet, combined with our continued superior execution and performance, positions us well for a strong second half of the year. Accordingly, we expect to deliver full-year segment results fairly in line with our full-year guidance. Turning to US Drilling. We expect the average Lower 48 rig count to increase to a range of 67 to 68 rigs. This includes some level of churn, albeit at a much reduced level compared to prior quarters. Daily adjusted gross margin for the second quarter is expected to average approximately $13,300, a modest sequential improvement driven by pricing. While the overall market environment remains somewhat constrained, we see targeted opportunities to add our rigs. This is driven by our strong and disciplined operational and commercial execution combined with our solid customer portfolio. We will continue to evaluate incremental opportunities based on asset availability, capital requirements, and crew capacity. Therefore, we are updating our activity outlook for the Lower 48 drilling business with an improved full-year outlook. We currently expect to exit the second quarter with approximately 69 rigs and to maintain activity at or near that level through the remainder of the year. At these utilization levels, we expect our pricing to trend higher over time, moving from the low-$30,000 range to reach the mid-$30,000s as we progress through this year and into 2027. For Alaska and US offshore combined, we expect EBITDA of approximately $15 million, reflecting the conclusion of an offshore O&M contract and planned maintenance for one of our rigs, which is also offshore. Over the medium to long term, we expect strong operations in Alaska. Drilling Solutions EBITDA is expected to be approximately $39 million, which is in line with the first quarter. Finally, Rig Technologies EBITDA is expected to be approximately $3 million. Next, I will discuss our capital allocation, adjusted free cash flow, and liquidity. First-quarter capital expenditures totaled $159 million, below our guidance range, mainly due to timing shifts in the SANAD newbuild milestones. Our Q1 CapEx included $72 million related to the in-kingdom newbuild program in Saudi Arabia. Total capital spending was closely in line with the fourth quarter, which amounted to $158 million including $78 million of newbuild-related spend. Looking ahead, we will continue our disciplined and flexible approach to capital investments. For the second quarter, we anticipate capital expenditures in the range of $180 million to $190 million, including $75 million to $80 million for the SANAD newbuild program. For the full year, we expect capital expenditures to remain in line with our prior outlook of $730 million to $760 million, including $360 million to $380 million for SANAD newbuilds. However, the timing and level of spend remains subject to market conditions and project pace. The cadence of the SANAD newbuild milestones may shift between quarters. Potential activity above our current guidance in the US will be evaluated carefully in the context of market visibility, asset readiness, and requirements, overall return and funding thresholds, and contract term. We remain firmly committed to managing capital spend at or below our guided range. Turning to free cash flow. During the first quarter, Nabors consumed $48 million of consolidated adjusted free cash flow. We exceeded our midpoint guidance range by more than $35 million. Importantly, free cash flow outside of SANAD was nearly breakeven, representing a meaningful outperformance relative to our expectations. This beat was mainly driven by a better-than-expected working capital progression and capital expenditures below plan levels. While this free cash flow outside of SANAD may be modest in absolute terms, it marks a very solid result, given that our first quarter is typically the most cash-intensive period of the year driven by payments of cash interest, property taxes, and annual bonuses, among others. This distinction in the origin of cash is important, as free cash flow generated outside of the SANAD JV is available to Nabors for debt service and other corporate purposes. For the second quarter, we expect to generate approximately $10 million of consolidated adjusted free cash flow with SANAD consuming approximately $10 million. Based on the continued momentum in our Lower 48 business, a constructive outlook for our international operations, and the compounding effect of our capital discipline, we are well positioned to exceed our full-year guidance. Finally, I would like to make a few comments regarding our continued focus on our capital structure. During the first quarter, we redeemed the remaining $379 million of senior guaranteed notes maturing in 2028, extending our nearest maturity to June 2029 and leaving a very manageable $250 million maturity at that time. We remain focused on further strengthening our balance sheet and capital structure with an objective of reducing net debt leverage to approximately one time over the long term. I will provide updates as we progress towards this goal. With that, I will turn the call back to Tony. Tony Petrello: Thank you, Miguel. I will close with a few points. First, we continue to support our clients in the Middle East even as the operating environment has become significantly more challenging. We have maintained operational continuity and mitigated risk with strong management. In Saudi Arabia specifically, our SANAD JV remains on track for growth. The newbuild deployment schedule is unchanged. Discussions for the fifth tranche of new rigs are progressing. Each tranche is expected to generate more than $60 million in annual EBITDA. This program represents a significant, differentiated, long-term growth opportunity in our industry. Second, in the Lower 48, strong performance has resulted in growth in our rig count as well as free cash flow. Customers continue to select our high-spec rigs and integrated NDS solutions to improve both performance and returns. We expect to deliver further progress through the year. Third, our free cash flow reflects disciplined operations across the business. We are firmly committed to using free cash flow to reduce debt. The message today is clear. Nabors is a stronger company. We deliver. Returns are improving. The business is more resilient. We are creating value in Saudi Arabia and across our international franchise. We are expanding technology-driven earnings and we are continuing to improve the financial quality of the business. There is more work to do, but we are on the right path and we are confident in the value creation ahead. Thank you for your time this morning. We will now open the call for questions. Operator: To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. The first question comes from Daniel Kutz with Morgan Stanley. Please go ahead. Daniel Kutz: Hey, thanks a lot. Good morning. Unknown Speaker: Morning, Doug. Daniel Kutz: So I wanted to ask, with the US Lower 48 rig count where you are at today, about 66 rigs, that is up from a low of just under 60, and then you have guided to go to 69 in the second half of this year. Can you talk about how, for the rigs that you have reactivated or are planning on reactivating so far, some of the mobilization or restart costs and how that has translated to maybe some pricing upside with customers? But perhaps more importantly, what is the Nabors Lower 48 supply stack beyond that 69 active rigs planned for the second half? I think the last time that you were at that level was roughly two years ago. What would it take? What is Nabors’ appetite? What is the cost involved? What is the pricing you need to see to reactivate rigs beyond the current plans for the second half this year? Thanks. Tony Petrello: Sure. So beyond the 69, I think I divide it into two categories. The first category, the next 11 or 12 rigs on top of that, that tranche is a relatively digestible number. And then beyond that, there is a second level, another roughly 15 rigs where the cost gets incrementally higher. So that is where we would do it. The first tranche, we are ready, able, willing to execute on both tranches. Obviously, there will be price increases associated with it, and we do not see that as being much of a problem. Daniel Kutz: Got it. Fair enough. And then maybe just one on capital allocation. Could you remind us if you have put out, or what type of net leverage target you are targeting longer term or through cycle? Basically, what I am driving at is, is there a net leverage level where you might be comfortable—I feel like you have been very clear that using free cash to reduce debt is at the top of the capital allocation priority list, in addition to the SANAD newbuild program and maintenance, obviously. But at what point would you be comfortable—what kind of net leverage level or liquidity level would you be comfortable moving some other capital allocation priorities up the list, whether it is shareholder returns or accelerating PaceX Ultra upgrade investments or any other investments? Maybe it is to upgrade and mobilize stacked US rigs for some international unconventional opportunities. Just how do you think about what the longer-term balance sheet and liquidity level that you would need to see to consider some other uses of capital, and what would potentially be on that list of capital uses? Thanks. Miguel Rodriguez: Thank you, Dan. So, look, first of all, starting with the PaceX Ultra, we are in the process of deploying two additional Ultras during the remainder of the year. These rigs, I want to reiterate, are the best possible rigs we can think of in the entire Lower 48 market, not only for the technology aspects on the rig itself, but the full integration with the Nabors portfolio of services. The performance of the first rig has been outstanding, and I invite you to look at our press releases around the PaceX Ultra. We will continue to invest in this type of integrated technologies and rig as we continue to see interest from our key customers. That is number one. Number two, we have been clear that our medium- to long-term roadmap in terms of net leverage is around the one time. This is a medium- to long-term objective. Tony and I remain very optimistic about our progress and the outlook not only in 2026, but into 2027 and beyond toward this goal. Once we get there or close, we will seriously contemplate other capital allocation initiatives. One of them will certainly be returns to shareholders, whether in the form of share buybacks or dividends, or both for that matter. But first of all, we believe our shareholders will get a better benefit by us continuing to reduce gross debt, and that remains the number one goal. Daniel Kutz: Great. All makes sense. Thanks a lot. I will turn it back. William Conroy: Take care. Operator: The next question comes from Derek Podhaizer with Piper Sandler. Please go ahead. Derek Podhaizer: Hey, good morning. So on the Lower 48, you added eight rigs since last year, sitting at 66. You expect to move to 69 by the end of the quarter. From there, you called for a steady rig count in the back half of the year, but now you are expecting private stack incremental rigs as the eight rigs you described were added primarily from the publics. You talked about the survey, two operators adding 15 rigs. In this setup, should we not see some upside to your second half rig count above the 69 versus being steady? Could you help us with the moving pieces here and how we should think about it? Tony Petrello: Obviously, if all things click and there are no setbacks, there should be upside in the story here. We have made no secret of the fact that we have two additional rigs in process. But we are trying to be cautious as well because this market has the ability to turn on a dime. We do not want to get over our skis right now. We are comfortable changing the guidance that we have for the year to the 69 number, but we are not yet ready to move it to the next number. Derek Podhaizer: That is fair. I appreciate that. Flipping over to Saudi, you have the newbuild program going. You are considering the next tranche to happen over the next couple of months. I am trying to think through your upside torque if Saudi were to add incremental activity once we get to a world post resolution here. It sounds like all your suspensions are going back to work. Is there any ability to accelerate the newbuild program from the initial cadence or is there potential for adding rigs into the JV that are outside of the country? Thoughts around upside torque if we see Saudi add incremental rigs in a post-conflict world? Tony Petrello: Sure. First of all, let us put the whole thing in context of the Saudi Arabia market as a whole. There are currently 251 operating rigs in general—192 onshore, 59 offshore. Of the original suspensions, 82 were onshore, 37 were offshore, and there has been a resumption of 36 offshore and four onshore. We do not think all those suspended rigs are going to come back necessarily—maybe up to another 20 or so—and there is line of sight to at least 12. Given where we are and what our ramp has done so far, I think it is a very positive sign. Obviously, if the market demands incremental production, they will have to reassess their plans, and we are in a great position to be part of that, whether it is additional rigs within the Nabors existing fleet from other markets or not, or acceleration of a newbuild. Probably acceleration of the newbuild program will not solve a short-term need. So my guess is, if it is going to come, it will come from Nabors’ other assets somewhere else. The other thing I would say is that our relative position there has really improved a lot. Our operating fleet is now really weighted to natural gas development. We remarked how we actually changed in the quarter some rigs from oil to gas. Ninety percent of our rigs are now directed at gas projects, just to give you an idea. Nabors’ share of the gas work is about 40%. Our overall market position is approximately 28%. We have to acknowledge Aramco’s role here; they have been steadfast in supporting SANAD throughout everything, including this very challenging environment. Also part of the story there is the rollout of technology. NDS is now beginning to make inroads with performance products. For casing running, we are already a large player in the region with a substantial operation in the UAE. Globally, Nabors on land is now the third-largest casing running provider; in the US, we are the second-largest. In that region, we are a key player. When you look at the current environment and what may happen post this dispute in terms of the need for these NOCs to resume activity—and if you take into account the UAE’s recent announcement and aspirations to grow production—I think we are really well established in the region to take advantage of that. Does that make sense, or do you have any other color you wanted? Derek Podhaizer: That was great. Appreciate all the color. Very helpful. I will turn it back. Operator: Next question comes from Scott Gruber with Citigroup. Please go ahead. Scott Gruber: Tony, encouraging comments on the activity volumes you have already seen and that are forthcoming, and also on the rate side in the US. I am curious around the drivers behind the rate inflation you see coming. I assume there is a component of market tightness, but is there also a component to getting compensated for these upgrades? Some color on that move into the mid-$30,000s—Is that mainly market or is it a combination of market and compensation for upgrades? Tony Petrello: I think it is a combination of things. First, you have to remember over the past two years there has been a reduction in the overall number of marketable rigs. Second, well programs’ demands have increased, particularly among larger customers who want to do four- or five-mile laterals. That involves upgrading rigs and components. They recognize that means extra cost, therefore extra pricing as well. But those add-ons are very high-return. That plays to Nabors’ strength because our existing X rigs are more than capable of handling these large upgrades like the 10,000 PSI with expanded setback and other specs. The X rig was designed from day one to be that kind of rig, and the market has finally caught up to the X rig. Basin dynamics also matter. In West Texas, there is tightening—churn has come down and pricing is directionally up. South Texas is improving strongly—churn is cut in half and market tightening is lifting pricing. North Dakota is slightly higher, driven by pockets of customers increasing rig count with some planned acceleration into 2027, so pricing is directionally up. East Texas is flat with churn persisting and utilization under pressure; pricing is about flat to slightly up, reflecting the gas story. The Northeast is steady and flat given pipeline constraints. Combine reduced available rig supply, higher operator capability demands, Nabors’ ability to add technology to rigs, and a greater focus on performance contracts to recognize the value we provide—put that together and it drives a path to increased pricing and better returns on capital. You must exercise discipline and execute performance that justifies it. Those are the requirements to make it happen. Scott Gruber: That makes sense. I appreciate that color. And did I hear correctly that Saudi did not renew a couple of contracts on a few workover rigs? If so, can you provide a bit more color there? It is a bit surprising in light of restart needs. Generally, what are you hearing from customers in the region around calling on workover rigs? Miguel Rodriguez: We were very clear about these rigs coming down during our last earnings call, where we mentioned that SANAD has elected, rightly so, not to extend these workover contracts due to pricing considerations, and they were very marginal in terms of EBITDA and free cash flow contributions to the venture. So you are correct—these rigs came down, and we announced this during our last earnings call. We need to remain focused on the trajectory of our additions in international, Saudi included. The number of rigs that we added in Q1 outperformed our expectations, primarily by the late addition in Mexico, with Saudi remaining on plan even with all the headwinds—adding the fifteenth newbuild as well as one of the suspended rigs coming back to work. In Q2, we expect to remain on track in Saudi and elsewhere. Our outlook of reaching 101 rigs at the end of the year remains unchanged. In Q2, to be very clear, we are going to exit at 95 rigs. Scott Gruber: Got it. I realize these workover rigs have always kind of contributed minimally. But given the backdrop, is Saudi coming back to try to contract those rigs again, or are other customers calling? Miguel Rodriguez: The SANAD team remains poised to put these rigs back to work at the earliest opportunity. But as Tony mentioned, there are still a number of suspended rigs. We do not know how many of those are going to come back to work. If my memory serves me well, it is about 46 rigs that still need to come back to work. There are probably opportunities for these workover jobs, but if I am at Aramco, I would give priority to gas drilling or oil drilling, as opposed to workover. The team is working on putting these back to work. They are not in our 101 exit by the end of the year. Tony Petrello: I do not know if you are referring to a separate class of rigs called workover rigs that are not drilling rigs. The class we are talking about involves a drilling rig doing certain workover jobs, which is different. There is another class of rigs—workover rigs—which we are not in; SANAD is not in that business. That separate business depends on Aramco’s plans in terms of activating production. In a market where they need to accelerate production, you could see some extra workovers in that class. But that is a whole different class of rigs. Scott Gruber: Got it. I appreciate the color. Thank you. Operator: The next question comes from Keith MacKey with RBC. Please go ahead. Keith MacKey: Hi, thanks and good morning. Maybe just to start out on free cash flow. Miguel, you mentioned you would be in a good position to exceed your free cash flow guidance for the year. Can you run us through some of the factors there? I know you have maintained your capital guidance, but at the same time there are some incremental rigs in the US and maybe a bit of upgrade capital and reactivation capital that you might not have expected initially. Can you take us through some of the big pieces of free cash flow and, to the extent you are comfortable, where you think the year might land given how things have unfolded so far? Miguel Rodriguez: Sure, Keith. I will not tell you where we are going to land. What I can tell you very clearly is that with the improved outlook in the Lower 48, our constructive view around international and the number of opportunities we continue to see even outside of the Middle East—even considering the headwinds around the conflict persisting—combined with very strong capital and pricing discipline, Tony and I firmly believe that we are going to outperform our earlier guidance around adjusted free cash flow. Where is that going to come from? Primarily incremental EBITDA, as a result of the improved activity outlook and remaining firm around international performance. We are maintaining, as you rightly mentioned, our CapEx range, which by itself is a testament to our discipline around where we deploy the money and what our thresholds are. We continue to make strong progress on working capital in general. Q1 is good evidence of this. These are the key building blocks I can give you. I am sure you will run your models and arrive at something that will likely make sense. We remain robust and optimistic about the outlook in the US, the strength of our international franchise, and our ability to continue to manage and be disciplined around pricing, working capital, and CapEx. Tony Petrello: As your question anticipates, there is a clear focus on optimizing incremental capital expenditures. As the year has gone by, that has been an increasing priority, particularly with aspirations of some of these new contracts. Extracting more from what we have today is a high priority, and hopefully that translates into the numbers you are hearing about. That is also one of the dynamics at work here. Keith MacKey: Got it, and I appreciate the comments. Just turning to the Middle East, it is impressive you are able to maintain the same operational tempo given everything that has gone on there, and the broader international outlook still gets to 101 rigs by the end of the year. Can you talk about what you are seeing on the ground in the Middle East, how you are able to maintain drilling operations with minimal disruptions, and given persistent production shut-ins, do you think customers will continue to be able to drill for the foreseeable future? Or will there have to be some slowdown in drilling programs at some point? Tony Petrello: Let me give you some color on what we have been navigating operationally. It has been a huge logistics strain. On the travel side, you have crew rotation issues. There are fewer airlines, for example, in Saudi. Turkish Airlines, Saudia, and FlyDubai are operating, and Emirates is just now resuming. No European airlines serve Saudi. All that puts strain on the situation. On the supply side, we had a need for drill pipe; we had drill pipe in Jebel Ali but could not get it out. That meant internally we had to use spare equipment from operating rigs to fill gaps, which drives a lot of activity to optimally allocate everything we have. On top of that, with the vast majority of our imports coming through the port of Dammam on the Gulf side in the Eastern Province, that has been an issue. We are shipping from the Red Sea and trucking 850 miles, just to give you an idea. That adds time and extra expense. All these things are navigable. One thing I would like to comment on is our people in the region have been incredibly supportive of continuing operations. Our major customer Saudi Aramco in particular is totally supportive. Any concerns about safety, they respond. Despite the conflict and rockets flying in the region, our crews are focused on doing the job every day and are committed to it. That is a great sign of commitment. In general, together with a stronger Lower 48 with improving pricing and continued balance sheet improvement through 2026 to 2027, we are constructive on international despite headwinds, and we see growth in the Middle East and outside the region in Latin America. We think our capital discipline puts us in a great position to outperform and meet the free cash flow guidance Miguel mentioned. That is the whole package. Keith MacKey: Got it. Thanks very much. Operator: That is all the time we have for questions today. I would like to turn the conference call back over to William Conroy for closing remarks. Please go ahead. William Conroy: Thank you very much, everyone, for joining us. If you have any questions or care to follow up, please reach out to us. And thank you, Ashia, for hosting the call this morning. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning. Welcome to Scotts Miracle-Gro's Second Quarter 2026 Earnings Webcast. I'm Brad Chelton, Head of Investor Relations. Speaking today are Chairman and CEO, Jim Hagedorn; President and Chief Operating Officer, Nate Baxter; and Chief Financial Officer and Chief Accounting Officer, Mark Scheiwer. Jim will provide a strategic overview Nate will provide a business update, and Mark will follow with a review of our financial results. In conjunction with our commentary today, please review our earnings release, 8-K filing and supplemental financial presentation slides which were published on our website at investor.scotts.com, prior to this webcast. During our review, we will make forward-looking statements and discuss certain non-GAAP financial measures. Please be aware that our actual results could differ materially from what we shared today. Please refer to our Form 10-K filed with the SEC for details of the full range of risk factors that could impact our results. Following the webcast, Executive Vice President and Chief of Staff, Chris Hagedorn, will join Jim, Nate and Mark for an audio-only Q&A session. To listen to the Q&A, simply remain on this webcast. To participate, please join by the audio link shared in our press release. As always, today's session will be recorded. An archived version will be published on our website. For further discussion after the call, please e-mail or call me directly. With that, let's get started with Jim's update. James Hagedorn: Good morning, everyone. Results count and ours speak for themselves. Through our first 6 months of the fiscal year, we continued on our growth trajectory and made progress toward every single one of our full year financial imperatives. This marks over 2 years of driving improved results and 4 years of hard choices, self-help and financial recovery. More importantly, we delivered 2 major accomplishments that are the final pieces of our journey. They include closing the quarter with leverage at 3.71x debt-to-EBITDA, the first time in 4 years that we're below 4x and the divestiture of Hawthorne. We're at the point where everything we've been working toward is coming together. Leverage is in a normal state where we're comfortable operating. Gross margin expansion is on track for our targets. Our mix strategy to focus on high-margin branded products is working. And free cash flow, EBITDA and EPS are all exceeding expectations. When you look at our total performance, here's where we find ourselves today. We continue to hone our superpowers and invest in strengthening our brands, R&D, supply chain and sales. We have substantial growth opportunities and are taking market share. Our retail relationships are stronger than ever. Our consumer is healthy and engaged. We have a proven and battle-tested leadership team. And we've lived up to all of our commitments. The real question is where do we go from here? First, we're ready to embark on the first tranche of the multiyear share repurchase program we announced last quarter and said would begin once leverage was comfortably in the 3s. We're there. The ultimate goal is to buy back at least 1/3 of our outstanding shares. It will be earnings accretive, won't add to our debt level and has 0 implementation risk. That's why it's the only significant M&A we're interested in. I've asked Mark to move forward with the repurchases in a way that can be easily modulated based on our results and capital allocation needs while maintaining leverage in the 3s. When you look at our accomplishments in total, it's clear we're one of the best consumer product franchises in America. It's just not showing up in our share price. And that's okay because it makes the timing of our share repurchase even more attractive. We don't think we're properly valued. And when you layer in our growth plans, were the type of investment that should appeal to anyone who wants to be part of a market leader with a lot of upside. There's a second answer to the what's next question and that involves moving to the next stage of growth. The 2030 target of an incremental $1 billion in top line sales, a gross margin rate approaching 40% and total EBITDA north of $1 billion. And this is where Nate comes in. He's created the building blocks to unlock this growth through a multiyear plan he calls SMG 2.0. Among the building blocks are channel and category expansion in conjunction with deep investments in our brands, innovation, marketing, advertising and supply chain. We think upwards of $800 million of top line sales growth under SMG 2.0 will be generated through e-commerce alone. We, like our brick-and-mortar retail partners are shifting more resources to activation initiatives and marketing approaches to drive consumer takeaway into this channel. I want to make it clear that legacy retailers will continue to play an important role as the incremental sales we are projecting will primarily come from POS through their online sites and our joint partnerships. To maximize our potential in this area, our product assortment must change to reflect the type of SKUs that are more conducive to selling online while addressing consumer unique needs. This is where much of the innovation work will focus. Nate is putting together a strong team that is future-oriented and can help us execute upon SMG 2.0. We're also expanding our capabilities with data and analytics for better insights and we're advancing the use of automation, technology and AI. Nate is strengthening our marketing function and our approach to business development and product assortment. In line with this, I have executive level news to share. We're announcing the hiring of a Chief Brand Officer to serve as Nate's partner in leading the brands and marketing. This is particularly important as we create new and more powerful consumer experiences. The person we've selected has agreed to start in June and we'll make a formal introduction in the coming weeks. The only reason I'm delaying the announcement is to allow our new Chief Brand Officer to work with his current organization on a transition plan. Here's what I can tell you today. He's a significant talent who has served in a leadership role at a global New York agency known for its innovative work in digital marketing, social media and emerging trends. He's a real talent who 100% understands the changing nature of marketing and where we need to go. We know him and he knows us. With his solid creative instinct and experience in brand media and campaign strategies, he will jump-start our marketing mission, especially as we move further into the online space. Another plus is he's passionate about Scotts Miracle-Gro and our category. With Chris Hagedorn coming off Hawthorne, he'll be able to devote more time to our core business, filling a real need for us. His [ remit ] will be expansive as he takes responsibility for some of the big things that are critical to SMG 2.0 and our growth targets. Chris will lead company strategy with focus on business development. He'll also work on product assortment to ensure we're giving consumers what they want and need in the online marketplace. Government relations, corporate communications and sustainability are within his purview as will be the strategic application of AI. All this plays into the SMG 2.0 playbook. As we look to the rest of the year, we're reaffirming our guidance and will not let commodities steer us off course despite global supply pressures from the Iran war. Most of our commodities are locked where we are exposed to higher costs, we can cover them within our existing budget and plans. Fiscal '27 is a bigger unknown. I can assure everyone we will control what we can control and take pricing in fiscal '27 if necessary. We will not sacrifice our gross margin goals. This point in time is the result of a righteous endeavor. We have worked our way out of 4 very tough years that were filled with hard work and many unpleasant choices. There were suffering along the way. But the management team, our associates and Board did what needed to be done and it worked. SMG 2.0 marks a new starting point for us, another journey that will take our business well into the future. Next up is Nate. Nate Baxter: Welcome, everyone. I want to start by thanking our associates for their hard work this past quarter. We are executing this year's operating plan with discipline and focus. Our first half performance reflects the impact of this work and demonstrates we're on a clear path to the 2030 targets that Jim outlined. I first want to provide clarity around SMG 2.0. It is grounded in 2 realities: the evolving consumer and the evolving retail environment. The face of our core consumer is changing as we move from baby boomers and Gen X to millennials and Gen Z. At the same time, how all consumers shop is shifting. They're in more control than ever. They increasingly buy online, through retailers, social platforms and direct-to-consumer channels. They want organics, naturals, and products that fit their lifestyles. They take recommendations from influencers and they become influencers themselves. Our retail partners are changing too, concentrating more on sell-through via their online sites. We are there with them. This is reflected in our double-digit e-com sales increase for multiple quarters. The marketplace is dynamic and there are more competitive pressures from digitally native startups with low barriers of entry to traditional CPG companies expanding their presence. The good news is there is more than enough opportunity for us. We have an incredible advantage with our superpowers and market position. Delivering on Jim's 2030 goals will require us to create a more rich lawn and garden experience for consumers. That's what SMG 2.0 is all about, transforming for future growth. Here are the building blocks. Innovation and SKU rationalization to optimize our portfolio, including moving with greater speed to bring new products to market, channel expansion, primarily e-commerce, but also in expanded retail partnerships and professional do-it-for-me space. Category growth by bringing emerging consumers in more demographic groups into our world, connecting them through new approaches to marketing, including positioning Scotts Miracle-Gro as a lifestyle brand. Operational efficiencies and savings to support margin expansion and ensure the best-in-class supply chain. Let me walk you through each of these, starting with innovation and SKU rationalization. We are realizing the benefits of a multiyear effort to optimize our portfolio through new products, including extensions into spaces where we have not played and the sunsetting of low-margin lines in favor of the higher-margin SKUs. The rationale is twofold. One, it supports top line sales and margin growth; and two, it makes room for new products that appeal to emerging consumers and are better suited to selling and shipping online. So far in fiscal '26, we've introduced 83 new product SKUs, accounting for $41 million in revenue. These range from K-31 grass seed and Turf Builder Liquid Lawn Food to Miracle-Gro Indoor Plant Food and small bag soils, and we have more innovation to come. We are also moving with speed. We brought the Ortho Mosquito and Flying insect traps to market within just 6 months. And Chris and his strategy team are targeting tuck-in M&A to help us fill other portfolio gaps quickly. On the SKU rationalization front, we have line of sight to eliminate 30% of our lowest-performing SKUs by next fiscal year. This will be margin accretive, while reducing complexity and providing better choices for consumers. Turning to channel expansion. E-commerce is clearly the growth engine. In partnership with our retailers, we have a team dedicated to maximizing POS through digital marketing and product assortments optimized for online. But brick-and-mortar is still important. We have product gaps here and are addressing them by strengthening partnerships with retailers across channels. Some of our new SKUs include bigger sizes suited to roll property owners with larger loans, for example. We're also exploring channel diversification through the do-it-for-me with the recent launch of a pilot program for small- and medium-sized professional lawn and garden service providers. It's early days, but we're seeing sales traction with fertilizers, grass seed and controls for larger coverage areas. The full season performance will gauge our future here. Our foray in the do-it-for-me reflects a start-up mentality we're instilling throughout the company. Move with speed, test the market, gather learnings and fail or succeed fast. This entrepreneurial spirit is part of the cultural shift we're making. Turning to category growth. We are attacking this through marketing and consumer activation efforts to engage emerging consumers and drive frequency of product use. We have campaigns this spring, specifically for Hispanic consumers, a key demographic group for us. These coincide with more product listings in Hispanic-centric retail stores. In Q2, we also launched an initiative with Bonnie Plants and Gardenuity to provide ready-made growing kits for people who are new to the category. These kids remove the barriers to gardening, simplify the process of growing and set new gardeners up for success. The goal is to convert them into lifelong garners. On this note, our live goods venture with Bonnie Plants is performing really well this season. They have focused on improved sell-through and quality and the results are starting to show. And finally, on operational effectiveness, we continue to invest in our business, mainly focusing on factory automation and technology implementation across the enterprise. We're pursuing a dual-track approach to AI transformation. On one hand, we're investing in the foundational work, building a modern data lake and implementing SAP S/4HANA is our next-gen enterprise resource planning system, because organized accurate data is the bedrock of any successful AI deployment. But we're not waiting for that foundation to be fully in place before we act. In parallel, we're reimagining core processes with an AI-first lens, embedding intelligence directly into how we operate. The data foundation and the AI transformation are advancing together each reinforcing the other. AI is already playing a role in back office and data insights as well as consumer experiences. To date, we're working on about 40 use cases of AI ranging from consumer chat and voice agents to automated content generation, intelligent product search and productivity tools. Beyond efficiency, AI is directly contributing to top line growth through optimized e-commerce performance and personalized consumer engagement while protecting the bottom line through cost avoidance in areas like data security and process automation. As an example, we've developed 3 commercials in this past quarter using AI, saving about $0.5 million in production costs. All our tech investments support our operational efficiency goals and have the potential to deliver significant savings. When you combine them with our investments in automation and other efficiencies, we are striving to deliver supply chain and savings of at least 1% annually. That equates to around $35 million in high-return cost savings each year contributing to gross margin improvement. We've covered a lot of ground. If you take anything away from today, it's this. Jim has set the financial targets and SMG 2.0 is our road map to achieve them. We are making progress on its building blocks, while at the same time, remaining highly focused on our fiscal '26 plan. We have many great things happening across our company and its go time for our teams. Everyone is rising to the occasion. Here's Mark with the financial details. Mark Scheiwer: Thank you, and hello, everyone. Jim and Nate provided an excellent update on our growth strategies and consistent progress towards our financial targets. We have early season momentum, and we've delivered on strong performance, further galvanizing our confidence in the full year outlook, supported by disciplined execution despite dynamic macro environment. While we're halfway through fiscal '26, I'll remind everyone that the first 6 months represent approximately 25% of our full year POS. The season is in front of us, and consumer sell-through remains the primary focus with increased investments in marketing, media and consumer activation now kicking into high gear. We're tracking to our targets for net sales growth, gross margin expansion and leverage reduction. As Jim previously explained, in moving towards the execution of the multiyear share repurchase program, I will be the gatekeeper and we will be mindful of maintaining leverage comfortably in the 3s. Looking at our results. You'll recall, we are excluding Hawthorne, having classified it as a discontinued operation last quarter and completing its divestiture in early April. In the second quarter, total company net sales increased 5% to $1.46 billion. For the first 6 months, net sales increased 3% to $1.81 billion, in line with our full year net sales guidance of low single digits in our U.S. consumer business. Our focus on higher-margin branded products is meeting expectations. Sales of branded products through the first half increased 8%, partially offset by expected declines in mulch and nonbranded product sales. We discussed in previous calls that we expected retailers to increase purchases as we drew closer to the POS consumer sales curve. This has played out in the second quarter. The increase in shipments to retailers is attributable to 3 factors: one, strong, seasonal and retailer support of our branded products initiative, including year-over-year growth in branded soils and grass seed; two, an increase in early season fertilizer sales compared to the second quarter of fiscal '25. Last year, through joint consumer activation efforts, reinforcing our multi-bag purchases, our retail partners experienced strong demand and sell-through of our fertilizer products. This year, our customers are doubling down in anticipation of a stronger spring performance. and three, early replenishment orders related to higher-than-expected POS sell-through of controls products due to more favorable weather conditions in the West, one of our early season markets. From a regional perspective, consumer takeaway was strongest in the West, where POS dollars were up nearly 15% from the previous year-to-date. As a reminder, beginning in the last quarter, we expanded our POS data to include our 15 largest customers, including e-commerce and only for branded products, excluding mulch, private label and commodity items. Taking a closer look at consumer engagement through the first 6 months, POS dollars were plus 4%, closely mirroring our total net sales growth. That was driven by fertilizers, plant food, Ortho and Roundup, coupled with consistent e-commerce growth. E-commerce POS trends continue to demonstrate the effectiveness of our channel expansion. Year-to-date e-comm POS dollars were up 22% with growth in every category and customer. Gross margin continues to be a strong story. Year-to-date, we delivered over 200 basis point improvement over prior year driven by favorable mix and sales of higher-margin branded products, along with supply chain savings from ongoing efficiencies. Pricing actions early in the year also contributed. In the quarter, the GAAP and non-GAAP gross margin rate was 41.8%, a 280 basis point improvement and a 240 basis point improvement, respectively, over prior year. For the first 6 months, the GAAP gross margin rate was 38.5%, a 260 basis point improvement and the non-GAAP adjusted gross margin rate was 38.6%, up 230 basis points from a year ago. As it relates to potential headwinds from the Iran war, for our full fiscal year, most of our cost of goods sold are locked as we have purchased produced and hedged a significant portion and are enacting contingency plans to minimize further impacts in the year. Moving down the P&L. SG&A in the quarter increased 12% and to $199.2 million compared with $177.8 million in the prior year quarter. Year-to-date, SG&A is up 5% from $291.3 million to $305.1 million. The increase in SG&A was expected and reflects our increased media and marketing spend to drive consumer takeaway of our branded products. SG&A spend is on track to our full year target of around 17% to 18% of sales. Moving to non-GAAP adjusted EBITDA. For the quarter, it was $437.4 million versus $401.6 million a year ago. Year-to-date, it was $440.2 million, a nearly $38 million improvement over $402.5 million in the corresponding period. Below the line, interest expense declined from lower debt balances and interest rates. For the quarter, interest expense was $31.3 million compared with $36.6 million in fiscal '25. For the first 6 months, interest expense was $58.5 million versus $70.5 million in fiscal '25. We leverage at 3.71x an improvement of 0.7x versus a year ago was a result of higher EBITDA and continued deployment of free cash flow to debt reduction. Year-to-date, free cash flow was favorable by more than $100 million over prior year from higher net income from continuing operations and our focus on working capital management and disciplined inventory management. Our current year plans and execution are driving improvement on the bottom line. For the quarter, GAAP net income from continuing operations was $263.3 million or $4.46 per share compared with $220.7 million or $3.78 per share a year ago. Adjusted non-GAAP net income from continuing operations in the quarter was $267.8 million or $4.53 per share versus $233.7 million or $4 per share last year. For the first 6 months, GAAP net income from continuing operations was $215.6 million or $3.65 per share compared with $154.7 million or $2.64 per share a year ago. And adjusted non-GAAP net income from continuing operations was $223.3 million or $3.78 per share versus $183.5 million or $3.13 per share in prior year. Looking ahead to fiscal '27, commodities are a primary focus. Given the volatility of the Iran war, it is too early to estimate with certainty what we might face next year. but we expect to manage any impacts while continuing to invest in our superpowers and advance our growth initiatives. Jim talked about our confidence to cover material cost increases with pricing adjustments which would be consistent with how we've navigated the high inflationary period of fiscal '22 and '23 in the early stages of the war in Ukraine. Nate and his team are also driving supply chain savings and working on sourcing contingencies to ensure we have optionality heading into fiscal '27. As always, we will develop hedging strategies to provide more cost certainty. Overall, we are pleased with our performance as we enter the peak lawn and garden season. We are reaffirming our fiscal '26 guidance and have a high degree of optimism for the long-term financial goals. In early June, we will provide a seasonal update at our William Blair Annual Growth Stock Conference in Chicago, and we will follow that up with a deeper dive into SMG 2.0 and our financial priorities at our Investor Day on August 4 at the New York Stock Exchange. Here's the operator. Operator: [Operator Instructions] And our first question comes from Jon Andersen of William Blair. Jon Andersen: Two quick questions for you. Could you talk a little bit about what you're seeing in terms of the kind of the I guess, the restage on the lawns business and fertilizer and how some of that -- I know you've done some work on the assortment and pricing structure and how that's performing. And then I know another part of your strategy is to really drive deeper into e-com and would love an update on that as well. And maybe a last point is just -- was there any kind of -- anything unique in the quarter from a shipment perspective and retail inventory level perspective that we need to consider as we think about fiscal third quarter results? Nate Baxter: All right. Jon, this is Nate. I'll start. I'll start with the bottom. So shipments remain strong. Obviously, through Q2, they were strong and they remained strong for the first part of Q3. So not seeing any issues there. I'm not concerned about inventory levels. Slightly elevated versus this time last year, but I think supports the bullishness of the retailers and us on the category. On e-com, I'm really happy with where we are. We're up double digits. We've gained both market share and are seeing a real adoption of some of the innovation because we brought a lot of that to market through e-com-first, and we'll talk more about that at Investor Day, but I'm pleased with our progress so far. For Lawns, I'm going to let John Sass, our GM of lawns, just comment because I think that's probably the most important point that you asked. So John? John Sass: Yes, Jon, great question. I think our lawns business, we talked about it a lot in the past 1.5 years here, what -- we are transitioning from a product program to a portfolio and really selling a 4-step type of solution for consumers. The first phase of that was last year when we adjusted media plans and our promotional plans, which we had a great response from consumers and our retail partners. And this year is the rollout of the product piece of that. So this year, we just introduced a new Turf Builder Lawn Food product that's for kids and pets. It's a great solution that is now showing up in retailer stores right now. And our adjustment to our media and advertising continues. So we're really enhancing and showcasing the 4 feedings a year, really getting consumers back into a program that will give them a great lawn solution. So I would say the early part of the season, we're step 1 through the program. We're seeing another sell-through of our Halts, our first step in the program over 20%, which is a great sort of first indicator for us going into the season. And now we go into the weed and feed part of the season. So off to a great start, a great continuation from last year. James Hagedorn: I might just throw in, Nate, [ that Davitt ]. Where we had the biggest gap in share is really controlled on the online business on e-com. So you want to talk a little bit about what you're seeing with Ortho? Mike Davitt: This is Mike Davitt. When you start to think of the Ortho business, how consumers are searching for controls product has changed over the last few years. Obviously, we have a ton of products that sell multiple solutions. Consumers are moving to specifics. If you look at the portfolio we launched with mosquito, with ant, and with specific weed products, we're giving consumers new solutions that they're looking for. So as Nate talked about this next generation of consumer, we're doing it in dot-com first. Nate Baxter: Yes. And it's across all our categories, we have a lot of room to grow with market share. Controls is the biggest opportunity for [ sure ]. Operator: Our next question comes from Peter Grom of UBS. Peter Grom: Great. So I wanted to ask on SMG 2.0. And I think the commentary was helpful, but I wanted to dig into the $1 billion sales target and gross margin approaching 40%. My guess is we'll get more color in August, but how should we think about building to these targets? Is it linear because that you'd expect kind of equal contributions to the top line and margin expansion over the next several years? Is it more back-half weighted? Not trying to get fiscal '27 guidance, but I'm just kind of curious how quickly some of these actions can begin to show in the P&L. Nate Baxter: Yes. So you're right, Peter. We'll certainly get into much more detail as we go to Investor Day. I would say right now, I would just look at it as linear. I don't think it will play out that way. But our focus clearly is the biggest piece of the pie to go get is e-com. So Jim talked about it in his prepared remarks. This is an area that Chris is going to focus on with product assortment. Tuck-in M&A. But we have strength in other categories, whether it's expanded programs with our retailers as well as focus on Hispanic. So I would say it's early days. We'll lay out a year-by-year road map for you when we get to the August meeting. But from my point of view, I'm really comfortable. Remember, [ the nettability ] and we're obviously overshooting. And again, we'll get into that detail during Investor Day. James Hagedorn: But I would -- Hagedorn here. What I would throw in there is just getting share equal to what we have in sort of big box retailers. That's the vast majority of this. So this is one where just getting our share online up will give Nate most of what he needs to get that $1 billion. Peter Grom: Understood. That's really helpful guys. And then I guess just a quick follow-up on the gross margin for this year. Obviously, really strong performance. It seems like the mix benefit from the branded products emphasis is really showing through. And I don't think that was originally contemplated in kind of the gross margin [ of plus 32% ] or what have you. So can you maybe just speak to maybe what we've seen year-to-date how is it progressing versus what you were anticipating? And then as you think about reiterating the outlook, is that simply conservatism or are there certain headwinds that we need to contemplate in 3Q and 4Q? James Hagedorn: Listen, you guys are constantly thinking like there's some trickier or something. Look, I would say it's good, it's happening, right? I mean, so it's a positive. Nate and I were dealing with -- and this was a big factor in last year's calls about private label and are you guys losing out on private label. I think you guys are aware that with a couple of giant customers, we basically said, we don't care about the mulch business, take it, okay? But when we take it, we're taking our promotional money with us. And if you want that promotional money, then put it into our branded business. So to the extent that you guys were kind of living it live with us last year, and I think some people were criticizing us for it. [indiscernible] was a vulnerability. We took the marketing money and said, if you want the marketing money, you're going to put it behind branded, and they did, okay? And so to some extent, a little bit of a surprise because some of the strategy, Nate and I were figuring out on the airplane to go visit some customers and deliver like a sort of hard line which we're not negotiating on this. And so I think the result, to some extent, is choices we made not as well planned as you thought, but it was basically saying we're not going to lose money on this stuff. And if you find somebody who can make it cheaper, God bless, but all that money that's going into marketing it, that stays with us unless you want to redeploy it. And so I think that has worked out really well for us. Nate Baxter: Yes. It is those 2 things. It's mix and supply chain and as always, I'm very proud of our supply chain organization and they can continue to deliver and even over-deliver. Jim is right on the mix stuff. If you look at our POS year-to-date, we're ahead in dollars versus units. That reflects -- we're doing less heavily discounted units. We said we were going to walk away from that. We leaned into the branded. So I think that just performed a little better than we expected, and we're happy with that. James Hagedorn: [indiscernible] you might as well get finance guy in there because we're talking gross margin and how you feel that. Mark Scheiwer: Yes, no problem. So I think Nate said it best as far as the overperformance year-to-date on some of the branded products in the mix. So I think from an expectation standpoint, I think for the first half, we did see some of that. That gives us confidence as we wrap up the back half of the year, which, I mean, we all know that there will be some level of commodity inflation in the back half of the year that we navigate -- but we definitely feel like we can deliver on the 32% gross margin guide with additional supply chain efficiencies coming in for the back half of the year as well. James Hagedorn: We're learning like, I don't know, you guys could probably criticize and say, this you have to learn. But if you look at like the Halts business, the Halts business was a business that I'm not saying with some decline, it probably was. But we weren't putting anything behind it. And a couple of years ago, we started putting like some radio in it and got like crazy good results. So we started to invest behind Halts. And the numbers are phenomenal. And there's these giant benefit of this, not only are we selling more. But the more we sell, it's the kind of product they have return privileges on. The more you sell, so you're selling out and you're not dealing with returns on it, it's just a very virtuous thing for us. And so I think we're also learning that advertising, marketing activation works. And so that's also helping our margins at and our mix. Mark Scheiwer: and the only other thing, Peter, I'll just bring up. I think in the Q1 call, we talked about a shift in sales from first half to second half. I don't know if we're fully seeing that. So that's part of the overperformance as well. Peter Grom: Awesome. Yes, I never want to be tricked, Jim. So I appreciate all the color, guys. James Hagedorn: I just think you guys asked like somehow is like we're kind of pulling the will of your eye said, no, not at all. It's just sometimes where as surprised as you are, like... Operator: Our next question comes from Jonathan Matuszewski of Jefferies. Jonathan Matuszewski: My first one was for you, Mark. And just if you could remind us of the historical quarterly sequencing in terms of how you secure raw materials for the upcoming fiscal year? And just how we should think about maybe the current prices of raw materials, is that leading you to think about deviating from what you lock in during a fiscal 2Q or this year versus history? Any color there? That would be my first question. Mark Scheiwer: So I'll take a stab, and I'll let Nate jump in as well. Generally, I would just say what you see in our P&L is stuff that was purchased most likely 6 to 9 months previously. We have really great suppliers, really reliable sources and so we can leverage our superpower. So just as that as a backdrop. As we look to '27, really this summer becomes an important part of just working with our suppliers on our plans for next year and our customers. This year is kind of unique, right? Obviously, with the Iran conflict, we're dealing with elevated commodity prices. So I think our approach this year is a little more of a wait-and-see approach. There are areas where we will start to buy for '27 and lock in supply. That will start to happen over the next several months. But really, the summer months here, I would say, will really begin to shore up some of those activities. But again, I just go back around 6 to 9 months is kind of the tail as we navigate that. Nate Baxter: Yes. And I think, Jonathan, it's Nate. I'll just -- urea specifically, we have flexibility. What I would say is we're going to delay purchases a bit this year relative to how we've done it in the past. And we've got the flexibility in our Marysville chem plant to do that. So we've not put production for next year at risk. And I think Jim said it well, we just don't know what we don't know, but we've got a great team that's focused on it and we'll manage and we're committed to our margin walk, and we're committed to taking pricing if we have to. So we'll talk more about '27 as we know more. It's a little early for us, but we're definitely thinking through all the scenarios. James Hagedorn: Look, I think as the ore has sort of carried on and we've seen whether it's resins, diesel, urea, all of the sort of big commodities for us. I think, first of all, the purchasing team has done a terrific job like reducing the risk for this year. And I think Nate has been pushing to sort of understand '27 better. I just think that this is one of those things while some of the stuff we just have to manufacture, and we'll get -- it will end up on the balance sheet and inventory. A lot of our purchasing decisions, I think can get much better if the resolves itself. And so the thing that I would like to make sure that everybody on this call is aware we are not going to sacrifice our margin goals with this idea that by accepting dilution in our margins is somehow okay. Any costs we're seeing, there's not a single country -- company in America that's not dealing with this stuff. And I'm I am not concerned or shy about saying that where we're headed on margins, if we have to use pricing, everybody else will be as well. And so that -- if I was talking to my family like right now, I would say we're not going to give up our goals for our plan because somehow we think we're doing the right thing for the consumer. The consumer -- it could be that, right, for the consumer. But the good news for us is we know when things are bad to the consumer, people garden. They're not -- travel as much. They haven't got the dinner as much, but they stay home and they take care of their home and their yard and garden and spend time there. So this is something where if it's bad for the consumer, I also think we'll see goodness in commodities if the economy starts to get a little wobbly. And so my encouragement to date is just to try to stay loose as you can. This is not [ that '27, it's ] not an issue on commodities. We're not going to eat it. But trying to get too far ahead of it and worry about it, I think, is not the issue. As long as we say, we're going to take pricing to cover the costs. Nate Baxter: Correct. And remember, we play in a really broad set of categories within lawn and garden. And the commodities we've just been talking about are limited to a certain segment of those. Mark Scheiwer: Yes. Jonathan, for perspective urea, for example, less than 10% of our cost of goods sold. So it's like mid-single digits. So to Nate's point, we've got a broad portfolio. Jonathan Matuszewski: Right. And then just a quick follow-up on in-store merchandising. Looks like RONA recently rolled out 100 dedicated Shop in Shops for your brand ahead of spring. Maybe just speak to any productivity boost you may have seen from initial pilots that led to this rollout? And how you think about the opportunity to replicate something similar in key U.S. retail distribution partners? Nate Baxter: No problem. Well, listen, I'm just going to say, I think it's a little early to really quantify the results from that. But again, in the spirit of retail partnerships, that's an important one. You'll see us do more with other retailers, including in the U.S., not necessarily all rolling out this year, but over time, whether it's digital or physical like we're seeing at RONA. I think that just speaks to the nature of where we need to go from a consumer activation standpoint, and we'll be happy to talk more about that test with RONA when we see you in August. I think we'll have more data then. Operator: And our next question comes from Joseph Altobello of Raymond James. Joseph Altobello: I guess I'll stay on the pricing subject. But Jim, I think you your thinking on pricing seems to have evolved over the years. There was a time when you were on hesitant to do it, but now you feel like it seems like you're more comfortable? And I know the situation is volatile, but if nothing were to change on the cost side. Would you view the pricing that you'll need to take next year as manageable from the consumer's perspective? James Hagedorn: I was going to say 100%, but that's probably unsafe. But yes, absolutely feel -- look, we -- Nate and I were down at a big retailer last year, and they were dealing with all the tariff issues like huge -- and I think we were down there for like a couple of percent. And I said, seriously guys, like with all the trouble you have, you're worried about a couple of percent from us? No, I -- yes, I think that the damage we do to this company by not staying on top of our margins is way worse than people who are buying a product once or twice a year in an environment where they're seeing pricing like this. In fact, I think we're probably pretty shy compared to a lot of stuff that people buy. So yes, I guess it has evolved. But I do think that where we're going with SMG 2.0, that is in part, Nate's promotion is based on the results here. And so I am a big time encouraging him to get it done. The share repurchases like I kind of meant what I said, which is I think this is a fabulous opportunity. And I think last year, for those of us who had the sport of being on these calls, there was a lot of frustration on with me on good results that didn't get reflected in the share price. I think my view right now is we'll buy our own shares back. And so the more money that Nate can create faster and deeper, we can buy shares back at a price that I think is attractive. And the Board does as well. So that's kind of where I'm at. And so I think being less comfortable with pricing puts a lot of that stuff at risk. Nate Baxter: And John, I'll just -- sorry, Joe, I'll just add. Remember, I'm looking at this to the lens of a 5-plus year strategy, right? So certainly didn't anticipate 2 months ago what was happening in the Middle East. But like everything else, we've been through this, right? We've seen $900 to $1,000 a ton urea in the past. We've managed through it. We've taken pricing -- to Jim's point, I'm keeping my eye on the long ball, which is a commitment to be a branded-first company with a very, very strong gross margin profile. Joseph Altobello: Very helpful. And just to shift gears a little bit to this e-commerce shift, if you will. How does it impact your margin structure, does it require any investment on your part? Is it required more or less working capital. How does it change your business model, I guess? Nate Baxter: So I mean, it obviously affects all of those. I mean not so much on the working capital, but certainly investing in the people to come in and help us drive e-com with that experience to drive product development, again, is going to pick up a big piece of this. There is a margin delta, but on a like-for-like between brick-and-mortar and e-comm today, and that's something that we'll continue to chip away at by bringing innovation and then bringing costs down on the back end of it. So there's a target, there's a challenge. I'm not particularly worried about it. It's a few hundred basis points delta. And we're putting teams and plans in place to manage that for the long term. James Hagedorn: And Joe, what we're talking about leveraging our retail partners. So we're not going to be doing direct-to-consumer like all across the country where we'll have to build out a massive network and stuff from a cost in perspective. So we leverage our customers through that process. Listen Joe, personally, I think it's really exciting. And we had a Board meeting last week, Thursday and Friday, and at the dinner, I got onto sort of the [ sofas ] which [ as CEO, you can do at a Board ] dinner and just talk about not participating is suicide for us. So this is not something that we really have a choice in. We're underpenetrated. There's all kinds of opportunity. the retailers from our existing brick-and-mortar to other retailers are incredibly enthusiastic and want to play; so they see the opportunity as well that they are underpenetrated in longer garden. And a lot of -- remember, 80% of the volume we're talking about is with our existing retailers. And so it's not like we have a choice. I do think that it's a little bit more expensive to operate. And I think Nate and team will deal with that. But if you [ say to ] yourself, it is not optional, but not playing in the sort of dot-com space works, it just doesn't. And so we've got to figure it out. And I think we have a lot of opportunity there. And if margin is sort of the issue and a lot of new products are going to have to happen in that when people are buying online to make it more convenient to make it ship better because consumers want more choice. This is an opportunity for in the design process to sort of build margin in. Nate Baxter: Yes. And I'll just put a pin in this by saying as we talk about product assortment, we recognize the need for differentiation in these channels and among retailers. And so when I talk about SKU rationalization and innovation, just keep in mind it contemplates that. Operator: And our next question comes from Chris Carey of Wells Fargo Securities. Christopher Carey: I know this is asked. So I apologize for coming back to It. But we're continuing to get a lot of questions around inflation curve, I guess, if you will, into fiscal '27. I know that you're going to be strategic, as you had mentioned already on the call about locking in for exposure, you would look at pricing. I realize urea, as an example, is quite seasonal through the summer. Can you -- at what point is it that you have to kind of make decisions either on locking the current costs or you need to start having those discussions with retailers? And clearly, you have some momentum in fiscal '26. You've put strong investments into market. Does that give you a bit more ability to take pricing, justified pricing if indeed, you see that inflation proved to be a bit stickier into fiscal '27 such that you can continue to achieve the margin targets that you set out there. I just wanted to drill in a bit more on that. James Hagedorn: Well, first, I think it's a good question, okay. I'm not sure what the guys are going to answer on this. I would say that merchandising decisions, we probably got 3 months. I'm looking at sales right now. to he's putting up. So I think that you're probably talking 8 to 12 weeks where these decisions need to be made. So I think that sort of frames your question, which is when do you have to get on top of this? Nate Baxter: No, I was going to say Q3, our fiscal Q3, Chris, that's exactly when we have to make all these decisions. And like I said, the team has done a great job. We understand the dynamics as they are today. We've done a lot of scenario planning, including some simulations. And it will all come together where we have to go sit and talk to retailers for line reviews, and we'll have those discussions with them. And we're always transparent with our retailers about what we're trying to bring to the table. James Hagedorn: Because you're going to see that -- like what happens is as the finance people start working with the operating team to develop numbers for next year, they're going to start putting standards in for what stuff is going to cost. It's got to be relatively certain within that time frame that the standards are going to be higher than where they are today. Nate Baxter: Absolutely. James Hagedorn: So I think this sort of drives you that I think pricing is going to have to be a tool in the quiver this year, and we've got to just agree to that. And if we do see prices down that make for opportunity, if retailers are listening to this, we can probably find ways to get money back if it turns out our costs go down. But I do think pricing is going to be something that has to be used this coming year. I don't want people focusing on next year this year because I think navigating this year is what's important to us. If you look at the results, it's going really well. I think purchasing has sort of minimized sort of pain. I would say, and this -- I had this conversation with the Board. It is a little bit unfortunate. I think we've talked about sort of headwinds that are entirely manageable, which are built as of this year, it just sucks for the managers of the company who are paid on results that we're seeing incentives being eaten up. I tried using what the Board force majeure. I think they were somewhat vulnerable to it, which is the ability of like -- the management team is doing a great job in managing this really well. It just kind of sucks that something that's beyond our control is eating into upside for this year. The good news is we have it covered. And that's what I want people focusing on now. It's pretty soon, we're going to have to start focusing on next year. And I think we've kind of answered that question. Operator: And our next question comes from William Reuter of Bank of America. William Reuter: I have two, which I think will be fairly quick. The first is you mentioned price increases Were these the price increases that were taken kind of in normal line review timing? Or were there additional price increases taken, I guess, maybe at the beginning of the second quarter or end of the first? Nate Baxter: We haven't taken any additional pricing since establishing with the retailers last [ quarter ]. James Hagedorn: I mean we talked about it. Should we put a surcharge on for fuel. I think the issue we got into, to be fair, is probably half of what gets picked up from our plants. Retailers are picking up. And we just figured we get into pricing on a fuel surcharge, they're going to say, well, cool, like we're picking stuff up, you should give us a surcharge. And I think we just basically said we got this manageable. So I think again, for retailers who are listening, we were calm this year in spite of the fact that we had pretty significant increases. But remember, we had a lot of hedges in our diesel. So I think -- we make money on those hedges. Yes. This will be typical line review pricing we're talking about coming up here in the summer months. Nate Baxter: It would be pretty distractive to change pricing in the middle of the load and with retailers. So obviously, try to avoid that all costs. James Hagedorn: We've done it before, but it's been an emergency. William Reuter: Got it. And then, Jim, clearly, you're very focused on the share repurchases as an investment. How should we think about what the leverage profile is going to look like over the next handful of years? Should we assume that more or less, you're going to keep leverage where you are now and that share repurchases will just be at an amount that will kind of keep us where we are today? James Hagedorn: Yes. I mean that's what I would say. We've talked at the Board level. I know Mark has a point of view I think Mark would probably like to be closer to 3.5%. I -- we said in the 3s, I think notionally, 3.75% is a find enough place. Remember, this is one where we can't get all screwed up here because all we got to do is like take our foot off the gas pedal. And what I've told Mark in his gatekeeper role is that in the Air Force, when you're in an air combat situations, anybody can call knock it off. And the fight stops, everybody says what just happened. And Mark has knock it off rights here. And I think that's appropriate as our Head of Finance. And so -- and we'll all respect that. But I'm saying I'm pretty comfortable where we are. and he might like a quarter turn difference. I would just make the sort of argument that to be at, let's say, 3x for maybe even less that basically puts it off another year. And I'm not really willing to do that. We talked about the board. I got support at the board level to do this. Mark, I think is cool he cares about his knock at off rights, and I'm happy for that. So I think the answer is yes. Operator: This concludes our question-and-answer session and also today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good day, and welcome to the Prosperity Bancshares First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche, Executive Vice President and General Counsel. Please go ahead, ma'am. Charlotte Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares First Quarter 2026 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I'm Charlotte Rasche, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Senior Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. Also joining us this morning are Bob Franklin, Chief Executive Officer of Stellar Bancorp; Ray Vitulli, President of Stellar Bancorp; and Paul Egge, Chief Financial Officer of Stellar. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics; and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman. David Zalman: Thank you, Charlotte. I would like to welcome and thank everyone listening to our first quarter 2026 conference call. The first quarter of 2026 was impactful for the company, and I'm excited to announce that during the quarter, we completed the merger of American Bank Holding Corporation on January 1, 2026, and completed the merger of Southwest Bancshares, Inc. on February 1, 2026, and announced the merger of Stellar Bancorp on January 28, 2026, for which we have now received all necessary regulatory approvals and expect to complete on July 1, 2026. Additionally, we completed a core system conversion in February. We and others believe that Prosperity is doing the right thing. Prosperity has been ranked as one of Forbes America's Best Banks for 2026. And since the list's inception in 2010, was ranked in the top 10 for 14 consecutive years. Prosperity has also been recognized by Newsweek as one of America's Best Regional Banks and was ranked 15th in the S&P Global Market Intelligence top 50 U.S. public bank rankings for 2025. In an effort to continue to enhance shareholder value, Prosperity Bancshares repurchased approximately 837,000 shares of its common stock at an average weighted price of $68.15 a share for a total of $57 million during the 3 months ending March 31, 2026. Our net income was $116 million for 3 months ending March 31, 2026, compared with $130 million for the same period in 2025. The net income per diluted common share was $1.16 for 3 months ending March 31, 2026, compared to $1.37 for the same period in 2025. During the first quarter of 2026, Prosperity incurred merger-related expenses from the mergers with American and Southwest of $42.5 million or $0.34 per diluted common share. Excluding these charges, the net income was $149.9 million and net income per diluted common share was $1.50 for the first quarter of 2026. This represents a 9.5% increase over the $1.37 reported for the same period in 2025. Our loans were $25.2 billion at March 31, 2026, an increase of $3.3 billion or 15.1% compared with $21.9 billion at March 31, 2025. The linked quarter loans increased to $3.4 billion or 16% from $21.8 billion at December 31, 2025. Loans increased primarily due to the mergers with American and Southwest. Excluding the loan increases due to the mergers and excluding the impact of the net charge-off, total loans decreased 1.2% or about 4.8% annually, that did include about $100 million plus in warehouse lending increase. So excluding that, the decrease would have been somewhat more. The deposits were $32.6 billion at March 31, 2026, an increase of $4.6 billion or 16.4% compared with $28 billion at March 31, 2025. Our linked quarter deposits increased $4.1 billion or 14.6% from $28.4 billion at December 31, 2025. Deposits increased primarily due to the mergers. Excluding the deposits acquired from American and Southwest, our core deposits increased about 1.2% and public fund deposits experienced its normal seasonal decrease. Prosperity has strong noninterest-bearing deposits of 32.4% of the total deposits as of March 31, 2026, with a cost of funds of 1.45% and a cost of deposits of 1.32% compared with 1.38% for the same period last year. Our net interest margin on a tax equivalent basis was 3.51% for 3 months ending March 31, 2026, compared with 3.3% for the 3 months ending December 31, 2025. Obviously, the net interest margin was affected by the mergers but it was also impacted by the repricing of assets as we predicted and mentioned during previous calls. Our asset quality, our nonperforming assets totaled $122 million or 33 basis points of quarterly average interest-earning assets as of March 31, 2026, compared with $150 million or 46 basis points of quarterly average interest-earning assets at December 31, 2025. The allowance for credit losses on loans and off-balance sheet credit exposure was $421 million at March 31, 2026, compared with $386 million at March 31, 2025. The allowance for credit losses on loans increased during the first quarter of 2026 due to the mergers of which $47 million was attributable to the American merger and $43 million was attributable to the Southwest merger. Excluding Warehouse Purchase Program loans, the allowance for credit losses on loans to total loans was 1.61% at March 31, 2026, and that's compared with 1.67% at March 31, 2025. Our quarterly net charge-offs were $41 million, the largest amount in our bank's history. This has mitigated somewhat by the total being comprised primarily of two credits both of which were unique in nature and we believe do not represent a trend in the potential future losses. This is evidenced by the lack of any material additions to nonperforming loans in quarter 1, 2026, and only two nonperforming relationships of more than $10 million. Both charged-off credits were generated out of our Dallas office. Both loans were shared national credits. However, both were initially originated and syndicated by us before the loans were moved to much larger banks that were willing to provide modified loan structures that we were not. The larger charge-off of approximately $30 million was to a start-up insurance company. Once that loan was moved and syndicated, Prosperity purchased a percentage of that loan back, although it was a smaller exposure than we previously had. While the borrower had allegedly a strong sponsor that is well known in the industry with the history of backing its investments, it failed to do so this time. The smaller charge-off with a customer who legacy banked for over 15 years and is reflective that in lending money, sometimes things just don't work out. With regard to acquisitions, as previously mentioned, the merger of American Bank Holding Company was completed on January 1, 2026, and the operational integration is scheduled for September 2026, and the merger of Southwest Bancshares was completed on February 1, 2026, and the operational integration is scheduled for November of 2026. We are fortunate to have American and Southwest associates on the Prosperity team. We are excited about our pending merger with Stellar Bancorp and expect to complete the transaction on July 1, 2026. While we continue to have conversations with other bankers regarding potential acquisition opportunities, we remain focused on the completion of the Stellar merger and the integration of all three transactions. Texas and Oklahoma continue to benefit from strong economies and are home to 57 Fortune 500 headquartered companies. Texas also benefits from diversification in various industries, including energy, oil, gas, renewables, technology, manufacturing, trade logistics, major ports health care and finance. Further, it's business-friendly environment, no state income tax, population growth that supports spending and workforce expansion and key role in trade and cross-border commerce positions Texas well for 2026 and the future. While Texas continues to outperform the U.S. on output growth, the labor market has cooled noticeably after years of rapid expansion. The growth in 2026 is expected to be steady, although the state's size, diversity and policy advantages position it well for a rebound. Overall, I would like to thank all of our associates for helping create the success we have had. We have a strong team and a deep bench at Prosperity and will continue to work hard to keep our customers and associates succeed and to increase shareholder value. Thanks again for your support of our company. Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek? Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended March 31, 2026, was $321.2 million, an increase of $55.8 million compared to $265.4 million for the same period in 2025, and increase of $46.2 million compared to $275 million for the quarter ended December 31, 2025. The net interest margin on a tax equivalent basis was 3.51% for the 3 months ended March 31, 2026, an increase of 37 basis points compared to 3.14% for the same period in 2025, and increase of 21 basis points compared to 3.3% for the quarter ended December 31, 2025. Excluding for accounting adjustments, the net interest margin for the 3 months ended March 31, 2026, was 3.44% compared to 3.1% for the same period in 2025 and 3.26% for the quarter ended December 31, 2025. The increase in net interest income and net interest margin during the first quarter 2026 is primarily due to repricing of earning assets and addition of American Bank and Texas Partners banks during this period. The fair value loan income for the first quarter 2026 was $3.7 million compared to $3.1 million for the fourth quarter of 2025. The fair value loan income for the second quarter of 2026 is expected to be in the range of $3 million to $4 million. Noninterest income was $46.5 million for the 3 months ended March 31, 2026, compared to $42.8 million for the quarter ended December 31, 2025, and $41.3 million for the same period in 2025. Noninterest expense was $217.3 million for the 3 months ended March 31, 2026, compared to $138.7 million for the quarter ended December 31, 2025, and $140.3 million for the same period in 2025. The linked quarter increase was primarily due to merger-related expenses of $42.5 million and the addition of American Bank and Texas Partners Bank during this period. For the second quarter of 2026, we expect noninterest expense to be in the range of $176 million to $180 million. This projection does not include additional onetime merger expenses for the quarter. The efficiency ratio was 59.2% for the 3 months ended March 31, 2026, compared to 43.7% for quarter ended December 31, 2025, and 45.7% for the same period in 2025. Excluding merger-related expenses, the efficiency ratio was 47.6% for the 3 months ended March 31, 2026. The bond portfolio metrics at 3/31/2026 have a modified duration of 3.8 and projected annual cash flows of approximately $2.1 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loan and asset quality. H. E. Timanus: Thank you, Asylbek. Nonperforming assets at quarter end March 31, 2026, totaled $122.107 million or 48 basis points of loans and other real estate compared to $150.842 million or 69 basis points at December 31, 2025. Since March 31, 2026, $7.936 million of nonperforming assets have been removed or put under contract for sale. For March 31, 2026, nonperforming asset total was made up of $108.714 million in loans, $136,000 in repossessed assets and $13.257 million in other real estate. Net charge-offs for the 3 months ended March 31, 2026, were $41.309 million compared to net charge-offs of $5.884 million for the quarter ended December 31, 2025. There was no provision to the allowance for credit losses during the quarter ended March 31, 2026. But $91.4 million total was added via the mergers with American Bank and Texas Partners bank. No dollars were taken into income from the allowance during the quarter ended March 31, 2026. The average monthly new loan production for the quarter ended March 31, 2026, was $312 million compared to $314 million for the quarter ended December 31, 2025. Loans outstanding at March 31, 2026, were approximately $25.288 billion, compared to $21.805 billion at December 31, 2025. The March 31, 2026, loan total is made up of 38% fixed-rate loans, 28% floating rate loans and 34% variable rate loans. I will now turn it over to Charlotte Rasche. Charlotte Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator, Nick, will assist us with questions. Operator: [Operator Instructions] The first question will come from Catherine Mealor with KBW. Catherine Mealor: I wanted to first to start out on the NIM guidance. It was great to see the NIM move higher. I know part of this was just the addition of these 2 acquisitions. But interested if you could just help us think about how you're thinking about the margin moving forward next quarter and then once you add in Stellar. And then maybe is there anything within the margin this quarter that felt onetime in nature, either some kind of onetime loan payments or anything like that, that we should be aware of that we should be rolling forward to next quarter? Asylbek Osmonov: I'll answer, Catherine. So we are pleased with our margin expansion this quarter. it was, like I mentioned, contributed from our asset repricing during the first quarter and addition of 2 banks to help us with the increase in the margin. But if you look at our rate track model, and it's like based on the static balance sheet, looking for the second quarter, we see that our projected margin for second quarter will be flat and a little slightly higher than the first quarter. And the reason is that there was like -- there was several factors that impact in Q1. We saw continued repricing of earning assets, but we also had -- we recognized about $4 million of loan income from nonaccrual loans, which we don't expect in the second quarter. And also, I think the -- having fewer days than the calendar quarter helped as well -- historically helped our margin. So if those 2 things had an impact on it, but overall, we are very pleased with the expansion. David Zalman: Do you want to go ahead and give them some kind of guide? Asylbek Osmonov: So we continue on the guidance. If you kind of long term, and I'm going to include the Stellar Bank in our model for 2026, I think what the model shows that we'll be exiting combined NIM around 3.70% and -- but for having full year of Prosperity and half year of Stellar, average model shows around 3.60% for 2026. Catherine Mealor: Okay. Great. And then on the bond, there was a big increase in assume you restructured the portfolios that you acquired. Is this a good run rate for the rent yield on the securities book or anything to be aware of there and how you're thinking about that going forward? Asylbek Osmonov: No, I think it's a good run rate. What we've done in the first quarter, we did in addition to bringing the bond book from the acquired banks, we also did buy some securities. That's why you saw almost $1.4 billion including bond portfolio. I think we also continue to buy. So from now on, we -- I see that the yield on bonds should increase a little bit than what we had in the first quarter. Catherine Mealor: Okay. And where did that $1.4 billion in securities -- what was the rate -- the new rate on that? Asylbek Osmonov: So I think it's between -- we were able to get between 4.50% and we were able to get around 4.85%. So it was kind of in between when rate is with the Iran war, the rate fluctuated, so we were able to secure some at 4.85%. Operator: The next question will come from Manan Gosalia with Morgan Stanley. Manan Gosalia: Can you hear me? David Zalman: Yes, we can. Manan Gosalia: All right. Sorry about that. So David, you mentioned the benefits of diversification in Texas. At the same time, you mentioned the labor market is kind of cooling right now. And then maybe if I add on to that, there's clearly a lot more competition, especially from some out-of-state banks. Can you put that together for us in terms of how you're thinking about competition overall, loan spreads, deposit rates, loan growth and just your bigger picture thoughts on the dynamics in the state? David Zalman: Well, that's a big question. But even though it may be slower growth, there's probably still better growth than anywhere else in the United States. So I still think that Texas is probably the best place to be as far as growth goes. I mean there has -- it's really kind of a -- it's kind of split. Everybody complains about prices going up and when they go to the grocery store or they go buy gas or car that used to cost $60,000 now costs $100,000. And everybody complains about it, but when I talk to people, again, I think probably middle class and upper middle class, it still had to slow people down. People still have a lot of money and they're still spending money. Probably it's affecting lower earning group than maybe the other group. But I think for the long run, Texas has still had tremendous growth. You're still seeing I mean every time California does a thing like they're going to tax people 5% on net worth, make it only makes states like Texas and Florida better. So for the foreseeable future, we still see it very good. Talking about the competition, that is a big deal because you have a lot of banks that want to be in Texas, it's hard for them to get market share, and we're competing against them on loans on a day-to-day basis. And some of the bigger deals that we competed on where we were in the 6% price range, they were down in the 5.9% range. I understand that when we ever go into a new market, that's exactly what we do. We try to underprice something and try to get some market share. So that's what we're looking at from the out-of-state banks coming in. On the deposit side, you still see them throwing sometimes if you're a noncustomer right now like Truist, you are advertising like a 4% rate on a money market rate -- on a money market account, we're closer to the 3%. So they're trying to buy the business. We understand that. At the same time, we have in acquiesce. We lost several big deals where we haven't come down on the price, we haven't come down on the price and we're still trying to maintain our margin, I think that we will continue. And I think that overall, in the long run, we've been through this before. It's not our first rodeo. We'll continue to do good. Our partners, you could saw -- Stellar, they did much better than we did this time. And I think it just shows that things happen over a period of time. They were up over $200 million. where they might have been lagging before. And I think that's the same thing for us. We'll win. We have a number of big deals that we're looking at right now that we -- I think we've agreed to the price. We're just making sure that we want to do the deal. So I do see that. Having said that, we have 3 mergers with banks. And if you look at it historically, I'd like to tell you that you're going to see this mid- to single digit loan growth or double-digit loan growth, and that just doesn't happen. I think that if we can stay flat, that's pretty good this year. I mean, because I think that as you do these deals, you just see some you see some change in that. And just historically, I'd like to say that you're going to be there, we're going to make it. But historically, that's not happening. Kevin, you may have some comments on the deal or... Kevin Hanigan: No, I agree with you, David. I think not to get too granular, Prosperity ex acquisitions has not had growth in the last couple of quarters. I think as I think about the wise to that, the market has gotten more competitive, particularly on very large construction deals, which we've always played a part in. The market has gotten cheaper in terms of the rates that they're willing to do those deals at and they come off levels of recourse, much lower levels of recourse. And we have not. We have not played in that game. And it's cost us. We've missed out on some deals. I think to augment that or to fight that off a little bit. We're likely to set aside a bucket of, say, $750 million to $1 billion worth of commitments where we'll play in those markets with certain clients, very well-known folks that have been clients for a very long period of time. So I think we'll fight some of that off ourselves ex what happens in the acquisitions. As David said, and this is no surprise to any of you. When we do acquisitions, it is more likely than not that there's some asset runoff from those acquisitions in the ensuing 18 months. It's been the case time and time and time again. And we've got 3 of them. So we'll be fighting those headwinds for the next year to 15 months, 18 months, and I think if we are flat during that period of time, overall, we'll have done pretty well. David Zalman: And I'd even say some of the out-of-state banks are offering 5.8%, 5.9% and we can get 4.85% on a security with about a 4-year average life. Pretty hard to pay the lender, reserve some money for loan loss and really go that low. But again, at the same time, if a customer is able to bring in, it's just not a dry relationship and that customer is really able to bring over a positive relationship that's a whole different story, and we'll give you credit for that, and we'll probably get as low as that if it's not a dry relationship. But all in all, we still stick with the story that the core deposits are really what makes the bank and that's where we're focused on and we're really focused on increasing net interest income and net income for the shareholder over the next 1 to 2 years. And I have to tell you right now I'm probably more excited than I've ever been in the last 3 years about our future. When I look at the numbers, I mean, we were going -- as you all know, our net interest margin was what it got as low as 2.75% or something like that, 2.90%. Our numbers that we're looking at right now, we're really looking at some really great net interest margin going forward. I think we're looking at probably for the next 2 years, net interest income increasing and so I'm terribly excited for where we're at right now today. Manan Gosalia: I appreciate all the color. I know that was a fairly broad question, but I appreciate the fusions. So maybe just a follow up there, given the excitement about the forward NIM expansion and forward growth as well. Maybe how are you thinking about additional M&A from here? Does it make sense to integrate the current deals first? Or do you think that there's room to pursue another one if you get something that makes sense for you? David Zalman: I think the answer that we all need to be doing is these 3 deals are very important. I mean we're going from a $38 billion bank to a $53 billion, $54 billion bank. And so that's -- so our main focus right now is the operational integration of these three deals. And so that's why when we talk about the things we talk about, our whole focus. I mean I don't think you'd ever want to say never on anything. At the same time, our primary focus is bringing these 3 deals together and hitting those consensus numbers that you analysts all have out there, and we feel really good about that. Operator: The next question will come from Dave Rochester with Cantor. David Rochester: Just as a part of your view on NIM going forward, how are you thinking about the cost of deposits here in a scenario of no rate cuts? Do you think you guys can hold deposit costs here? Can you shift them lower? And then I was just curious where you're seeing new loan yields come in as the remaining fixed rate loans are still rolling off here? David Zalman: I don't think that -- if interest rates stay where they're at, our net interest margin targets are really good. I mean I think also back talk to you just a minute ago in about a 3.6% average for this year, 3.7% exit. 2027, I think you guys have about 3.8% net interest margin 3.8%. I think if interest rates stay where they're at, we'll hit that or even higher. If interest rates go down 100 basis points, we're probably -- we'll come off of that to some degree. But again, I don't think that we're a lower deposit rates any. And I think our numbers show really higher net interest margins and maybe you do deals. But at the same time, I don't know that I really believe them because as interest rates come down, we never went up as high on a lot of our customers as we -- as they could have gone somewhere else so I don't know that we'll come down as fast or at the same time. So I don't if that gives you any color or not. Asylbek Osmonov: I'll just add a little bit on the deposit side of it. So we haven't decreased or changed our rates for the past few months now. And based on what we see on the deposit growth we mentioned on our core deposit growth, I think we're holding our own with the current rate. I know it's -- a lot going to depend on the competition. But at the current rate, we believe that we don't need to increase the rates. So they might come down rate overall because we have some higher CDs getting repriced. So we'll see some overall deposit rate or cost of deposits come down a little bit, but not significant, but it will do it because of repricing. But overall, I think as long rate doesn't change, we should be at this level or lower by ourselves. But if you add Stellar, Stellar has a little bit higher. But in the combined one it is still going to be a cost of deposits around 1.40. That's what our model shows. I think on the loan pricing, they want to know on loan pricing, I think if you... David Zalman: The loan repricing, I mean I think we're kind of good where we're at. I mean I don't see us -- I'm not saying we won't jump to maybe 1 or 2 deals to compete on the 5 or under 6. But for the most part, we're really not going to play that game. And we'd rather buy securities, I think, than just try to play a game just to have a dry relationship to beat somebody out and take a lot of risk. David Rochester: So new loan yields or where the book is right now? Are they still a little bit higher? David Zalman: A little bit higher. Asylbek Osmonov: Little higher. David Rochester: Okay. Maybe just one more switching to the loan trends, your thoughts there going forward? I know you mentioned maybe flattish loans this year with all the deals closing, maybe that carries into next year a little bit in terms of like a little bit of a runoff that you normally get. But just looking at Stellar this quarter, which had a solid loan growth quarter. It seemed pretty decently broad-based. I was just thinking about you guys next year and the growth trajectory. I was wondering if you think that with Stellar in the fold, after you have that little bit of runoff, are you thinking that maybe your organic growth profile can improve from where it has been over time? Kevin Hanigan: Yes. Post any, what I would call normal for us, post-acquisition runoff, I do think, particularly with Stellar hitting its stride that we'll return to kind of low to mid-single-digit kind of stuff, but it's going to take a while. David Zalman: I think even American Bank and Texas Partners are talking, they're excited with where their position is too and has done pretty good. Kevin Hanigan: We just want to be cognizant of the fact that it is typical for us to have some loan declines post acquisitions, and we've done 3 acquisitions, and we want to be realistic about it. Operator: The next question will come from David Chiaverini with Jefferies. David Chiaverini: So following up on the deposit side was sort of deposit growth should we expect? Should it kind of trend in line with loans and kind of flattish and the loan-to-deposit ratio stays in the low 70s? How should we think about the deposit side? David Zalman: I think our deposit side is really not going to be effective. We should have our normal organic growth on the deposit side with the exception of seasonal fluctuations with public funds. And I think we've always done at least 2% to 3% more. Now having said that, one of the banks that joined us has some really larger accounts that really operate under their Treasury -- that are treasury -- their treasury system that they have. They feel comfortable that we -- that they won't lose any of those accounts. On the other hand, it's always possible that there's -- there's a handful of those accounts that are $30 million, $40 million, and that could always affect us to some degree. But for the most part, I mean, all the banks that are joining us were in Texas. We should have growth on the deal. I think that -- I think that we're fine. You'll still continue to be -- still can see core deposit growth with seasonal drops with public funds. As far as the loan-to-deposit ratio is, I think I didn't answer that. We have a policy that we -- it doesn't say we can't go above 85%. But once we start hitting -- we hit 85%, we have to go in front of the Board and discuss that with them. So unlike a lot of the other banks or a number of the other banks that are at 90% and 100%, I don't think you'll see us doing that. I think we feel more comfortable at the 75% and 80% for the most part. David Chiaverini: Got it. And then shifting over to the capital side. Can you talk about the Basel III Endgame potential benefit to your capital ratios and then your buyback appetite from here the last couple you've been a little bit more active than you had been historically. How should we think about that going forward? David Zalman: I think that we're going to make a lot of money or at least it looks like we're going to be making a lot of money at least combined. And so I think that as long as -- whenever we see this, you'll see the price. You saw the buyback when the price of the stock was, I forgot what the average time was $68 or something like that. So I think you'll still see us when the price is an opportunity like it is right now, you'll see us continue to buy back. And again, we have a lot of capital even with the combination of Stellar Bank, and I know we're paying 25% or 30% cash on that, but we still have a lot of capital. And I think going forward, you'll see us continue to buy back if prices stay where they're at, for sure. Asylbek Osmonov: Yes. And on the Basel III benefit, we did high-level analysis of impact of the mortgage loans, and it will benefit, but I think it's when we calculate maybe 50 basis points on the capital, that what we saw benefit on the -- once the rule passes on the mortgage loans. David Zalman: But from a capital standpoint, I mean we're in... Asylbek Osmonov: Kind of benefit. David Zalman: When we look at a pro forma based on our combined earnings of both of these banks even after you take out dividends, you're talking about $500 million or $600 million a year in excess after dividends to do something with. So we have a strong capital going in, and I think we'll have a stronger capital going forward, really and the ability to purchase our own stock back. Operator: The next question will come from Matt Olney with Stephens. Matt Olney: I want to go back to the Stellar Bank discussion. And I think you mentioned the improving loan growth at the bank, but also it looks like the adjusted net income at Stellar Bank was almost $30 million in the first quarter, ex a few nonrecurring items. If I go back to the original assumptions when the deal was announced back in January, it looks like the earnings projections from Stellar for the full year was $113 million. So it seems like you're tracking well above that number, if I just annualize that first quarter. Was there anything else unusual or anything else to consider with that first quarter net income number of almost $30 million? Or is that a clean number that we can carry forward from here? David Zalman: Matt, thanks for the question. It is a clean number. We actually feel great about the earnings prospects entering into the second quarter, taking the cumulative nature of the growth that we had in the first quarter. So we feel good about the path that we're on and what that implies. Matt Olney: Okay. I appreciate that. Unknown Attendee: We're paying we paid down on April 1, the last remaining piece of sub debt. So we actually see benefit to margin that will come back -- come out as a byproduct to it. Matt Olney: Okay. David Zalman: For those of you who don't know, that was Paul, CFO at Stellar. Matt Olney: Great. And then I think you completed the core system conversion at the bank in February. I think there was a mention earlier on the prepared remarks, but I missed it. Just remind us of the time line expectations to complete the remaining conversions for each of the acquired banks? David Zalman: Yes. First of all, the DNA conversion was a huge deal. I don't want to just keep talking about it, but our bank was more on a back system. And over the weekend, if you had a long weekend by the time we ran everything back through and brought everybody's account back up to date, we may be up by Monday morning, and we may not. And under this new system, we can update everything in about 1.5 hours. So that just tells you how much capacity we have. It was a real big deal to the years to complete. And so I think when you look at our bank and we had 3 major deals. We had a DNA conversion. We've had our plate full. So the team has done just a miraculous job. And so going forward, we're looking at September operational integration for the American Bank. We're looking at a November operational integration for the Texas Partners Bank and for Seller, we're looking at March 8, I think. Operator: The next question will come from Brett Rabatin with Stonex Group. Unknown Analyst: I wanted to go back to the credits, the 2 credits you guys talked about and you guys obviously have a historical very low net charge-offs, really strong asset quality. So the 2 this quarter were obviously an outlier. But I was hoping maybe for any other color, you mentioned one was an insurance company. Was there a fraud involved? Were these loans from past acquisitions? Was there anything unusual that created the loss exposure relative to what you modified as collateral? Kevin Hanigan: Yes. The big one -- this is Kevin, Brett. The big one was an insurance company. They were in the business of selling Medicare products, so Medicare Plus Medicare Advantage kind of products. And if you want to get to the core of it, their business was doing pretty well for the first 18 to 24 months and not to get too deep into the accounting, but if you call them and you did a Medicare Advantage program through them and your annual premium for the year was, let's just say $240 to make it easy, $20 a month, they would accrue $20 for that first month paid by the government largely. And then the rest of it would be booked as a receivable. So $220 in account receivable. In that business, what you do is you model and project what your account turnover is going to be. So you may wake up 3 months from now and cancel that policy because you think you can get a better deal or you want a different deal. You're unhappy with the deal you've got. So there is some modeling of the turnover of your receivables of people canceling. And what happened here was the cancellation rates were way higher than the model reflected. And that causes obviously two things: a write-down of your receivables by the remaining balance that has not been accrued in the income, and it can cause you to have to restate prior period earnings. And that was the big factor in that overall deal. The deal was backed by a very large, very well-known private equity firm that our bankers have had some experience with in the past, and they have typically backed their deals. In this case, at least to this time, they have not backed the deal. I think we began talking about this deal probably in the third quarter of last year. We talked about it again in the fourth quarter, and we chose to write things down this quarter all the way. So that I would call that a one-off in our case. If we look across the remaining nonaccruals in our book, I think the largest nonaccrual loan we have is $10 million. So there's nothing else out there that looks anything like this. This is truly a one-off. David mentioned the other one has been a long-time client. It was a legacy client in the Buy Here Pay Here car space. High-performing company for 15, 18 years with us that we banked them. And they got a little more aggressive in their business model coming out of COVID, poor timing. And I would differ the first one, which was a one offer and probably should never happen again, a loan we probably should not have made, easy to say today. The second one is the loan we would have made today, and it's just basic business. The guys changed their strategy a bit. The strategy was not successful, and it costs them dearly and it cost us a bit. So I'd say one is a way out there. Nothing else looks like that in the portfolio kind of thing that we're worried about. And the other one, look, it was a bad day. David Zalman: Well, you'd have to say the original insurance deal, we did have the backing of this big sponsor. We didn't want to release it. They wanted to release and so a huge major, major bank took it and they release the guarantee on it. Our stupidity is enough -- us being stupid, we bought a percentage back. However, a lesser percentage than what we had originally. David Chiaverini: Okay. That's very detailed color. I appreciate that. And then, David, I wanted to ask, when I look at your map, I mean you're pretty dense in Texas. Is strategy from here, you're obviously very focused on integrating these 3 acquisitions. But would the strategy from here be more density? Or would you look to new markets? Are there markets -- are there other smaller markets in Texas that might have great deposits, other community banks? Just any thoughts on how you see the environment from that perspective. David Zalman: As we mentioned before, first of all, I'd say we don't want to grow just to grow. But having said that, scale has just become very, very important. I look at our income statement, and I see just buying equipment, technologies, like $2 million a month, sometimes, that doesn't count what the technology we spend, $75 million, $80 million, $90 million a year on that. So scale is important, but we don't want to say we grow to grow. We still, as we mentioned earlier, I think that we really think that a real bank -- the real value in it is the core deposits, where if you don't want to grow loans that you can still buy bonds and still have a good 1.5% plus return. I think that we've all talked about it. We like where we're at right now. But we also -- we still -- again, our primary objective is still to put these 3 deals together. But our real -- our deal is to really be in -- we grew up in the times when you had Texas Commerce and our First City and an Allied and all that. And it's still our plan and goal to continue to make one of the Texas biggest banks, not just because it's big, but they can offer services from a technology standpoint to the biggest customers to the smallest customers. And we'll continue to do that, but we're going to do it at a pace -- we're not going to do it at a pace until we really can put these deals together and really show you that everything that we can make the $6 or something since this year, when we make the $7 or something since next year. We want to show everybody that we can do that. And that like in the past, when we promised that we'd bring in that margins up. We want to do what we say that we're going to do. But but the future is still building that larger bank that we want to be for everybody. Operator: The next question will come from Janet Lee with TD Cowen. Sun Young Lee: I appreciate the near-term guidance you provided on expenses for the second quarter, just given a lot of moving pieces with some cost saves at Stellar in the third quarter. Is there some sort of fuller expense guide you could give for the year or where the efficiency ratio could trend? Is it -- is this mid-40s level a good place to be? Or how should we think about the trajectory? Asylbek Osmonov: Janet, I don't know if I can give a specific guidance long term because we're still trying to integrate two banks and then Stellar coming in the second half of the year. But what we said earlier on at least two banks that we merged, cost savings that we announced, that we are working toward it and we're going to achieve those cost savings. I mean, we're already getting some of the cost saves now, but most of them come when the integration of the system, what we mentioned in September, November, then when we're going to see that. Also, with the Stellar addition, we're going to probably see most of the cost savings next year. And with Stellar 35% cost save, we feel very comfortable about the cost saves on that side of it. So if you combine all together, I think the goal for us to get back to the -- with all the cost savings and get back to the mid 40s that will we ran historically, 44%, 45%, 46%. So that's the goal, and I think it is achievable. Sun Young Lee: Got it. That's fair. And you said the loan accretion income expected to stay around this $3 million to $4 million range on the loan side in the second quarter. Could you remind us where this could go with the Stellar the third quarter? Or could you maybe provide a projection around the full PAA as opposed to just loan accretion? Asylbek Osmonov: Yes. On the -- for second quarter, yes, it's a saying $3 million to $4 million. With the addition of Stellar, I mean, it can a lot of change, right, it depends on the market rate environment when we do merge with Stellar July. So it's kind of hard to say. But I'll tell you when we did our projection when we put together in January, we said that we're probably going to expect about at least on 2027, about $10 million to $12 million of interest -- fair value income from Stellar, that's a pretax number. That's what we estimated. But again, a lot of can change depending on the rate environment in July. David Zalman: That was for loan and securities. Asylbek Osmonov: For loans, yes, and security is going to reprice. I think Stellar was about, what, 3.5% margin. So they're going to reprice a little bit and maybe 100 basis points or so. Sun Young Lee: Got it. And the 3.70% NIM that was the target for the... Asylbek Osmonov: Yes, that was -- yes, that's going to be our exit, meaning the end of the year combined Prosperity Bank and Stellar together. David Zalman: With 3.6% average for the year. Asylbek Osmonov: For the year because we can just going to have Stellar for half a year. Operator: The next question will come from Jared Shaw of Barclays. Jared David Shaw: I guess just on the $30 million charge-off that you had highlighted, was there a specific reserve associated with that prior to the charge-off? Asylbek Osmonov: Yes. For that specific, we had a reserve half of it last year because I think when we kind of start seeing that and we reserved rest of it and charge off this one. That's why we didn't see any of the P&L impacts this quarter because we provisioned half last quarter and we charged off the remaining half this quarter. Jared David Shaw: Okay. Okay. And then on the Stellar deal last quarter, a couple of times, you mentioned that just given their underwriting and pricing, you didn't expect to see any runoff from that portfolio. But today, it sounds like maybe there could be some run off. What should we assume is potentially at risk from the stellar portfolio of running off? And I guess what changed to change your view on that? David Zalman: Kevin can jump in a minute, but again, I think we're just trying to prepare everybody that you have Stellar, you have Texas Partners Bank and American that just historically that we have lost loans through these deals. And again, we don't want to give somebody a deal that says, okay, we thought it was great that they increased $200-and-something million. But again, we don't want to come here and tell you we're going to have a 5% or 6% loan growth when historically, we've seen things that I guess we're just being cautious really. Kevin Hanigan: Yes. I'd say it's cautious. I do think they underwrite much like we do. It does take -- and again, I went through this on the other side in 2019 with a large lending staff. It takes 6 to 9 months to get integrated into the system and how the underwriting is done at prosperity at the forms in the process. it takes a while, and then lenders get used to it and things stabilize. David Zalman: I think it's even more than that, Kevin. I think even I look at what we did in our production this first quarter. And it was definitely impacted by doing a DNA conversion, people trying to get their loans to the loan committee doing working with 3 different banks to put it all together. So I think there's -- when you're doing this, I mean, we increased our assets, you can do the math between $38 million and $54 billion. That's a lot of increases, so to try to massage and put all this together, things are not going to be just exactly the way they were. And if you -- and I would say this that if you think they're going to be exact complex, you're going to have this exponential growth I think it would be a mistake. I think right now, we really need to focus on putting all this together, making sure everybody fits in good and take our time in doing it right. Asylbek Osmonov: Just to clarify 1 thing in my mind, I call provision, but that's 1 I meant like specific results, we put specific reserve on that loan provision expense. Operator: The next question will come from Jon Arfstrom with RBC Capital Markets. Jon Arfstrom: I might have missed this, but Kevin, can you touch on the warehouse lending business and your outlook there? Kevin Hanigan: Yes, warehouse as you know, Jon, averaged $1.207 billion, I think, for the quarter, but we closed out at $1.430 billion something, maybe $1.432 billion or $1.433 billion. So it ended up the quarter really strong. It's backed off a bit from there. I think yesterday, it closed at about $1.240 billion, $1.238 billion, something like that. I think it will be higher on average in the second quarter than it was in the first. So I'll call it $1.3 billion to $1.25 billion. David Zalman: Because even our own mortgage company, we're finally seeing where they're making money, and most of our mortgage companies are doing pretty better. Yes, so it probably ought to be a little better. Jon Arfstrom: Okay. Good. And then maybe also, Kevin, you talked about construction and being a little more cautious there due to competition, but there was still decent growth for the quarter. Was that acquisition-driven? Or is there activity that you guys are putting on the balance sheet now? Kevin Hanigan: No. Construction has been weak. What I was saying is we're losing out on a lot of construction deals because of the competition in the market is willing to do it with less recourse and way cheaper spreads to SOFR and that we are looking at establishing a bucket for a handful of clients that would be our A+ rated clients where we might be willing to do things at a little cheaper rate and a little less recourse. David Zalman: Yes. I mean, the bottom line is we lost some really larger deals, $100 million-plus deals because, again, we just weren't willing to go down to the pricing and the terms and conditions that those guys are willing to do and we could buy on, not have the risk to still make the money. Jon Arfstrom: Okay. David, one for you. That's maybe an odd question with your Stellar team in the room, but you got beat up last quarter on the pricing and during the quarter on the price paid. Just curious how you're thinking about it a quarter later. It sounds like you still believe the accretion is there and the 2027 EPS numbers are there. But and maybe Stellar is doing better than planned. But how are you feeling about this quarter later? Just it's a big deal, obviously. David Zalman: I couldn't be happier. I think it's a great deal. I mean I think there's a huge difference between 1 bank and another bank. And I think I'm not just saying is because these guys are in here. If we were ever to sell our bank, I wouldn't sell for anything less on a multiple that these guys that we pay for. So I think it's top-notch. I think you are going to -- I thank all the analysts -- in the end of 2027 when we make the money, we're going to make, I think everybody going to say, I know it the whole time. But right now, I got to prove it. But you guys are all going to say, well, we knew it the whole time, and that's when the stock is going to go to $95 or $100. But which I'm telling you it's going to happen, and I feel better than I have in 3 years about all these different deals. Kevin Hanigan: Yes, Jon, this is Kevin. Look, we did get a little dinged up, right? We -- the market thought we paid a little too much, and they thought -- they thought we were using estimates that were greater than the market had for 2026. But I think we did it based upon a deep dive of due diligence and knowing these people really, really well in the course of putting the acquisition together and feeling comfortable with their internal numbers. And it's really rare for us to put out numbers that are above the consensus when we're doing a public deal. It's rare for anybody to do. We did it. And I think they've proven up with a clean quarter that's really good this quarter. And my guess is when we look back at all of this, the estimates that we used for Stellar for 2026 are going to be better than the one -- they're going to -- we're going to end up doing better than even the ones we. David Zalman: Well, I would even go a step further that and Bob can jump in if he wants, but I know this goes from American and probably for Bob, both, if they wouldn't have got the price they wouldn't have done the deal. I mean they know what they're worth. Bob, you may jump in and say that, but I wouldn't. I mean, I wouldn't do a deal if we knew we were worth more. H. E. Timanus: Absolutely, David. I'm kind of thinking now we didn't pay it enough. David Zalman: I knew that was... Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks. Charlotte Rasche: Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Community Bank System, Inc. First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note that this event is being recorded, and the discussion may contain forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates, and projections about the industry, markets, and economic environment in which the company operates. These statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed. Refer to the company’s SEC filings, including the Risk Factors section, for more details. Discussion may also include reference to certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company’s earnings release. I would now like to turn the conference over to Dimitar Karaivanov, President and CEO. Please go ahead. Dimitar Karaivanov: Good morning, everyone. I would like to first highlight a very recent recognition our company received. Last week, we were named CenterState CEO Business of the Year with over 50 employees here in Central New York. This is one of the most prominent recognitions in Central New York. I believe it is a great illustration of the activity, commitment, visibility, investment, and impact we are having, and the results we are about to discuss come in no small part due to all of the above. A major thank you to all of our teams across banking, insurance, employee benefits, and wealth management. Great things are happening in Upstate, and great things are happening in our company. Now on to results. We are off to a very good start in 2026. Organic growth is visible across all of our businesses. New business efforts, combined with the benefits of a supportive interest rate environment and market values, resulted in 9% total revenue growth. Our balance sheet, as always, is a source of strength for us and our clients, with excellent liquidity and credit metrics. Expenses and return on investments remain a focus. All in all, 17% growth in operating diluted earnings per share compared to last year’s period is a result we feel very good about. Focusing on each specific business: Banking and Corporate is benefiting from organic growth, expanding margin, and our recent branch acquisition in one of the most attractive markets in the Northeast. A 29% bottom-line improvement year over year is peer-leading. Market share gains have been and will continue to be the main source of growth for us. Employee Benefit Services is expanding at the expected pace of mid- to high-single digits, and we are starting to see some tangible results of our recent investments. Insurance Services had a difficult comp from last year due to the timing of contingency payments, which, as a reminder, came in during 2025 versus our typical pattern of most in the second quarter. This, however, has not changed our expectations for overall insurance performance during the year. Wealth Management Services also experienced mid-single-digit revenue growth and high-single-digit bottom-line growth, in line with our expectations. In summary, we did have a very good start to 2026. Organic activity is strong. Targeted inorganic discussions are active across all of our businesses. We have excellent capital and liquidity and look forward to continued strong performance throughout the year. I will now turn the call over to Mariah Loss for the financial results. Mariah? Mariah Loss: Thank you, Dimitar. Good morning, all. As Dimitar noted, the company’s first quarter performance was strong. Including acquisition expenses, GAAP earnings per share of $1.08 increased $0.15, or 16.1%, from the first quarter of the prior year, and increased $0.05, or 4.9%, from linked fourth quarter results. Operating earnings per share and operating pre-tax pre-provision net revenue per share were record quarterly results for the company. Operating earnings per share were $1[inaudible] in the first quarter as compared to $0.98 one year prior and $1.12 in the linked fourth quarter. First quarter operating PPNR per share of $1.10 increased $0.21 from one year prior and increased $0.03 on a linked-quarter basis. These record operating results were driven by a quarter-over-quarter decline in operating noninterest expenses and a new quarterly high for net interest income. The company’s net interest income was $134.7 million in the first quarter. This represents a $1.3 million, or 1%, increase over the linked fourth quarter and a $14.5 million, or 12.1%, improvement over the prior year, and marks the eighth consecutive quarter of net interest income expansion. The company’s fully tax-equivalent net interest margin increased 6 basis points from 3.39% in the linked fourth quarter to 3.45% in the first quarter, driven by lower funding costs. During the quarter, the company’s cost of funds was 1.2%, a decrease of 7 basis points from the prior quarter, primarily driven by lower deposit costs. Operating noninterest revenues increased $3.2 million, or 4.2%, compared to the prior year’s first quarter and decreased $3.2 million, or 3.8%, from the linked fourth quarter. The increase in operating noninterest revenues compared to the prior year was reflective of increases in Banking, Employee Benefit Services, and Wealth Management Services noninterest revenues, partially offset by a decrease in Insurance Services noninterest revenue due to changes in the timing of collections of contingent commissions revenue. Operating noninterest revenues represented 37% of total operating revenues during the first quarter, a metric that continuously emphasizes the diversification of our businesses. The company reported a $5.0 million provision for credit losses during the first quarter. This compares to $6.7 million in the prior year’s first quarter and $5.0 million in the linked fourth quarter. During the first quarter, the company recorded $133.0 million in total noninterest expenses, a decrease of $5.5 million, or 4%, from the linked fourth quarter and an increase of $7.7 million, or 6.2%, from the prior year’s first quarter. The decrease from the prior year’s fourth quarter was due in part to seasonal factors and the absence of certain one-time items described last quarter, as well as acquisition expenses associated with the Santander branch acquisition. $3.9 million of the increase in total noninterest expenses from the prior year was attributed to salaries and employee benefits, primarily due to the incremental costs associated with acquisitions and de novo bank branches opened between periods, along with the impact of annual merit-based increases. Occupancy and equipment expenses increased $2.2 million from the prior year’s first quarter, driven by incremental costs associated with the opening of 15 de novo bank branches and three regional headquarters, along with the seven branches acquired from Santander in the prior year’s fourth quarter. Additionally, acquisition expenses of $0.4 million were incurred in 2026 associated with a pending acquisition of ClearPoint Federal Bank and Trust. Ending loans increased $181.4 million, or 1.7%, during the first quarter and increased $710 million, or 6.8%, from one year prior, primarily due to organic growth in the overall business and consumer lending portfolios. The company’s ending total deposits increased $978.1 million, or 7%, from one year prior and increased $483 million, or 3.4%, from the prior year. The growth in total deposits during the first quarter was primarily reflective of seasonal inflows of municipal deposits. The increase in total deposits over the past twelve months included the $543.7 million of deposits assumed from the Santander branch acquisition. Moving on to asset quality, the nonperforming loans ratio decreased 4 basis points and the net charge-off ratio increased 2 basis points from the linked fourth quarter, while both the 30- to 89-days delinquent ratio increased 5 basis points from last quarter, aligned with typical seasonal trends. The company’s allowance for credit losses was $90.2 million, or 81 basis points of total loans outstanding, at the end of the first quarter, an increase of $2.3 million during the quarter. The increase was primarily attributed to reserve building in the business lending portfolio reflective of organic CRE growth. The allowance for credit losses at the end of the first quarter represented 7x the company’s trailing twelve-month net charge-offs. Looking forward, we believe the company’s diversified revenue profile, strong liquidity, and historically good asset quality provide a solid foundation for continued earnings growth. With that, the financial expectations we provided earlier this year for full-year 2026 remain consistent. That concludes my prepared earnings comments. We will now open the call for questions. Operator, please open the line. Operator: Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. We will pause momentarily to assemble our roster. The first question comes from Steve Moss with Raymond James. Please go ahead. Steve Moss: Morning, Dimitar and Mariah. How are you guys doing? Nice quarter here, and maybe just starting on the loan side—good commercial loan growth. I am just curious where you are on the pipeline. I apologize if I missed it. Just curious for color on that aspect of the loan book to start. Dimitar Karaivanov: The commercial pipeline is in excellent shape. I think it is actually the highest it has been and meaningfully higher than last year at this time. Of course, there is uncertainty as to timing and pull-through, but right now activity is very good and it has been building. We have had a little bit fewer payoffs than we did last year so far, and you all know that impacted us meaningfully last year. So right now, we are in pretty good shape. Steve Moss: Okay. And then on the auto side, strong quarter there. I know you were upbeat on it. What are you seeing going forward in terms of pricing and where it could go for the rest of the year? Dimitar Karaivanov: A reminder: the RFPs for us are really a function of pricing and overall market demand because we do not do anything as it relates to credit—that is set with fairly constant credit parameters. As long as they fit in the credit box, then the question is where we are on pricing. We entered this year with a little bit more of an aggressive stance, expecting rates to trend down over time. I think we gained a bit more market share than last year. We learned our lesson last year—we were down meaningfully in the first quarter in that business—and this year we did not want to start deep in the hole. Activity is strong, demand is okay, pricing is now a little bit better than it was at the beginning of the year. Our goal for that business continues to be mid-single digits. Steve Moss: Got it. And then on the fee side, you mentioned the contingent piece more in the second quarter. As I look back, it looks like that contingent benefit you typically get is about $1.5 million to $2 million in the second quarter. Is that about fair? Mariah Loss: Yes, that is in the range. Steve Moss: And just one more on expenses. Good to see where they came in. Updated thoughts on the cadence of expense growth throughout the year and where you are looking for things to land? Dimitar Karaivanov: Our guidance stays intact on that side. Year over year we are running just above 6%, and that includes the impact of acquisitions from last year. As we get into the latter part of this year and we are comparing truly apples to apples—in terms of the de novo expansion last year and acquisitions—I expect that rate to trend lower from 6%. It will be within the range; we are going to drive it as low as we can. Our goal is not to spend money; our goal is to make money, and that will continue to be a focus for us. Operator: The next question comes from David Conrad with KBW. Please go ahead. David Conrad: Good morning. You had really good NIM expansion this quarter, but I thought it was interesting that investment yields actually went down 4 bps. Maybe refresh us on your NIM expectations for the year and talk about how the portfolio balances may be used to pay down borrowings or fund loan growth. Where do you expect those securities balances to go? Thank you. Mariah Loss: NIM did outperform our Q4 guide as we expanded 6 basis points in Q1. This is the result of strong loan growth, ongoing repricing efforts, and a steeper yield curve than in recent quarters. Looking forward to Q2, we expect 3 to 5 basis points of expansion. We will continue to capitalize on loan and deposit efforts and fully realize the late-2025 cuts. Note that Q2 NIM will be partially aided by an FRB dividend. In terms of the overall portfolio, if we have the opportunity, we will pay down borrowings, but we see a steady state for now. We are pleased with how our book looks at the moment. Operator: Thank you. The next question comes from Manuel Navas with Piper Sandler. Please go ahead. Manuel Navas: Hey, just a follow-up on the NIM discussion. So is the expectation for loan yields to be flat to up? And then deposit cost performance has been excellent—any more room for it to come down, or do you have to shift toward acquiring deposits within the de novo branches? Can you talk about deposit costs going forward? Dimitar Karaivanov: Good morning, Manuel. The environment continues to be more supportive on the asset side, so the trajectory for margin will be predominantly driven by assets. There will be quarters like this one where you absorb some of the hit on the asset side while repricing deposits. For us, being flat in loan yields in the quarter, having absorbed 2.5 cuts essentially, was pretty good. Going forward, given where new production is—right around 6%—and where the back book is—around 5.68%—that should give you 30-plus basis points to work with as we continue to reprice the book. On deposits, we have active deposit management across the board and pulled through as much as we could this quarter. If there are no additional cuts, there is more limited opportunity, but another couple of basis points is possible. Also keep in mind that in the second quarter we will be sitting on more liquidity for the first 45 days or so that is municipal-related, and those tend to be higher-cost deposits, so there are natural ins and outs of deposit costs depending on municipal flows. Manuel Navas: Appreciate that. Shifting over to capital deployment, you had a little bit of a buyback this quarter. Can you talk about your appetite there and any updated thoughts on M&A—key businesses versus whole bank? And could we have a checkup on the de novos? Dimitar Karaivanov: We generate a fair amount of capital, and we are fortunate to have four businesses to allocate it across. Our first priority is always organic growth across those businesses. For the bank, that is tied to balance sheet growth; for the other businesses, it is more in the expense base where we are making investments. We continue to have active and very targeted discussions across all businesses on the inorganic side. Historically, for us that has been singles and doubles—a string of pearls—in our nonbanking businesses. On the bank side, we tend to like things we can meaningfully grow and expand, creating returns for shareholders, which also tend to be on the smaller side. We prefer to use cash; sometimes we may have to use stock, and sometimes we will buy back that stock if we use it for an acquisition. The buyback this quarter was opportunistic—to clean up some equity dilution and also take advantage of disruption in the stock price during the quarter, knowing where company earnings are projected to be versus the market price at a moment in time. We will continue to be opportunistic. On a projected forward P/E basis, our stock looks attractive versus historical measures and the overall index, so we think it is reasonably attractive to look at when there are moments of disruption. Operator: The next question comes from Matthew Breese with Stephens Inc. Please go ahead. Matthew Breese: Good morning. Thinking back to strategic initiatives—taking market share in some of the more economically vibrant areas in your footprint—could you give us an idea where we are on that priority and where you have made the most progress, whether it is Rochester, Buffalo, Eastern Pennsylvania, New Hampshire? And then maybe some thoughts around local investments, whether it is chip manufacturing or otherwise, and whether you are starting to see any tangible impacts yet. Dimitar Karaivanov: We have been on a multi-year journey of revamping the organic capability of the company. It started before I joined and included the de novo in Albany, which was very successful, and we then recreated the same approach in Central New York and in Western New York. What is really encouraging is that growth this quarter and the past quarter was broad-based across every single one of the regions. We have had past quarters where the diversification shows up as strong performance in Pennsylvania, Western New York, Syracuse, and New England at different times; lately it has been consistently broad across markets. We feel very good about our opportunities, people, talent, reputation, and brand—things that are hard to replicate. It is not pricing or structure; it is the hard things we have focused on. In terms of Central New York, the major project here is underway. This is a long-tail event that will play out over a decade plus. Tangible things are starting to show up: around 4,000 workers will be on-site soon—transient workers who may not open accounts with us but will consume goods and services in our markets, helping our customers. Then we will see more permanent populations around these facilities—not just Micron, but suppliers, onshoring from Canada and other markets. As a ballpark over multiple years: if you compare the size of the Central New York investment in chips/advanced tech manufacturing to similar investments across the country relative to local GDP, Central New York’s impact is roughly 250% of local GDP. It is very large, and over a long time horizon. Matthew Breese: I did not realize it was that large relative to local GDP. On the ClearPoint deal—is that closed yet, or when is it expected to close? And during the quarter, were there any other notable fee income business line acquisitions that did not get an 8-K? Dimitar Karaivanov: No additional fee income acquisitions in the quarter. As it relates to ClearPoint, both parties are prepared to close—we have everything lined up and it is a straightforward execution with low risk, with limited conversion, technology, or people impact. We are still waiting on regulatory approval. That could be any day, or it could be later—we do not know. Once received, we will be prepared to close shortly after. Matthew Breese: Last one from me. On expenses—in the press release you mentioned use of AI. How and where are you using it, and any notable applications that have saved money or helped on the revenue front? Dimitar Karaivanov: We have been on this journey for about two years. Credit to our retiring director, Sally Steele, who pushed us to be more front-footed back in 2024. Our goal has been to continue to scale without necessarily growing the expense base and headcount—shifting lower-value activities away from people and focusing them on high-value activities. I agree with Alex Karp’s view that AI’s impact needs to be transformational—doing five times as much at half the cost. Until I can point to that outcome definitively and tie it to margin, we will be quieter publicly and continue working in the background. Operator: To ask a question, you may press star, then 1 on your touch-tone phone. The next question comes from Manuel Navas with Piper Sandler. Please go ahead. Manuel Navas: Just want to jump back in. The expense level is seemingly annualizing below your full-year guide. Where are some of the increases across the year as you invest in your businesses? Dimitar Karaivanov: A couple of things to consider. There are fewer days in the first quarter, and additional payroll days in later quarters can be a meaningful add. We also expect continued opportunities for talent acquisition or maybe smaller tuck-in acquisitions that we will ultimately try to absorb with minimal cost, but along the way they might produce some expense. Medical is a swing factor as well—we had a pretty good quarter in medical costs, and that could reverse quickly. A couple of million dollars can be an easy delta in a quarter and move the reported growth rate meaningfully. Mariah Loss: To add to that, we are staying consistent with our guide—4% to 7% expense growth, mid-single digits, with full-year dollars anywhere between $535 million and $550 million, averaging about $135 million a quarter. Core expense came in under $133 million in Q1, so we are on track within those guardrails. We are diligently reviewing spend to ensure investments are focused on growth—talent acquisition, business acquisition, technology, and occupancy. Manuel Navas: Two specific modeling questions. What is the FRB dividend benefit in the second quarter that you expect? And what was the repurchase price on the buyback—you said you were opportunistic; trying to gauge your appetite. Dimitar Karaivanov: On the buyback, it was in the low sixties. As it relates to the dividend, we will follow up with you separately. Operator: Again, if you have a question, please press star, then 1. This concludes our question-and-answer session. I would like to turn the conference back over to Dimitar Karaivanov for any closing remarks. Dimitar Karaivanov: Thank you, everybody, for joining us for our first quarter. We look forward to speaking with you again in July. Operator: Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Ashland's Second Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sandy Klugman, Director of Investor Relations. Please go ahead. Sandy Klugman: Thank you. Hello, everyone, and welcome to Ashland's Second Quarter Fiscal 2026 Earnings Conference Call and Webcast. My name is Sandy Klugman, and I am Ashland's Director of Investor Relations. Joining me on the call today are Guillermo Novo, Chair and CEO; William Whitaker, CFO; as well as our business unit leaders; Alessandra Assis, Life Sciences and Intermediates; Jim Minicucci, Personal Care; and Dago Caceres, Specialty Additives. Please note that we will be referencing slides during today's call. We encourage you to follow along with the webcast materials available at ashland.com under Investor Relations. Please turn to Slide 2. As a reminder, today's presentation contains forward-looking statements regarding our fiscal 2026 outlook and other matters as detailed on Slide 2 and in our Form 10-Q. These statements are subject to risks and uncertainties that could cause future results to differ materially from today's projections. We believe any such statements are based on reasonable assumptions, but there is no assurance these expectations will be achieved. We will also reference certain adjusted financial metrics, both actual and projected, which are non-GAAP measures. We present these adjusted figures to provide additional insight into our ongoing business performance. GAAP reconciliations are available on our website and in the appendix of these slides. I'll now hand the call over to Guillermo for his opening remarks. Guillermo Novo: Thanks, Sandy, and welcome to everyone joining us. I'll start with a brief overview of our second quarter performance, then William will review the financials and outlook, followed by a deeper business unit detail with the team. Please turn to Slide 5. Overall, second quarter results reflect resilient underlying commercial performance amid stable demand conditions with pricing and portfolio mix action remaining a central focus across the organization. Life Sciences delivered steady results supported by resilient pharma demand. Injectables, tablet coatings and high-purity excipients continued to drive growth, marking a fourth consecutive quarter of volume gains. Progress across our innovate and globalized pillars remain strong with continued adoption of differentiated new product introductions. Personal Care generated broad-based portfolio growth, driven by strong volume gains and execution across biofunctional actives, care ingredients and microbial protection. Biofunctional actives delivered robust double-digit year-over-year growth, while microbial protection continued to gain share following our globalized investments. Specialty Additives operated in a mixed market environment. Coatings volumes grew year-over-year, reflecting share gains and new product traction, while construction sales remained lower, reflecting deliberate portfolio mix actions and slightly softer demand. Overall results returned to flat year-over-year, which is an important step forward given that we have not yet fully lapped our prior year China impact. Intermediates operated in a stable but trough level environment with results impacted by both commercial and operating effects of the Calvert City outage. The team will cover more later, but operational performance was impacted by specific issues during the quarter, all of which are internal and not reflective of underlying demand trends. Despite these headwinds, commercial execution across much of the portfolio was solid, and we continue to see encouraging demand trends in Q3. Please turn to Slide 6. I'll now walk through our second quarter results, which reflect disciplined execution across the portfolio in a mixed market environment. Teams remain focused on cost control, operating discipline and customer service while managing through operational headwinds during the quarter. Structural actions taken over the past several years continue to support the underlying economics of the business, even as near-term performance was pressured by temporary execution challenges. Working capital was a key strength in the quarter, driving strong operating cash flow and reinforcing our focus on cash discipline. Looking across the portfolio, the quarter demonstrated resilient underlying performance and continued progress in strengthening the business foundation with demand conditions generally stable across the portfolio and margin pressure primarily driven by specific operational issues rather than end market weakness. Please turn to Slide 7. First, our consumer-focused businesses, principally Life Science and Personal Care continue to provide stability, supported by resilient end market demand. Second, innovation and globalization initiatives are gaining traction with accelerating momentum in higher-value applications across the portfolio. Innovation has already exceeded our full year target after 2 quarters, reflecting the strong pipeline execution and commercialization. Third, structural actions taken in prior periods are now embedded across the business, enhancing margin durability and positioning the portfolio to benefit as operating conditions normalize. Teams remain focused on disciplined execution and targeted corrective actions. Before turning the call over to William, I want to emphasize 3 themes for this quarter: Resilient consumer-focused demand, accelerating innovation and globalization momentum and continued commitment on improving execution. I'd like to now turn the call over to William to provide a more detailed review of our second quarter financial performance. William? William Whitaker: Thank you, Guillermo. Please turn to Slide 9. Second quarter sales were $482 million, up 1% year-over-year, reflecting resilient demand conditions across much of the portfolio. Volumes were relatively stable overall with growth in Personal Care offsetting softness in Intermediates, while Life Sciences delivered steady. Pricing declined modestly year-over-year, primarily reflecting carryover impacts from prior period pricing actions supporting targeted share gain activity generally across the segments. Foreign exchange was a meaningful tailwind, contributing approximately $16 million or 3% to reported sales. Adjusted EBITDA was $98 million, down 9% year-over-year, reflecting approximately $10 million of previously disclosed temporary impacts, including the Calvert City start-up delay and weather-related operational disruptions during the quarter. Excluding these discrete items, underlying performance reflected softer pricing, offset by disciplined cost control and foreign exchange benefits, consistent with the resilience we are seeing across the portfolio. As previously discussed, Calvert City impacted results in the second quarter. Repairs are now complete and the facility is back online. Adjusted EBITDA margin was approximately 20%, down 220 basis points year-over-year, largely reflecting these temporary operational disruptions. Adjusted EPS, excluding intangible amortization, was $0.91, down 8% year-over-year, consistent with the EBITDA decline. Cash generation and conversion was notable strength in the quarter. Cash flow provided by operating activities totaled $50 million, up from $9 million in the prior year, driven by disciplined working capital management, including meaningful inventory reductions. Ongoing free cash flow was $29 million, representing solid conversion driven by working capital improvements and reduced capital expenditures. We ended the quarter with total available liquidity of approximately $939 million and net debt just over $1 billion, resulting in net leverage of roughly 2.7x. The balance sheet remains strong, providing flexibility to support operations, invest in strategic priorities and maintain disciplined capital allocation. With that, I'll turn the call over to our business unit leaders for a closer look at segment performance. Alessandra, over to you for Life Sciences. Alessandra Assis: Thank you, William. Good morning, everyone. Please turn to Slide 10 for Life Sciences. Life Sciences sales were $172 million, flat year-over-year. Results reflect resilient pharmaceutical demand, partially offset by softness in select non-pharma end markets and modest pricing pressure. Pharma delivered low single-digit growth for a fourth consecutive quarter. supported by strength across differentiated cellulose excipients, injectables and tablet coatings. Outside of pharma, nutrition and other non-pharma markets remained softer, reflecting customer order timing rather than underlying market deterioration. Pricing declined modestly year-over-year, largely reflecting carryover impacts from prior period actions while remained stable sequentially. Foreign exchange contributed approximately $6 million to sales during the quarter. Looking at our globalized initiatives, Injectables continued delivering quarter-over-quarter growth with a record second quarter results. Positive lead indicators on sales pipeline, new product uptake and new orders signal continued growth momentum in this high-margin segment. [indiscernible] continued its double-digit growth trajectory versus prior year, fueling capacity release initiatives. Turning to innovation. Growth was supported by expanding adoption of low nitride oral solid dosage excipients and high-purity injectable and bioprocessing products. New product success in this segment reinforced Echelon's differentiation in regulated, high-value markets fully aligned with our growth strategy. Looking ahead, we have positioned the second half of the year for multiple new product launches across oral solid dose injectables and Crop Care, supporting sustained growth and portfolio renewal. These initiatives continue to reinforce portfolio differentiation and long-term growth opportunities. Turning to profitability. Adjusted EBITDA was $50 million, down 11% year-over-year. Adjusted EBITDA margin was 29%, reflecting the combined impact of modestly lower pricing and higher costs, including approximately $5 million of weather-related disruption and Calvert City start-up delays during the quarter. These headwinds were partially offset by favorable mix, disciplined execution and foreign exchange, which contributed approximately $3 million to EBITDA. Importantly, underlying pharma demand remains resilient and recently announced pricing actions are now being implemented across the portfolio. Life Sciences continues to benefit from durable end market fundamentals, strong customer engagement and sustained momentum across our Innovate and globalized pillars. Please turn to Slide 11 for Intermediates. Intermediates operated in a challenging but stable trough market environment, consistent with expectations entering fiscal year 2026. Demand conditions remain stable with sales and pricing at trough levels across the BDO value chain. Sales were $35 million, down 5% year-over-year, reflecting continued pressure across the BDO value chain and commercial and operating impacts related to the Calvert City outage. Merchant sales were $26 million compared to $27 million last year as our relatively steady volumes were partially offset by modest pricing pressure and disciplined commercial actions, including controlled merchant activity. Captive BDO sales were down approximately $1 million year-over-year, primarily reflecting the Calvert City impacts during the quarter. Foreign exchange provided a modest $1 million benefit to sales in the quarter. Turning to profitability. Adjusted EBITDA was $5 million, up from $2 million in the prior year quarter. The improvement reflected disciplined cost management and favorable manufacturing input actions, which more than offset Calvert City-related impacts and ongoing pressure across the BDO value chain. Now I will turn the call over to Jim to discuss Personal Care. James Minicucci: Thank you, Alessandra. I'll now highlight our Personal Care results. Please turn to Slide 12 for Personal Care. Personal Care delivered resilient results, supported by broad-based demand and strong execution across the portfolio. Sales were $150 million, up 3% year-over-year or 4% on a comparable basis, driven by growth across all 3 business lines. Biofunctional actives delivered another quarter of double-digit growth, supported by continued adoption of [indiscernible] and customer expansions across Europe and North America. Microbial Protection delivered robust growth across the portfolio and geographies, driven by new customer wins and continued share expansion. Within Care Ingredients, the portfolio remained resilient with strong growth across hair and skin care categories, particularly in Asia Pacific and Latin America. Previously reported customer-specific outages from the prior quarter have now returned to more normalized levels. Foreign exchange contributed approximately $5 million to sales during the quarter. Turning to innovation. Biofunctional Actives recently launched Essernonite, our 2026 flagship ingredient. Essernonite targets key skin longevity markers and was recognized with an industry award at the In-Cosmetics Global event earlier this month. Care Ingredients launched a new hair care conditioning polymer from our VR technology, which is already gaining customer adoption. Overall, Personal Care continues to benefit from strong momentum across our globalized and innovate platforms, reinforcing growth in consumer-focused applications. Turning to profitability. Adjusted EBITDA was $43 million compared to $44 million in the prior year quarter. The slight decline was driven by operational outages from weather-related events, which were predominantly offset by volume growth and mix. Adjusted EBITDA margin was approximately 29%, demonstrating the strength of the portfolio and benefit of ongoing commercial and productivity efforts. Foreign exchange contributed approximately $2 million to EBITDA. In summary, Personal Care delivered robust sales growth across all 3 business lines, demonstrating strong margin resilience, disciplined execution and meaningful progress across its innovate and globalize initiatives. With that, I'll turn the call over to Dago to review the results of Specialty Additives. Dago Caceres: Thank you, Jim. Please turn to Slide 13. Specialty Additives operated in a mixed demand environment during the second quarter with performance varying by end market and region. Overall results reflected disciplined commercial execution with targeted pricing actions supporting share gains and specific operational headwinds. Sales were $134 million, flat year-over-year as volume growth for the second consecutive quarter was largely offset by softer pricing and the lapping of a difficult prior year comparison following share losses in China. Breaking down the segments, Architectural Coatings returned to year-over-year growth, supported by share gains and new product traction. Volume trends improved relative to prior quarters as commercial initiatives gained momentum, while underlying demand remained generally flat with continued regional variability. Construction volumes were lower, reflecting deliberate portfolio mix management actions associated with network optimization and relative muted end market demand. Other end markets were mixed with volumes growth in Performance Specialties offset by softer energy demand tied to customer-specific impacts in the Middle East. Pricing declined modestly year-over-year, reflecting targeted share gain opportunities. Foreign exchange contributed approximately $4 million to reported sales. Turning to profitability. Adjusted EBITDA was $16 million, down from $26 million in the prior year quarter. Adjusted EBITDA margin was 11.9%, reflecting softer pricing and higher manufacturing-related costs, including approximately $2 million from weather-related disruptions, a discrete bad debt reserve related to a Middle East energy customer as well as productivity challenges associated with the Hopewell scale-up, notably regarding the HEC scale-up. Product quality and customer service levels have been maintained and achieving profitable scale remains a key operational focus. While near-term performance has been impacted, these actions are expected to enhance long-term reliability and cost efficiency across our cellulosics network. All other sites continue to operate reliably and our global network supported uninterrupted customer supply. Overall, the focus remains on targeted actions to improve operational performance, strengthen cost control and advance differentiation across the applications, positioning the business to benefit as market conditions normalize. With that, I'll turn the call back to William. William Whitaker: Thanks, Dago. Please turn to Slide 15. Given recent geopolitical developments in the Middle East, I want to briefly highlight how Ashland is positioned in this environment. Starting with exposure. Ashland's direct exposure is limited and manageable. The Middle East and North Africa represent approximately 5% of total sales, largely concentrated in Turkey and Egypt, and we have no manufacturing footprint in the region, which significantly reduces operational risk. From a cost perspective, Ashland is structurally advantaged. We are less reliant on petrochemical and energy-intensive feedstocks across our portfolio. Energy-intensive inputs represent roughly 15% of sales with the majority sourced from North America, supporting lower cost volatility and more resilient margins as energy prices fluctuate. The team is advancing pricing actions to address cost escalation. And given the additives represent a relatively small share of our customers' overall cost structure, we expect to be able to recover these increases. From a demand standpoint, visibility remains solid, supported by a strong order book and a portfolio concentrated in resilient consumer-facing end markets, including pharma and personal care. Finally, based on prior dislocations, we expect security of supply to become increasingly important to our customers. Ongoing geopolitical disruptions, antidumping actions and reassessments of single region sourcing are reinforcing the value of reliable diversified supply chains, positioning Ashland as a preferred partner for critical applications. Taken together, while the environment remains dynamic, Ashland's limited exposure, advantaged cost structure, resilient demand profile and supply chain reliability position us well to manage volatility. Please turn to Slide 16. I'd like to spend a few minutes on our execute agenda with a specific focus on manufacturing, including the challenges we encountered at Hopewell, our progress across the broader commitment and how this ties to our longer-term cost savings targets. Starting with Hopewell. Our HEC scale-up has progressed more slowly than planned, which impacted second quarter performance. As Dago mentioned, our product quality and customer service have been maintained. However, productivity, yield and cost performance did not ramp as expected. These challenges are execution related and internal, and we have taken targeted actions to address them, including tightening operating discipline, increasing leadership focus on the site and advancing specific technical work streams. While productivity has been below expectations, results have stabilized, and we are seeing sequential improvement. We continue to take targeted actions, though the financial benefits will take time to flow through the results. Importantly, the issues at Hopewell do not change the strategic rationale for the consolidation. The site remains critical to simplifying the network and lowering the structural cost base of our cellulosics platform. Outside of Hopewell, manufacturing optimization efforts continue to progress in line with expectations. VP&D and small plant consolidation initiatives remain on track with benefits weighted towards the second half of fiscal 2026. As a result of timing delays at Hopewell, our fiscal 2026 manufacturing optimization benefit has been reduced by approximately $10 million to $12 million. That reflects delayed realization, not a reduction in the underlying opportunity. Stepping back, our longer-term manufacturing optimization targets remain intact. We continue to expect $50 million to $55 million of sustainable annual cost savings with an opportunity to reach approximately $60 million as China volumes recover. Execute remains a core pillar of our strategy, focused on simplifying the footprint, improving reliability and strengthening cost competitiveness. While near-term execution has been uneven, the actions underway are designed to ensure we deliver the full value of the program over time. I'll address how this translates into our outlook and expectations for the remainder of fiscal 2026 in a moment. Please turn to Slide 17. I'd now like to briefly update you on the progress across our globalized and innovate platforms. Starting with Globalize. Performance has accelerated year-over-year with incremental contribution increasing approximately $8 million to $11 million fiscal year-to-date. Globalized businesses delivered double-digit year-over-year growth in the quarter and incremental sales are ahead of plan to date, reflecting continued traction from prior investments across our regions. Turning to Innovate, momentum has been even stronger. Innovate has already exceeded its full year target after just 2 quarters, reflecting accelerated commercialization across the portfolio. Performance has been supported by continued strength in high-purity pharma excipients with emerging contribution from GLP-1-related applications. In the quarter, Innovate delivered approximately $10 million of incremental sales, taking us past our original $15 million full year target. This reflects the strength and depth of our innovation pipeline, particularly in [indiscernible] as well as successful new product introductions across other parts of the portfolio. Based on the progress to date, strong executions across both platforms reinforce our confidence in delivering our fiscal 2026 $35 million combined revenue commitment from Globalize and Innovate. Please turn to Slide 18. I'll now walk you through our updated fiscal 2026 outlook, which reflects current operating conditions and a prudent view on near-term execution while maintaining confidence in the underlying strength of the portfolio. For fiscal 2026, we are updating our guidance as follows: For sales, $1.835 billion to $1.87 billion and adjusted EBITDA of $385 million to $400 million. We also expect adjusted EPS growth to be mid-single to high single-digit growth and ongoing free cash flow conversion of approximately 50% of adjusted EBITDA. The updated outlook reflects softer energy-related demand tied to the Middle East conflict, reduced EV-driven demand and slower-than-anticipated productivity at Hopewell. This is partially offset by resilient demand in core end markets, ongoing price actions and continued growth across our globalized and innovate platforms. In addition, key assumptions underlying the outlook include Life Sciences and Personal Care are expected to remain resilient, supported by stable end market fundamentals, continued portfolio progress and encouraging early third quarter demand trends. Specialty Additives and Intermediates markets remain stable at trough levels with any recovery in coatings expected to be gradual and regionally uneven. Raw material and logistics costs are trending higher, reflecting geopolitical-driven volatility, although recent pricing actions are expected to offset these impacts. Performance remains second half weighted, consistent with historical seasonality. Given these factors, we believe it is appropriate to remain prudent while continuing to manage production, inventory and free cash flow with discipline. With that, I'll now turn the call back to Guillermo to discuss our technology platforms and share some closing thoughts before we open the call for questions. Guillermo? Guillermo Novo: Thank you, William. Innovation remains a core driver of Ashland's long-term value creation and the progress we're seeing in fiscal 2026 reinforces the strength of our pipeline. Slide 19 highlights 3 innovation platforms that demonstrate how we are translating science into scalable, differentiated growth opportunities across multiple end markets. Importantly, these are scalable technology foundations supported by customer collaboration, regulatory progress and clear paths to commercialization. Starting with transformed vegetable oil. This platform continues to move towards early commercialization. Customer trials are progressing in crop care, regulatory milestones are being achieved and TVO-based solutions are expanding into personal care, coatings and industrial applications. Turning to super wedding agents. Customer feedback remains strong, particularly in personal care. Originally developed within Specialty Additives, this PFAS-free silicon-free technology is expanding across multiple end markets. Finally, bioresorbable polymers continue to gain momentum across high-value medical applications, including long-acting injectables and medical devices. Beyond these platforms, we continue to advance adjacent innovation programs across personal care and coatings, including new multifunctional starches, pH neutralizers and next-generation rheology solutions with multiple global launches planned in fiscal 2026 and early regulatory progress supporting broader commercialization. Taken together, these platforms demonstrate Ashland's ability to translate science into scalable growth, combining strong technical capabilities, global manufacturing expansion and deep customer relationships to support value creation over time. Please turn to Slide 20. As we look ahead, I want to briefly outline the leadership priorities guiding our actions as we strengthen the foundation of the business and position Ashland for sustained performance beyond 2026. Our full year expectations reflect both the underlying strength of our portfolio and the reality that our operating performance this year has fallen short of our standard. While the market environment remains mixed, the fundamentals of the business continue to provide resilience. Performance in the second quarter was impacted by specific internal manufacturing challenges. These issues are disappointing, but they are internal and within our control and addressing them is a top priority for the leadership team. We are making targeted disciplined actions to improve operational reliability, cost performance and consistency of execution. At the same time, several elements of our strategy continue to progress. As William highlighted, innovation and globalize momentum remains strong. Cash generation and balance sheet discipline remains central supporting resilience in a volatile macro. Portfolio simplification and structural actions are strengthening the foundations for improved performance as execution stabilizes. As we move forward, our priorities are clear: Operational -- operate safely and reliably with a focus on consistent customer service, stabilize and improve manufacturing execution, execute pricing actions to offset raw material inflation while actively managing supply chain volatility to strengthen resilience, convert innovation momentum into commercial results using our global platforms. Fiscal 2026 is a year of strengthening the foundation. While near-term manufacturing performance has fallen short of our expectation, the strategy remains sound and our actions are focused on restoring delivery against our commitments. With a more focused portfolio, resilient end markets and clear operational road map, we are positioned to manage near-term challenges while building towards improved performance in fiscal 2027. I want to thank our Ashland employees for their continued commitment during a demanding period. And I thank our shareholders for their continued engagement and support. Operator, please open the line for Q&A. Operator: [Operator Instructions] Our first question comes from Josh Spector of UBS. Joshua Spector: I was wondering if you could talk a little bit more about price/cost dynamics. I think from the prior energy cycles, you guys have been a bit more of a beneficiary because of some of your back integration and then it's just a matter of timing for pricing to catch up. But you've lowered your sales guidance for a couple of different reasons rather than raising it with higher pricing. So I'm curious if you could talk about that a bit more around how you expect that to play out in the second half or if that's a little bit more of a longer duration thing or if I'm just thinking about it in the wrong context here. Unknown Executive: Thanks, Josh, for your question, a critical question in this environment. Let me answer first on pricing and then on how we adjusted some of the guidance. So first and foremost, on the pricing, we're moving. We've announced each business is executing on that, given cost differences in different regions. It's region by region, product line by product line that we're doing it. Like in 2022, we're moving quickly. We're not a big part of the cost of our customers. We're not as petrochemical exposed. So our increases overall to cover cost is not that significant. So the quicker we can move, get out of the way of our customers, they've got bigger problems that they need to address. That's our objective. So we are moving at that, and we're already starting to get some of that benefit and will start flowing through this month and into the coming months. We're moving -- just also to clarify, we're moving both on price increases and surcharges. That depends on contracts, how we need to move. I think the market understands the dynamics Obviously, you have to do the dance with customers on timing, magnitude and all that, but we're making very good progress. If you look at our guidance, I think we are -- it's a very uncertain environment right now with many things. So our trim of the high end of the sales guidance was really more driven by things we know. Energy & Resources, we are seeing -- it's not a big part of our overall exposure, but we do have some business in the Middle East, and we're seeing that coming down both in terms of sales. Also, we had some credit issues, but we believe will recover later on. But right now, in this environment, I think it is having a little bit of impact. And also, we're seeing a lot of delays in the EV projects for intermediates. So that's basically what's driving it. On the pricing side, it is an upside. And we didn't put it up or factor that in, but there's still a lot of uncertainty in the macro market. And I think the biggest issues that we're looking at is will demand start picking up again in North America, for example, coatings. North America and Europe, we're not seeing any improvement. So we want to be prudent on that. So I would keep the pricing dynamic more of an upside in these numbers. Joshua Spector: Okay. That's helpful. Maybe just quickly within Life Sciences. I think you noted the downturn you saw in Nutrition and talked about customer order timing. And I know that's relatively small, but do you have visibility to that coming back? Because I think most of your comments broadly where demand was more resilient across Life Science and Personal Care, and that's kind of maybe one outlier to that dynamic. Unknown Executive: Yes. No, we're trying to be transparent on the specific segments. I'll ask Alessandra to comment. But overall, I would say Life Science and Personal Care are moving positively. We're not talking, for example, we've lapped all the things, but just to be clear, in the case of Personal Care, as an example, we did have some sales last year. So the growth is actually a little bit stronger. So overall, all the segments are doing pretty well. But Alessandro, if you want to talk -- it's not a big issue. Alessandra Assis: Yes. Just talking a little bit about the non-pharma nutrition. So we have had -- as we talked about, we have had recent wins and the ongoing commercial activity does support the growth that we are projecting for the third and fourth quarter. Josh, it is timing. There was some order timing on Nutrition, but we are confident on on the wins that we're seeing and the commercial activity. It is just a timing, but we see the improving traction. Operator: Our next question comes from Laurence Alexander of Jefferies. Kevin Estok: This is Kevin Estock on for Laurence. Just on your revised outlook, so $385 million to $400 million EBITDA, I guess, could you help frame what sort of what needs to go right from here to get to the top end of that range, maybe particularly around like operations and pricing realization? Unknown Executive: I think as we said in the other one, pricing is an upside. So the net impact of pricing and macro demand outlook and it's probably mostly in Specialty Additives and Intermediates. There is opportunity for some upside there. Those are the 2 big things, and we're just being prudent and conservative in terms of not including them at this time given the uncertainty. And we're listening to our customers. If you look at the coatings customers in North America, Europe, nobody -- everybody is being more prudent. So I think it's better to be prudent and perform on the upside if those markets get strength. just to add a little bit more, as you think about the range on the guidance, it's mostly on the sales side. So as you look at the lower end of it, at the low single-digit year-over-year growth rate, most of that's driven by some of the activity on the pricing side, which, of course, then implies flattish volumes otherwise. But as you look on the higher end of it, it's closer to a 6% to 7% sales growth rate, and it's balanced across both volume and price. And as you look at the volume side, credit to the team, it's been a really strong start on the Globalize and innovate, and we expect that to continue. So what gets you on the higher end is your delivery growth outside of the Global and Innovate. Operator: Our next question comes from Jeffrey Zekauskas of JPMorgan. Jeffrey Zekauskas: If you total up all the onetime events in Specialty Additives in the quarter, how much was that? And do you expect Specialty Additives operating income to grow in the third quarter? Unknown Executive: So Jeff, 2 comments that I would say, in line with the question, but I'll broaden it a little bit. The bigger year-to-date impact was the Calvert City, which impacted all the business, mostly life science and personal care. And that was equipment failure, downtime. It was just waiting to get the equipment delivered. It was just the lead times. We weren't -- there was nothing that we were doing in that period of time other than waiting. So it was more of an absorption impact, and that was the bigger impact for the full year. And obviously, we have a little bit of the weather and all that. But focusing on Calvert and Hopewell. Calvert was the big one. That plant is back on stream and producing did impact sales per se, but a lot of absorption. We're moving back. Hopewell is -- it had some impact in this quarter, but it's really moving forward. Our production rates are not where we want them to be. So the plant is operating -- the budget is above our expectation and the production rates. We're not producing at the rate we want. So again, from an absorption perspective, those are the big impacts. I would say between the 2, I would say 20-ish in the -- between the weather and Calvert on the front end and another $10-ish on the Hopewell in the back end, just to be very high level on some of those products. So for us, this is -- to be very clear, all the other areas are performing per our expectation. If would have should have could have, but $30 million is an internal issue, does not reflect some of these -- our overall core performance. So overall, this should have been a much better year. We're very frustrated, obviously, as everybody is on our operating performance, but those are internal things. We're working them. As I said, Calvert is back online, and we already have the resources the investments in place going on in Hopewell to get the productivity back in line. The other issue that I would point out in terms of our EBITDA impact is we are not planning to make significant inventory rebuild, okay? Given the uncertainty, we are focused right now on specific product lines. The Calvert City outage did help us bring down inventories and normalize them. There are specific products that we're going to build up. Similarly, with the HEC, we built up inventories for the Parlin transition, and that is coming. And we will build on specific product lines, but it's not a broad base. We feel very good of all the changes that we've made in the sense of timing. We've reduced the overall cost structure of the company. lin out, we've reduced the operation of specific units in our BT&D network. All that has reduced our cost base and our need for absorption. So that puts us in this uncertain environment in a better, more stable operating environment in terms of our normal production rates that we need to do. So these are specific plant issues that we're addressing at this moment. And Jeff, on the specific question around Specialty Additives operating income or EBITDA in the second half, a key piece of the Hopewell adjustment, right, the 10 million to 12 that we cited material sits within Specialty Additives. So on that basis, I would expect Specialty Additives down year-over-year. Jeffrey Zekauskas: Okay. And then in the intermediates and solvents area, there have been all of these different duties that have been placed on U.S. producers and offshore producers in Europe. Does that affect you? And when you think about the EBIT or EBITDA generation of I&S, what's the trajectory from here? Are we going down or up or nobody can tell? Guillermo Novo: So Jeff, I would say 2 things. And I would split up our back integration, which is BDO related and the competitive dynamics. So BDO costs are increasing for China overall production. So we would expect that if you look at our -- we're in this business to support our VP&D back integration that should be favorable from a competitive environment perspective because the cost structure for Europe and Asia is going up. We're mostly U.S.-based natural gas, butane based. So we're in a good position. So that's favorable for the entire company. If you look at specifically intermediates, we don't sell a lot of BDO. It's more the derivatives. We are seeing pricing. The business is operating stably in the trough the trough now for several quarters, but it's stable. I think the issue right now is as price inflation comes, that will drive some improvements. Hopefully, given our lower cost structure, that will be an upside potential. Just today, Alessandro was mentioning the [indiscernible] BDO numbers came up. So prices are increasing overall in the U.S., 5% to 6%. So there is good momentum to support. But I don't know if you have anything else you would add, Alessandra. Alessandra Assis: Yes. No, that's right. We announced price increases this month we are implementing. And Thermo, as you mentioned, right, the cost implications, U.S. versus China are different. And we do see a market stabilization and less erosion from a pricing standpoint. Prices are have started to move up with the cost implications. But availability remains -- it's basically this market are different when we look at -- when you compare to other markets that are -- other segments, right, being impacted by the Middle East conflict. So definitely, even though costs are going up, there's still a supply-demand dynamics and not a lot of impact from availability. The availability is not changing significantly in this market with the Middle East conflict. So we are moving forward with prices increases, but of course, managing the supply-demand dynamics. Unknown Executive: And Jeff, on the margin side, the Lima -- we did slow down Lima as part of the Calvert City because obviously, that feeds into the Calvert City. So we had to slow that down. So it did have an impact in terms of absorption. But all that is now normalizing with Calvert City picking up. So the cost side should be more normalized as we move forward. Operator: Our next question comes from Michael Sison of Wells Fargo. Michael Sison: Just curious how you think about 2027, I know it's a little bit early to give any specific guidance. But just directionally, what the run rate should be? And what are the pushbacks that we should see next year? Guillermo Novo: So Mike, just high level and then, William, if you want to give other comments. I mean we're not ready to talk about 2027, but just high level, what we're seeing right now. Obviously, macro uncertainty is what everybody questions. We don't have a crystal ball. But I would say if you look at this year, the business mix, we've done all the work. It is performing as we expected. All the businesses, obviously, Life Science and Personal Care on resilient. So we would expect that to continue. The Specialty Additives is stable. I think we're gaining volume. coatings as an example, this year, we will get volume growth for the year, and that's about share and going back into the market. I feel very good about what Dago and the team is doing. The response now is much more high-end response in the market. We're launching a lot of products with different price points. So we're not just dropping price. We're giving customers, hey, choices on different price points of what we can do. We can be competitive. We can change cost performance. So I feel SA is well positioned to continue to drive share gain. And obviously, the expectation would be -- is more the question would be is North America and Europe going to start to improve. We don't see China improving a lot in the foreseeable future in terms of macro demand in the construction side. We've streamlined the manufacturing. I'll repeat it, this has been a challenging year of internal operating issues, but our cost structure, the footprint changes, all those things make us stronger, more competitive and we have a lower cost base. So that should continue taking out a lot of these issues that we had this year, that should be additive to next year's performance. It should have been additive to this year's performance. The Globalize and Innovate continue with good momentum. So we'll still continue to work that. Then we continue to improve our systems and processes to give more visibility to our regional management teams as they start driving their P&L. We're pushing a lot of these activities to the front line so that they can have more ownership and accountability for driving performance. So our goals moving forward remain, if you look at the 5 5% growth is a target overall for the market, plus or minus a few percentage points, getting back to the 25% EBITDA margins and 55% free cash flow conversion. And just, Mike, we don't want to get into -- we don't want to be premature to get into the specifics on '27, but just a couple of things to keep in mind that we spoke to. One, first half this year at the VLO, right, both the outage as well as the extension as well as weather, which is a $20 million impact in the first half of this year. Two, the team continues to do a really good job. So we're focused on [indiscernible], of course, because it's not in line with our expectations, but BP&D and the small plant consolidation, all of that work is progressing. And so you'll continue to expect some carryover benefit from that. Hopewell, the team is doing work. We're committing to improving operations, particularly in the second half this year. We'll start to get some carryover sequential benefit going into fiscal '27. Of course, this is very dynamic on price raws. But right now, of course, that's a key piece of the carryover next year, some of the pricing activity as well as raw material. And then to Guillermo's point, volume growth contribution, mix benefit over time as we drive to globalize and innovate. And really, the only piece on the offset side, of course, is that we have to manage cost inflation. So I think there are several things that point to a nice recovery going into fiscal '27 and a lot of it's in our control. Operator: Our next question comes from Steven Haynes of Morgan Stanley. Steven Haynes: I wanted to just come back to the price/cost dynamic for a second. Is there any way to maybe just put a finer point on the magnitude of how much price you're expecting to achieve versus how much cost is going up? I'm just a little -- and maybe I'm sorry if I missed this somewhere earlier in the call, but is the midpoint of the guidance assuming that that's neutral this year? Or is it expected to be a net positive or net negative? If you could just put a finer point around all that, that would be helpful. Guillermo Novo: Thanks, Steven. It's a good and it's an important question. So I think, first of all, let me just anchor on what we've said in the call, and then I'll add some additional color. So the good news for us, right, is that we purchased a number of our raws that are from the U.S., right? And so even those that are energy-intensive or petchem derived, a lot of that is sourced in the U.S. And so the way that we've been sizing this is around the percent of sales, just to help from your framework perspective. So overall, we group energy-intensive raws as well as petchem linked raw materials and freight because freight is obviously moving to. That's roughly 20% of sales. 15% is the raw material basket, 5% is freight, so 20% overall. So even though we are well positioned, we're, of course, not immune to what's going on in the world from a volatility perspective. Some of our processing inputs are up, of course, and that varies a great deal by product line and by region. So if you isolate that 20% exposure of sales and assume it's up 10% to 15%, you'll get a sense of the increase that we're seeing on the cost structure. As I'm sure you can appreciate, there's lagged components, both on pricing and raws. I would say on the raws side, the lag is a bit longer. So you do get some favorable price raws benefit in the second half on that basis because of our inventory position. But I'd say really the key piece for us is given that magnitude, 10% to 15% on that 20% of sales, the team believes it's a manageable exposure for us, and it's one that we can manage to cover. And overall, I mean, we're talking -- you could get 20%, put an inflation number to that. That's raw material, we're in the single digits. We've announced -- it depends by region. There are product lines that are much higher. So I don't want to generalize, but 3% to 8% in general has been sort of the numbers that we've been giving, I would say, if I average out some of the numbers. We don't want to get into specific. We're negotiating with customers and all that and the specifics, but it's a very doable number for us, and we've had a good track record in moving that through. Operator: Our next question comes from Chris Parkinson of Wolfe Research. Christopher Parkinson: So just a broad-based question. When you look globally at pretty much every one of your competitors and knowing it's fairly fragmented, but across VP&D, across cellulose, across HEC, essentially every single supplier has been raising price. And I'm a bit confused in terms of the disconnect in terms of the customer acceptance or, let's say, not acceptance as quite yet in terms of that because it doesn't seem like anybody is really budgeting into kind of the middle part of this year. And at the same time, in certain geographies, people are potentially facing even shortages based on the fact that the supply is at fairly low availability right now. So what are you actually hearing from your customers? Is this a when, not an if? Or just how would you kind of characterize the dynamics heading into the middle of the year? Guillermo Novo: I don't think it's an if. I mean things are moving. So we're -- like I said, we're moving across the board. Everybody understands the dynamics of what's going on and we're moving. So we're not questioning our need or ability to do the pricing. That's moving, and we expect that to deliver. What we're trying to make sure everybody understand is that we are not as petrochemical exposed. So our numbers are the necessity. We don't make -- our margin expansion isn't driven by increasing prices in this kind of environment. We want to recover our inflation, our margins so that we don't get erosion into it. And I think our customers know that. But we do -- our overall margin performance is driven by value pricing and by managing our cost structure. And value pricing is going very well, especially as you look at some of the newer products. The price increase inflation is going very well. Obviously, this year, we've taken a lot of strategic actions on the cost, but that's where I would say we underperformed in our internal with 2 of the plants. Christopher Parkinson: And just as a very quick follow-up, just in the personal care market, at the beginning of the year, I'd say the end of '25 into '26, there were some rumblings of some inventory destocking here and there. At the same time, it does seem like you're seeing pretty substantial improvements, especially in some of the biofunctionals. What are you hearing from customers in terms of the balance of the year in terms of end market demand, inventory management? It seems like things are back on track, but what is your degree of confidence on that? Guillermo Novo: Do you want to comment Chris, so in Q1, in the December quarter, as we mentioned, excluding some of the specific customer outages, we were up low single digit, and we continue to see momentum in this quarter as we're up low to mid-single digits. I would unpack that into 2 parts. There's the base and then there's the actions that we're driving. So if you look at our biofunctional actives, the base continues to perform well. And we've had really good success expanding our customer base and getting our new products adopted and ramped with customers. Similar, microbial protection, the base is holding well, and the team has done really a phenomenal job converting our pipeline and continuing to gain share in that business line. And even our care ingredients, that was the one that was impacted by the customer outages in Q1. They're back online, and that's going to continue to flow through the balance of the year. So as we look out through the rest of the year, we see the market remaining relatively stable. There's the things that we're driving in our globalized business lines that we expect to continue to flow through. And then we'll continue to monitor how the base performs through the balance of the year as it is dynamic, although we still see fairly robust demand. Operator: Our next question comes from David Begleiter of Deutsche Bank. David Begleiter: Guillermo, just on the price/cost fill in F Q3, how much of a tailwind is that dynamic? And what would you expect as well for F Q4? How much of a tailwind, a dollar EBITDA tailwind do you expect price loss to be for you guys in F Q3 and [indiscernible] Guillermo Novo: So I mean, for the price raws, the inflation, most of it will start hitting us a bit later. So our issue is getting the pricing in line. I mean the costs are coming up and it will flow through into our inventories for now. But we want to make sure that we're getting our costs -- our pricing in place to cover that as we move forward. So we haven't really outlined specifics on the price increases and the flow-through, but that's already starting to come this month, and it's building in. So we'll be reporting more as we go forward. But it's more of a timing issue. We do -- I would say, for the spot business, I think we'll be moving spot non-contract business, we will be moving in faster. I think we have a lot of contract business, especially if you look at pharma and some of our bigger customers. And that's where we're working with them on the timing. But we're not uncertain about the magnitude of the increase that we're getting at this point in time. But we don't have a specific number to give you at this point in time. David Begleiter: Great. And on the revised EBITDA guidance, was there a change to incentive comp accruals for this year? Guillermo Novo: Not significant. I think the biggest issue would be on the Specialty Additives. Obviously, there was some impact on -- given some of the operating issues, but we're working it, but it's not a significant impact overall because we -- for the majority of the organization, it's business by business in terms of incentive comp. Operator: Our next question comes from John Roberts of Mizuho. John Roberts: What's the route engineering cause of the Hopewell ramp-up issues? Are you doing something differently there than at other HEC sites? Guillermo Novo: Yes. The whole issue in Hopewell, remember, we shut down Berlin. We changed the mix of the plant significantly. We had just brought on some investments in capacity at the end of last year in terms of HEC overall capacity, but the mix change is really what is driving the productivity. So we're putting a lot of investments in, in terms of enabling the new mix. So we're producing -- we're getting the products we want, but it's not at the production rates that we wanted. And I think that's the biggest issue. But the teams are already working on it. The budgets were a little bit higher, and that is, I would say, 2 things. One is on our own performance. The other one is we are putting more resources to drive those improvements in the near term. David Begleiter: And then in Personal Care, there was a range of growth from high single digits in skin care to low single digit in Oral Care and Home Care. Is there just more innovation going on in skin care that's driving that? Or is there something else just in the comparisons to cause the unevenness? Guillermo Novo: Let me -- a high level, but then you can comment. So it depends on the product line. Obviously, a lot of the biofunctional actives and actually micro goes into the skin care and those areas. So it's a product mix. And it's the base business, but Jim can give more color on especially on the base business. Absolutely. Yes. So John, as you mentioned, I mean, a lot of our innovation and globalized businesses are both focused in skin and hair, and that is the majority of our Personal Care business, and we're seeing really nice growth in both of those segments. In Oral Care, we also -- and as no surprise, we've shared it in the past, we do have sometimes order pattern timing. And so we are seeing some shift again this year in order pattern timing, fine for the full year. And so that's driving some of maybe the lower comps on a prior year basis. And you'll see that step up as we go through the balance of the year in oral. Operator: Our next question comes from Mike Harrison of Seaport Research Partners. Michael Harrison: I had a question on Life Sciences. The last time we went through a round of supply chain disruption and kind of an inflationary cycle, you guys ended up picking up some market share kind of temporarily in the pharma space and then you ended up giving it back. Just curious, could we see that kind of dynamic again given maybe some of the challenges that your competitors are seeing in Europe and Asia? And how would you approach the situation differently to make sure that you're generating more durable share gain with some of your customers? Guillermo Novo: So Mike, let me high level and Alessandro, if you have anything specific, but just at a high level. I mean in this level of uncertainty with the war, all the news and analysis that we're getting would be, hey, if this persists, the cost structures for China or Asia in general, India would also be impacted and also for Europe would increase. So we are one of the few large producers in that product line from the Western world and we're U.S.-based. There's not a lot of other production at our scale in the U.S. Most of our competitors are either in Europe or in China. So there is an opportunity. I think as Alessandra said, there is not a shortage at this point in time. So that would be not an issue of cost. I think, would be more of an issue of availability, especially for Europe and for China. So there is an opportunity that, that could evolve as we move forward. I think what would we do? Obviously, I think, one, just this risk reinforces for customers the need to be balanced in terms of their supplier base and having a balance and a U.S.-based good energy costs, good position from a cost structure is obviously a favorable reminder for everybody, and I think that plays well for us. But obviously, we can do if that scenario starts to play out, there's things that we can do in terms of contracts and how we want to play it. But I think importantly, we would also be very clear with everybody on what's -- what are some of these share shifts that are permanent versus that would be transitory. And -- but we would maximize our performance as orders come in. But if you want to -- anything else you would add? Unknown Executive: Yes. As Guillermo mentioned, there is not a shortage at this time, but we are seeing as we have the largest -- the broadest portfolio from an excipient standpoint in the pharma industry. We are a reliable, high-quality supplier. So definitely, we have seen in the last month. I mean, customers nervous about their business continuity plans, BCP plans and looking at dual sourcing. So that opens opportunities for where we didn't have participation. So definitely, we see this as -- there are opportunities. And as Guillermo mentioned, making this more with long term as far as agreements. But definitely, we expect to see life sciences, specifically pharma continue to deliver healthy growth in the second half of the year and going forward, we see the resilience of the pharma demand, and we are working on basically capitalizing on the momentum of our globalized Innovate, which are areas where we have opportunities to grow our market share. So definitely, the disruption, we don't see a shortage, but it does bring us opportunities from -- as our customers work on their BCP plans. Guillermo Novo: One last thing, Mike, just on your comment, but just broader than just the VP&D question. I mean, there's a lot of uncertainty. And depending on how these things go, there's a lot of upside that can come in intermediates, I mean shortages. If things get worse, there's a lot of upside. We don't have a crystal ball. We don't think it's prudent just to be overly positive with the guidance that we're giving, especially on the revenue and the core businesses, the core performance of the business portfolio. I think we're in a healthy growth, healthy momentum, and we don't want to be overly optimistic and surprised on that side of the equation, and we're being transparent about it. I think on the EBITDA side, same thing. If that picks up, it will translate into greater EBITDA. But again, we're going to be more conservative. I think we're acknowledging our internal issues, but we want to be -- we're very pleased with all the broader external macro issues. And we do recognize that there is upside on pricing impact and that there is upside on -- if demand tightness increases. Operator: Our last question comes from John McNulty of BMO. John McNulty: I just wanted to revisit the commentary around the innovate part of your kind of midyear progress. So I think you were looking for $15 million for the year, and you're at $16 million already. I think you did $6 million in the first quarter of sales, that means $10 million in the second. So clearly, things are coming in, I think, better than what you expected and you're on pace for potentially coming in double what the target was going to be. I guess can you help us to think about where you expect to end the year in terms of a run rate, just so we can think about how some of that innovation may drive growth as we look into 2027? Guillermo Novo: I think the way you described it is sort of how we see it. I mean this is a cumulative metric for the year. So if we already gained the business and it's at a certain run rate, if it continues, we will continue with that level of performance. So that's sort of our expectation. As a reminder, I mean, we're -- from a dollar perspective, it's a lot of the core innovations that we've been working on, and it's a very, very healthy growth, both, I would say, right now, pharma and personal care driving a lot of it. But we're launching a lot of new products. So I think there's -- the opportunities for continued momentum there, both with core in the near term. And I would highlight that I'm very excited on the progress that the team is making on some of the new platforms in significant projects, be it in personal -- especially in personal care and the Specialty Additives. In Life Science would be more ag pharma takes a longer pipeline. So it's going to take a little bit longer for those things to take off. But all of them, we're really confident -- we've proven the value -- the technical and performance value of these platforms. The teams are now really working on product development, specific customer projects to tailor the technologies for them. So both in the near term, but more importantly, in the long term, we see continued momentum there. Operator: I am showing no further questions at this time. I would now like to turn it back to the CEO, Guillermo Novo, for closing remarks. Guillermo Novo: So thank you, everyone, for your time and your interest. Just wanted to reiterate the 3 big points that we made. From the business side, we're really happy with the overall performance of the businesses, the market trends, be it resilient life science, personal care, stable, specialty additives with growing momentum around share gains, Intermediates stable on the trough with opportunities depending on market dynamics to improve, globalize and innovate very strong. Competitive dynamics have been -- continue to be strong, but stable. So that is giving us room to really start to drive our own agenda moving forward. And we haven't seen any significant prebuying of our things. So overall, the business side of things are moving probably stronger on the stronger side of our expectations. We are moving on pricing, and there is upside in terms of the financial impact there. We're muting that a little bit just with caution on demand outlook in core markets that we don't have a crystal ball, and we're not seeing the immediate recovery. Coatings, North America, Europe is a big example. So we're following the lead of our customers and what they're saying. And lastly, it's the real issue for the outlook changes that we have is more our operating performance and our manufacturing, 3 issues that have impacted us, 2 are behind us. Calvert City, the equipment failure and the delays in getting the replacement equipment, which impacted our absorption, weather impacts. And right now, the big focus for us is Hopewell and getting it back on productivity. We are frustrated with that part of the performance, but we're working on it. That's in our control. It does not represent a view of the broader portfolio or all the bigger strategic actions, and we're confident that we will be overcoming that in the near future. So thank you for your time. We look forward to connecting with you after and answering any other questions you may have. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to Entergy Corporation's First Quarter 2026 Earnings Call and Teleconference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, press star one again. I will now turn the call over to Liz Hunter, Vice President of Investor Relations for Entergy Corporation. Liz? Liz Hunter: Good morning. Thank you, John, and thanks to everyone for joining this morning. We will begin today with comments from Entergy Corporation's Chair and CEO, Andrew S. Marsh, and then Kimberly A. Fontan, our CFO, will review results. In today's call, management will make certain forward-looking statements. Actual results could differ materially from these forward-looking statements due to a number of factors, which are set forth in our earnings release, our slide presentation, and our SEC filings. Entergy Corporation does not assume any obligation to update these forward-looking statements. Management will also discuss non-GAAP financial information. Reconciliations to the applicable GAAP measures are included in today's press release and slide presentation, both of which can be found on the Investor Relations section of our website. And now I will turn the call over to Drew. Andrew S. Marsh: Thank you, Liz. Good morning, everyone. We had a productive first quarter in which we delivered strong financial results. We launched our Fair Share Plus pledge, and we advanced customer initiatives with the execution of several electric service agreements. Beginning with financial results, today we are reporting first quarter adjusted earnings per share of $0.86. 2026 guidance remains on track, and we are increasing our already strong adjusted EPS outlooks driven by 8.5% retail sales growth. Now I will cover the business updates for the quarter, and as always, I will start with the customer. For several years, we have worked with stakeholders to recruit data centers and capture the transformative impact they can have on our communities through investment, jobs, and other support while at the same time protecting and benefiting existing customers. Earlier this year, we formalized that commitment with the launch of our Fair Share Plus pledge. The Fair Share Plus pledge is a set of guiding principles that ensures that data centers pay their fair share for the power they consume, plus additional benefits for customers and communities. Our pledge aligns with the rate payer protection pledge that our customers signed with the White House. Fair share is achieved in several ways. Minimum bills and contract length cover incremental costs. Termination provisions ensure current customers avoid unneeded costs. Clean energy terms support a potential future transition and strong credit terms give us confidence in all of it. Fair share also means that data centers cover their portion of fixed costs that our current customers pay for today. The fair share portion alone is the source of the estimated $7 billion of benefits we have highlighted, and current customers' bills will be lower than they otherwise would have been because data centers are paying the incremental infrastructure they need as well as their share of fixed costs. The plus component is all of the community benefits originally envisioned by our state and local leaders, including well-paying jobs and targeted workforce development, a substantial influx of new support for schools, nonprofits, and other state and community needs, and multiplier effects from new businesses and employment opportunities that come about because of the data centers. The plus component also includes a stronger electric system with reliability and resilience benefits, lower average fuel costs driven by more efficient generation, and specific customer benefits like low-income or energy efficiency support. The plus component is clearly valuable, and it is in addition to our estimated $7 billion in customer benefits. We are proud that the framework we committed to more than two years ago is already providing significant benefits for our customers and communities, and those benefits will compound well into the future. I cannot say enough about the tremendous work our employees have done to create this transformative opportunity for our communities while also providing so much value for our existing customers. And we are not done yet. In late March, we announced a new electric service agreement with Meta for another data center in North Louisiana. The fair share value from this agreement alone is expected to be $2 billion, which is included in the $7 billion I mentioned. In the plus category, over the next 20 years, Meta has made other commitments: $140 million for energy efficiency programs, and $60 million for our Power to Care program. Entergy Louisiana will match Power to Care funding, bringing the increase to $120 million. For context, that is a five-times annual increase over 2025 levels that will meaningfully improve outcomes for our most vulnerable customers. Shortly after executing the agreement, Entergy Louisiana filed an application with the Louisiana Public Service Commission requesting approval for assets needed as a result of adding the new Meta data center to the system. The investment includes seven new combined cycle units, transmission infrastructure, and battery storage facilities. The cost of the proposed facilities will be covered by payments from Meta, whether from their tariff or other contributions, yet all customers will realize reliability and resilience benefits and lower fuel costs from these investments. We also agreed to pursue another 2.5 gigawatts of renewables and further investigate CCS, nuclear upgrades, and new nuclear to support Meta's clean energy goals. We will add projects to the plan as assets are identified. This month, the commission affirmed that our request falls under their new Louisiana Lightning initiative, and they directed that the procedural schedule should support a decision at the December B&E meeting. The commission's Lightning initiative is part of Governor Landry's Project Lightning Speed to support economic development that provides significant benefits to state and local communities. We are requesting approval for more than $15 billion in capital with about $14 billion in our four-year plan. As a result of the agreement, and pending the approval request, we are also raising our sales and adjusted EPS outlooks. Kimberly will discuss in more detail. Beyond the Meta agreement, so far this year, we have signed ESAs totaling over 1,000 megawatts. These agreements were from multiple industries across all our operating companies, and they indicate that customer growth beyond data centers remains robust in our region. We also continue to receive data center interest within our service area. After all agreements signed to date, including the recent agreement with Meta, we still have a pipeline of 7 to 12 gigawatts of potential data center customers that are not in our plan. Moving beyond the customer growth update, I would like to cover a few more items. Operational excellence remains a key focus area, and we will talk in more detail about that at Investor Day. For today, I will share a couple of highlights. Orange County Advanced Power Station achieved its first fire milestone, bringing it one step closer to delivering reliable power for our customers in Texas. We expect the plant to be fully online in late summer. Recently, our power delivery team identified more than $30 million in capital savings on the Commodore to Churchill 230 kV project. Our engineers developed a solution which improved the design, lowered materials cost, and enabled faster customer delivery. Importantly, the improvement can be applied to future large transmission projects. This kind of innovative thinking combined with the scale of our capital plan continues to lower cost for customers and unlock additional customer investment opportunities. Entergy Texas is working to expand its firm generation capacity to serve a growing customer base. Following the commission's feedback, they issued an RFP in February for combined cycle capacity and energy. Across our system, we continue to expand our renewables portfolio driven by our customers' desire for clean energy options. We have active RFPs for more than 1,600 megawatts of renewables and storage, and we have over 4,500 megawatts of renewables and storage in various stages of negotiation, after selections from prior RFPs in Arkansas, Louisiana, and Mississippi. Roughly two-thirds of the megawatts in negotiation would be owned. In addition, we are actively managing proposals through Louisiana's accelerated renewable review process. These are important tools to help us identify projects supporting customers' clean energy goals. As we indicated on the previous earnings call, Entergy Arkansas filed its base rate case in late February requesting a $45 million rate change, which is less than 2%. Because bill impacts vary by customer type, the residential impact would be less than 1%. Some of the features that we requested include an optional time-of-use rate that provides residential customers with the opportunity to lower bills by shifting energy use to lower-cost hours, and low-income rates that provide a 50% discount on the customer charge for households that qualify for LIHEAP assistance. We also elected to resume Entergy Arkansas four-year FRP after the rate case is resolved. Entergy Mississippi filed its annual formula rate plan with no change requested. Arkansas and Mississippi both have mechanisms to provide cash allowance for funds used during construction for investments to support significant economic development projects. To that end, Entergy Arkansas filed its first annual Generating Arkansas Jobs Act rider in March, and Entergy Mississippi updated its interim facilities rate adjustment in January. One additional comment about Mississippi: The state recently passed legislation authorizing securitization of costs associated with Winter Storm Fern. Kimberly will provide additional details on that as well. Beyond Fair Share Plus, our employees continue to work every day for the benefit of the communities we serve. We recently participated in the industry's LIHEAP Action Day in Washington, D.C. to advocate for energy affordability for our customers in need. Congress approved an appropriations package that includes a $20 million increase for LIHEAP, which reflects growing recognition of the program's importance. For more than 15 years, Entergy Corporation has also provided free tax preparation for low- to moderate-income customers at sites throughout our region. In 2025, our customers received $54 million in Earned Income Tax Credits, putting money directly into our customers' pockets. Finally, we are very excited about our upcoming Investor Day in June. We plan to walk through the clear line of sight for our multiyear strategy and outlooks in detail, and you will hear directly from our leadership team on the opportunities ahead. Highlights will include a conversation with large customers on how we partner together to create better outcomes for our key stakeholders, a view into our operational strategy to successfully execute on the large build cycle ahead of us, a discussion of the work we are doing to unlock additional deployment opportunities, a review of our approach to maintaining financial discipline, and, finally, a deeper dive into the significant near- and long-term customer growth opportunities to sustain our strong growth well beyond our five-year outlook. We had a productive start to 2026 with solid progress and execution across the business, and by continuing to put our customers first, we will deliver premium value to each of our key stakeholders. We look forward to discussing this in more detail with you at our Investor Day. I will now turn the call over to Kimberly for the financial update. Kimberly A. Fontan: Thank you, Drew. Good morning, everyone. I will now review our financial results and provide an update on our long-term outlooks. Our results for the quarter were straightforward. Our adjusted EPS was $0.86, as shown on slide 4. The primary drivers were from the effects of investments made for our customers, including regulatory actions, net of higher depreciation expense, taxes other than income taxes, and interest expense from financing capital expenditures. The per-share increase was partially offset by a higher share count from settling equity forwards. Industrial sales growth was very strong at 15% as new and expansion projects continue to ramp up their operations. Overall retail sales increased 6%. The earnings contribution from retail sales growth was essentially neutral as higher revenue from the industrial growth was offset by the effects of weather, including positive weather in the first quarter of last year. As Drew discussed, the Meta contract creates significant customer and community benefits. In addition, we are refreshing our outlooks to reflect the new agreement and other minor updates. The highlights are summarized on slide 5. This agreement further strengthens our retail sales outlook. We now expect approximately 8.5% compound annual retail sales growth through 2029, driven by 16% industrial growth. Data centers continue to be a significant driver, along with growth from a variety of traditional Gulf South industries, including LNG, industrial gases, petrochemicals, agricultural chemicals, and primary metals. As a reminder, we only add hyperscale data centers to our plan once we have a signed electric service agreement, and then we include them at minimum bill levels. This conservative approach ensures that we can count on the revenue that we have included in our plan. Our customer-centric four-year capital plan is now $57 billion, which is $14 billion higher than our plan last quarter. The increase includes the investment needs resulting from the new customer agreement, primarily seven new CCCTs as well as battery storage projects. All seven CCCTs have in-service dates in 2030 and 2031, such that not all of the capital for these units is in our four-year horizon. For the transmission investments in the filing, we have made a conservative assumption not to include them as we work through financing options. We have also not yet included the renewables or Riverbend nuclear upgrade investments discussed in our filing. These would be added to the plan as specific projects are firmed up. The equity associated with our four-year plan is now $6.6 billion at the lower end of our target range of 10% to 15% of the total capital plan. Our strategy to be proactive in addressing our equity needs provides certainty and flexibility, giving us ample time to raise capital. We have successfully sold forward contracts through our robust ATM program as well as the block transaction we executed last March. The agreements we have in place cover about 30% of our four-year need. With $1.9 billion already contracted, that leaves $4.7 billion to be sourced, which is not expected to be needed until late 2027 through 2029. Our forecast also includes $3 billion of hybrid instruments at parent. Slide 6 summarizes our credit ratings and affirms that our credit metric outlooks remain better than rating agency thresholds. Our plan reflects FFO to debt at or above 15% from Moody's metric throughout the period, giving us capacity to manage events in the business as they occur. Our financial health is bolstered by the work we have done to strengthen our balance sheet and create benefits for customers, including structuring large agreements to protect existing customers and our credit, solidifying our pension funded status, and receiving constructive regulatory mechanisms. You may recall our system experienced an ice storm earlier this year. Mississippi's recent legislation provides a path to securitize the storm cost, which we estimate in the $200 million range. This will lower the overall cost for customers. We will submit our filing by October 5, and we expect the commission to issue a decision within 60 days of our filing. As shown on slide 7, we are affirming our 2026 adjusted EPS guidance and updating our outlooks. For 2026, we are firmly on track, and we remain confident that we will deliver on our guidance. Looking ahead to the second quarter, with other movements in our plan, we expect other O&M to be approximately $0.15 higher than the same quarter last year, reflecting higher vegetation spending and the timing of nuclear maintenance. Beyond 2026, today's update reflects our new capital plan, which includes investment resulting from the latest customer agreement as well as other updates since the third quarter. Our adjusted EPS outlook for next year is now $0.20 higher. As the investment accumulates, the increase grows ratably to $0.50 in 2029 to $6.40. We will extend our full outlook to 2030 at our Investor Day in June. As a preview, the 2028 to 2029 year-over-year adjusted EPS growth was 12%. We expect approximately the same for 2030. Entergy Corporation is executing a differentiated growth strategy delivering strong, sustainable results. Through our disciplined customer-centric approach, we are creating value for all our key stakeholders, including our owners. Our plan is solid with clear line of sight to achieve our outlooks, and we have significant opportunities before us. This update makes our already strong growth profile stand out even more. And now we are happy to take your questions. Operator: We will now open the call for questions. Press star followed by the number one on your telephone keypad. Again, press star 1 if you would like to ask a question. In the interest of time, we ask that you please limit your questions to one primary and one follow-up. Our first question comes from the line of Shahriar Pourreza with Wells Fargo. Shahriar Pourreza: Hey, guys. Good morning. Morning, Drew. So, obviously, a great update this quarter with the Meta deal. I just want to be crystal clear here as today's results just kind of raise the bar again. Does the CapEx increase today fully support the deal, or do you see additional CapEx and earnings accretion as we shift focus to the Analyst Day? You just had a strong update, so should we assume there could be further updates to the capital plan in addition to the roll forward in the June Analyst Day? Thanks. Kimberly A. Fontan: Yeah. Good morning, Shar. As I noted, $14 billion was added to the plan. The filing had about $15 billion, and the CCCTs close outside the period. But what is not in the plan is the renewables that are under the agreement as well as some of the nuclear pieces. So, certainly, there is more opportunity both in the period and beyond, but what we have provided here today is largely around the generation pieces that you see in the filing. Andrew S. Marsh: And what we would probably expect for our Investor Day through 2029—because it is only six weeks away—it is a very short window. We tried to give you a preview of it today. Shahriar Pourreza: Got it. That is perfect. And then just lastly, in terms of financing, what are the specific mechanisms that keep incremental equity funding for the $15 billion in new CapEx under 20%? Is that something that would get replicated beyond the current CapEx plan? I mean, most of the new investment is in Louisiana, but do you see the same accretion from DC clustering in Arkansas and Mississippi? Thanks. Kimberly A. Fontan: We have been able to maintain that 10% to 15% rate on our capital plan for some time, and I do not see any factors that change that. There are a number of factors that help support that, whether it is the mechanisms that we have, the forward mechanisms, the recovery of AFUDC during the construction period, I mentioned funding of our pension status. So it is a variety of mechanisms, but no fundamental structural change that I see that causes that to really shift as we think about new capital. Shahriar Pourreza: Okay. That is perfect. Thank you, guys, and big congrats. You keep raising the bar for the industry. Andrew S. Marsh: Thanks, Shar. Operator: Our next question comes from the line of Nicholas Joseph Campanella with Barclays. Nicholas Joseph Campanella: Hey. Good morning. Productive quarter, like you said. Thanks for all the updates. I just wanted to follow up on some of your prepared remarks. You said that you have a pipeline of 7 to 12 gigawatts that are still not in the plan. You used to have this nice slide around EEI which kind of showed how much equipment you secured to facilitate growth above the plan. So can you just talk about, after this Meta announcement and the other gigawatt that you highlighted as well that you executed on in the quarter, what does the equipment outlook look like for you now? Thank you. Kimberly A. Fontan: Hi, Nick. Appreciate the question. Yes, Drew did confirm that even after this agreement, our pipeline is still 7 to 12, and that underscores the fact that we continue to see that pipeline move and refresh. From an equipment perspective, we will give you a full update in just a few weeks at Investor Day, but we have additional turbines lined up, and we are not standing still relative to continuing to ensure that we can support that incremental growth. We will also talk about what else is out there relative to all of our other industrial customers in just a few weeks. Nicholas Joseph Campanella: Okay. Thank you. Looking forward to that. There was some discussion in the filing at the regulator about exploring new large-scale nuclear studies at certain sites. And, Drew, just maybe given your involvement in NEI, can you talk about where the company stands on committing to large-scale nuclear at this point, what the industry still needs to move forward, and what Entergy Corporation would need to move forward? Is this something that we should be keeping in mind as we get to the Analyst Day update? Thank you. Andrew S. Marsh: Thanks, Nick. Certainly, new nuclear is something that we believe we will need when we look out into the long term. We have talked about this in the past. We do not think we will get to something like 2050 without having new nuclear as part of our portfolio. So it is something that we are continuing to actively explore and investigate, and the agreement that we signed with Meta helps move that forward a little bit. We are in the same spot from a financial risk perspective that we always have been, and that is that there are significant challenges that we still have to overcome from a cost and cost-uncertainty perspective. We are mindful of what that could mean to the balance sheet of Entergy Louisiana or any of our operating companies. We are not going to enter into any agreement that creates an existential risk right off the bat, and we have said that many times. At our Investor Day, we will have some ideas about how we could manage that and how we could move the needle on the costs and the risk associated with construction. That could help us get there, but our balance sheet is not big enough to cover the whole risk by ourselves, and we are aware of that. Nicholas Joseph Campanella: Thank you. Andrew S. Marsh: Thank you. Operator: Our next question comes from the line of Jeremy Bryan Tonet with J.P. Morgan. Diana Niles: Hi, good morning. This is Diana Niles on the call for Jeremy. Thanks for taking my questions today. Andrew S. Marsh: Absolutely. Good morning. Kimberly A. Fontan: Good morning. Diana Niles: Could you elaborate on the 1,000 megawatts of additional ESAs beyond the Meta agreement, and maybe how you would characterize the kind of industrial breakdown there and ramp going forward? Andrew S. Marsh: They are things that you are familiar with—steel, petrochem. I do not have a specific by-industry breakdown. Lots of smaller ones. There are many that are in the less-than-20-megawatt range, but altogether, they add up to 1,000 megawatts. I do not have a specific breakdown for you. I will also add that we probability-weight those non-data-center projects. They are not all in at 100%. And as Kimberly noted in her remarks, the data centers only go in whenever we have a signed ESA. Diana Niles: Got it. Thank you. So to maybe clarify there, there could be upside should the more traditional industrial load all come on at the full capacity? Andrew S. Marsh: That is correct. If it were all to come on—they are probability-weighted for a reason because that does not usually happen—but if they were all to come on, yes, there would be upside. Diana Niles: Got it. Thank you. And to piggyback on the prior question, I saw that the study in the Meta agreement speaks to AP1000s. Was that selection of technology a preference from Entergy Corporation or from the customer? Andrew S. Marsh: We are supportive of any of the technologies out there, and we are investigating and talking with the vendors for all kinds of different technologies. Certainly, the AP1000 is one that has been constructed and built, and there is a full design. It is also a technology that we are familiar with because it is a PWR. So I think those are things that we are comfortable with, and there are some benefits associated with that, but we are more or less agnostic to the technology. What we are more concerned about is the risk sharing for construction. Diana Niles: Got it. Thank you. Appreciate that. Andrew S. Marsh: Thanks. Operator: Our next question comes from the line of Richard Sunderland with Truist Securities. Analyst: Hey. Good morning. Thanks for the time today. Andrew S. Marsh: Hey. Good morning. Analyst: Sticking with some of those other CapEx elements for Meta that are out of the plan, could you speak a little bit more to guardrails, timing, other elements you have an eye to before you would go and add those to the plan? And then, similarly, on the size and scope, I know the transmission you outlined, but what are you thinking about as an order of magnitude on the other buckets? Thank you. Kimberly A. Fontan: Good morning, Richard. Certainly, we saw Meta as well as other customers make commitments or sign up for new solar in multiples of gigawatt amounts. We do have open RFPs to build those as well as looking at our own self-builds that we would put into those RFPs to fill that, and we would be looking to fill that over the next several years. You could see some of that come into this four-year plan, and you could see some of it stretch a little bit beyond that. From a size and scope perspective, 2,500 megawatts in this Meta agreement, 1,500 megawatts in the previous agreement—all provide a good framing around incremental solar that we can have, and then you can have incremental in other areas as well. And I said solar, but it could also be batteries as well. Analyst: Got it. Thank you. That is helpful context. And then turning back to the 7 to 12 gigawatt backlog. Did the Meta addition today move through the backlog and then you backfill with new interest to get back to the 7 to 12 gigawatts? And even on the industrial side, how have some of those trends been relative to crystallizing the 1,000 megawatts that you also referenced today? Any color there? Kimberly A. Fontan: On the 7 to 12, you are exactly right. Meta would have moved through that. It is now in our plan, so it is not in the 7 to 12. That reference is data center opportunity that is outside of our plan. Our 7 to 12 was never our full scope of plan. As things move through, we have additional things coming in as well as additional interest. On the broader customers, what Drew referenced on the 1,000 megawatts is really closing out specific customers—either getting them to sign agreements, which would adjust the probabilities as well. We will give you a full update on that pipeline again in a few weeks, but that continues to be strong as well. Analyst: Great. Thank you. Looking forward to the updates. Operator: Our next question comes from the line of Paul Zimbardo with Jefferies. Paul Zimbardo: Hey. Morning. Can you hear me okay? Andrew S. Marsh: Yes. You were breaking up, but we can hear you now. Paul Zimbardo: Thank you. And again, setting a low bar for everyone by saying a productive quarter—my goodness. One, I did want to clarify, and Kimberly mentioned a little bit, in terms of the conservatism on the minimum take-or-pay minimum bills, is there any way to frame what that benefit can be to earnings or cash flow? Any parameters would be helpful there. Kimberly A. Fontan: We have not given specifics around the minimum bill levels, except to say that on all of our industrial customers we have minimum demand charges, and on all the hyperscalers it is significantly higher than what we have had on traditional customers for the amount of incremental investments that they drive onto the system. In the forecast period, these customers are going to be ramping up, so their minimum bills are coming in during the period and they go into the ramping period. You are going to have more opportunity once they get to full load versus a minimum bill, but certainly there could be some opportunity near term if perhaps they ramp faster. Generally, the minimums are pretty substantial, so there is some margin but it is not equal to full-load operations. Paul Zimbardo: Okay. That is helpful. One other I add—and again, cannot wait for the Investor Day. As we think about the capital you put into the plan today relative to the $0.50 of increase in 2029, is there any information on shaping? Is that kind of back-end weighted in the 2029 CapEx? It seems like there are more earnings to come from that capital. Any flavor you could provide would be helpful. Kimberly A. Fontan: You can see the chasing of the earnings through 2027, 2028, 2029 in the materials. And in my comments, I noted as a preview to 2030 that we would expect the year-over-year from 2029 to 2030 to be roughly the same as the year-over-year from 2028 to 2029. That gives you some indication of how that shapes into that fifth year. Paul Zimbardo: Awesome. Well, thank you very much. Andrew S. Marsh: Thanks, Paul. Operator: Our next question comes from the line of UBS. Please go ahead. Analyst: Yes. Hi. Good morning. Just isolating the Meta update here. Is the $14 billion of incremental capital entirely attributable to the expansion of that agreement? Kimberly A. Fontan: Yes, that is essentially the add here, consistent with what is included in the filing. I went through what we included and what was not, but that is essentially the add. Andrew S. Marsh: There has been a bit of capital added since our last earnings change—you will recall that we added Cottonwood, and there have been some other things that have happened—but certainly, the $14 billion is the key driver here. Analyst: Right. And then on top of that, there is still some residual generation spend that will show up in 2030, and then you talked about the transmission and renewables also not included. When we think about the totality of what that Meta deal is worth in terms of CapEx, it is obviously something north of the $14 billion—an incremental several billion. Is that fair? Kimberly A. Fontan: Yes. Drew mentioned in his comments that it was more than $15 billion that happens outside the period, and certainly depending on where the solar and battery—the renewables—land gives you some upside opportunity there. Analyst: And when should the full earnings run rate be realized on the Meta expansion? I know you are talking about the CODs are 2030 into 2031. Is that when we think about the entirety of the return on the capital being reflected in financials—around mid-2031? Kimberly A. Fontan: The CCCTs finish closing in 2031, so most of your capital is in by then. We gave you the ramp-up through 2030, and we will talk about what longer term visually looks like—without giving you specific outlooks—at Investor Day. Analyst: Okay. That is it for me. Thank you. Operator: Our next question comes from the line of Steven Isaac Fleishman with Wolfe Research. Steven Isaac Fleishman: Hi. Thanks. I think a lot of my questions got answered on this. But it sounds like there is meaningful earnings that come from the Meta CapEx—even though it is largely in place through 2029, the earnings tail a little later as the projects come on? Kimberly A. Fontan: Yes. With all construction projects, you have AFUDC leading up through the construction period and then again in 2030. I would see a similar uptick ratably as to what we saw in the years that we gave you, getting you to the similar type of growth rate in 2030. Steven Isaac Fleishman: Great. And then the $14 billion that you added to CapEx, is that before CIAC or after? Because we do not have rate base to match up. Kimberly A. Fontan: I would think about that related to CCCTs as largely overnight cost. We did not include transmission, and the financing costs are largely not included in there either. Steven Isaac Fleishman: Okay. You also mentioned this renewables RFP separate from Meta—the 4.5 gigawatts, of which two-thirds would be owned. Is that in your plan at two-thirds owned or not? Kimberly A. Fontan: About half of that is not in our plan. We had some projects that we worked to safe harbor or get ahead of relative to other solar interests, but there is a good bit that is not in the plan. Steven Isaac Fleishman: And then on equity—you do not need equity for a while, timing-wise, late 2027 or 2028–2029. How are you thinking about approaching equity? Are you continuing to try to get out ahead of that? Any thoughts on ways to approach getting the equity for this? Kimberly A. Fontan: We do not require equity until well into 2027, but we have been proactive about ensuring that we stay ahead of that. Thirty percent is already on the table. The ATM has been an effective tool, and we were able to use a block last year. We do not require additional equity until 2027, so we cannot speak to specific timing, but I would think about it that way. Steven Isaac Fleishman: Okay. Operator: Our next question comes from the line of Sophie Ksenia Karp with KeyBanc Capital Markets. Sophie Ksenia Karp: Hi. Good morning. Thank you for taking my question, and congratulations on a strong update here. Maybe if you could talk a little bit about the regulatory mechanisms you have, particularly in Louisiana and other areas that may experience significant growth. Do you feel like you have sufficient regulatory recovery mechanisms in place? And is there a risk of some regulatory fatigue if the capital grows as much as it has been growing? Andrew S. Marsh: Thanks, Sophie. Good morning. I think we have adequate regulatory mechanisms in place. You have seen our regulators begin to change some of their processes. A good example is in Louisiana—the Louisiana Lightning initiative—to accelerate reviews for strong economic development projects. That is really the key: if we are providing significant benefits for customers and communities, I think the regulators will be very supportive of these kinds of ongoing activities. I do not know that there would be necessarily any fatigue associated with that. That is why we have really been focused on these things. If we cannot provide benefits, that would be a different story, but we have been able to do that pretty well so far, and we would expect to continue that story going forward. Sophie Ksenia Karp: Thank you. And then a real quick one: how are oil markets and the conflict in the Middle East impacting your industrial customers—either positively or negatively—on the ground in your territory? Andrew S. Marsh: Generally, I would say it has been positive for most of our industrial customers. The spreads between oil and gas have increased, as have geographic spreads between the Gulf Coast and Asia/Europe. Our industrial customers along the Gulf Coast have benefited somewhat from the conflict because it has dislocated prices a little bit. But it is not out of alignment with where we have been over the last decade to 15 years. Prices for oil were a little bit lower early in the year and are higher now, but the spreads they pay attention to are similar to what they have been seeing for a long period, and, frankly, we would expect them to continue to stay in place well after the conflicts are resolved. Sophie Ksenia Karp: Appreciate it. Operator: Our next question comes from the line of RBC Capital Markets. Analyst: Drew and Kimberly, thanks very much for taking my question. If I look at the change in terawatt-hour sales growth from April to this update, it looks like it is just about 3 terawatt-hours. If I try to back into what that means for incremental load from data centers, it seems like it is only 400 or 450 megawatts. Can you talk a little bit about how the Meta facility ramps? If it is 5.5 incremental gigawatts, it feels like there is a ton of terawatt-hour sales that are going to come beyond 2029. I want to understand what that means both for earned returns and also capital deployment beyond 2029. Kimberly A. Fontan: You cut out a little bit, but I think your question was how the Meta agreement ramps and how to think about the terawatt-hour sales you are seeing. Certainly, we have to build to support this customer. You see that in the CCCT deployment, which come online in 2030 and 2031. They are able to get some ramp in the period, but full loads are not going to come online until all of those assets come online. Recall that we have minimum bills on these customers as they ramp, and that minimum bill is reflective of ensuring that they cover the incremental cost they drive over the life of the contract, so that minimum bill may not be directly in sync with the ramp. What we have included in our forecast is the minimum bill here, but you should continue to see a ramp as those assets come online. Analyst: And any flavor for what adding 5 gigawatts to the existing sales forecast does to sales figures through 2032 or so? It seems like a very significant incremental step up. Does it have customer benefits or rate benefits that you can pass back? Any way to think about that? Kimberly A. Fontan: We will give you the sales growth through 2030 in just a few weeks, and then we will show you how we think about opportunities longer term. All customers are benefiting from this ramp and from the minimum bills, to Drew’s point—both from the fair share component ensuring that they are paying their portion of the incremental cost, and that will flow through the traditional mechanisms in Louisiana and similarly in other jurisdictions. So there is opportunity and benefit there for other customers. We will provide you that sales forecast in just a few weeks through 2030. Analyst: Great. Thanks. That is all I had. Operator: Our next question comes from the line of Chris Ellinghaus with Siebert Williams. Analyst: Drew, vis-à-vis the Iran issue, is that providing some impetus or interest in new ESAs and in companies’ calculus of where the world markets are? Andrew S. Marsh: Perhaps. We have a lot of natural advantages associated with where we are located. We are along the river and the Gulf Coast, we have access to global markets, significant energy infrastructure with pipelines and low energy costs, and rail and other transport availability to domestic markets. We are well-situated with a supportive community that values industrial investment. All of that has meant that when people look around for places to invest in industrial facilities, they look at the Gulf Coast. Over the last few years, we have seen a lot of interest in onshoring because of geopolitical uncertainty. I would say that this current situation is a continuation of that. To the extent that people around the world are looking for a stable place to invest, given the opportunities and advantages associated with the Gulf Coast, it becomes a natural potential location. It is a very attractive place to invest. So this situation may cause people to look a little more, but it is not a new scenario, and it goes with the long-term commodity spread discussion I mentioned a minute ago. Analyst: That makes sense. Are there any other Cottonwood-type transactions in your mind, sort of in the hopper? Andrew S. Marsh: We normally do not talk about M&A, but in this case, there is really just not much in terms of other generators that are around. I would not expect asset M&A to be a significant part of our potential capital outlay going forward beyond Cottonwood. Analyst: Given the significant increase to the CapEx, can you give us any idea of how it might alter your thinking about the cadence of dividend payouts over the four-year horizon? Kimberly A. Fontan: We have historically had a 6% growth rate on our dividend, and we are obviously growing faster than that, which affects the payout ratio. Our philosophy has been to balance the growth rate in earnings and sales relative to the growth rate in the dividend. To date, that has been our approach, and I think that is an appropriate balance over the next four years. Analyst: Lastly, Mississippi data center interest seems to be exploding. Can you talk about what is in the plan at this point and whether there is a significant bucket of unplanned at this point? Kimberly A. Fontan: I would reference you back to our 7 to 12 gigawatts, which is not OpCo-specific but our enterprise view of the data centers. We do not provide that breakdown by where they are in the pipeline or by operating company. Still a significant opportunity before us—one that we are working to shore up and capture as much as we can. Lots of opportunity there, but no specifics by operating company. Andrew S. Marsh: And the data centers that are in our plan are already signed. We do not have any data centers in our plan that are prospective. Analyst: Right. Okay. Thanks for all the updates. A great quarter. Operator: Our last question for today comes from the line of Andrew Weisel with Scotiabank. Andrew Weisel: Hey, everybody. Good morning. Two for me. First, in terms of financing the incremental $15 billion of CapEx or so for Meta, I understand that Meta is going to be paying for that under the Fair Share Plus commitment as part of the setup, but you are including that in the CapEx and the equity plan. Help me understand how that works from a timing and cash flow perspective. If you are not going to collect the revenue—or how and when will you collect the revenues relative to the construction and equipment payments—and how and when will the $2 billion or $7 billion be returned to customers? How does that work in terms of the timing and how that impacts your credit metrics? I know you reiterated credit metrics, but how does that work in terms of the short-term impacts on credit rating metrics and your conversations with the agencies and cash flows? Kimberly A. Fontan: Our Fair Share Plus is our commitment to ensuring that these customers are paying their fair share, and that covers a number of areas. One is ensuring that they are paying to support not just the incremental costs that they drive, but also the embedded costs that are already in customers' bills. That shows up in ways like in Mississippi—we have talked before about Superpowered Mississippi—where they are deploying $300 million of capital without incremental cost to customers because the embedded costs that AWS is supporting enable us to continue to make investments for customers without incremental cost. Another example is in Louisiana—we have securitized storm costs on bills already related to previous storms, and these customers will pick up their allocable portion of those costs. Customers that were paying will see slightly less cost. That is how that $7 billion effectively flows back to customers. Andrew Weisel: And in terms of the credit metrics and timing issues, is there going to be temporary pressure on the credit metrics during construction? Kimberly A. Fontan: As I noted in my comments, our credit metrics on a Moody's basis are 15% or better throughout this four-year forecast period during this heavy construction period. That has a lot to do with all the constructive mechanisms we have as well as how we are contracting. It does not, in and of itself, put pressure on the metrics because it enables you to make investments as these customers pay a portion of incremental costs that customers otherwise would have paid previously. Andrew Weisel: Okay. Very impressive. And one last one, if I may. The 15% industrial sales growth in the first quarter was notably better than your guidance of 10% for the year, and a big pickup from last year's full-year results of 7%. You mentioned it was a combination of new and expansion projects. Can you elaborate a little bit on what you are seeing? And does that change your expectation for the full year? Kimberly A. Fontan: We did have a good first quarter, but on a year-over-year basis we expect the customers to ramp up—that is what you are seeing there. It does not change what we expect for the full year. It does shore up that those are coming online. Even if the volumes were off a little bit, you would not see a decrement because of the minimum bills and other structures that we have to support. We are comfortable with our guidance, and we are pleased to see the volumes starting to come in. Andrew Weisel: Does it position you toward the high end, or is it too early to say something like that? Kimberly A. Fontan: It is way too early. It is first quarter, so we obviously have to get through the summer and through the end of the year. Andrew Weisel: Okay. Sounds great. Thank you very much. Andrew S. Marsh: Thank you, Andrew. Operator: Thanks, Andrew. And that concludes our Q&A session for today. I will now turn the call back over to Liz for closing remarks. Liz? Liz Hunter: Thank you, John, and thanks to everyone for participating this morning. Our quarterly report on Form 10-Q will be filed with the SEC at a later date and provides more details and disclosures about our financial statements. Events that occur prior to the date of our filing that provide additional evidence of conditions that existed at the date of the balance sheet will be reflected on our financial statements in accordance with generally accepted accounting principles. Also, as a reminder, we maintain a webpage as part of Entergy Corporation's investor relations website called Regulatory and Other Information, which provides key updates of regulatory proceedings and important milestones on our strategic execution. While some of this information may be considered material information, you should not rely exclusively on this page for all relevant company information. This concludes our call. Thank you very much. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines.
Operator: Greetings, and welcome to the Urban Edge Properties First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Areeba Ahmed, Investor Relations. Please go ahead. Areeba Ahmed: Good morning, and welcome to Urban Edge Properties First Quarter 2026 Earnings Conference Call. Joining me today are Jeff Olson, Chairman and Chief Executive Officer; Jeff Mooallem, Chief Operating Officer; Mark Langer, Chief Financial Officer; Heather Ohlberg, General Counsel; Scott Auster, EVP and Head of Leasing; and Andrew Drazin, Chief Accounting Officer. Please note, today's discussion may contain forward-looking statements about the company's views of future events and financial performance, which are subject to numerous assumptions, risks and uncertainties and which the company does not undertake to update. Our actual results, financial condition and business may differ. Please refer to our filings with the SEC, which are also available on our website for more information about the company. In our discussion today, we will refer to certain non-GAAP financial measures. Reconciliations of these measures to GAAP results are available in our earnings release and our supplemental disclosure package. At this time, it is my pleasure to introduce our Chairman and Chief Executive Officer, Jeff Olson. Jeffrey Olson: Thank you, Areeba, and good morning. We had a great first quarter, delivering results that exceeded our internal expectations. We generated FFO as adjusted of $0.36 per share, a 3% increase over the first quarter of last year. Same-property net operating income, including redevelopment, increased by 2.8%, primarily due to rent commencements from our signed but not open pipeline. Leasing fundamentals across our portfolio remains strong, reflecting continued demand from retailers seeking well-located, high-quality space. Our shopping centers, primarily anchored by grocers, discounters, off-price retailers and home improvement stores, along with shops comprised of quick service restaurants, health, fitness and service uses continue to generate increased traffic. During the quarter, we executed leases totaling 419,000 square feet, including 84,000 square feet of new leases at a strong 52% cash spread. Our leasing pipeline remains robust and should result in record leasing activity over the coming quarters with leasing spreads expected to exceed 20%. Our signed but not open pipeline remains a meaningful contributor to future growth, representing $22 million of annual gross rent or approximately 7% of current net operating income. This provides us with strong visibility into earnings through 2027. In March, we completed the acquisition of the Village at Bridgewater Commons, a 92,000 square foot shopping center located in Bridgewater, New Jersey for $54 million at a 7.7% cap rate. This property is situated in a highly traffic corridor within an affluent market. It attracts 2.2 million visitors per year, among the highest for its size. Tenants include Summit Health, Chipotle, Shake Shack, Millburn Deli, CAVA and Starbucks. We structured the acquisition of Bridgewater in an accretive 1031 transaction with the expected sale of a Kohl's-anchored property in New Jersey. Looking ahead, based on the results we achieved in the first quarter, we increased our 2026 FFO as adjusted guidance by $0.01 per share on the low end to a new range of $1.48 to $1.52 per share, reflecting 5% growth over 2025 at the midpoint. Urban Edge is well positioned to continue delivering steady growth, supported by strong fundamentals, our $22 million SNO pipeline, our $157 million redevelopment pipeline and future acquisitions. I will now turn it over to our Chief Operating Officer, Jeff Mooallem. Jeffrey Mooallem: Thanks, Jeff, and good morning. From an operating standpoint, the first quarter reinforced what we have been consistently seeing across the portfolio. Demand for our space remains strong and leasing momentum has not slowed. During the first quarter, we executed 45 leases, comprising 13 new leases and 32 renewals for a total of 419,000 square feet. New leases were signed at a same-space cash rent spread of 52% and every new lease signed this quarter, including 2 new anchor leases, have contractual annual rent increases of 3% or higher. We continue to push not only starting rents but also contractual rent increases in all of our deals, and we are seeing the results of that effort. Same-property leased occupancy at quarter end stood at 96.4%, a decrease of 30 basis points over the previous quarter and the first quarter of 2025. The decline was expected and was primarily driven by the recapture of the Saks box at Hanover Commons, where we are evaluating multiple potential uses, ranging from grocer to apparel to creating additional shop space. Based on the activity in our pipeline, we continue to believe that occupancy levels of 97% to 98% are achievable by the end of the year. In addition to leasing our remaining vacancy, we also are working to proactively take back space that is under leased. At several of our properties, we've approached tenants with low rents and average performance in an attempt to convert those spaces to better uses at better rents. This will become a bigger part of our growth in the coming years as market rents have now increased to the point that landlords can accretively terminate leases to make way for a replacement tenant, something that was nearly impossible a few years ago. For example, in Framingham, Massachusetts, we negotiated an early recapture right on our Kohl's space and are in active negotiations with multiple users to lease the space at a significantly higher rent. On the redevelopment front, we stabilized 4 projects totaling $7 million during the quarter with the rent commencement of Trader Joe's and Ross at The Plaza at Woodbridge, Lidl and Boot Barn at Totowa Commons, Texas Roadhouse at The Outlets at Montehiedra and Big Blue at Plaza at Cherry Hill. These projects generate nearly a 50% yield, which speaks to the lower level of landlord contributions national retailers are now accepting. Our total active redevelopment pipeline is now $157 million with an expected yield of 13%. These projects are largely pre-leased, providing both visibility and attractive risk-adjusted returns. With that, I'll turn it over to our CFO, Mark Langer. Mark Langer: Thank you, Jeff, and good morning, everyone. Our first quarter performance further highlights the stability and earnings strength of our portfolio, particularly in the current environment. FFO as adjusted for the quarter was $0.36 per share, reflecting 3% growth over prior year and was driven by the growth in same-property NOI, including redevelopment, which increased 2.8% compared to the first quarter of 2025. NAREIT FFO this quarter benefited from an $8 million gain recorded in other income received from the state of New Jersey for environmental remediation costs incurred a number of years ago. On the financing front, in March, we obtained a $62.5 million 7-year nonrecourse mortgage secured by The Plaza at Woodbridge at a swapped fixed rate of 5%. The debt markets remain highly liquid and competitive as evidenced from this recent transaction. We ended the quarter with total liquidity of nearly $1 billion, with $30 million drawn on our credit facility and no amounts drawn on either of the 5-year or 7-year delayed draw term loans. Our balance sheet is in excellent shape, which provides significant flexibility to pursue attractive growth opportunities that may arise. Looking ahead to the remainder of 2026, we have increased our guidance for FFO as adjusted by $0.01 per share at the low end to a range of $1.48 to $1.52 per share, primarily due to the 25 basis point increase on the low end of our same-property NOI guidance, which now reflects a new range of 3% to 3.75%. In terms of some of the puts and takes driving NOI growth, let me start with the first quarter and then touch on future expectations. Same-property NOI growth of 2.8% in the first quarter benefited from new rent commencements and better-than-expected recoveries, including $500,000 of out-of-period tax refunds related to appeals that got settled for multiple prior year periods. The better recoveries in tax refunds more than offset higher-than-expected bad debt this quarter. The elevated bad debt pertained to isolated cases of tenants we were negotiating payment plans with that got moved to a cash basis. Going forward, we believe uncollected rent levels should trend near 75 basis points of gross rents for the remainder of the year. In terms of NOI growth going forward, I will note the point that I made last quarter when we gave initial guidance in regards to our SNO pipeline. We expect to recognize another $3.3 million of gross rents from our SNO pipeline in the remainder of the year. 90% of this amount is expected to be generated in Q3 and Q4. In addition, recall that Q2 of last year benefited from $1 million of onetime tenant, CAM true-up billings. Therefore, same-property growth is expected to accelerate in the back half of the year as SNO rents commence. Our guidance now incorporates $60 million of disposition activity that Jeff mentioned. In closing, we are encouraged by the continued momentum in fundamentals, the depth of our leasing pipeline and our ability to generate sector-leading FFO and cash flow growth. With that, I'll turn the call over to the operator for questions and answers. Operator: [Operator Instructions] First question comes from Michael Goldsmith with UBS. Michael Goldsmith: Mark, you mentioned a couple of isolated instances of bad debt in the quarter. Can you walk us through what you're seeing if you're able to identify the tenants or at least like the types of categories where maybe there's been a little bit more pressure than anticipated? Mark Langer: Sure Michael. What I would say is the most significant increase that I referred to in the quarter pertain to a franchise operator that has 6 different QSR locations in our Puerto Rico portfolio. The tenant was moved to a cash basis. So both the back rents and current rents were reserved for. I can tell you that since we've closed the quarter, we've executed a payment plan with this operator and the operator has fully paid April rent and started making payments on the arrears. So this is why we think it is more isolated. It's not systemic of any other patterns. We did go through a deep dive of all of our other Puerto Rico tenants and receivables were normal. So as I said in my prepared remarks, I believe what you should expect for the rest of the year is closer to 75 basis points rather than what was incurred in Q1. Michael Goldsmith: Got it. And then you mentioned 2 new anchor leases with escalators of 3%. Can you talk about just the demand on the anchor side? Obviously, you're backfilling the Saks box as well. So just trying to get a sense of overall demand and then your ability to get strong lease terms, right, like with escalators of 3%. Is that kind of the norm for your portfolio? Or is that kind of like an exceptional outcome? Jeffrey Mooallem: Michael, it's Jeff Mooallem. I wouldn't say it's the norm that we're going to be getting 3% or better annual increases from anchor tenants going forward. There are certain tenants out there like Trader Joe's or T.J. Maxx who fight really hard on things like increases. We happen to have an outlier quarter where we did a couple of anchor deals where we were able to extract that. But I think the point is that the trend line on things like anchor leasing is -- continues to go up. And whether it's less options, fair market value options, annual increases in options, we're able to have conversations with anchor tenants today that we were not simply able to have a few years ago. And we're pushing on not just starting rent and less capital, but pushing on increases as well. So while I wouldn't say that we expect to be able to do annual increases on every anchor deal we do, unfortunately, they're still not quite there yet as an industry. Certainly, the ability to extract better increases and better terms throughout the lease is there. And I would tell you that I think this is the strongest anchor leasing market we've seen in a really, really long time simply because of the imbalance between supply and demand. Operator: Next question, Michael Griffin with Evercore ISI. Michael Griffin: Jeff, maybe just on the leasing front, do you have a sense, are tenants starting to come to you earlier to renew given the dearth of available space out there? And do you think that gives you more leverage in the renegotiation process? Jeffrey Mooallem: Yes, absolutely. We're seeing -- we're having conversations with tenants earlier in the process. And a lot of times now, what our leasing team is doing rather than going to a tenant who has a year or 2 left on their lease and saying, "Hey, do you want to renew?" they're starting by going to the market and really figuring out what we can do with that space so that the initial conversation with that existing tenant is more, "Hey, we have another option here for your space, you need to pay X to stay," and we can switch the leverage over a little bit. There's certainly a lot of desire on the part of the national tenants to lock their space up for longer. Sometimes we'll go to a national tenant with a request for a waiver on something or something we're doing in the parking and they're saying, "Well, yes, we're happy to work with you guys on that. Can you give us another 5-year option?" So the anchors, the national tenants are very motivated to keep as much term and control as they can, and the landlords are savoring getting the opportunity to take space back. If you think about the vintage of a lot of the leases in our portfolio, they were signed, maybe 20-year leases that were signed '08, '09, '10, '11 that time, not a great time in the anchor leasing world. So we're excited to get some of those rents back over these next several years. Michael Griffin: That's some helpful context. And maybe just following up on the Bridgewater acquisition. Just wanted to clarify, is that 7.7% cap rate that you quote, that's a stabilized in-place cap rate? And if so, would you say that's indicative of the assets that you're targeting for acquisitions? Or there was something maybe about this that just stood out from a cap rate perspective as maybe more attractive for you to acquire? Jeffrey Olson: Yes. I think we got lucky with this one, Michael. It's Jeff Olson. And I mean, it traded at a higher cap rate in part because the anchor was not a grocery store. The anchor was a medical user called Summit Health, which you may be familiar with, but a very high credit health care tenant. They have a long-term lease. I believe they have 11 years left of term. And in addition to getting it at that 7.7%, I mean, our revised numbers expect to generate 2.75% NOI growth, so very good growth. And more than half of that growth is coming from contractual rent increases and option exercises. So yes, we think it was a great opportunity. I wish we had a pipeline to 10 more like it. We don't at the moment, but we're on the hunt for more. Operator: Next question, Michael Gorman with BTIG. Michael Gorman: Jeff, if we could just stick with Bridgewater for a second. I'm curious, as you underwrote it, how much of a role did the Bridgewater Commons adjacency play? How much does the performance of the mall play into the $2.2 million in annual visitors that you cited to The Village component there? Jeffrey Olson: I don't think it's a huge component. Most of our customers are not using the mall as a cotenant. It is fairly far away. So I don't think it's a major component. Jeff, do you want to add anything to that? Jeffrey Mooallem: Yes. I mean, Michael, The Village was actually built as a sort of a lifestyle center adjacent to the mall. But what's happened over time is it's become its kind of own ecosystem mostly of daytime population for lunch. So if you look at the roster of the QSR tenants there and the demand from some of the best names in food that want to come into it if we get vacancy, we've been turning space over there. And really, what you're seeing at that property is there are some mall visitors who will go there for lunch, but mostly, it's the daytime population in and around Bridgewater. There's a very strong suburban office market population in that area and a lot of weekend visitors as well, a lot of tourism in that area for various conventions and hotels and weddings and bareboat mitzvah kind of traffic. So we were very happy when we really dug into this to see that the traffic is coming from a lot of places. Michael Gorman: Great. That's helpful. And then maybe back to the same-store. Obviously, solid result in the quarter. I noticed when you kind of dig into the revenue and expense side of things, the property operating was up, I think, 25%. Was there anything atypical in that or onetime? Was that seasonal? I would expect that would normalize over the course of the year. Is that a fair assumption? Mark Langer: Yes, Michael, it's Mark. Absolutely. That was really driven by snow and snow-related costs in the quarter, which were up over -- to put in perspective, about $3.5 million just versus prior year. So that almost fully accounts for the driver. And you're right, it will level off and revert to more normalized levels for Q2 to Q4. Michael Gorman: Great. And maybe just one more for me, Mark, on the mortgage that you put in place in the quarter, can you just remind us on the strategy there? Obviously, you stabilized a big chunk of redevelopment at that property, which I would imagine is a help. You still have a couple of phases there. So do those phases get carved out? Are they small enough that it doesn't factor into when you go for a mortgage on a property like that? Maybe just some context there would be helpful. Mark Langer: Yes. I'm glad you asked, Michael. It's actually a great story. The Woodbridge Center actually had a mortgage on it that we paid off last year. It was about a $50 million mortgage. And we paid it off knowing we had visibility with the re-leasing of space we had. This center had a Bed Bath and a buybuy BABY that was paying $17 in rent Fast forward gets re-tenanted with Trader Joe's and Ross that are paying a blended around $25 a foot, a karate studio that was paying $28 the rent more than doubles with CAVA. So we had line of sight for all of that upside in NOI. And fast forward, as you saw, we extracted $12 million more in this new mortgage. And so really, the phases you're talking about in terms of any other outparcel work, we still have the ability to add even more income from that. It isn't that it's carved out, but there's some potential more lift that we could get upon refinancing it again. But that puts into context, I think the story, the asset management strategy, and we were really delighted with that execution to lock that in with more proceeds at 5%. Operator: Next question, Floris Van Dijkum with Ladenburg. Floris Gerbrand Van Dijkum: Like the acquisition, I know you mentioned something about a Kohl's sale. Is that -- presumably that's a pending Kohl's anchored sale that you have in the pipeline? Jeffrey Olson: Yes, Floris. We're in diligence with the buyer right now. So we're hoping to complete that deal soon. Floris Gerbrand Van Dijkum: And presumably, that would be at a lower cap rate than where you're acquiring it at as well besides the fact that you're also obviously improving your credit profile? Jeffrey Olson: Yes. You got it. That is the game at the moment. Floris Gerbrand Van Dijkum: Great. And then the Kohl's at Shoppers World in Framingham, talk a little bit about the upside potentially that you could see there. I know it's a little bit early, but maybe you could give people on the line a little bit of a flavor of what kind of demand you have for that space. Jeffrey Mooallem: Floris, it's Jeff Mooallem. Yes, I mean, we're super excited about this one. We were able to negotiate an option to get that space back from Kohl's about a year ago, and that option will be coming up in first or second quarter of 2027. So we've been sort of out testing the market and the demand has exceeded our expectations. We have several national retailers that have submitted LOIs on it. We've looked at cutting up the space, adding shops, doing a full-fledged demolition and redevelopment. But ultimately, what I think you're going to see us do is re-tenant the box at a very healthy spread, 75% to 150%, I would say, over the existing rent with a much better user, much better credit. This will enhance the overall Shoppers World profile and experience and really make that parcel within Shoppers World kind of its own little really strong asset. So we're very excited for what that's going to turn into in the next 12 months here or so. Floris Gerbrand Van Dijkum: Maybe last question. Can you guys give us a little bit of an update on what's happening in Puerto Rico? I know it's not that big part of your portfolio, but I believe that you're seeing some really strong demand. Can you talk us through some of the retailer demand and what kind of upside in NOI you see for that portion of your portfolio? Jeffrey Mooallem: Yes. Puerto Rico continues to grow. We've done a lot of re-tenanting work there, as you know, over the last couple of years. And we're now adding names like Sephora, which will open, I think, this week or next week at Caguas, Coach, Bath & Body Works, national names coming over from the mainland to the property. We opened a T.J. Maxx last year that opened extremely strong. So we're very happy with the way the 2 Puerto Rico assets are performing. I think the next step for us in Puerto Rico is to really dig in more on some of the ancillary income opportunity that we're able to generate in other places like signage, carts and kiosks. We're looking to grow on all those areas as well. But if you look at our model and our forecast, Puerto Rico should continue to grow at comparable growth rates to the rest of the portfolio. We've done a lot of the heavy lifting. So I don't think it's going to be a 10% annual growth story going forward over the next few years, but it's certainly going to be positive growth. Jeffrey Olson: It should be in that 3.5% to 4% range. Operator: Next question, Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Great. Maybe I'll start on sort of any update on sort of Sunrise Mall and what sort of the development prospects. I know you were contemplating different things. Just any update there? Jeffrey Olson: Look, the entitlement process is advancing on schedule. We had disclosed previously that Amazon is going to occupy about 1/3 of the property, Ron, and we're finalizing our plans to develop the remaining land for retail and other uses. So we're super excited about our progress, and we really look forward to delivering a great result for the town of Massapequa and also for our investors. Jeffrey Mooallem: The only other update, Ron, is that our last tenant at the mall which was Dick's Sporting Goods, will be giving the keys back to us tomorrow actually. So we are now fully unencumbered the mall from tenancy, and that will allow us to advance our plans rapidly into later this year. Ronald Kamdem: Great. And then on the -- going back to the 97% to 98%, I think you mentioned sort of occupancy target for the portfolio as you sort of sit through. I mean I think what are some of the sort of tactics that you guys are using to sort of drive that number? And what has been sort of the biggest sort of sticking points or barriers to sort of getting there historically? Jeffrey Olson: I think the biggest tactic is simply that retailers are seeking high-quality space, and they're coming to us proactively. So for the first time in a very long time, we have multiple tenants going after the same vacancy. And so it's more a function of the market than it is a specific tactic that we have. Our tactic, obviously, is to create the best merchandise mix that we can at our shopping centers balanced with receiving good rent terms, good lease terms, et cetera. So we feel very good about the fact that the majority of our vacancy will be leased up, and that's what gives us the confidence of being in that 97% to 98% range. Operator: [Operator Instructions] Next question comes from Paulina Rojas with Green Street. Paulina Rojas Schmidt: Given that your portfolio is concentrated in the Northeast corridor and recognizing that local trade area dynamics can vary meaningfully in retail. I'm curious how you think about market differentiation within the region? Are you seeing any meaningful and consistent differentiation, for example, in terms of cap rates, rent growth or even tenant demand between, let's say, New Jersey, Boston or D.C. or even smaller pockets within the corridor where you're seeing something that stands out? Jeffrey Olson: Yes. I mean it is very submarket driven. I think in general, we're most pleased with what we're seeing in Boston at the moment, Paulina. And that may be a function of simply having new ownership on some of the properties in addition to a very strong and tight market. But our assets in Northern New Jersey are doing very well. There's very little vacancy in Northern New Jersey. I guess if there's one market that sort of has been an average market over the years in the Northeast for us, it would be Philadelphia. D.C. is a strong market for us. We don't own that much there. But overall, we're very pleased with our markets. The underlying theme behind virtually everything that we own in the D.C. to Boston corridor is just having a massive population base around our centers. And that doesn't change submarket to submarket to submarket. We have a couple of hundred thousand people on average around our properties within 3 miles, and those customers need areas to shop. Paulina Rojas Schmidt: And then you have characterized the demand and supply backdrop in your markets as supportive of sustained long-term growth. So I would like to push a little bit on what that means in practice. And when you use that language, are you thinking about, for example, rent growth that is in line with inflation, above or even substantially above inflation? I'm trying to frame it a little even in broad terms. Jeffrey Olson: I mean given the tightness of the market, I would expect rent growth would be above inflation. And it's really being driven by these larger anchors that are looking for space that are losing out on opportunities to their competitors. And as they lose more deals, they're realizing that they have to pay more. So I would expect more than inflationary type growth, particularly for boxes that are 10,000 square feet and greater. Operator: Thank you. I would like to turn the floor over to Jeff Olson for closing remarks. Jeffrey Olson: Great. We look forward to seeing many of you at the upcoming NAREIT conference, and we will see you then. Please call if you have any questions. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Hello, and welcome to FirstEnergy Corp.'s First Quarter 2026 Earnings Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Karen Sagot. Vice President of Investor Relations. Please go ahead, Karen. Karen Sagot: Thank you. Good morning, everyone, and welcome to FirstEnergy's First Quarter 2026 Earnings Review. Our earnings release, presentation and related financial information are available on our website at firstenergycorp.com/ir. Today's discussion will include the use of non-GAAP financial measures and forward-looking statements, which are subject to risks and uncertainties. Factors discussed in our earnings news release during today's conference call, and in our SEC filings, could cause our actual results to differ materially from these forward-looking statements. The appendix of today's presentation includes supplemental information, along with the reconciliation of non-GAAP financial measures. Please read our cautionary statement and discussion of non-GAAP financial measures on Slides 2 and 3 of the presentation. Our Chairman, President and Chief Executive Officer, Brian Tierney, will lead our call today, and he will be joined by Jon Taylor, our Senior Vice President and Chief Financial Officer. Now it's my pleasure to turn the call over to Brian. Brian Tierney: Thank you, Karen. Good morning, everyone. Thank you for joining us today. We are off to a solid start this year with first quarter core earnings 7.5% above last year, reflecting our customer-focused investment plan and strong financial discipline. We are on track for a successful year with expected results in line with our 2026 earnings guidance range of $2.62 to $2.82 per share and our long-term outlook remains strong. The team executed extremely well in the first quarter despite numerous storms that rolled through our service territory. Our employees demonstrated a strong commitment to our customers by their performance safely restoring power. What I observed during the first 3 months of this year further strengthens my commitment to our strategic direction. We are investing in our electric system to improve reliability, resiliency and the customer experience, listening and responding to our communities and investing in our people to be safe, well trained and productive. By doing these things, we improve the well-being of our customers, our communities and our teammates and provide a strong value proposition to investors. Over the last 3 years, we have fundamentally transformed FirstEnergy. We sharpened our strategic focus and strengthened our alignment around our core values. I am pleased to share with you that we have recently completed a couple of key hires, further strengthening our leadership team. I am pleased to announce Chris Beam as our new President of West Virginia and Maryland. Chris replaces Jim Myers, who retired after 40 years of remarkable service. I'm also pleased to announce that Dan Puskas has agreed to serve as our Chief Information Officer after serving on an interim basis for the last 6 months. Both Chris and Dan bring deep technical industry and leadership experience to the executive team. At the core of our strategy is improving the service we provide to customers. Each of our business units are working with customers, elected officials and regulators to prioritize investments for local needs. Collaboration with our key stakeholders drives alignment and better outcomes for customers and better results for our company. You see this in action across our footprint, and is a key reason why we are positioned for long-term success. Our investment plans focus on fundamentals, addressing aging infrastructure, reducing operational risk and building more capacity to serve growing customer demand. For instance, in Pennsylvania, we are accelerating investments under the long-term infrastructure improvement plan that we expect will significantly improve reliability particularly across the rural portions of our service territory. In West Virginia, we see a compelling opportunity to support economic development with new generation, which is strongly aligned with the state's energy goals. And our transmission investment plan remains a key focus, given the location and critical nature of our system in PJM. Across the company, our business units are executing against tailored investment plans and regulatory strategies that are focused on improving the customer experience. Affordability remains central to how we lead the company. On average, our rates are 20% below our in-state peers with the T&D component of our bill being 35% below those peer companies. We are proactively having constructive conversations with elected officials and regulators in each of our states to look for ways to address questions around affordability for our customers. The main driver behind the affordability conversation today is a demand and supply imbalance from a capacity market construct that is not attracting any significant incremental generation. Our conversations with key stakeholders are about how we get more dispatchable generation at a fair price while still protecting our existing customers. We believe that PJM's proposed reliability backstop procurement auction could be a step in the right direction, although there is a significant amount of detail needed to ensure the right amount of dispatchable generation is procured at affordable rates. Additionally, we still have the capacity auction cap in place for the next 2 auctions through 2030. These were initially negotiated by Governor Shapiro on behalf of all PJM customers. We are also discussing what we can control through operational efficiencies, alternative distribution rate designs and innovative solutions on other costs on the customer's bill. Since 2022, we have reduced our base O&M by more than $200 million or 15%, and we are continuing to look for ways to work smarter and more efficiently. We are also exploring other ways to protect our customers. For instance, in Pennsylvania, we recently filed an innovative proposal to reform our default service program protecting customers from higher supply rates on variable price contracts. Had this mechanism been in place in 2025, customers would have saved $80 million. We want to protect them from paying higher prices in the future. Customer affordability continues to be a significant part of our regulatory strategy, and we are proactively working with stakeholders to balance affordability and the critical investments required to ensure a safe and reliable electric system. Looking ahead, the rapidly evolving energy landscape will continue to require new transmission and generation investments that are above our current plan. Substantial investments in our transmission system are needed to ensure we proactively address aging equipment before it fails. We believe that new transmission capacity is a critical component to energy dominance and economic development. We continue to see ongoing opportunities with regional transmission planning investments through the PJM open window process. Our scale, planning expertise and strategic location position us well for these types of opportunities. Over the last 4 years, we have been awarded more than $5 billion in competitive projects, and we expect more opportunity in future solicitations. Turning to generation. In West Virginia, in addition to the recently filed CPCN for our 1.2-gigawatt natural gas facility, our data center demand in the state continues to grow with approximately 1.8 gigawatts of highly credible projects, an increase of 50% since February. Beyond that, we are having constructive dialogue with prospective customers representing over 6 gigawatts of load in West Virginia. This data center growth would support incremental generation and economic development which is strongly aligned with Governor Morrisey's 50 gigawatts by 2050 initiative and a significant priority for FirstEnergy. We are prepared to move forward with incremental generation projects as additional large loads enter our pipeline and become contracted, subject to regulatory approval. Our data center interest continues to grow beyond just West Virginia. Approximately 4 gigawatts of our total pipeline is in final contract negotiations and are expected to become contracted with the construction agreement within this quarter, nearly doubling our contracted demand. This is an exciting time for our industry and our company. We are confident in our customer-focused strategy and our operating model that aligns with key stakeholders and local needs. Our focus is to drive great outcomes for our customers, communities and teammates which will result in a strong value proposition for investors. Now I'll turn the call over to Jon to discuss our financial results and regulatory updates. K. Taylor: Thanks, Brian, and good morning, everyone. Yesterday, we reported first quarter GAAP earnings of $0.70 a share against $0.62 a share in the first quarter of 2025. Core earnings were $0.72 a share, increasing 7.5% from $0.67 a share in Q1 of last year, with each of our regulated businesses reporting increases year-over-year. You can find more details on our results, including reconciliations for core earnings and the strategic and financial highlights document we posted to our IR website yesterday afternoon. . Earnings growth largely reflects execution against our regulated investment strategy, with 75% of our capital program under a formula rate. In the quarter, transmission rate base increased to 13% and including a 19% increase at our integrated businesses and an 11% increase from our stand-alone transmission segment. Additionally, continuous improvement and innovation continue to be a focus of the management team, with our base O&M down close to 5% in the quarter. Automation increasing the speed of enhanced data transparency for better and more timely decision-making and technology enhancements are pillars to our cost management program. These innovative solutions are making us more efficient and provide better insight into information so we can make the best cost-effective decision for our customers. In fact, in each of our base rate filings planned for this year, our comparable base O&M is lower than what was approved in the last rate case, demonstrating our commitment to continuous improvement and innovation, allowing us to minimize rate impacts to customers. Our overall financial performance resulted in a consolidated return on equity of 9.8% on a trailing 12-month basis and continues to be in line with our targeted returns. Our investment program continues to be on track with $1.4 billion of customer-focused investments in the quarter, representing a 33% increase compared to the first quarter of 2025, with nearly all of the increase in formula rate investment programs that are focused on improving the reliability and resiliency of the electric grid. Overall, we are very pleased with our performance and confident in the path ahead. In late March, Moody's raised its outlook on FirstEnergy's senior unsecured rating to positive resulting from our improved credit profile as well as our low risk rate regulated T&D operations. Also in March, we successfully completed an $850 million debt offering for FirstEnergy, Pennsylvania with an average coupon of 4.4%. We were pleased with the strong interest in this deal as it was more than 5x oversubscribed. We also successfully completed planned debt offerings for 2 of our transmission companies, MAIT and ATSI with issuances of $250 million and $175 million, respectively. For the rest of the year, our financing plan includes $1.7 billion in subsidiary debt offerings and a modest amount of common equity. As we discussed previously, our current 5-year plan includes up to $2 billion of equity or equity-like securities, including $100 million annually from our long-term employee benefit programs, with expected annual common equity issuances at approximately 1% of current market capitalization. Turning to regulatory updates. In West Virginia, hearings for our proposed 1.2 gigawatt combined cycle gas generating facility are scheduled for mid-July. We're pleased with the time line for this proceeding and anticipate approval for the project in the second half of the year. We are simultaneously working through contracts for major equipment, EPC and gas supply with all of us work on track. Upon regulatory approval, we expect to be in a position to execute these agreements and we'll update our financial plan, reflecting this investment. Also in West Virginia, we plan to file our base rate case in May, reflecting a $1 billion increase in rate base since our last case in 2023. Based on our filing schedule, we expect new rates effective in the first quarter of 2027. In Ohio, on April 22, we made the prefiling notices for our 3-year rate plan, which will be formally filed next month. Since our last rate case filing in 2024, we have invested more than $1.3 billion in Ohio's distribution system. As part of our filing, we are proposing to increase our investments by nearly 15% to approximately $800 million annually to focus on improving reliability for our customers. Proposed customer bill impacts are less than 3% each year, and we expect new rates to go into effect mid-2027. In Pennsylvania, as of April, our approved infrastructure investment program is now being recovered through the distribution system improvement charge, which supports recovery of nearly 50% of FirstEnergy, Pennsylvania's capital investment program. This capital program and related surcharge are important tools to ensure we meet our customer commitments from our last base rate case in 2024. And finally, PJM recently opened the planning window for 2026. We anticipate the open window will address needs in a few areas, including portions of our system. The PJM Board is expected to approve projects in the first quarter of next year. We are off to a strong start this year. Our capital investments supported by our constructive regulatory frameworks and strong financial discipline are improving the customer experience and will continue to provide solid regulated returns to our investors. We are reaffirming this year's capital investment plan of $6 billion and our core earnings guidance range of $2.62 a share to $2.82 a share, with most of the remaining earnings growth compared to 2025, materializing in the second half of the year. We are also reaffirming our long-term core earnings CAGR and of 6% to 8% through 2030 and targeting near the top end of that range, with growth based off our 2026 guidance midpoint of $2.72 a share. We're confident in our outlook for this year and beyond, and we're looking forward to the incremental opportunities ahead. Now I'll open the call to your Q&A. Operator: [Operator Instructions] Our first question comes from the line of Shar Pourreza with Wells Fargo. Shahriar Pourreza: Obviously, lots of upside there on data centers around your systems. The messaging is getting more and more constructive there. But maybe just focusing on comments centered on West Virginia, you highlight 6 gigawatts of load there, incremental generation that's needed. Could we just get a sense on the timing of the spend, your turbine queue status for the incremental generation? And maybe just how that should affect or impact the profile of the CAGR since you're already growing near the higher end. Brian Tierney: Yes. So let me start with the queue of our turbines. We're on track to receive delivery of equipment to be able to be online in 2031, with the power plant. Everything is proceeding according to plan there. West Virginia is a state that is open for business not just for data centers, but for everything else. And being led by Governor Morrisey, who's saying we want 50 gigawatts by 2050. And so it's a place where we're looking to invest to meet that demand and to attract that demand. So disproportionately, data centers are moving to West Virginia because of its open for business stance, and we're happy to be investing into that. I'll ask Jon to comment on what things -- timing of spend and what that might mean to our growth. K. Taylor: Yes, Shar. So we anticipate we'll get approval of the existing application in the second half of the year. If I had to guess, it's probably going to be early in the fourth quarter. What we've told people is, upon approval, rate base growth would increase from just over 10% to just over 11%. And obviously, we'll be very focused on translating rate base growth into earnings growth. So -- more to come on that. We'll update the plan as soon as practical after approval, but we're really excited about this opportunity as well as the opportunities that are in West Virginia associated with the additional data center demand. . Shahriar Pourreza: Got it. Perfect. And then just lastly, Brian, I mean just the affordability rhetoric in Pennsylvania, I mean, the governor's tone and one of your peers obviously recently pulled its rate case. Can we just get a sense on how you're thinking about the political backdrop, the rate case timing? I mean can you just invest in Pennsylvania through the LTIP program and the rider, can you stay out further until the affordability concerns are kind of more muted? Brian Tierney: Yes. So on these affordability issues, I think it's really important that we stay close to our executives, our regulators and our customers on the issue and talking about what's impacting the affordability. So I was just down in Philadelphia last month and met with Governor Shapiro and talked about these issues. He's extremely knowledgeable on energy issues and plugged into what's driving the cost. I also mentioned in our last rate case and our rates just went in effective there a year ago, first quarter of 2025. The main issues there were reliability and investment in the state. And John Hawkins is addressing those issues every day, making sure that we're making the required investment in Pennsylvania and driving improvement in reliability. So since 2024 in Pennsylvania, our customer average interruption duration is down 27 minutes. So the things that were important in the most recent rate case, we're addressing and we're doing and making happen. And in terms of affordability, we're staying in touch with people and talking to people like Governor Shapiro, Governor Sherrill in New Jersey and making sure there will be no surprises in any of our states when we come in for a rate case. Operator: Our next question comes from the line of Nick Campanella with Barclays. . Nicholas Campanella: I wanted to follow up on the discussion you were having on West Virginia. And I'm just kind of going back to some of the comments in your prepared about exploring ways to kind of protect customers and drive economic growth at the same time. It seems like there's a lot of interest in Virginia with the 6-gigawatt backlog you highlighted. And I know we'll figure out what happens with the CPCN and the first gigawatt, which is really more IRP driven. But just what are kind of the frameworks that we should be thinking about to facilitate the next phase of load growth in the state? Do you need to file a separate tariff? And just since you're vertically integrated, are there other models kind of across the sector that you think are working well that you would be interested in replicating in West Virginia? Brian Tierney: Yes. So thanks for that, Nick. I think the most important thing is that when you look at data center developers, hyperscalers, there's been somewhat of a political pushback to data center development and the impact in affordability and cost. And I think in response to that, the hyperscalers, data center developers are taking a stance of, we want to make darn sure we're paying our fair share, our full fair share for everything that we are consuming in the energy landscape. And so when we're talking to these folks and negotiating with them, they are coming from a stance of we're paying for what we're taking, whether it's transmission, generation, land. And in some states like Michigan, I saw Jeff Blau on CNBC earlier this week, talking about something they're doing in Michigan, even lowering electricity rates for existing customers by some development that they're doing in places like Michigan. I think the models are out there and the smart things for us to do are replicate the places where these things have worked well rather than just stopping development. And I think if we work with stakeholders in West Virginia and other states, if we're transparent about who's bearing what costs and if there's a net positive to customers in the state. Those are models that we should adopt and develop and continue to impact energy dominance and economic development. Nicholas Campanella: And then I mean just one follow-up I had is just as we layer in some of the additional capital to the plan, just how you're thinking about the funding and financing mix. And yes, maybe I'll leave that there. K. Taylor: Yes, Nick, this is Jon. So as we talked about before, specifically on the West Virginia generation investment, if we get the AFUDC cash recovery, that will help fund a portion of the investment. So we expect up to about 35% of that investment to be funded with new equity. And as we layer new investments into the plan, I don't anticipate it to exceed that amount. Operator: Our next question comes from the line of Steve Fleishman with Wolfe Research. . Steven Fleishman: Sorry, probably going to hit the same topics that have already been hit to some degree. So just in Pennsylvania, first, the -- so we had Shapiro's comments early in the year, then we see unanimous -- pretty much unanimous settlement with PPL still to be approved. And we have this reaction to filing a case and pulling it, although I think they did file it kind of earlier than normal. So just maybe you could just take these different pieces and what's the takeaway? Is it just -- I think you're in a stay out. So I assume you're not going to file early out of the stay out. Was that really a lot of the issue here or be curious your thoughts. Brian Tierney: Like I don't think we should read something into Pennsylvania from what's recently happened. Like we view it as a place that wants our development, wants increased investment, wants to improve the customer experience but is also cognizant of the affordability issue, like Governor Shapiro is really thoughtful on these energy issues, and he saved customers and PJM billions of dollars from the caps he negotiated. So he's not some person who wants to shut down investment or stop economic development in the state of Pennsylvania. And so we're proceeding with our investment plans. We're happy with our ability to invest there and our returns. And we're being cognizant of the affordability issue as the governor would expect us to be, and our customers would expect us to be. And that's true in the state of Pennsylvania, and it's true in all of our states. And I think the key issue is engagement with the executives in our states, with the regulators, with the legislators. And like I said, I met with Governor Shapiro last month in Philadelphia, and will continue to meet with them and talk about these issues that are important to our customers in Pennsylvania and all of our states. It's about engagement and transparency, and we're going to keep doing that in Pennsylvania, in all of our states. It's part of our job. It's important that we do that on behalf of our customers. Steven Fleishman: Okay. That makes a lot of sense. So -- and then just back to West Virginia, I know you're finalizing a lot of these contracts for the power plant and I think the initial number was kind of -- I don't know, it goes back, I think, about a year. So just any sense of kind of where the final costing kind of ends up on it? . Brian Tierney: Yes, we're still confident in our estimates of about $2.5 billion for the plant. That's what we filed. We had some contingencies in there, of course, let there be no doubt. It's a seller's market when you're talking about turbines and the like. And I think the sellers need to be thoughtful about how much they're going to squeeze that pricing because that goes to the affordability issue and there are political implications related to that. And I think people like governors and legislators and others are going to be looking at the equipment suppliers and saying, "Hey, you're impacting the affordability to our customers and your profitability and your squeeze on people looking to have energy dominance in the United States need to be measured rather than running free." And so we're confident in the numbers that we have and confident that our partners will be thoughtful about any price increases they try to pass through in a seller's market. Steven Fleishman: I guess they might have a lot more business to come afterwards to be thinking about in West Virginia. So okay. Brian Tierney: Yes, we -- that's a good point, Steve. We'd love to be a repeat customer -- and Steve, we'll do that with people that are long-term partners to us, and we'll be reevaluating that as we go forward. So thank you. Operator: Our next question comes from the line of Jeremy Tonet with JPMorgan. Jeremy Tonet: I'll try not to ask on Pennsylvania here. Just maybe if you could turn towards transmission in the PJM open window here. Just wondering any incremental thoughts you might be able to share on what the scope of the opportunity set is for you? Or just any other color in how you feel about that process at this point? Brian Tierney: So Jeremy, I think looking at past performance as an indicator for the future. $5 billion that we've been able to secure over the last 4 years. We've changed how we've done things from doing everything by ourselves to partnering with some others where we think some of our neighbors and us might come up with a better solution than each of us doing it on our own. And we've changed things to be more competitive as we've gone forward. So our business model continues to evolve in this competitive landscape. We think that benefits our customers in terms of affordability. We think it offers better reliability and resiliency solutions. And so we'll continue to develop our business plan under Mark Mroczynski, who's leading that effort for us, but we've been pleased with the incremental investment we've been able to secure in the competitive process and are confident that we'll be able to have similar success in the future. K. Taylor: Yes, Jeremy, this is John. The only thing I would add to that is if you think about our transmission CapEx plan, 80% to 85% of it is not the competitive projects. It's just the existing work and the investments that are needed on our existing system. And that will be a continuing theme for us just given where our system is situated, the age of the system. So as we move into the future, I anticipate additional transmission investments on the core system in addition to the regional transmission projects that you asked about. Jeremy Tonet: Understood. That's helpful. And then just want to turn, I guess, to affordability. And I appreciate the disclosures and how epi appears to be among the lowest bills in all the states that you operate in. And just wondering how that resonates with local stakeholders there and particularly thinking about New Jersey, given the new administration there. Brian Tierney: Yes. So let me start with New Jersey. We finished a rate case where rates went into effect the early part of '24. And the main issue there in that rate case was investment in New Jersey and improving reliability there. And so we started down the path of the clean energy corridor and enabling that we've shifted away from that to other type growth. I was in Lakewood, New Jersey earlier this month, the amount of growth is phenomenal. Since 2,000 that city in New Jersey has more than doubled in population. And so a big part of the last rate case, investment in New Jersey, enabling growth and enabling reliability. And Doug McCoy and his team, the President of JCP&L there are making that happen. And so we need to be cognizant of affordability. As we go in for rate cases, Jon, I think for each of the rate cases that we're going into today, the O&M burden is less than it was in the last rate case. So we're talking the talk, walk in the walk on affordability but also making the investments that are demanded from us by our customers and regulators and trying to strike that right balance. K. Taylor: Yes. And I would say, obviously, making improvements in reliability are important. We talked about Pennsylvania having a 20% improvement in outage duration. If you look at New Jersey, 24 to 25, it's a 16% improvement, which is about 47 -- or excuse me, 49 minutes of outage duration per customer. So pretty significant. So it's important that we continue with this plan, with this investment strategy because we're not where we need to be, but we're on the path to get there. Jeremy Tonet: Got it. And just a quick follow-up there. Just wondering, in these conversations, do you see distinguishment as far as your bills being lower, lower wallet share than others in state? Is that being appreciated and differentiated in your thinking in conversations with others in the state? Brian Tierney: I do, Jeremy. I think those are important facts to point out the idea of what the share of wallet is if our rates are increasing at a rate that's lower than inflation. Those are all important things for us to point out. But at the same time, we recognize that customers are being squeezed not just by our bills, but by things like gas bills, food bills, pharmaceuticals and other things. And so we do need to be cautious, aware, empathetic to those issues but also point out what the facts are. And if our bills are lower, if we're increasing less than inflation, that means that the value we're delivering to our customers is increasing over the periods that we're talking about. So yes, those facts are really important. Operator: Our next question comes from the line of Andrew Weisel with Scotiabank. Andrew Weisel: Just one for me. You noted the impressive cost-cutting measures as a tool to help with affordability? If I heard you, Brian, I think you said O&M expenses were down 5% year-over-year and came in below the levels approved in the latest rate case. Can you elaborate on that? Was that across all jurisdictions. Are those savings structural or ongoing? Or were they more onetime in nature, whether related to the weather and maybe lower run plant run times or something like that? Were these related to AI and automation? Or how do those cost savings, were they helpful or potentially harmful in terms of reliability? Any additional details would be helpful. K. Taylor: Yes. I mean, Andrew, so there's obviously a little bit of timing in each quarter that you go through in terms of when you incur maintenance work and maintenance activities. But we've been at this continuous improvement, cost management program for quite some time, and you're seeing sustainable benefits from the work that we've done historically really starting in 2022 to now. And so this is a lot of sustainable cost savings that are going to help us move into the future, and it's around moving from a more reactive historical performance decision-making process to a much more integrated analytical risk-based decision-making process using data and analytics to help us inform the decisions that we make to be much more efficient with our resources and where we deploy our resources, whether it be capital or O&M. And so it's much more predictive, much more proactive decision-making that's really driving a lot of our cost management program. So I kind of view it as a much more sustainable part of the company moving forward. Brian Tierney: And also add to that, have we changed our business model to focus on our 5 business units, we are shrinking our service core and increasing our business unit presence. So we're moving more of our customers' management and focus closer to the customer in each of those business units, and that's having the related operational success that we've talked about earlier in the call. Andrew Weisel: Okay. Safe to say you see opportunity for more? . Brian Tierney: Always. Always. Operator: Our next question comes from the line of Ross Fowler with Bank of America. Ross Fowler: Maybe we'll turn this to FERC for just a second. Obviously, you've got the NOPR out there, the colocated load order and the backstop procurement, so not a shortage of things going on. You obviously took this up to the D.C. circuit with a petition for review. So maybe can you sort of scope out the decision time line there? What you frame is the range of outcomes? Is this sort of an all or nothing, in your favor or not? Brian Tierney: Yes. On a lot of this stuff, Ross, it's more to come, whether it's the NOPR or the other issue that you mentioned. And I think our biggest thing there is we think the large loads should pay their fair share, but we think it should be to the utility company, to the transmission provider who's providing the service and have the opportunity to earn a return on that. So it's not just you pay it, it's out of rate base and the utility operates something that they're not earning on. We think it should be a model even similar to what you have in natural gas pipelines, where you have an open season and people sign up to contract with the pipeline company. But they are paying the pipeline company and the pipeline companies earning a return on their investment. So we don't think CIAC should be outside of that model for network improvements. We think that the large load should pay for their network improvements, but they should be paying the utility and the utility should be earning on their invested capital for that incremental investment to serve them. Ross Fowler: Understood, Brian. And then on the backstop procurement, you kind of said you're evaluating the proposal there from PJM and there might be some things to do there. It's still too early to talk about that? Or are you still flushing that out? Brian Tierney: Still fleshing it out. But Ross, I think a large part of this is who pays and for what. And I'm not sure of PJM's value standing in between the people who are making the investment and the people who are paying for it. I just -- I don't see why PJM is a clearinghouse for any of that adds any value. I think that the people making the investment, the power plant developers and builders should contract directly with the end-use customers rather than having some middleman in between and then another middleman being the electric distribution companies. The long and the short of deregulation was that customers bear the risk of capacity and energy markets. And customers have gotten the benefit of that for the last 20 years. And now it looks like prices are going to be higher. What I think we need to be careful about, whether it's the backstop or anything else in capacity and energy markets is customers for paying for something they're not getting. And that's exactly what's happening in today's capacity markets. People are paying for new capacity, and they're not getting new capacity. Existing capacity owners should get something that's reasonable but not as high as new capacity. And so today, customers, residential customers are wasting their money in the PJM capacity markets, and that should stop. Ross Fowler: I mean, certainly, Brian, we've contracted before we can contract again. I don't know what difference it makes that PJM gets in the middle. It's bilateral contracts or bilateral contracts, right? I mean that's... Brian Tierney: Yes, the wrong people are going to end up paying with PJM in the middle. Like the whole idea of deregulation was that the utility companies are just wires companies and they don't take generation capacity and energy commodity risk. And I'll tell you, going forward, if we get the Phase 2, and I'll tell this to PJM and anyone else who listen, we are not going to sign contracts where our companies take commodity risk on generation and energy. It's not going to happen. So Phase 2 has got some real hurdles to overcome. And if Phase 2 is going to work, they need to contract with us. And the way it's structured today, we're not signing contracts. Ross Fowler: Yes. I mean, that's not your business model, right? Your business model is regulated wires, right? Brian Tierney: And it's not what the legislators in 4 of our 5 states asked for. They said, "You don't do that. You're out of that business." And believe me, we listen to our legislators. We listen to our regulators and we respond accordingly. Operator: Our next question comes from the line of Anthony Crowdell with Mizzou Securities. . Anthony Crowdell: Just a quick one on Ross's question. Brian, you just talked about your view of the backstop auction, all the stress that it creates. Does the state regulators that you -- the states you operating, does the regulators share that same view? Or any insight you can provide to the governors or the regulators share a similar view to how you're viewing what's going on right now in the capacity markets? Brian Tierney: I think they absolutely do, Anthony. Look at the law that was just passed last summer here in Ohio, where the legislature took a very firm view of utilities cannot own generation and the market and the legislature took the view that the market will solve the problem and not the utilities. And so -- we heard that. We listened to that, and we're not going to own generation in Ohio, and we're going to let people contract with each other in whatever market they choose to contract in. But yes, Ohio just completely doubled down on that a year ago. So they're firmly an agreement with us. And if you look across our deregulated states, everyone but West Virginia, the markets are -- the legislation is clear that we don't own generation. And that is handled through markets and the utility provides T&D services and is not involved in the commodity. So yes, they're firmly in agreement with us. Operator: Our final question this morning comes from the line of Carly Davenport with Goldman Sachs. Carly Davenport: Maybe just to follow up on some of your comments on New Jersey earlier. I know you guys have been considering kind of the right timing to potentially file another rate case there. Any updated thoughts on what that could look like? Brian Tierney: Look, I think given the governor's executive orders and where we are in our rate case cycle, we'd be very, very thoughtful about when we move forward, and there would be no surprise to the governor, the BPU or anyone else in the state of New Jersey when we do come in. But -- no, we just -- no surprises is our biggest mantra. And that won't happen as a surprise, we'll come in at the right time. But the important thing in the last rate case, and I hope it's the important thing in the next rate case is, are we investing in New Jersey for economic development, for growth, and for reliability and balancing that with affordability. And that's our job, and we'll do that openly and transparently whenever we do come in for a rate case in New Jersey. You're not a customer of ours there. Are you, Carly? . Carly Davenport: I'm not at the moment, but I might be at some point, but that's really helpful. I appreciate that. And then maybe just one question on Maryland. I know you guys have the plans to file there soon as well. Just any impacts that you're looking out for from the Omnibus bill that was recently passed in Maryland just in terms of any risk around changes to the regulatory process on the back of the legislation. K. Taylor: Karl, this is Jon. It's kind of too early to tell right now. I mean we've historically used a historical test year in Maryland, but other components of the legislation, we're working our way through. and we'll update our plan accordingly. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect your lines.
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 day, and thank you for standing by. Welcome to the PROG Holdings Q1 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, John Baugh, Vice President of Investor Relations. Please go ahead. John Baugh: Thank you, and good morning, everyone. Welcome to the PROG Holdings First Quarter 2026 Earnings Call. Joining me this morning are Steve Michaels, PROG Holdings' President and Chief Executive Officer; and Brian Garner, our Chief Financial Officer. Many of you have already seen a copy of our earnings release issued this morning, which is available on our Investor Relations website, investor.progholdings.com. During this call, certain statements we make will be forward looking, including comments regarding our revised 2026 full year outlook and our outlook for the second quarter of 2026. Listeners are cautioned not to place undue emphasis on forward-looking statements we make today, all of which are subject to risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. We undertake no obligation to update any such statements. On today's call, we will be referring to certain non-GAAP financial measures, including adjusted EBITDA and non-GAAP EPS, which have been adjusted for certain items which may affect the comparability of our performance with other companies. These non-GAAP measures are detailed in the reconciliation tables included with our earnings release. The company believes that these non-GAAP financial measures provide meaningful insight into the company's operational performance and cash flows and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding the company's ongoing operational performance. With that, I would like to turn the call over to Steve Michaels, PROG Holdings' President and Chief Executive Officer. Steve? Steven Michaels: Thanks, John. Good morning, everyone, and thank you for joining us. I'll start by saying we delivered a strong first quarter. We are very happy with the start to the year and the momentum we're seeing in the business. Our results came in at the high end of our revenue outlook and exceeded the top end of our outlook for earnings and non-GAAP EPS. This outperformance reflects the discipline of our operating model and strong execution across the organization, supported by higher-than-expected GMV with improved economics at Four, as well as better portfolio yield at Progressive Leasing primarily due to lower-than-expected utilization of 90-day purchase options. In an environment where the geopolitical and macroeconomic situation presents challenges, including from rising gas prices, our model performed as designed. This consistency is a direct result of how we built and manage this business over time. Let me provide some additional color on the quarter before walking through our strategic priorities. As I mentioned in February, we have begun framing growth through the lens of consolidated GMV which grew 54% in Q1 compared to the same period last year. These results reflect the addition of purchasing power and the triple-digit growth of Four. As our portfolio of solutions expands, GMV is generated through multiple products across leasing Four and purchasing power, and this consolidated view better reflects the full scale of our platform. It's a great example of how we are deploying an integrated ecosystem of solutions to better reach underserved individuals and families. Starting with Progressive Leasing. GMV for the first quarter came in at 2.2% below the same period last year. However, trends improved meaningfully as the quarter progressed, with January down high single digits, February down low single digits and March up low single digits. As a reminder, throughout last year, our leasing business faced GMV headwinds from deliberate tightening actions and the bankruptcy of Big Lots. As we lap both of those headwinds, particularly through February, leasings GMV trends inflected positively in March. From a GMV standpoint, the quarter played out largely as expected, and we are excited to exit the quarter on a growth trajectory. Four's GMV for the quarter was 134% higher year-over-year. Customer demand for our BNPL product remains robust, and importantly, we are seeing that growth translate into attractive economics and profitability, which I'll discuss in more detail shortly. Purchasing Power's Q1 GMV grew double digits at 10.3% year-over-year. This growth was due to favorable performance within existing employer accounts. We also added several new employer clients during the quarter, bringing tens of thousands of new eligible employees onto the platform and supporting future growth. Consolidated revenue came in at $743 million, representing 11% year-over-year growth. This performance was primarily as a result of the addition of Purchasing Power, along with growth at Four and partially offset by a revenue decline at Progressive Leasing due to a lower portfolio size throughout the quarter. Consolidated adjusted EBITDA was $90.3 million and non-GAAP EPS was $1.24, both exceeding the high end of our outlook. This outperformance was fueled by better-than-expected portfolio yield and customer payment performance at Progressive Leasing as well as increased customer demand and profitability at Four. To summarize the quarter, we delivered results above expectations, saw improving GMV trends while maintaining portfolio health at leasing drove profitable triple-digit growth with improving economics at Four achieved double-digit GMV growth at Purchasing Power and continue to execute against our ecosystem strategy. Before we shift into our strategic priorities, I want to briefly address the broader environment and how it informs our updated outlook. The consumer we serve remains resilient, but they are facing real challenges. Gas prices are elevated, and there is increased uncertainty in the macro backdrop. We remain committed to continue to deliver consistent portfolio performance across all our businesses and managing costs prudently to achieve our earnings outlook. Our track record demonstrates our ability to adapt quickly, and we will do so as conditions evolve. Let me now turn to our 3 strategic pillars, grow, enhance and expand to share some highlights from the quarter. Starting with the grow pillar. We saw encouraging traction at Progressive Leasing and Purchasing Power with remarkable growth at Four, which collectively resulted in consolidated GMV being up 54% year-over-year. For leasing, Q1 applications grew double digits year-over-year and GMV trends improved sequentially month-over-month, with March up low single digits compared to the prior year. In addition to lapping the tightening actions from early 2025, these results reflect our investments in technology to enhance customer experience and in marketing to promote engagement across both new and existing customers. You heard about many of these initiatives at our recent Investor Day, we're pleased to say that they are continuing to have a positive impact on our business. Our long-term distribution base of exclusive retail partners with approximately 70% of Progressive Leasing GMV secured into the 2030s provides a durable foundation for growth as we also gained balance of share within existing key retail partners. Additionally, our direct-to-consumer efforts spanning both marketing and digital channels have been meaningful drivers of growth. Within Marketing and Progressive Leasing, we leaned into customer acquisition, partner marketing and cross-product campaigns, which drove increased engagement and incremental GMV. We focus further up the funnel while maintaining flat acquisition costs year-over-year. At the same time, our outreach channels, including e-mail, SMS and push notifications, generated incremental GMV, reinforcing healthy consumer demand and improving return on ad spend. On the digital front, PROG Marketplace delivered another notable quarter, growing at 169% year-over-year. We are scaling this channel through ongoing product enhancements, increased traffic and improved conversion. Our e-commerce channel also grew meaningfully due to deeper integrations with retail partners and improved digital checkout experiences. Q1 e-commerce GMV was 25.7% of total Progressive Leasing GMV up from 16.8% in the same period last year and the highest first quarter mix to date. Shifting to Four. We delivered another triple-digit growth quarter, our tenth in a row, with performance powered by both customer acquisition and engagement. The team rolled out AI-driven product enhancements that simplify the shopping experience and average order values increased year-over-year. Monthly active users more than doubled compared to a year ago, reflecting growing consumer interests. On marketing side, spend was deployed efficiently to support growth maintaining a healthy balance between paid and organic customer acquisition. Finally, Purchasing Power delivered double-digit GMV growth, reinforcing the strength of its model and its strategic role within our ecosystem. Its payroll deduction model represents a differentiated distribution mode, serving employees who value predictable, convenient purchasing options through their paycheck. We remain in the early stages of deeper integration including introducing Purchasing Power to our retail partner employee bases and leveraging addressable employer relationships to expand leasing distribution. Over time, we believe this opportunity represents a meaningful incremental growth lever. From a marketing perspective, early media testing and purchasing power is showing encouraging results, demonstrating our ability to improve penetration within the eligible population. Under the enhanced pillar, our investments in improving both customer and retailer experiences are progressing with several initiatives beginning to deliver positive results. Our AI-driven lease eligibility engine is scaling meaningfully. We've expanded our leasing product catalog and improved response times from 3 seconds down to 1/10 of a second. At the same time, we are advancing customer experience enhancements that are driving higher conversion. We deployed multiple AI-driven improvements across our marketplace, including an AI chatbot assistant, enhanced payments navigation and a new AI-powered checkout flow that simplifies and streamlines the transaction process. These marketplace enhancements have delivered an approximately 20 percentage point improvement in checkout conversion versus the prior experience while also lowering cost to serve and improving operational efficiency. The focus remains clear: enhance the customer experience to support higher customer lifetime value while improving the economics of the business. Under the expand pillar, Four is scaling and Purchasing Power is growing double digits, in line with expectations as integration efforts advance. We remain intensely focused on strengthening our ecosystem. Four executed at a high level delivering 142% revenue growth in Q1 2026, the tenth consecutive quarter of triple-digit GMV and revenue growth. Q1 GMV reached $280 million, more than doubling Q1 2025 and March 2026 GMV of $108 million was the second highest month in company history. Customer engagement trends remained favorable with average purchase frequency of approximately 5 transactions per quarter and more than 130% growth in active shoppers year-over-year. New shoppers grew approximately 80% year-over-year, representing expansion of the platform's customer base. Four subscription model remains a key driver with Four Plus subscribers continuing to contribute approximately 80% of total GMV. Four's take rate defined as revenue generated as a percentage of GMV over the trailing 12-month period remained consistent at approximately 10%, indicating positive monetization efficiency as the business scales. From a profitability standpoint, Four generated adjusted EBITDA of $12.9 million in Q1 2026, already exceeding full year 2025 adjusted EBITDA of $9.9 million. Q1 adjusted EBITDA margin was 37%, reflecting the benefits of scale. While Q1 is seasonally the highest margin quarter, following elevated GMV from the holiday period, the business continues to demonstrate meaningful operating leverage. MoneyApp, our cash advanced product grew revenue over 50% in the first quarter and continues to play an important role as both an engagement and cross-sell driver within our ecosystem. Growth as a result of higher average advanced sizes as well as early traction from a new product we introduced in December called Pop-Ups, which allows qualifying customers to responsibly access additional funds on top of an existing advance. While still early, Pop-Ups are beginning to generate incremental revenue and represent another avenue for us to deepen customer engagement and expand the platform over time. Our ecosystem strategy is gaining traction. At our Investor Day in March, I highlighted that cross product engagement is a strategic priority because we believe it is a key component of long-term growth and value creation. We are seeing progress from our ecosystem first approach with customers increasingly engaging across multiple products, driving higher lifetime value and improved acquisition efficiency. Four is currently our most connected product often serving as an entry point and engagement driver across our platform. Progressive Leasing showed the most meaningful improvement in cross product engagement during the quarter with more of its customers interacting with other offerings. Notably, we also drove the largest overlap and fastest growth in overlap between Progressive Leasing and Four customers. Before turning it over to Brian, let me touch on capital allocation. Our priorities remain unchanged: invest in the business, pursue strategic M&A and return excess capital to shareholders through share repurchases and dividends. In February, I told you that in the near term, we will focus on prioritizing debt reduction as we work toward our long-term net leverage target of 1.5 to 2x, and we did. During the quarter, we paid down $210 million in recourse debt ending Q1 with a net leverage ratio of 2x. To summarize the quarter, we delivered results above expectations led by consistent execution and improving demand trends across the business. Importantly, these results were achieved while continuing to invest in our strategic priorities, advancing our direct-to-consumer capabilities, scaling our digital channels and deepening integration across our platform. Overall, our distribution moat, diversified ecosystem and data-driven decisioning capabilities position us well to perform across a range of environments. I firmly believe the best chapters of PROG story are still ahead of us. With that, I'll turn the call over to Brian. Brian? Brian Garner: Thanks, Steve, and good morning, everyone. Our strong performance in the first quarter was broad-based and reflects disciplined execution across each of our businesses as well as some margin favorability from consumer behavior in the leasing segment. In a short period of time, we made significant progress against our goal of deleveraging following the Purchasing Power acquisition. And as we exit the quarter, we are within our target net leverage range of 1.5 to 2x. I'll begin with our Q1 results of Progressive Leasing, followed by Four Technologies, Purchasing Power and then move to consolidated results. I'll close with an update on our balance sheet, capital allocation and our revised full year 2026 outlook. While more broadly, consumer demand across several discretionary categories remains pressured, our teams executed well on the areas within our control, including targeted growth initiatives, decisioning, expense discipline and capital deployment, enabling us to deliver results ahead of expectations and reinforcing the underlying opportunities within the business. Starting with Progressive Leasing. First quarter GMV came in at $393 million, representing a 2.2% decline year-over-year, which was in line with our expectations. As Steve outlined, this performance reflects 2 primary factors in the first half of the quarter. The tightening actions we implemented last year to preserve portfolio performance and the lapping of remaining GMV from Big Lots following their bankruptcy. As we progress through the quarter and move past these headwinds, GMV trends improved sequentially, returning to low single-digit growth in March. Revenue for the Progressive Leasing segment was $597 million in the first quarter down 8.4% year-over-year, primarily a result of a smaller average lease portfolio throughout the quarter. The lower gross leased asset balance, which is down 9.4% entering the quarter compared to a year ago, created a headwind to Q1 revenue. We ended the first quarter with a portfolio size down 5.4% year-over-year. As we executed against our growth initiatives of Progressive Leasing, we expect this portfolio headwind to subside and the revenue compare will become less difficult as the year progresses. Additionally, utilization of the 90-day early purchase option, which is seasonally high in Q1 due to tax refund season came in lower than expected for the quarter and below 2025, while an environment where fewer customers are electing to exercise their 90-day purchase option represents a revenue headwind in the period, over time, we expect total revenue, gross profit and margins to trend favorably. Gross margin for Progressive Leasing was 31.5% in the quarter, up 210 basis points year-over-year. Margin expansion stem from improved portfolio yield and a higher proportion of customers choosing to remain in their lease agreements longer, which, in part, ties to a lower 90-day purchase option activity. Lease merchandise write-offs came in at 7.3% of lease revenue within our targeted annual range of 6% to 8% and a 10 basis point improvement from the Q1 2025 rate of 7.4%. This result reflects the benefits of the tightening actions taken a year ago, and we have been largely comfortable with the trends we have seen since those changes. As we've consistently emphasized, protecting portfolio health remains our top priority, and we are closely monitoring payment behavior, delinquencies and vintage level performance, and we are pleased with what we have seen year-to-date. Progressive Leasing's SG&A for the quarter was $81.3 million or 13.6% of revenue compared to 12.6% in Q1 of 2025 and was flat in total SG&A dollars spent even as we invest selectively in areas to support long-term growth, including technology modernization, customer experience and AI initiatives. As we've demonstrated over time, we remain focused on balancing near-term expense discipline with investments that enhance the durability and scalability of the business. Adjusted EBITDA for Progressive Leasing was $77 million or 12.9% of revenue at the high end of our long-term target range of 11% to 13% representing a 260 basis point improvement year-over-year. This performance was primarily the result of operational execution, including managing portfolio performance and yield partially offset by the revenue headwind of a smaller lease portfolio throughout the quarter. Turning to Four Technologies. Q1 GMV reached $280 million, representing growth of 134% year-over-year and marking the tenth consecutive quarter of triple-digit GMV growth. March alone generated $108 million in GMV, the second highest month in company history. Revenue of $35 million exceeded expectations, growing 142% year-over-year. Adjusted EBITDA was $12.9 million, representing a margin of 37%. I would note that Q1 is the strongest margin period for Four and throughout the remainder of the year, I expect margins to moderate to the range implied in the revised outlook for the segment. Underlying economics are improving, and we remain highly encouraged by the performance of the business across both growth and profitability metrics. Finally, switching to Purchasing Power. Q1 GMV was $132.7 million, representing 10.3% growth. Revenue for Purchasing Power was $107.1 million in first quarter with adjusted EBITDA of $0.8 million, consistent with the near breakeven results we expected. As a reminder, Purchasing Power seasonally generates a greater proportion of its revenue and earnings in the back half of the year, particularly in the fourth quarter. Integration efforts are on track and we remain encouraged by the progress we are making across both front-end and back-end synergies as well as its strategic fit within our broader ecosystem. Transitioning to consolidated results. We delivered strong GMV growth with continuing operations increasing 54% year-over-year to $806 million, driven by the addition of Purchasing Power and growth at Four. Revenue from continuing operations grew 11.1% year-over-year to $742.7 million, reflecting the addition of Purchasing Power and triple-digit growth at Four Technologies partially offset by the revenue decline in Progressive Leasing. From an earnings perspective for continuing operations, consolidated adjusted EBITDA was $90.3 million or 12.2% of revenue and non-GAAP diluted EPS was $1.24, both exceeding the high end of our February outlook and delivering 29% and 38% year-over-year growth, respectively. Turning to the balance sheet. We ended the first quarter with $69.4 million of unrestricted cash and total available liquidity of $419.4 million, including our revolving credit facility. We ended the quarter with $650 million of recourse debt. Since closing the acquisition, we paid down recourse debt by $210 million, resulting in a net leverage ratio of 2x trailing 12-month adjusted EBITDA. As a reminder, this ratio excludes the nonrecourse ABS debt used to fund Purchasing Power operations does not add back the associated interest expense to adjusted EBITDA and only includes the Purchasing Power adjusted EBITDA since the acquisition. Importantly, net leverage was approximately 2.5x immediately following the acquisition on January 2 of 2026. Since then, our focus has been on integrating Purchasing Power and driving meaningful deleveraging and we have made material progress in the quarter, bringing net leverage back within our long-term target range of 1.5 to 2x. As we move through the balance of the year, we expect to remain below 2 turns. We returned capital to shareholders in the first quarter through our quarterly dividend, paying $0.14 per share, a 7.7% increase from the prior year quarter. I would now like to touch on a few key aspects of our second quarter and revised full year outlook, which was provided in this morning's earnings release. Despite their macroeconomic challenges, we believe our GMV momentum at a consolidated level will carry into the remainder of the year. Improving leasing GMV trends positively impact the gross lease asset balance which is a leading indicator of future period revenue. Four is delivering strong growth with improving economics and Purchasing Power is just being started on realizing its GMV and margin potential. Portfolio performance at leasing is expected to remain healthy as we actively manage yields while balancing GMV growth. We expect full year 2026 lease merchandise write-offs to remain within our targeted annual range of 6% to 8%. Our revised consolidated outlook for 2026 raises expectations on both revenue and earnings from continuing operations, reflecting the Q1 outperformance and our confidence in executing at a high level through the rest of the year. We are already making progress against the 3-year 2028 compound annual growth rate framework we outlined in the Investor Day. Q1 was a strong and encouraging start to this journey. Our revised consolidated outlook for continuing operations for 2026 calls for revenues in the range of $3 billion to $3.1 billion, adjusted EBITDA in the range of $343 million to $370 million, non-GAAP EPS in the range of $4.40 to $4.80. This outlook assumes an operating environment with no change in the current financial pressures and uncertainties for our customer, no material changes in the company's decisioning posture, no meaningful increase in the unemployment rates for our customer base, an effective tax rate for non-GAAP EPS of approximately 26% and no impact from additional share repurchases. To summarize, Q1 was a great start to the year with broad-based outperformance across our businesses and disciplined execution in the areas within our control. We delivered improving trends of Progressive Leasing, sustained high growth and expanding profitability of Four and early progress with Purchasing Power as integration continues. At the same time, we strengthened the balance sheet, bringing net leverage back within our target range while maintaining a prudent approach to capital allocation. As we look ahead, we remain focused on driving profitable growth, managing portfolio performance while executing against our strategic priorities and navigating a still uncertain macro environment. I'll turn the call back over to the operator for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Kyle Joseph of Stephens. Kyle Joseph: Congrats on a really strong start to the year. Steve, would love to kind of pick your brain on macro. Obviously, a lot of moving parts throughout the quarter. Initially, we're expecting higher tax refunds and then you get into March and higher gas prices. But just kind of walk us through the moving parts of macro and maybe how those impact your businesses differently. We're no longer just focused on leasing. Obviously, Four had a really good quarter and we're obviously new on the Purchasing Power side of things. So just a little bit of macro kind of evolution through the quarter and different impacts across the businesses. Steven Michaels: Yes. Thanks, Kyle. I guess I would start by saying that we do have this multiple product ecosystem, but they do have connections in that. They serve a very similar customer across the products. So to the extent that the macro overlay has an impact, it's not identical, but it's directionally similar across the products. And we have the benefit of being able to see it -- see the customer behavior and the influence on the customers across those products and can use that to help as insights into all the products. As the quarter played out, and you called out a few of those things. We're always used to preparing for a tax season. We thought the tax season was going to be higher. Tax season actually played out about as we expected. It was higher, but not maybe as high as some people were reporting back in August, September, October time frame for our customer. Certainly, refunds were up across the board. But for our customers, they were up somewhere in the whatever high singles to low doubles range, and that was about what we were planning for. And as Brian said in his remarks, we did see in the leasing business less or fewer customers choosing to exercise their 90-day purchase option, and we've seen that in over time in different cycles when customers might be making different decisions about the liquidity the tax season brings, they're making payments to stay current, but not necessarily accelerating a payoff of an obligation. And that played out. Some of the other products don't exactly have that kind of accelerated repayment early -- during the tax season. So less of an impact outside of leasing. Certainly, gas prices during the month of March became a bigger story. The consumer is stressed but resilient. I mean I think that's the common refrain. We're watching all of our early indicators intensely. And we're seeing basically evidence of that stress really. And so we feel good about where we're positioned. The tightening in the leasing that we did in the first quarter of '25 has, I think, served us well and positioned the portfolio to be able to withstand some of the stress, so we saw a really good first quarter. And we're watching the numbers closely and watching the early indicators, but poised for some good momentum to continue. Kyle Joseph: Got it. That was broad-based, but I appreciate you covering it all. Just one follow-up for me. Obviously, a tough retail environment even going into the year and then layering in gas prices. Just kind of want to get an update on your discussions with retail partners kind of given now you have a bigger suite of products and given, call it, some more incremental headwinds for retailers? Steven Michaels: Yes. I mean, that's kind of more of the same on the retail, especially in consumer durables that the leasing business addresses. And our biz dev teams are doing a good job. They've -- they had some wins in the back half of 2025 and have a very, very good pipeline of retailers of all sizes that we think we're making progress with from a sales age progression standpoint. So we continue to believe that our suite of products with leasing at the retail level being the largest one are things that can help retailers. We are having increased conversations about a multiple product solution with various retailers, bringing forward into the mix or on the Purchasing Power side, bringing other products to employers to be able to offer additional value to their employees on that voluntary benefit platform. So we look forward to continuing to really dive into that ecosystem strategy and business development in our B2B2C businesses, specifically leasing and purchasing power is a big part of it. Operator: Our next question comes from the line of Bobby Griffin of Raymond James. Robert Griffin: Congrats on a good start to the year. I guess, Steve, I wanted to first ask like when you've seen that customer behavior before with a lower expected 90-day buyouts. Has that historically given you kind of any insights into what the customer does for the back half of the year? Is there anything to like learn or kind of how that plays out and what the health of that customer is when you see that? Steven Michaels: Yes, I'll start and Brian can certainly fill in the gaps. But there's no perfect kind of corollary, but we have seen in the past, specifically in 2023, coming off of a really tough '22 from an inflation standpoint but also a pretty material tightening that we did in the leasing business. We saw a very low 90-day buyout take rate on our customers. And then what we saw was those customers kind of just -- they stayed in their leases longer, which is a theme that we've talked about for a couple of quarters here on the leasing business. So not doing a 90-day in that time period, '23 did not indicate or necessarily mean that the customer was going to do a straight roller through the buckets and end up having elevated charge-offs, they end up paying deeper into their lease and maybe doing an early buyout, maybe later in the lease or going to full term. Certainly, some do end up in charge-offs, but we saw from a margin standpoint that this was a margin positive kind of trade-off because, as you know, 90 days, a very low margin outcome for us and the deeper they go in the lease is better. So -- we're watching that closely to see what the kind of the next action is. If the 90-day window expires, which a lot of it did in March because of the holiday -- the holiday uptick in leasing activity, and it expires on exercise what happens and how do those customers continue to pay us. And so far, we're pleased with the roll rates and other indicators in the portfolio health. And it's not -- we're not expecting a mirror of '23, but we are looking to that period to help with our forecasting. Brian Garner: Yes. And I would just add, I mean, it is the right question. As you just kind of evaluate consumer health overall. And we talked about 210 basis points improvement in gross margin at leasing in the quarter, primarily driven by this dynamic. And I think what's reflected in our outlook is a view that this is going to be a net positive for us, the tailwinds from lower 90 days. You might see some pressure and maybe some potentially some delinquency trends that you watch, but I'm not anticipating that there are anything significant. We saw write-offs come down 10 basis points year-over-year. So as you see us increase our outlook, and at least in specifically, we expect this kind of disposition dynamic and a shift towards lower 90 days to be a net positive for the P&L over the course of the year. Robert Griffin: Okay. That's helpful. I appreciate the details. And then maybe lastly for me, just on the actual GMV trends within Progressive leasing side, flip back positive in the quarter. Can you unpack a little -- is that just a function of the comparisons? Or is that actually in a sign of kind of inflections in consumer trends or whatnot. I guess I'm just asking it in context, I believe you did call out double-digit growth in apps, which would probably reflect some of the comparisons dynamic too with the Big Lots. So just trying to understand what is more comparison driven or if it's an inflection on that consumer engagement with the product and maybe seeing -- start to see a little trend improvement. Steven Michaels: Yes. We're pleased with the trends as we exited the quarter. Specifically, as the quarter progressed, like we talked about, it was kind of down high singles in January when we had both of those 2 discrete headwinds still in force. And then improved to down low singles in February as we lap that those things during the month and then up low singles in March. And if you remember kind of through most of 2025, we called out what the GMV trends would have been were it not for those 2 headwinds. And we were in kind of the low to mid-singles as air quotes the rest of the business that did actually decline in Q4 down to only up 1% absent those headwinds. So a lot -- much of it is kind of what the business has -- how the business has been performing, absent those headwinds over the last several quarters, but we're also seeing some strength in our digital channels. We talked about marketplace being up again 169%, e-commerce as a percentage of total leasing GMV up at 25.7% and the highest first quarter mix to date and also some various projects that we got over the goal line with existing retailers to help to improve that integration and improved balance of sale. So there's a mix of freeing up from the lapping. It also some things are positively trending in our execution. The apps are a strong point, but apps have to turn into approvals that have to turn into conversions and that those things can vary by channel. So -- but we're pleased with how we exited the quarter and how it sets us up for the rest of the year. Operator: Our next question comes from the line of Hoang Nguyen of TD Cowen. Hoang Nguyen: And congrats on the quarter. Just a quick one for me. So you mentioned about some of the cross-selling synergies between leasing and purchasing power. I think you're still in the early days, but can you give us some of the flavor of the conversation that you're having? Are you seeing a lot of inbound engagement from both sides of the enterprises? And I have a follow-up. Steven Michaels: Sure. Yes. I mean that's definitely part of our plan. It was identified during diligence, and we plan to execute on it. We talked a little bit about it during Investor Day. But we believe that the deep and long relationships that we have with retailers on the leasing side are fertile ground for us on the biz dev side for Purchasing Power and those efforts are underway. Purchasing Power has several employer clients that happen to be retailers that we believe could benefit from offering leasing to their customers, and those discussions are happening as well as augmenting the Purchasing Power offering with additional products that our intelligence says their employees are already consuming in the broader market. And so if we can deliver that to them as a voluntary benefit, we think that's a big benefit and differentiator for Purchasing Power to help with the sales motion in those employer clients. So we're pleased, and we're excited about the opportunity. But as you called out, we're very early in the integration because we're still just a few months post closing. Hoang Nguyen: Got it. Maybe one for Brian. So you guys have now returned back to your targeted leverage range, although at the high end. I think historically, you guys have done opportunistic buybacks. So I guess, I mean, when can we expect you guys to kind of get back to the market and buy back shares at these prices? Brian Garner: Yes. We haven't given any plan specifically to our buyback cadence. I think what I'd offer is you saw here in Q1 with the highly cash generative period, our ability to deploy capital against the deleveraging. And as we look forward over the course of the year, into Q2 and Q3. I think you continue to see some cash generation during those periods. What I think is on the horizon in Q4 is now you have these 3 businesses and progressively seeing Purchasing Power and Four that are seasonally heavy in Q4 in terms of the GMV concentration in the fourth quarter and the utilization of cash in that in that period. So I think the calculus is just kind of going through our capital allocation priorities of investing in the business first before we look to those kind of share repurchase type options. We're sizing up that fourth quarter and just kind of assessing the cash needs during that period. But that's really the calculus. And to the extent that we have excess capital, we'll go through that decision-making process, obviously, we're bullish on where we think this business is going and the share repurchases have been part of our RevPAR in the past, and we'll continue to evaluate them. Hoang Nguyen: Got it. And congrats on the quarter. Operator: And our next question comes from the line of Anthony Chukumba of Loop Capital Markets. Anthony Chukumba: Let me have my congrats on a strong start to the year as well. So I just had a question on Four, incredibly impressive performance there. As I look at the revised guidance, so if I take kind of the midpoint of the adjusted EBITDA and the revenue, it would imply that the EBITDA margin was -- in the previous outlook was calling about 15.1%, and that goes up now to about 18.2%. Given the fact that the take rate is consistent, I'm assuming that, that's just greater scale in terms of that higher EBITDA margin? Or is there something else there as well? Steven Michaels: Yes. Thanks, Anthony. Yes, we're very pleased with Four, it's the start to the year, but also the position it's in and what we think we can accomplish with it. And you're right, we did increase our view as to the margin expansion that we could achieve this year versus last year as we set about executing on that path towards a more mature state that we think is materially north of where we'll be in '26. And it is largely due to scale, but I would say that this team at Four is doing an outstanding job of doing more with the same and in some cases, doing more with less. They have leaned into AI in a very aggressive way and are not only achieving customer-facing improvements and innovation but also back office savings. And so we -- it is a scale play, but it's also an efficiency play and just the subscription strength and stickiness or said another way, lack of churn has been a bright spot and that revenue is very high-quality revenue that flows through to earnings in a meaningful way. Anthony Chukumba: Got it. Okay. And then I just have to ask my obligatory question in terms of the retail partner pipeline and Progressive Leasing. Steven Michaels: Yes. Thank you. Yes, I mean, as I think I was saying to Kyle, the biz dev team is really doing a great job. They're out there. They're talking. They had some wins in the in the back half of '25 that will pay us dividends here in '26 and the pipeline is full with retailers of all sizes. We're constantly getting new doors out in the SMB space. And that's kind of a different team than the folks that are hunting the super regionals and the enterprise accounts, but we're very pleased. We've got a great offering and a great way to tell the story. The ecosystem strategy reinforces that story, even though it might be a leasing conversation. We have more earned authority around this customer and have more products. So those are all helping us have some successes, and it's our expectation that we'll have some more wins here this year in '26. Operator: Our next question comes from the line of Hal Goetsch of B. Riley Securities. Harold Goetsch: Congratulations on a quarter. With the acquisition of Purchasing Power, and I think hitting the asset back market for some of their receivables, you've got some new items on your income statement, gain of sale based receivables came on changes or value of receivables. And I'm wondering if you could just give us some color on how we should think about any thumb-rule we should use in modeling for those types of line items in your income statement going forward since you've got this new business, and it's a little bit of flow for us to help us predict the future with it. Steven Michaels: Yes, I'll start, and then I'll turn it over to the expert, Brian, but you're right, and we appreciate that. I will call out the difference in the 2 things that you specifically mentioned. The gain of sale of aged lease receivables is not purchasing power related. That's on the leasing side. And we did that in Q4 of last year and again in Q1 of this year, and I would -- we had not done that historically, but I would point that to be -- to you that is not a onetime thing. That is going to be a recurring motion that we're in. It's probably not going to be to the same quantum as Q4 and Q1 moving forward, but we do have an inventory of items that -- or not items, but charge on leases that we have been working internally that we will then turn to sell into the open market. So that would be something that would be -- we consider to be a recurring item. The -- I'm going to let Brian talk about the Purchasing Power side because there is some purchase price accounting and fair value stuff that is -- that we have excluded out of -- or we've not had in adjusted EBITDA for the reasons of -- it's not kind of an ongoing thing. Brian Garner: Yes, it's -- really, that line item is related to the acquired receivables from purchasing power and they were fair valued on the data acquisition and really what that line represents. It's just a continued evaluation of the fair value of those receivables. And you might see a few million bucks in any given period. But like Steve said, this is really more of a technical accounting dynamic and bleeding through from the fair value on the acquisition date. And so we've made the decision to adjust it out of -- or added back to adjusted EBITDA to -- for more of a consistent presentation. So -- it's hard to give you any guidance on exactly how that's going to move. A lot of that has to do with collection activity and what actually occurs relative to what we thought was going to be the value at acquisition date. But I don't expect it to be material in any given period. It should be speed slight adjustments each quarter. Harold Goetsch: Okay. Terrific. And then the first point, as Steve mentioned, is this -- are these more like money is received on basically a recovery basis from selling past due accounts. Is that basically what it is, I hear that correct? And... Steven Michaels: Particularly aged -- age lease receivables. So receivables that we charged off in some cases years ago, and we sell them to a third party and it's not the dollars are sizable, but the percent -- the pennies on the dollar are not that big, but then they go out and they attempt collection efforts. It's not a consignment, it's actual sale where they -- we don't like share in the -- we get our money up front and then they go out and do their attempt to collect. Harold Goetsch: Understood. Okay. If I could ask you -- I know I understand like on the Buy Now, Pay Later, Q1 is a very big quarter because a lot of the payments from a very heavy holiday season come in the first quarter you have the subscriptions to your take rate is good. But your margins in the first quarter are like -- were better than most people in the industry already. And I was just wondering if there's like a -- if this is -- our margin reflected maybe not being fully burdened with the corporate overhead. Does that make sense? If the margins are quite high, and I'm just trying to figure out like this was a stand-alone comp may be lower because there'll be more corporate overhead associated with it. Steven Michaels: Yes. I mean if it was -- I think that's fair. But the margins are high. I mean, 37% EBITDA margin is impressive. But as you pointed out, Q1 is the seasonally high quarter. And as Anthony pointed out, like our guide implies something in the range of half of that for the full year. And so that shows that we're still in the scaling phase and haven't reached the maturity of some of the pure-play competitors that are out there, but we believe that the progression from loss-making in '24 to low teens in '25 with margin expansion at '26, but paints a nice picture of our ability to get up to those margin levels of the pure-play competitors. Operator: Our next question comes from the line of Brad Thomas of KeyBanc Capital Markets. Bradley Thomas: Congrats on the next quarter here, guys. I wanted to just follow up on the GMV growth that you're seeing at the end of the quarter within Progressive Leasing. And just curious if you could speak to perhaps the -- your confidence level that we may be at an inflection point here and may be able to continue to drive growth in that GMV in 2Q and through the balance of the year. And then just how we should think about the timing potentially of the portfolio flipping to growth again and when PROG leasing then flip to growth again? Steven Michaels: Yes. Thanks, Brad. I'll start and Brian can talk about the gross lease assets portfolio. But actually, the GLA is part of my answer. We don't guide specifically to GMV on a quarter-by-quarter basis. But I think that in order to achieve the revenue guide that we did put out for the leasing business, it would need to imply that we followed similar trends coming out of Q1 into the balance of the year. And -- but on the revenue side, a lot of that will the exactly what you called out the portfolio size. And we made some good progress here this quarter, but I'll let Brian kind of chime in on that. Brian Garner: Yes. I think what I'd highlight there is starting the quarter, Brad, we were -- our portfolio size, which is the key driver of revenue was down 9.4% start, and we made progress as Steve has articulated, kind of step functioning up our GMV trajectory. And so we ended the quarter down 5.4%. And the net -- sorry, 9.4% to 5.4%. The net impact of revenue in the period was revenue was down 8.4%. And so there's a pretty good corollary between kind of the average portfolio size year-over-year and where revenue is trending. And so you kind of extend that trend line into Q2 and Q3 and what we've got kind of implied in our revenue for Progressive Leasing for the rest of the year. I think what you said would really have to play out, which is we have to see a continued improvement in that trajectory. The gross lease asset balance continuing to make progress towards growing year-over-year as the year moves on in order for us to hit that revenue target. And so I like the trend there. I think it's -- we're taking month by month and we continue to make progress. But I think as we now pass these difficult comps that I feel like we've been talking about forever, what they lost and the tightening action. I think we can now have an easier conversation just about the apples-to-apples periods, year-over-year, and I think they're trending favorably. So I don't think it's too far down the road before we're seeing that portfolio size larger year-over-year. Bradley Thomas: That's very helpful. And if I could ask a follow-up around the cash flow generation. Brian, I apologize if I missed it in your prepared remarks, but what does the guidance imply for free cash flow this year? Can you remind us if there's anything that's sort of maybe onetime that wouldn't repeat as we look to cash flow next year? And then it seems like you could boost margins nicely if you paid off some of this funding debt, are you considering paying that off? Brian Garner: Yes, it's a good question. So just a couple of things. We haven't provided free cash flow guidance, but what I will say is if you just kind of take it quarter-by-quarter here, here in the first quarter, post acquisition on January 2, we were able to pay down total debt of $254 million. And so very heavy cash generative quarter, it gives us a lot of optionality. And as we stated out the gate here, our prioritization is deleveraging back to our targets. As we look forward to Q2 and Q3, I think both of those quarters will be slightly cash generative and give us additional optionality around either further deleveraging or evaluating -- putting the cash elsewhere. Q4 is -- and I mentioned this to Hoang is where there's going to be a net cash need I anticipate just with the growth that really these 3 businesses are demonstrating right now and not talking about MoneyApp, which has also shown some encouraging trends. And so I think we've kind of got that lens that we're looking through and the cash decisions that we're making. But net-net highly cash generative even in a growth -- heavy growth anticipation for Four and then Purchasing Power double digits and Progressive Leasing turning the corner on growth. So the onetime aspect that I would just highlight, and we've spoken about it on prior calls, and that's with respect to the BBA, and that's -- I wouldn't even call that necessarily onetime because given that, that is permanent in the law, that's going to continue to benefit us. But we did have a a $20 million tax refund at just under $20 million that we ended up getting here in Q1 really to 2025, that was additive, and the BBA is going to continue to benefit the rest of the year just as it reduces our overall tax liability, and we sized that rough benefit of about $100 million for the 2026 period. So those are -- that's, I think, a tailwind, obviously, from a cash perspective. But going forward, I think we've got a lot of optionality. You asked about the funding debt, the ABS debt that's tied to Purchasing Power. Our view is that, that is an important tool for Purchasing Power right now. I think it's an efficient model for them to be able to borrow against the receivables that they're generating and help us from just a capital efficiency standpoint. So obviously, as long as the ABS market is favorable to us and the rates that we disclosed here in our Q, you can see them by tranche. They're relatively favorable for us. And I think we continue marching down that path. No plans to pull those back meaningfully in the near term at least. Operator: This concludes the question-and-answer session. I will now turn it back to Steve Michaels, President and CEO, for closing remarks. Steven Michaels: Thank you very much for joining us today. We delivered a strong first quarter with improving trends across the businesses, and we're entering the balance of the year with real momentum. I want to thank all of the team members across PROG Nation for the execution we've seen as well as our retail partners and employer clients and our customers for trusting us. I firmly believe the best chapters of PROG story are still ahead of us. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Anika's First Quarter Earnings Conference Call. I will now turn the call over to Mr. Matt Hall, Executive Director, Corporate Development and Investor Relations. Please go ahead. Matthew Hall: Good morning, and thank you for joining us for Anika's First Quarter 2026 Conference Call and Webcast. I'm Matt Hall, Anika's Executive Director of Corporate Development and Investor Relations. Our earnings press release was issued earlier this morning and is available on our Investor Relations website located at www.anika.com, as are the supplementary PowerPoint slides that will be used for the discussion today. With me on the call today are Steve Griffin, President and Chief Executive Officer; and Ian McLeod, Senior Vice President, Chief Accounting Officer and Treasurer. They will present our first quarter 2026 financial results and business highlights. Please take a moment and open the slide presentation and refer to Slide 2. Before we begin, please understand that certain statements made during the call today constitute forward-looking statements as defined in the Securities Exchange Act of 1934. These statements are based on our current beliefs and expectations and are subject to certain risks and uncertainties. The company's actual results could differ materially from any anticipated future results, performance or achievements. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. Please also see our most recent SEC filings for more information about risk factors that could affect our performance. In addition, during the call, we may refer to several adjusted or non-GAAP financial measures, which may include adjusted gross margin, adjusted EBITDA, adjusted net income from continuing operations and adjusted earnings per share from continuing operations, which are used in addition to results presented in accordance with GAAP financial measures. We believe that non-GAAP measures provide an additional way of viewing aspects of our operations and performance. But when considered with GAAP financial measures and the reconciliation of GAAP measures, they provide an even more complete understanding of our business. A reconciliation of these adjusted non-GAAP financial results to the most comparable GAAP measures are available at the end of the presentation slide deck and our first quarter 2026 press release. With that context, I'll turn the call over to our President and CEO, Steve Griffin, to walk through our performance and discuss our priorities as we move forward. Steve? Stephen Griffin: Good morning, everyone, and thank you for joining us. In the first quarter of 2026, we made meaningful progress across Anika's three strategic priorities: driving sustainable commercial channel growth, advancing our hyaluronic acid-based innovation pipeline and strengthening execution across our organization. Our first quarter performance reflects a more focused business with early benefits from the operational changes we put in place. I want to walk through our first quarter results through the lens of these three priorities and importantly, in the context of what we said we would do. First, our top priority remains accelerating sustainable revenue growth, and the first quarter results reflect continued progress in that direction. In the first quarter, commercial channel revenue continued to grow at a double-digit rate, increasing 12%, reflecting strong performance across both regenerative solutions and our international OA pain management portfolio. Within Regenerative Solutions, Integrity continues to be a central driver of that momentum with U.S. procedures up 35% year-over-year, generating nearly $2 million in revenue. Growth was driven by U.S. surgeon adoption, the full launch of larger sizes and expanding international penetration. We continue to be pleased with Integrity's performance as it progresses through the commercialization curve, having now surpassed 3,000 cases with accelerating adoption. We are seeing surgeons progress to their fifth and tenth Integrity cases faster than initially expected, with acceleration evident across each stage of adoption. This reinforces that once surgeons begin using Integrity, utilization ramps quickly as confidence builds. We are closely tracking new surgeon adoption with new surgeon users per month growing at a double-digit rate month-over-month. This reflects continued success both in expanding our surgeon base and in deepening engagement as surgeons increase their use of Integrity over time. We're pleased by early results following the launch of the larger Integrity sizes with demand tracking ahead of expectations. But the bigger opportunity is adoption. Today, augmentation is used in only about 8% of rotator cuffs in the U.S. In other words, more than 90% of patients do not receive a patch at all, even though we know augmentation can support better healing. Our strategy is to change that. By expanding the Integrity platform with additional sizes, configurations and enabling instrumentation, we aim to make augmentation easier for surgeons to adopt. Over time, that can both improve patient outcomes and significantly expand the total addressable market for Integrity in the ASC. Hyalofast also continues to contribute to the strength of our regenerative solutions portfolio, delivering steady growth outside the United States, supporting overall commercial channel performance. International demand remains solid, driven by established clinical adoption and continued expansion across key markets, underscoring Hyalofast's role as a durable contributor to our regenerative platform and a complementary driver alongside newer products within the portfolio. Turning to our international OA Pain Management portfolio. We delivered strong first quarter revenue of nearly $9 million, reflecting the continued strength of our commercial channel. Performance was driven by ongoing regional expansion and improved market share across multiple geographies for CINGAL, MONOVISC and ORTHOVISC. Lastly, the OEM channel grew 14% year-over-year, primarily due to favorable order timing for both our U.S. OA pain management products sold through our partnership with J&J MedTech and our non-orthopedic products. We continue to expect quarterly variability in this channel. Within the U.S. OA Pain Management portfolio, performance was driven by MONOVISC unit volumes that exceeded our internal projections for the quarter. With pricing tracking in line with expectations, MONOVISC delivered meaningful favorability and more than offset lower-than-expected demand for ORTHOVISC. This product level mix shift highlights the inherent variability in our OEM channel, where timing and demand can differ by product and quarter without changing our full year expectations. Non-orthopedic revenue was up in the quarter, driven by order timing of our animal health products. As a reminder, we continue to assess optionality as legacy distribution agreements cycle through with a clear focus on maximizing shareholder value. Our second priority is advancing our HA-based innovation pipeline centered on Integrity, Hyalofast and CINGAL and doing so through a structured and predictable development approach. During the first quarter, we continue to make steady progress across each of these programs. The Hyalofast PMA review is ongoing as we continue to engage with the FDA through their review process. CINGAL also advanced during the quarter. Enrollment in the bioequivalent study remains on track as we continue to prepare for an NDA submission, including the necessary CMC work to support hyaluronic acid as a drug. In addition, CINGAL has successfully achieved European Union MDR certification, becoming our third MDR certified product alongside MONOVISC and Hyalofast. Importantly, the certification includes expanded indications across multiple joints, including the knee, hip, shoulder and ankle, reinforcing CINGAL's clinical versatility and supporting continued international growth. In parallel, the post-market clinical follow-up study supporting marketing and the Integrity EU MDR submission continues to enroll and remains on track to complete enrollment later this year. We began 2026 with a clear focus on execution and the progress delivered in the first quarter underscores that commitment. Within our regenerative pipeline, we are advancing an early-stage regenerative suture and tape program that underscores the meaningful potential still to be unlocked from our hyaluronic acid technology platform. Leveraging [ HYAFF ] fiber, we can tailor both mechanical strength and biological response to specific soft tissue and tendon repair needs across a broad range of clinical applications. While development remains early, and we are not yet quantifying its financial impact, the preclinical data are very encouraging, and we look forward to sharing more as this and other programs progress. Our third priority, strengthening operational discipline and execution has been an increased area of focus, and it was a significant contributor to our first quarter financial performance. Gross margin improved meaningfully compared to the first quarter of 2025. That improvement reflects a combination of higher manufacturing productivity and throughput, the continued benefits of our margin improvement initiatives and greater discipline across our operations. As a result, adjusted EBITDA increased by more than $4 million compared to the first quarter of last year. Importantly, these results are not the outcome of a single quarter or a onetime action. They are being delivered through deliberate operational transformation that embeds lean manufacturing principles across our operations with a strong focus on continuous improvement and empowering our teams. We have reduced nonstandard work, strengthened engineering solutions and improved productivity by enabling teams closer to the work to drive meaningful change. At the same time, targeted investments in equipment upgrades have supported these efforts, allowing us to execute more efficiently and with greater consistency. Collectively, these actions are changing how we run the business, tightening processes, increasing operational discipline and building a more scalable operating model as volumes grow. While we don't expect margin performance to move in a straight line each quarter, the first quarter provides clear evidence that our operational transformation is underway and beginning to create meaningful operating leverage in the business. On the expense side, we continue to demonstrate strong cost control across the organization. Excluding onetime severance charges related to actions we took earlier in the year, SG&A remained well managed, reflecting the benefits of a more focused operating model and disciplined resource allocation. R&D expenses increased this quarter as expected, reflecting deliberate investment in our key pipeline programs. These investments are targeted and aligned with the advanced programs, we believe offer the greatest potential to drive future growth and value creation. With that, I'll turn it over to Ian to walk through the financial details. Ian McLeod: Thanks, Steve. Please refer to Slide 5 of the presentation as I provide updates on the first quarter of 2026. In the first quarter, Anika generated $29.6 million in total revenue, up 13% year-over-year. Commercial channel revenue grew 12%, reaching $12.6 million, driven by strong international execution and continued momentum in Integrity, which continues to exceed our commercial expectations. Our international OA pain management business remained a key contributor, delivering 9% growth in the quarter to $8.9 million of revenue, led by sustained market share gains for MONOVISC and CINGAL across several regions. OEM channel revenue was $17 million in the quarter, representing a 14% increase year-over-year. The increase was driven primarily by order timing, including shipments of U.S. OA pain management products sold through J&J MedTech as well as certain non-orthopedic OEM products. As we have discussed, the OEM channel is subject to variability related to customer ordering patterns. As a result, some revenue shifted into the first quarter, which may affect reported OEM revenue in the second quarter. Importantly, this timing-related variability does not change our expectations for the full year. Our gross margin improved in the first quarter, driven by higher volumes and improved execution across our manufacturing operations. GAAP gross margin increased to 64%, up from 56% in the prior year, reflecting higher productivity, increased throughput and the early benefits of our lean manufacturing efforts. Turning to operating expenses. First quarter operating expenses were $24.5 million compared to $19 million in the prior year period. Selling, general and administrative expenses increased to $17.8 million from $12.9 million a year ago, primarily reflecting $4.9 million of onetime severance-related costs associated with previous announced cost reduction actions. R&D expense was $6.6 million, up 11% from $6 million a year ago, driven by continued investment in key regulatory and clinical programs, including Hyalofast and CINGAL. We are continuing to closely monitor operating expenses, balancing disciplined spending with targeted investment in the programs most critical to long-term growth. Total adjusted EBITDA for the quarter was $4.3 million, driven by strong gross margin expansion and improved operating leverage. We ended the quarter with $41 million in cash with no debt, giving us a strong liquidity position and the flexibility to continue investing in our growth priorities. First quarter cash usage reflected typical seasonal expense dynamics, and we expect cash flow to improve as the year progresses. As previously communicated, we initiated a $15 million 10b5-1 stock repurchase plan in November 2025. And as of April 10, that program has been completed. As part of the second 10b5-1, we have purchased $15 million of stock at an average price of $10.76. Now please turn to Slide 6 as I review our financial outlook for 2026. Based on our first quarter performance and current visibility across the business, we are maintaining our previously issued full year 2026 guidance. At the total company level, we continue to expect full year revenue of $114 million to $122.5 million, representing 1% to 9% year-over-year growth. This outlook reflects continued momentum in our commercial channel alongside the market dynamics we've discussed in our OEM business. Within the commercial channel, we are maintaining our expectation for 10% to 20% growth or $53 million to $58 million for the full year. Growth is expected to be driven by the ongoing expansion of Integrity in the U.S., sustained Hyalofast performance outside the U.S. and increasing adoption across our international OA pain management portfolio. For the OEM channel, we continue to expect revenue to be flat to down approximately 5% year-over-year or $61 million to $64.5 million. This outlook reflects anticipated MONOVISC unit volume growth, partially offset by lower pricing. Turning to profitability. We are maintaining our expectation for adjusted EBITDA to be in the range of 5% to 10% of revenue. At the midpoint, this improvement is driven by higher expected revenue led by commercial channel momentum, along with the benefits of previously announced G&A cost reduction actions and continued productivity and manufacturing improvements as demonstrated in the first quarter. These gains are partially offset by modestly lower J&J MedTech pricing. With that, I'll turn the call back over to Steve. Stephen Griffin: Thanks, Ian. As we continue the transformation of the company following our divestitures in 2025, the Board is also evolving to reflect this next phase and two directors will be stepping down as outlined in the proxy filed last night. We are grateful for Dr. Glenn Larsen and Bill Jellison's contributions and valuable service to the company. With that context, before we move to Q&A, I want to briefly reinforce what we're focused on and how we're operating. Our priorities are clear. First, we are continuing to drive revenue growth across our commercial channels. Second, we are advancing our HA-based innovation pipeline through key regulatory milestones in a disciplined and predictable way. And third, we are building on the progress we've made operationally to support improved profitability and long-term scalability. Equally important is how we're going about this. We are running the company with a simple operating mindset built around two principles broadly shared by the best lean manufacturing systems. First, respect for people; and second, continuous improvement. Respect for people means recognizing that the most important work happens closest to our products and our customers. Leaders exist to support that work to simplify processes, remove obstacles and make it easier for teams to execute and improve every day. Continuous improvement is about being practical, disciplined and honest about where we can do better and then acting on it. This approach is helping us operate more effectively, staying close to customers and surgeons and running the business with a leaner, more focused leadership structure while maintaining strong accountability and execution. I want to thank our employees across the company who are embracing this way of working and showing up every day focused on execution and improvement. I'd also like to thank the surgeons and patients who rely on our products and partner with us. We value that trust and it keeps us focused on delivering consistent quality and performance. And finally, I want to acknowledge our shareholders. We appreciate your support and engagement as we make these changes to work to build a stronger, more durable business. Your interests are aligned with ours and those of our employees and customers as we focus on long-term value creation. With that, I'd like to now open it up for questions. Operator: [Operator Instructions] And your first question comes from Mike Petusky from Barrington Research. Michael Petusky: So I guess the first question I have is sort of around gross margin. Obviously, a really good quarter in terms of gross margin with some favorable order timing or I should say, favorable mix, particularly, I think, and obviously getting some benefit from manufacturing efficiencies. I guess going forward, I'd assume probably mid -- I'm sorry, upper 50s for most of '26. I mean, is that the right way to model this as things sort of normalize in terms of mix? Or might 60% or very low 60% be more of the new normal going forward? Stephen Griffin: Yes. Mike, thanks for the question. I think the first quarter is a demonstration of what we can do, and I think the lean manufacturing improvements that we've made are starting to show through. You are correct that we received some favorability in the first quarter as it relates to mix and some of the order timing on the OEM side that benefits the overall business. And so I do think that it will be likely lower over time, and it's going to vary quarter-to-quarter. I haven't given a specific guide, but it's implied through the EBITDA guidance that we don't expect it to maintain at the same level as it's at in the first quarter. But I think it is a good demonstration of what we're shooting for. Longer term, beyond just the course of this year, we're focused on improving the manufacturing productivity so that we can reduce our cost per unit as we continue to scale and grow operations. And I think this is an important step in that right direction. Michael Petusky: Okay. Great. And Steve, you sort of -- you gave a lot of detail, and I really appreciate, I'm sure other people really appreciate around integrity and sort of utilization and the footprint you're building out there with surgeons, et cetera. So given the opportunity that you sort of described, how do you guys sort of, I guess, approach that in terms of training surgeons? I mean, is there sort of a cadence, a rhythm that you all are going out and trying to achieve? Like what's the plan there to sort of get after that 92% of the market opportunity you don't think you're touching now? Stephen Griffin: Yes. It's an excellent question. And I would say we've talked in the past about the investment that we've made in our commercial channel. It's primarily related to the need to train surgeons on the procedure. And that's really where we spend a lot of our time and focus is on that new surgeon adoption. We closely monitor and track how long it takes the surgeons to get to that fifth and tenth case because that's really an indication of how well they're getting through the learning curve of the product. And that's been sort of our primary focus with the team that we have that are boots on the ground that have done a really great job of establishing a footprint here in the U.S. I think the broader question you're asking about in terms of how big the total addressable market is, just given sort of the current rotator cuff augmentation percentage rates is another clear indication of where we want to try and grow. And that's going to come not just from surgeon adoption, but also from the ease of use and the different sizes and shapes and instrumentation that we can deploy. And I think that we've got a really interesting product here from its regenerative capability and where we're focused on for R&D in the [ HYAFF ] space in the U.S. is around trying to make that easier so that surgeons are able to deploy it more rapidly to more patients. So it's not just the adoption, but it's also the R&D efforts in that space. And that, plus the clinical data that we're working to gather are sort of all part of our plan as we launch this U.S. commercial channel. Michael Petusky: Okay. Steve, I don't think I asked that question as well as I wanted to. I'm going to take a second shot at it. Is there targets internally, and I'd love if you'd be willing to share some of it in terms of how many trainings, how many new surgeons you want to train on Integrity over the course of '26? Like are there targets that you guys are trying to achieve there? Stephen Griffin: Yes. I appreciate the question. I'll answer it super simply. Yes, we have targets. Yes, our team works against those to try and get new surgeons adopted to the technology. And no, we're not going to share those externally. Michael Petusky: All right. Last question for me, at least for now. In terms of the share repurchase, obviously, completed it. Congratulations, particularly on the cost basis of those shares that you all repurchased. I guess my question is, given $40 million of cash on the balance sheet, as you look at sort of capital allocation priorities post the completed share repurchase, what would you call out there in terms of your priorities going forward? Stephen Griffin: Yes, I appreciate that question. Certainly, the share repurchase is part of a broader capital allocation strategy at the company level. And when we think about capital allocation, there's a few different facets to it. First is the operational investments we've made. So we've made investments in the CapEx in our manufacturing facility, and those are important to allow us to drive growth and scalability. Second will be the investments we've made into our U.S. regenerative commercial channel. So that's been an investment that we've talked about historically as something that's a drag to the P&L. We think of that really as a capital allocation decision we're making. And then as we think about capital allocation longer term, the share repurchase opportunity is certainly a piece of it. We think about that in the sense that it represents a long-term shareholder value, and we think that the shares today represent value, but we're also considering other elements of the business associated with the long-term potential and where we see our business headed. And at this point, we have nothing further to share. Operator: And your next question comes from Anderson Schock from B. Riley Securities. Anderson Schock: Congratulations on the strong quarter. So you mentioned that Hyalofast review time line remains intact. Could you remind us that time line and when you expect to submit the complete response and your working assumptions for an FDA decision window? Stephen Griffin: Absolutely. Appreciate the question this morning. So we had previously communicated from an impact to Anika's revenue opportunity that it could impact the fourth quarter of next year. That's built into our guidance. And with that is an expectation of sort of an extended time frame of discussions with the FDA. As you noted, we did submit the third and final module in the fourth quarter of 2025, and we received the deficiency letter from the FDA in the first quarter of this year, and we're working on those responses. We haven't given a specific timetable as to when we expect to have our full response back into them, but it's safe to say that it's in the coming months in terms of what we're planning on submitting back to them, and then we expect to have it back and forth with them associated with the previously announced clinical data. Anderson Schock: Okay. Got it. And 2027 guidance remains unchanged. So I guess at what point in the year would you need a positive FDA decision to have enough lead time to ramp commercial infrastructure to support the expected $3 million of 2027 U.S. Hyalofast revenue? Stephen Griffin: Yes. I think it's safe to say that we've built in a level of buffer in terms of what we think we would need for the commercialization ramp-up to support our business. Everything that we've kind of built into our assumption here of our back and forth with them is kind of built into that overall financial framework. Our teams are obviously working internally on the things that we can do now in support of a potential launch of Hyalofast and then a ramp further in next year would be decisions we would make depending upon FDA. Anderson Schock: Okay. Got it. And then could you provide an update on CINGAL's bioequivalent study enrollment to date? Does the current enrollment pace allow you to provide more specific completion and NDA filing window? Stephen Griffin: It doesn't, but I expect that as we continue to work our way through that, we will be in a position to share more associated with an NDA filing time frame. As you noted, we are working through sort of the two elements of it, which is the bioequivalence study, which I'm not going to share the specific numbers, but it remains on track versus our original expectations as we've started this year. I think we noted on our fourth quarter call that we had initiated the study in the December time frame of 2025. And so the pace of enrollment is on track. And then we're working that in conjunction with preparation of the CMC work to be able to file for Hyalofast as a drug. So those two things are running concurrently. Anderson Schock: Okay. Got it. And then finally, you mentioned a new regenerative sutures and tapes program in development. Could you provide some more color on the size of the market opportunity here? Stephen Griffin: Yes. I'd say it's a little early. I noted in the prepared remarks that we're not going to necessarily share, I'll call it, financial projections of this because it's still early. Really, what we wanted to do is just highlight the opportunity that exists for HYAFF as a regenerative technology in spaces that are outside of the areas that we're currently covering. Certainly, suture and tape is the space that we think would be most opportunistic. It's a very large addressable market, but that doesn't mean that it would be entirely addressable for us. But it's an area for where we think about regenerative technology in the long term, it could have a bigger impact. I don't think we're at the point yet to share more on that, but the early indication we have on some of the data we've seen has been encouraging. Operator: And there are no further questions at this time. Mr. Steve Griffin, you may please proceed. Stephen Griffin: Thank you. Thank you, everybody, for joining our call today, and we look forward to speaking with you on our second quarter earnings call. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you very much for your participation. You may now disconnect. Have a good day.