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Operator: Welcome to the Evolent Earnings Conference Call for the First Quarter ended March 31, 2026. As a reminder, this conference call is being recorded. Your hosts for the call today from Evolent are Seth Blackley, Chief Executive Officer; and Mario Ramos, Chief Financial Officer. This call will be archived and available later this evening and for the next week via the webcast on the company's website in the section titled Investor Relations. This conference call will contain forward-looking statements under the U.S. federal laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the company's reports that are filed with the Securities and Exchange Commission, including cautionary statements included in our current and periodic filings. For additional information on the company's results and outlook, please refer to our third quarter press release issued earlier today. Finally, as a reminder, reconciliations of non-GAAP measures discussed during today's call to the most direct comparable GAAP measures are available in the summary presentation available in the Investor Relations section of our website or in the company's press release issued today and posted on the Investor Relations website, ir.evolent.com, and the Form 8-K filed by the company with the SEC earlier today. In addition to reconciliations, we provide details on the numbers and operating metrics for the quarter in both our press release and supplemental investor presentation. And now I will turn the call over to Evolent's CEO, Seth Blackley. Please go ahead. Seth Blackley: Good morning, and thank you for joining us. Today, Evolent reported strong first quarter results that were in line with our expectations. Our performance reflects the continued focus and discipline with which we are executing the plan we laid out to you on our call in February. For the quarter, Evolent reported total revenue of $496 million, representing 9% sequential growth versus Q4 2025, excluding the divestiture of Evolent Care Partners or ECP, and adjusted EBITDA of $22 million, consistent with our expectations and the outlook we provided in February. Our medical expense ratio or MER for Q1 2026 was 93%, improving 150 basis points versus Q4 2025, excluding ECP. This performance, we believe, underscores our disciplined execution and our belief in the growing importance and demand for Evolent solutions in the marketplace. Looking ahead to the full year, we feel confident in our ability to continue delivering against our outlook and priorities. Accordingly, we are reiterating our 2026 revenue guidance range of $2.4 billion to $2.6 billion as well as our adjusted EBITDA guidance range of $110 million to $140 million and estimated MER will be approximately 93% for the full year. Mario will walk you through our financial results in more detail in a few moments, but I first want to touch on several key business highlights. Starting with our new Performance Suite launches, we had a successful launch with Aetna on January 1, supported by strong collaboration with the Aetna team. While it remains early, initial indicators are encouraging with our clinical intervention and provider engagement metrics above our internal targets for Q1. We will have greater visibility into the performance over the course of the year, but we're happy with the start. We're also pleased to have launched with Highmark on May 1. We have had great collaboration with the Highmark team on the launch, and I will be excited to give you a broader update on Highmark in the coming quarters. Our pipeline for new business remains strong as we continue to see demand for our products, specifically in oncology. While the market has seen some positive developments this quarter, overall medical trend remains elevated for our plan partners and oncology, in particular, continues to be one of the most challenging categories for health plans to manage as they seek to balance quality outcomes with affordability. We believe Evolent is recognized as a leader in helping health plans manage both quality and cost for cancer care. Our recent wins with marquee plans like Highmark and Aetna as well as our renewal rates with existing partners point to our market position today. At the core of our work in oncology are 2 simple principles: first and foremost, ensuring patients receive the very best care; and second, the cost of that care is thoughtfully managed. I often share with our partners that if I had a family member diagnosed with cancer, I'd absolutely want the Evolent clinical team to review the case. The clinical reality is that according to certain studies, up to 30% or more of cancer cases involve either an incorrect diagnosis or a suboptimal treatment plan prior to any second review, which is somewhat understandable when you consider, for example, that there are up to 32 different approvable regimens for a typical advanced metastatic non-small cell lung cancer case. While some of this gap can be addressed through traditional utilization management, we believe to more fully close the gap, treating oncologists need to have ready access to the very latest evidence and data as well as the right financial incentives to select the best care plan for my family member or yours. Further, pairing our traditional oncology solution with consumer-facing solutions like our member navigation platform are critical to fully close the gap. And of course, we believe we've been able to show that when we help oncologists and patients pick the right care plan the first time, costs on average come down, a win-win for the patient and the system. As a result of all these dynamics, we're increasingly seeing interest in our solution, and we're addressing this market demand with both our technology and services solution and with our enhanced Performance Suite solution, which has narrow corridors and the protections we've shared with you on the last earnings calls. Enhanced Performance Suite structure allows us to reduce some of our direct risk exposure while still offering guarantees to our clients. We believe this shift creates a more sustainable, attractive operating model for our clients, Evolent and our shareholders. In terms of new announcements, we have 2 new contracts to announce today. First, an existing Performance Suite client has signed a contract for our advanced imaging solution for 4.5 million lives across commercial, Medicaid and Medicare Advantage. We expect this contract to go live in Q3, subject to state regulatory approvals in certain states, and we view this agreement as further validation of our ability to cross-sell solutions into our existing client base. More broadly, we believe this new contract validates the nation's leading payers are looking for a trusted partner, not just for our leading solution in oncology, but that there is value in having our company provide our services and technology for multiple integrated solutions. Imaging, in particular, benefits from product integration given the importance of diagnostics for oncology, cardiology and musculoskeletal specialties. And second, in the Performance Suite, one of our national payer clients is expanding their existing oncology and cardiology solution in several new markets across commercial and Medicare Advantage. This expansion is expected to generate over $200 million of annual revenue and slated to go live in Q3, subject to regulatory approvals in certain states. We believe this new win is strategically important, reflecting growing client confidence in our platform and our ability to scale existing solutions across new populations. Similar to our other new Performance Suite launches, this oncology and cardiology expansion will run at higher MERs initially due to reserve building. We had already incorporated this new expansion into our full year MER expectation, so this announcement does not change our outlook. With respect to our update on the exchange impact, we've seen declines in exchange membership in the Performance Suite as clients saw reduced membership in select markets as previously communicated over the last few quarters. On the specialty D&S side of the business, early indicators are that the exchange membership decline may be slightly lower than the 40% we had assumed, but the data is still coming in, and we expect better clarity around this by the end of Q2. For now, our guidance for the full year continues to take a cautious approach and assumes the 40% decline we referenced previously. Turning to our continued efforts around AI and automation. We recently added a number of strong technology and data science players to our team, including naming Archie Mayani as our Chief Product Officer. Archie brings deep expertise scaling technology-enabled health care platforms and her leadership further strengthens our ability to execute against our product and automation road map. We continue to test automation initiatives while preserving and in many cases, enhancing the value we deliver to our customers and patients. Our ability to automatically approve authorizations through the use of technology and AI continues to expand and remains central to our goal of auto improving approximately 80% of authorization volume with the goal of making the process easier for providers and patients while driving down our internal operating costs. Deployment of new AI models is accelerated, particularly within our imaging solution. Our initial rollouts have shown auto approval increases in the high teens on cases evaluated by these models and in some cases, up to 30%, all with minimal clinical value loss for our customers. Finally, touching on our capital structure. We ended the quarter with unrestricted cash of $142 million and net debt of $792 million. With no debt maturities until 2029, we continue to believe that we have the balance sheet strength to support near-term execution while maintaining a clear and credible path to deleveraging over the long term. To conclude, Evolent is off to a solid start in 2026. Our disciplined execution in Q1, expanding Performance Suite footprint and strong early momentum gives us confidence in our full year outlook. Stepping back from the quarter and 2026, we believe there is a large long-term opportunity for Evolent that is supported by 2 major super cycles. First, despite the strength of our product and the opportunity to reduce variability in care and oncology care, Evolent today only manages approximately 10% of the oncology market. We believe this is due to 2 factors. One, we've only been accelerating our work in this area across the last 5 years. And two, we believe that approximately half of the market is still in-sourced by health plans. As costs and complexities to treat cancer diagnoses have continued to accelerate over the last 5 years, more plans are making the decision to outsource oncology management and upgrade to a more sophisticated partner like Evolent. We believe this will further accelerate over the coming decade as the oncology drug pipeline continues to grow and complexity increases. As such, we expect to be able to meaningfully increase our market share, which in turn should provide a long-term growth opportunity for Evolent. The second super cycle is the massive opportunity that AI can provide in automating specialty reviews. I covered this topic earlier, so I'll just add that our specialties outside of oncology care are especially well suited to automation, and we're investing to be a market leader in the innovations necessary to reach the 80% automation threshold goal I referenced earlier. Taken together, we believe these 2 super cycles should help Evolent continue to meet our near-term commitments and expect them to fuel our long-term success. With that, let me turn it over to Mario to dive into the quarter. Mario Ramos: Thank you, Seth, and good morning, everyone. We delivered solid first quarter financial results that were in line with our expectations and consistent with the outlook we discussed on the Q4 call in February. Total revenue was $496 million, representing 9% growth versus Q4 2025, excluding ECP. In addition, adjusted EBITDA for the quarter was $22 million. Performance Suite revenue was $323 million, up 26% sequentially versus Q4 2025, excluding ECP, driven primarily by membership from our new Performance Suite launches, partially offset by exchange membership declines in select markets and market exits from clients rationalizing underperforming markets. Specialty Tech and Services revenue totaled $81 million, a decrease of 16% sequentially. The lower revenue reflects not only actual exchange membership declines, but also includes our estimate of the revenue impact from additional disenrollment following the grace period expiration. We have contractual provisions with our specialty T&S clients that require us to return funds after members disenroll. Taken together, this total impact is in line with the 40% membership decline we have previously discussed. We expect to have better visibility into exchange membership by the end of Q2. The impact of exchange membership declines was partially offset by growth in Medicare Advantage membership and the launch of a new specialty for an existing client. Administrative services and cases revenue was $92 million, down 11% quarter-over-quarter, reflecting the expected termination of an administrative services client at the end of last year. This decline was partially offset by better-than-expected membership growth from existing clients in the first quarter. Our medical expense ratio or MER for Q1 was 93%, improving approximately 150 basis points versus Q4 2025, excluding ECP. As a reminder, Q4 2025 MER was temporarily elevated due to out-of-period true-ups as we recognized a full year of savings shared with clients. Excluding this impact, we saw sequential improvement even though Q1 trend ran above expectations due to higher-than-anticipated prevalence in oncology in a few markets. These markets are almost exclusively exchange markets that experienced membership declines and acuity shifts. We expect the negative impact on our MER from higher prevalence will be retroactively addressed later in the year based on our contractual protections. This cost pressure was partially offset by net favorable prior year development in Q1. Adjusted cost of revenue, excluding medical claims, but including medical device costs and adjusted SG&A totaled $173 million for the quarter. The variance versus our expectation was driven primarily by elevated exchange member servicing costs within Specialty T&S. This is because we are required to continue servicing members during the grace period even if they ultimately disenroll. This impact was partially offset by efficiency gains in our shared services organization and lower-than-budgeted vendor spend. We believe this exchange-related cost pressure to be temporary and to normalize as we see expected disenrollment in late Q2. We ended Q1 with $142 million in unrestricted cash and $792 million of net debt. Cash decreased modestly from our Q4 balance, reflecting roughly $1 million of cash used in operating activities and $6 million of capital expenditures during the quarter. Operating cash flow includes the settlement of a onetime $15.5 million client overpayment that we highlighted in February's earnings call. It also includes approximately $20 million of pass-through PBM proceeds that were received in Q1 with the corresponding payment occurring at the beginning of Q2. Excluding both the onetime client overpayment and the pass-through timing benefit, normalized operating cash flow for the quarter would have been approximately negative $6 million, which was in line with expectations. Turning to full year 2026 guidance, as Seth noted, we remain confident in our ability to deliver on our 2026 plan. However, given we're only days into the Highmark launch and do not yet have certainty around the ultimate exchange disenrollment impact, we are reiterating our 2026 guidance, revenue range of $2.4 billion to $2.6 billion and adjusted EBITDA range of $110 million to $140 million. We continue to expect MER for the full year to be approximately 93%. In the Performance Suite, our revenue guidance assumes the continued ramp of our new launches, offset by the membership declines we experienced in Q1 from exchange membership and market exits. In Specialty P&S, our revenue guidance assumes the approximately 40% decline in exchange membership we referenced earlier. As noted, the impact of both the actual and the expected incremental disenrollment required to reach the 40% decline is reflected in Q1 revenue. We should have better visibility into the final outcome of this dynamic by the end of Q2. On MER, we continue to expect MER to increase throughout the year and peak in Q3 as we see the full impact of the Highmark launch. As discussed, this reflects elevated reserves consistent with a new contract combined with normal seasonality. From there, we expect MER to improve steadily through year-end as the impact of our clinical programs and favorable contractual true-ups flow through in the second half of the year. Finally, on the quarterly adjusted EBITDA cadence, we believe Q2 will be in line with Q1 due to typical seasonality with a $10 million to $15 million sequential improvement per quarter in both Q3 and Q4. A few additional items related to our full year outlook. We continue to expect adjusted cost of revenue, excluding medical claims, but including medical device costs plus adjusted SG&A of approximately $675 million for the year. The elevated Q1 cost pressure related to exchange volumes is expected to moderate, and our efficiency initiatives are tracking on plan. We continue to expect cash flow from operations of $10 million to $20 million for the year after approximately $60 million of annual cash interest expense. We continue to also expect $25 million to $30 million in software development and capital expenditures for 2026. To wrap up, we are pleased with our first quarter execution and the underlying trends we're seeing across the business. While we're still in the early stages of the Highmark ramp and continue to monitor exchange dynamics, our Q1 performance reinforces our confidence in the plan we laid out and our ability to deliver on our full year priorities. We are reiterating our 2026 guidance and remain focused on disciplined execution, operating efficiency and delivering value for our clients and shareholders. With that, operator, please open the line for questions. Operator: [Operator Instructions] Our first question will come from John Stansel with JPMorgan. John Stansel: Maybe a bigger picture one here. I think we've heard commentary in the space around not just relaxation of prior authorizations, but standardization across payers and prior authorizations. I guess as we think about the longer-term outlook and how payers are approaching complex care and prior authorizations in general, how are you thinking about that kind of compare and contrast the near-term demand that you see with a robust pipeline and some of those changes that may come down the pipe? Seth Blackley: Yes. Great, John, thank you for that question. I'd make, I guess, 3 comments on that. Number one, we're big fans of the standardization that's happening. I think it's the right answer for patients and for physicians and it's very consistent with what you heard us doing with the application of AI to improve as much as possible. So that's kind of point one. I think point two, I think it's important for you guys to have the framing around sort of Evolent is a bit of a tale of 2 cities, meaning vast majority of Evolent's growth is coming in oncology, but about 95% of Evolent's approval volume, like the factory that we have to go through to do the work is not oncology. It's all of our other specialties because there's so much volume in things like imaging or cardiology, right? So -- and I think oncology, in particular, right, is so much more complex. It's going to be harder to standardize. That example of 32 approvable regimens, the pace of scientific innovation, there's 300 journal articles a month getting published in oncology. So I think the 95-5 rule of the 95 or whatever the example is for the entire industry being as automated as possible, fantastic. Good for everybody, good for us, good for our cost, good for patients, everybody. I think the 5 in our example that is the oncology is where our growth is coming from, where you need such deep clinical expertise and where you're going to need a little bit more of a human touch to help manage this because it's not -- in most cases, these things are not something that is subject to UM. A lot of these interventions we're making are about nudges or incentives or a conversation with the treating oncologists. And then the third thing is just to reiterate it because I think the industry needs this narrative. AI is amazing for doing the automation. We and nobody is ever going to be using AI to provide an adverse determination or a suggestion for a different plan. That's where a human has to come in. Operator: Our next question comes from Charles Rhyee with TD Cowen. Lucas Romanski: This is Lucas on for Charles. Congrats on a good quarter. Your guys' 1Q MER ratio was better than our estimate. Can you talk about what you saw in the quarter from an oncology and cardiology perspective? And then also, did you guys see any benefit in the quarter related to heavy weather storms in January and February? Mario Ramos: Great question. On oncology and cardiology, I think we're pretty much where we thought we would be very close. The exception is a couple of markets where we had higher prevalence because membership dropped a bit, as I had in my comments, membership dropped a little bit. And as a result, acuity was a bit higher than expected. But again, as we've been talking about for the last few quarters, that's exactly the type of contractual protection that we have. So the good news is even though we absorbed a little bit of higher MER in those couple of markets, we expect to make up for that via these contractual protections later in the year. Seth Blackley: Yes. And then on the weather thing, I do not think that's material for us. I mean people for elective things, I think it's more material for things like oncology treatment, people tend to figure out a way to get there and get it done. Operator: Our next question comes from Jared Haase with William Blair. Jared Haase: Seth, I think you talked a little bit about the early indicators being good with the launch with Aetna. And I think you mentioned some of the metrics around clinical intervention and provider engagement are maybe tracking above expectations. And I just wanted to double-click on that. I'm curious if there's anything unique to that partner specifically or just perhaps it's an indicator that just as you sign more and more of these deals over the years, you're just getting more efficient with launches. And I wonder if you could then extrapolate that into maybe a faster margin ramp with some of these new Performance Suite engagements. Seth Blackley: Yes. Thank you for the question. Yes. Look, I think the metric we really look at is this clinical intervention rate, which think of that as how often are we engaging successfully around our pathways, right? And that should be the leading indicator of the value that we create. I do think it's largely attributable to the teams doing a great job, and that's the Aetna team and the Evolent team together. A lot of credit to Dan and our team for the work we're doing to execute on our clinical team. And so I do think it's about execution. As to whether that then translates into a faster margin ramp, I don't think we're ready to go there yet, but I do feel like the operations Human team is doing a great job. Operator: Our next question comes from Kevin Caliendo with UBS. Kevin Caliendo: I've got 2. In terms of the 2 new contracts, I appreciate that, and congrats on each. How should we think about the potential earnings contribution ramp from those? Just given there's a sort of new diligence around reserving for these and the likes, there used to be a fact pattern around how to think about the profitability ramp as the new contract came on board over 1, 2, 3 years. I'm just wondering if those ramps, and I understand the 2 contracts aren't the same, but how to think about the contribution expectations from each? And then the second one is just to follow up on the prior auth questions. Did anything change in 1Q? Are there any different behaviors happening in the beginning of 2026 versus what was happening in 2025? Is there a movement to more biosimilars? Or are you seeing anything in the marketplace? Are you guys doing anything different that could be affecting trends and particularly in oncology? Seth Blackley: Great. Mario, I will start with the build, and then I'll come back to around your... Mario Ramos: Kevin. No change to what we've discussed in the past. There is a ramp to ability, which one of the contracts is a risk contract. So it does impact the short term. Nothing that we haven't accounted for in our guidance and our commentary. But again, I think it just creates more potential for next year as we ramp up profitability. The other contract, it's -- there is a gain share component. So there's a little bit of an impact also in the beginning. But again, nothing different than what we've accounted for and discussed with you guys for the year. So basically, no news in that regard. We still are working through different types of structures actually going forward. We may be able to make some changes and tweaks where we can improve the ramp-up. But for now, it's what we have discussed with you guys in the past. Do you want to address? Seth Blackley: Yes. Yes. Look, on the your question on is anything new this quarter versus a year ago. Look, I'll reiterate what I said earlier. It is a bit of a tale of 2 cities where in the categories of specialties that are standardizable, simpler, more rote, we're all moving aggressively to doing as much as we can using technology to quickly authorize and automate that work, which, again, I think if I'm a patient, to my family member, it is exactly what I want. I want it simple, I want it fast, I want it done. It's good for the patient. It's good for the doctor. It's good for the health plan. It's good for Evolent's cost structure if we're able to do that, right? So that's new and different across the last years ramping, and we're really supportive of it and trying to lead in that area. In oncology, which I think was maybe even more of your question, I think there, it really is exactly what it's been now for 5 years, and I think it's going to be for the next 5 or 10, which is incredible pace of innovation. Even as some things may go biosimilar, KEYTRUDA is going to go biosimilar in a couple of years. There's some cutaneous version. There are new applications. There's gene therapy, there's cell therapy. I think if you go do your market checks, call 10 payers and ask them what their #1 cost issue is, it's going to be Part B drugs, particularly in oncology. And I think that is going to continue to be the case for a long time. These are things that are going to be harder to standardize. They're approvable, right, which this is not a UM thing. This is about using evidence and incentives and scorecarding to get to the right answer, and that's really what we do. Operator: Our next question comes from Jessica Tassan with Piper Sandler. Jessica Tassan: Apologies if you've been through this already. But I guess just any perspective on kind of the competitive landscape given Cigna's decision to pursue strategic alternatives on eviCore? Just any thoughts on why a large competitor might want to get out of the market and how that might impact the competitive landscape? And then I guess -- again, I apologize if you've been through this, but just can you elaborate a little bit on the elevated oncology trend you're seeing? Like is that exclusively in exchange? And then can you comment just a little bit on trends within Medicare relative to your expectations? Seth Blackley: Yes. James, on your first question, obviously, we wouldn't comment on any specific situation, but I do think -- I'll say 2 things. One, I think there is a major long-term trend that is happening, and I talked about it earlier, where I think generally, the plans are going to want to look to third-party specialists to do a lot of this work. And I think the third-party part of that is important, like some separation, right? But the specialist part is probably even more important, which is the level of sophistication required to do this kind of work, whether it's the clinical sophistication or the AI sophistication, I think, is where the industry is headed generically. So I think that's number one. And number two, I'll just say generally Evolent, this is what we do. And I think we're here to be a long-term part of the answer for the industry to help solve this problem to balance how do you manage good things for patients and providers and the best quality, first and foremost, but also help moderate the cost pressure, which will translate into rates for consumers and everything else. So I think we view these types of things as positive and in generally, the direction of travel over the next kind of 5 to 10 years. Mario Ramos: Yes. And on the trend, Jess, as I said, the only elevated sort of trend that we've seen has been isolated to a couple of markets where we saw membership drops and acuity went up significantly. So it did not appear to be from utilization or any other factor other than prevalence. So other than that, I think things -- the trend has been as expected, fairly stable. And just to reiterate, that prevalence in those couple of markets are -- is exactly the type of protection that we have in our contracts going forward. Operator: Our next question comes from Jeff Garro with Stephens. Sahil Veeramoney: It's Sahil on for Jeff. I wanted to follow up on the new business wins, specifically the new advanced imaging contract with the existing Performance Suite client. I think historically, you've described imaging as the entry point that drives cross-sell Performance Suite. I think it's like novel to see sort of the reverse direction this quarter with the PS client adding imaging. So anything to call out on what this client did or saw in consolidating on to more of your unified platform? And is there any sort of recent innovation in the imaging suite that could potentially reinvigorate it as stand-alone growth going forward? Seth Blackley: Yes. I think a thoughtful question. I think you're right. It's a first for us. Look, I think that it highlights a couple of things that you're pointing out. I think one is that if I'm a health plan and I'm trying to manage my cost and quality and patient experience, I've got today dozens and dozens and dozens of partners. And I'd rather have fewer partners to do this kind of work rather than more niche partners. So integration is generally good. I think imaging in particular, usually when you're doing a scan, it's of a tumor or of a bone or of a heart and therefore, our ability to integrate across those things is valuable. That is a little bit new. We're going to be doing more and more and more in that area over time. And so I think that component is also benefits from the work we're doing. So we're really excited about this partnership. I hope to see more of these, and it's a good step for us. Operator: Our next question comes from Matthew Gillmore with KeyBanc. Zachary Haggerty: This is Zach on for Matt. So looking at the reserve to claims table in the slide deck, it looks like there was a favorable revenue true-up of $12 million. Can you remind us what causes the revenue true-ups and give us some context for the $12 million that was booked in the quarter? Mario Ramos: Yes. The revenue true-up is actually -- it brings revenue down. So it's unfavorable. It kind of nets out with the claims favorability. And there are a number of factors, but typically when we reserve at the end of the year. We're obviously making estimates on both the revenue side and the claims side because we don't actually have claims information. So everybody typically focuses on IBNR on the claims. But from time to time, if claims come in lower than we expected in some markets, we actually have a downward revision to the revenue side, and that's what's causing it in the quarter. Operator: Our next question comes from David Larsen with BTIG. David Larsen: Can you just talk about the actual revenue in the quarter and your expectations for the remainder of the year? I mean revenue came in well below our expectations. I'll take the EBITDA beat any time. So I like the higher quality revenue, but revenue was low relative to our expectations and you reaffirmed the full year guide. I think that calls for about 30% year-over-year revenue growth. Just color there, like maybe by division or by plan would be very helpful. Mario Ramos: Sure. I think it's a spread issue. Obviously, we spent a lot of time trying to explain what our EBITDA ramp was. It's a little harder with revenue because of all the launches, in particular, the very big Highmark launch, which is why we're not moving off of our revenue guidance for the year. I think last time, we had talked about the fact that Aetna as they were exiting some markets, our expectation was the membership was going to be a little bit lower than what we had talked about before. That has actually been the case. So that pushed down the first quarter revenue. But we also talked about the fact that Highmark had been coming in higher from a membership expectation than what we expected. So that's exactly how it's playing out. That plus these couple of very, frankly, attractive and big deals that we now are able to announce, which we really couldn't get into prior caused a little bit of a challenge in walking everybody through what the revenue progression was for the year. But I think the takeaway is even though the headline number might be a little lower than what consensus were, it really -- nothing has changed. If anything, we feel even more confident about the rest of the year. As I said, we're not ready to make any changes to the guidance just because of the very meaningful impacts that we're going to see over the next 2 months, High Mark and the exchange disenrollment. But I would just say that there's a little bit of timing in the first quarter that was really a lot harder to model. But hopefully, it's clearer now where we're going for the rest of the year. Operator: Our next question comes from Jailendra Singh with Truist Securities. Eduardo Ron: This is Eduardo on for Jailendra. You touched on the prior period revenue portion, but can you speak to the $23 million favorable PYD in the quarter? Was that focused on oncology or cardiology parts of the business? And I guess, how much of that, I guess, relative to the revenue adjustment flow through to EBITDA in the quarter? Mario Ramos: Yes. So you got to net out the revenue and the claims PYD. So on a net basis, it was a little bit higher than a $10 million favorable impact for the quarter. That's a little higher than the same quarter last year. But for the year, we're not expecting that number to change significantly, and it's very consistent with the prior year, 2025 in particular. On the claims side, the PYD was roughly split a little bit higher on oncology than in cardiology. Again, some very specific markets where as we saw claims run out coming in, they were a little bit better than what we had anticipated and had reserved for. But very consistent with the commentary that we've given you guys over the last few quarters where either trend has been coming down and being stable or in select spots where trend has popped up, we've had contractual protections. And sometimes it's a little harder to determine exactly what the adjustment should be during the quarter. And that's a little bit of what you're seeing there as claims came in, we saw favorability and we're ready to adjust that in the first quarter. Operator: This concludes our question-and-answer session. I would like to turn the call back over to Seth Blackley for any closing remarks. Seth Blackley: Thank you for the time this morning. We look forward to connecting over the next week or 2 with everybody. Thanks a lot. Mario Ramos: Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the First Quarter 2026 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately 2 hours after the conclusion of this call via dial-in or on the Investor Relations section of zoetis.com. [Operator Instructions] It is now my pleasure to turn the call over to Steve Frank. Steve, you may begin. Steven Frank: Thank you, operator. Good morning, everyone, and welcome to the Zoetis First Quarter 2026 Earnings Call. I am joined today by Kristin Peck, Chief Executive Officer; and Wetteny Joseph, Chief Financial Officer. This morning, we issued a press release announcing our first quarter 2026 financial results. Before we begin, I would like to remind you that the release and corresponding earnings presentation, which we will reference during this call, are available on the Investor Relations section of our website and that many of our statements today may be considered forward-looking statements and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and in our company's reports filed with the SEC. Additionally, today's remarks will include certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures can be found in our earnings press release and our company's 8-K filing dated today, May 7, 2026. We also reference reported and organic operational growth. Organic operational growth excludes the effect of foreign currency as well as acquisitions and divestitures, which individually impact Zoetis growth by 1% or more. Unless otherwise stated, all revenue growth performance metrics will be based on organic operational performance. And with that, I turn the call over to Kristin. Kristin Peck: Thank you, Steve. Good morning, everyone, and welcome to our first quarter 2026 earnings call. I'll start with the headline numbers we reported today. On an organic operational basis, revenue was flat and adjusted net income grew 1%. Our International segment delivered 10% organic operational revenue growth, while the U.S. declined 8%. By species, livestock delivered 12% organic operational revenue growth, while companion animal declined 4% operationally. To level set, the quarter unfolded differently than expected, particularly in companion animal. We saw a convergence of interconnected dynamics shaping decisions at the point of care. I'll outline each along with their impact and what we're doing about it. First, pricing in veterinary clinics continue to rise, though at a slower pace, adding to a multiyear increases and lower clinic traffic. Second, pet owners demonstrated increased price sensitivity with softer demand for premium products in preventative and chronic care, where Zoetis leads amid a more cautious spending environment. Third, competition intensified across key pet care categories, including dermatology and parasiticides with additional pressure in vaccines from certain generics. While competition is not new to us, what was different in Q1 was the pace and level of activity, more entrants across more markets with competitors leaning more heavily and aggressive pricing and incentives for extended periods of time to drive share, particularly in a softer end market. And fourth, in contrast to what we've seen historically, these new entrants have not yet translated into overall market expansion. Taken together, the result is a more price-sensitive and competitive environment. Pet owners delayed routine visits, extended dosing and had new lower-cost options, compounded by winter storms that further reduced clinic visits, all without the benefit of underlying market growth. As the market leader with significant share in premium products, we are at a point where our growth is less driven by new product cycles as we progress our blockbuster pipeline, which we expect to begin delivering significant value for the end of '27 and into '28. These dynamics increased our exposure, particularly compared to new entrants just launching into these categories and competing primarily on price. You see these dynamics most clearly in our key dermatology and Simparica franchises, where we saw declines in the quarter. In key dermatology, even with the industry's broadest and most differentiated portfolio, we were not able to fully offset the combined impact of increased pet owner price sensitivity and the lack of market expansion, which drove share pressure. That said, we do see a path for the market to return to growth over time, and we continue to invest in long-term growth, while taking decisive near-term actions to compete more effectively. We also remain on track advancing Cytopoint Plus, which we expect will further strengthen our dermatology leadership. In parasiticides, the Simparica franchise saw similar dynamics but more pronounced in the U.S. Fewer patient visits drove lower prescription volumes and impacted new patient starts and compliance with retail growth also moderating. Importantly, in the U.S., while competitive launches earlier in 2025 put pressure on share, largely through aggressive promotion, we saw that stabilizing with share levels nearing prior year by quarter end and puppy share still well above our overall patient share. International markets continue to deliver strong growth in the quarter, supported by the ongoing geographic expansion of our portfolio, partially offsetting the U.S. Despite pressure on revenue, we are pleased with the improving U.S. share trends and our ability to maintain a leadership position in a more constrained market, and across both franchises, while you can see these impacts geographically in today's results. This is more fundamentally about portfolio mix against the backdrop of the shifting demand trends I mentioned. Demand softness across key developed pet care markets underscores that this is not isolated, while emerging markets continue to provide runway for expansion. Now turning to OA Pain. While the broader trends for this category are consistent with what we saw in derm and paras, competitive dynamics are less of a factor here. In the quarter, Solensia continued to perform well, while Librela drove the year-over-year OA decline. That said, sequentially, Librela has stabilized in the U.S. with roughly flat growth. This U.S. stabilization reflects the continued execution across our multipronged strategy with a strong emphasis on medical education and specialist engagement, which is helping build veterinary prescribing confidence. Findings like those published by the Veterinary Medicines Directorate in the U.K., confirming Librela's positive benefit risk profile are important inputs into the education effort, and we saw an improvement in our conversations with vets in that market following the report. And as mentioned on previous calls, we expect additional label updates. These are a normal part of the ongoing regulatory review and provide more information to support appropriate use. We are also in the early phases of our Lenivia and Portela launches in certain European markets and Canada, which will expand the OA Pain franchise and support the long-term growth trajectory and early feedback continues to be encouraging. Looking more broadly across companion animal, diagnostics continues to be a source of strength. Performance in the quarter was driven by strong international momentum with modest U.S. growth against a strong comparison period and slower placement activity. Expansion in reference labs drove performance alongside strength in chemistry and hematology with continued progress in images. This is consistent with the broader shift we see across pet care, where spending remains resilient in areas tied to urgent and diagnostic care. Turning to livestock. We again delivered broad-based performance. Underlying market conditions remain favorable with sustained protein demand, driving stronger producer profitability and enabling continued investment in herd health and productivity. Performance was supported by our bios portfolio, particularly in cattle and poultry, where disease outbreaks and increased adoption reinforce the importance of prevention alongside strong performance in fish, benefiting from favorable vaccination timing and in swine. As a result, livestock remains a strong source of growth with solid end market demand and a more focused portfolio following the MFA divestiture. Our performance this quarter underscores the value of our diversified portfolio while also highlighting where we need to take action to maintain our leadership and regain momentum in pet care markets, where the consumer is under pressure and the competition is increasing. We are doing this on multiple fronts. First, we are sharpening execution across our core commercial levers with a clear focus on capturing demand more effectively. That starts with how we engage veterinarians, where we are focusing on integrated solutions that make better use of our broad portfolio and help strengthen clinic economics. We're also focused on improving execution in priority markets through localized action plans to more consistently convert demand into prescriptions. For pet owners, we're investing in targeted DTC activity, simplifying point-of-sale choices with clear loyalty and affordability options and ensuring convenient authorized access across clinics, retail and home delivery. And in livestock, we're reinforcing continuity of supply and responsiveness in key products and markets, ensuring demand is not constrained by availability. Second, we're accelerating our science to scale model, shortening time from approval to launch and translating that into growth. That includes prioritizing near-term launches and advancing convenience-led life cycle innovations with our portfolio to create new ways to compete, including long-acting mAbs, Procerta and the recent Canadian approval of Convenia RTU, which expands access through a ready-to-use, cost-effective formulation. Third, we announced an agreement to acquire Neogen's animal genomics business, expanding our capabilities in livestock genetics. This reflects our broader approach to targeted business development, where we continue to be strategic in pursuing opportunities to unlock new sources of growth over time. Finally, we are sharpening our approach to capital allocation, while continuing to invest in our key growth priorities. As reflected in our adjusted net income, we acted decisively as growth softened in the quarter and launched a comprehensive cost and productivity program, further tightening discretionary spending, driving procurement and operating efficiencies and assessing organizational levers to deliver a leveraged P&L in 2026 and beyond. We have clear priorities and a proven track record of execution, and we are confident these actions will position us to better navigate the current environment and improve performance over time. Looking ahead, our focus is on improving our trajectory over the balance of the year. Zoetis is providing updated guidance based on the current operating environment and the presentation of its financials for fiscal year alignment. For the full year, on an organic operational basis, we expect revenue growth of 2% to 5% and adjusted net income growth of 2% to 6%. This quarter reflects pressure in parts of our companion animal portfolio where market growth has slowed and competition has intensified. As we bridge to Zoetis' next wave of innovation-driven growth, execution, commercial effectiveness, portfolio optimization and enhanced cost discipline will play a greater role in driving performance, especially in this environment. We are actively managing through this period and our conviction in the underlying strength of our business and what enables Zoetis to win has not changed. Animal health remains a durable and essential industry, underpinned by the strength of the human animal bond and sustained global demand for protein. We operate from a position of strength with leadership in the categories we've helped build a diversified portfolio across species, geographies and channels and the colleagues and capabilities to compete effectively in a dynamic environment. Our near-term focus is clear: sharpen commercial execution and compete with precision while positioning the business to deliver the next wave of innovation. We are doing this with a pipeline that includes 12 potential blockbusters and more than $7 billion in additional market opportunity as we extend our leadership into entirely new categories of care. We have helped define the standards of care that exist today, and we expect to play a leading role in what comes next as we deliver our next wave of innovation. We've demonstrated our ability to perform in different environments, and we will do so again. And we remain committed to delivering long-term value for our shareholders by executing with discipline today while continuing to invest in the innovation that will drive tomorrow's growth. With that, I will hand it over to Wetteny. Wetteny Joseph: Thank you, Kristin, and good morning, everyone. As Kristin highlighted, our quarterly performance reflects multiple converging dynamics, macro-driven price sensitivity weighing on certain aspects of pet owner spending, ongoing pressure on vet clinic visits and an increasingly competitive landscape in which price continues to be a key differentiator. These dynamics have led to performance that is below our expectations this quarter, but we are confident in our near-term efforts to drive demand and cost discipline as well as our industry-leading portfolio and pipeline, which we believe will continue to drive growth in the longer term. Now I'll walk you through our financial results for the first quarter, which, as a reminder, are reflective of an aligned calendar year. For the first quarter, we reported global revenue of $2.3 billion, growing 3% on a reported basis and flat on an organic operational basis, with 2% growth coming from price, offset by 2% decline in volume. As we previewed last quarter, our Q1 2026 financial results were positively impacted by certain operational changes made in connection with our fiscal year alignment for subsidiaries outside of the United States. As referenced in our press release this morning and now posted under supplemental materials in the Quarterly Results section of our Investor Relations website, we have provided additional information in connection with our fiscal year alignment, including recast financial information on a quarterly basis for 2025 and annually for 2024 and 2025 to help with comparisons. You will note that for most quarters, the overall differences are relatively immaterial. However, I draw your attention to the $128 million revenue decrease on a recast basis from our previously reported Q4 2025 revenue. See the recast information on Page 3 of the supplemental material. As we described last quarter, certain operational changes made in connection with our fiscal year alignment resulted in the acceleration of the timing of sales, which led to an approximate $30 million increase in the sales that we reported for our International segment for Q4 2025. The balance of the $128 million decrease in recast Q4 2025 revenue or approximately $100 million resulted in a corresponding increase in Q1 2026 sales in our International segment. This $100 million difference was driven by the change that we previously referenced in the timing of price increases in certain international markets and the delayed processing of customer orders that we referenced in our full year 2025 results as well as by differences in the performance of the business when comparing Q4 2025 to a stronger Q4 2024. Excluding the approximately $100 million that shifted from Q4 2025 to early 2026 as a result of our fiscal year alignment, globally, we would have seen a 5% organic operational decline in the quarter. Adjusted net income of $646 million grew 2% on a reported basis and 1% on an organic operational basis. Turning to our franchises. Our global companion animal portfolio posted $1.5 billion in revenue, declining 4%. Key dermatology recorded $347 million in revenue, down 11% versus the prior year. Consumer sentiment is pressuring aspects of pet owner spend in several key markets as we are facing increased competition globally for Apoquel and despite our strong label, price has played a larger role in the decision process. While Cytopoint is also impacted by the vet clinic dynamic as a monoclonal antibody with a longer duration of treatment, Cytopoint switching to recent JAKi competitors has been low. Our OA Pain mAbs, Librela and Solensia posted a combined $140 million in revenue, declining 8%. Librela sales were $101 million, declining 13%. Librela trends have stabilized in the U.S., where we saw encouraging signs that our efforts are gaining traction. Solensia posted $39 million in revenue, growing 6%. Our Simparica franchise contributed $385 million globally, declining 1%. Simparica Trio declined 1% on sales of $297 million, while Simparica declined 3% on sales of $88 million. Additionally, we have seen recent generic competition impacting 2 companion animal products, Convenia, an antibiotic treatment for bacterial skin infections and Cerenia, the market-leading small animal antiemetic. While not considered part of our innovative core, these brands are both blockbusters and have lost meaningful share in the quarter due to price-driven generic competition. Our global companion animal diagnostics business posted $113 million in revenue, growing 10%, driven by expansion of our reference lab business as well as growth in chemistry and hematology, driven by our recently launched Vetscan Opticell. Moving on to livestock, which performed well in the quarter on $720 million in global revenue, growing 12% with broad-based growth across geographies and species as well as price and volume. Favorable producer economics drove higher demand, particularly in cattle. Combined with improved product supply and commercial wins, this provides solid foundation for sustained livestock growth, further supported by the long-term secular tailwind of rising global protein consumption. While our performance is driven by the declines in our companion animal business in the U.S. and certain developed markets internationally, this quarter highlights the benefit that having a global cross-species portfolio can have in challenging market conditions. Now let's move on to our segment results for the quarter. U.S. revenue was $1.1 billion in the quarter, declining 8%. U.S. companion animal posted $865 million, declining 11%. Before going into our brand performance, I wanted to highlight some of the broader impacts we've seen across our U.S. companion animal business. The global trends we have mentioned around competition and consumer price sensitivity are very prevalent in the U.S. market. Additionally, distributor and retail channel purchasing patterns were also a headwind this quarter, reflecting the lower end market demand. Historically, Q1 distributor inventories start the quarter higher than they ended as distributors typically buy ahead of price increases and promotions. This quarter, our promotions underperformed expectations and end market demand softened. So distributors and retail partners took longer to work through their opening inventories and engaged in less replenishment activity. As a result, our sales into distributors and retail partners lagged their sales out to customers compared with prior year quarters. These overarching drivers have impacted much of our U.S. companion animal portfolio. Our key dermatology products posted $215 million in revenue, declining 13% in the U.S. Apoquel has continued to face competitive headwinds consistent with our expectations with price remaining the primary differentiator, driving some shifts toward lower-cost alternatives. However, the impact has been more pronounced than we had expected. Share loss is being amplified by a derm market with declining patient volume in the clinic. Unlike prior competitive cycles, we do not currently have the benefit of underlying market expansion to cushion the revenue effect of competitive share shifts, though we do see a path for the market to return to growth over time with significant untreated and undertreated dogs in the space. Cytopoint trends were consistent with the global picture, primarily impacted by the vet clinic dynamics rather than JAKi competition. The U.S. Simparica franchise reported $238 million in revenue, declining 8% in the quarter. Simparica Trio posted $222 million in sales, declining 8%. Despite modest year-over-year declines due to additional entrants, our share has improved sequentially versus the second half of last year when we saw the impact of competitive launch promotions, which pressured our share, but also expanded the triple combination market, the dynamic that is not providing the same market tailwind in the quarter. We continue to see market contraction with softness in the clinics driven by lower flea tick and heartworm visits as well as a slowing of alternative channel sales driven partly by script denials in retail. Our market-leading share in puppies remains stable. In the U.S., our OA Pain mAbs posted $55 million, declining 15%. Librela contributed $37 million, declining 22%. U.S. Librela revenue increased sequentially for the first time in 6 quarters, and vet and pet owner satisfaction ratings remained stable. Additionally, despite declines in the canine OA pain market, our patient share has remained stable since the second half of 2025. Looking ahead, the comparative periods become more favorable as the year progresses. And combined with the stabilization we are seeing, we believe the underlying foundation of the business continues to strengthen. Solensia grew 2% in the quarter on $18 million in sales with feline OA visits holding relatively flat year-over-year. Generic competition in Convenia and Cerenia also contributed to the U.S. companion animal decline. Our U.S. livestock business posted broad-based growth of 7% in the quarter, reporting $225 million in sales. We saw growth across all species, driven primarily by cattle on improved supply of Septicure as well as the impact of strong demand generated from our spring promotions. Poultry and swine also delivered meaningful contributions with poultry growth driven by increased vaccine adoption and disease outbreaks and swine benefiting from improved supply. Moving on to our International segment for the quarter. Revenue grew 17% on a reported basis and 10% on an organic operational basis, posting $1.1 billion in revenue. Excluding the impact of the previously noted $100 million in sales that shifted from Q4 2025 to early 2026 as a result of our fiscal year alignment, our International segment growth was flat for the quarter. International companion animal reported $654 million in sales, growing 7%. The competitive and macroeconomic headwinds we have seen in the U.S. do exist in parts of our international business, but are largely concentrated in developed markets where conditions more closely resemble the U.S. environment. In many of our emerging markets where the standard of care is still maturing, we believe that meaningful market expansion opportunities remain, and that distinction is evident in our international results this quarter. Our international Simparica franchise grew 14% on $147 million in sales. Simparica Trio posted sales of $76 million, growing 29%, driven by key account penetration in major markets and the benefit of our recent launch in Brazil. Simparica reported $71 million in revenue, which was flat on the quarter, impacted by conversion to Trio in Brazil. Partially offsetting our growth in the quarter, key dermatology posted $131 million in revenue internationally, down 5%. For Apoquel, similar to the U.S., competitive pressures and macro price sensitivity, which are more pronounced in developed markets where Apoquel has a larger presence are having a compounding impact on sales. Similar to the U.S., Cytopoint performance is holding up better than Apoquel. Our OA Pain mAbs posted $85 million in sales internationally, declining 2%. Librela reported $64 million in sales, down 7%. As Kristin noted, positive benefit risk findings have helped strengthen our medical education effort around Librela, and we have seen a meaningful improvement in our conversations with veterinarians. Solensia grew 10% on $21 million in sales. Additionally, our international small animal vaccines products grew 13% in the quarter, driven by increased usage of FeloVax in China. International livestock contributed $495 million with growth of 14% with broad-based growth across all of our core species. We saw growth in cattle, swine and poultry, driven by disease outbreaks, commercial wins, especially in vaccines and improved supply. In fish, we continue to benefit from improved pricing on our Moritella vaccine as well as volume growth from market expansion into the Faroe Islands. Now let's move down the P&L. Adjusted gross margins of 71.8% declined approximately 10 basis points on a reported basis. Foreign exchange had an unfavorable impact of approximately 150 basis points. Excluding FX, we saw a 140 basis point improvement in margins due to benefit from price and lower manufacturing costs, partially offset by product and geographical mix. Adjusted operating expenses increased by 3% operationally due to higher compensation-related expenses as well as increased freight and logistics costs. Adjusted net income grew 1%. Adjusted diluted EPS grew 7%, including a 3% benefit from our convertible debt funded share repurchases. Now moving on to guidance for the full year 2026. Our updated guidance is reflective of the current operating environment as well as the presentation of our financials on an aligned fiscal calendar basis. Foreign exchange rates used in our guidance are as of late April. We are revising our full year revenue guidance to a range of $9.68 billion to $9.96 billion, with growth of 2% to 5% based on the current operating environment. It is worth noting that our fiscal year alignment was anticipated to provide approximately 200 to 250 basis points of tailwind to full year revenue growth. However, the challenging operating environment we experienced in Q1 and the expectations that carries for the remainder of the year more than offset that contribution. We now expect adjusted net income to be in the range of $2.87 billion to $2.95 billion with growth of 2% to 6%, reflective of the comprehensive cost and productivity programs Kristin mentioned earlier. Finally, we are updating our reported diluted and adjusted diluted EPS guidance ranges to $6.35 to $6.50 and $6.85 to $7, respectively. While Q1 reflected a more challenging environment than we anticipated, particularly in U.S. companion animal, where the convergence of price sensitivity, lower clinic traffic and intensified competition was more pronounced than expected, our path forward is clear. We are taking decisive action to sharpen commercial execution and drive cost discipline. Looking ahead, while we have appropriately reflected the near-term environment in our updated guidance, we remain confident in the underlying strength of our diversified portfolio and our ability to deliver the next cycle of innovation-driven growth in the years ahead. We remain committed to delivering long-term value for our shareholders. Now I'll hand things back to the operator for your questions. Operator? Operator: [Operator Instructions] We'll take our first question from Michael Ryskin with Bank of America. Michael Ryskin: I'm going to throw a couple in here real quick. So one, Kristin, for you, just maybe a high-level big picture one. From what we see in the market, competition appears to still be at a relatively early point. We think it's only going to get worse from here. You've got a number of competing products that are still early in the launch cycle or haven't even launched yet at all. And with this increased competitive landscape, the macro consumer pressures, we think that's going to persist for some time, maybe as much as 1 or 2 years, if not longer. So when you talk about working through the challenges you're seeing, you call out pipeline innovation as an offset. From what we can tell, some of the bigger product launches you have are still a couple of years out. So what can you specifically do more in the near term to turn the ship around in the face of this growing competitive pressure and the consumer challenges? And then, if I could squeeze in a second one real quick for -- more for Wetteny. The math is a little bit messy given the calendarization impact, maybe bear with me, but you called out the 200 bps, 250 bps impact from calendar. For 1Q specifically, you did 0 organic under the new math, under the old calendar, maybe that comes out to something like down 4% or down 5% given the $100 million benefit. And yet you're guiding to something like low-single to mid-single-digit growth for the full year. That seems like a pretty aggressive ramp. You've got easier comps in the second half. You do have the 4Q benefit from the calendar switch. But can you just bridge that for us? Is there anything else factoring in that will get you to that full year number after this 1Q print? Kristin Peck: Thanks, Mike. I'll start and then Wetteny can build on your second question. Essentially, what we saw in the quarter was sort of the economic and sustained price increases that the pet owner has experienced in the clinic. This has obviously made them much more sensitive, but also, as you saw, led to a decrease in vet visits, especially in some of the key therapeutic areas that we're in, such as paras, OA Pain, derm, et cetera. And I think this combined with an increase in price-driven competition as people saw the pressures of the pet owners on, I think you saw more promotions and more price competition there. And really, what that happened is that the market did not grow. Historically, as you've seen over the last few years, when we had competition increasing in paras, the market grew. And I think what I think changes is that with new competition, we didn't see that market grow. I think the difference, I think we might have with you as to what we see in the future is we are seeing positive trends. As Wetteny and I mentioned in our remarks, if you look at paras, for example, we have actually gained share from the end of last year into this year. And we ended the quarter, as we mentioned, pretty close to where we were last year before the competition entered. So again, our focus will be on expanding the markets. But as I think as you look at paras, we're pleased with the progress that we continue to make there. We're also pleased that with Librela, we saw stabilization of that product. As we look to the rest of the year, we continue to believe we can return that product to growth overall. Obviously, in the first half of the year, we have some tough comparable periods. But I think as we move through the year, we'll continue to gain share there and to grow. Obviously, in derm, we do have continuing to see new entrants, but we think we have a strong differentiated portfolio there. We're also excited to be adding long-acting Cytopoint as we look to the end of the year. And look, we are sharpening our focus on execution of our commercial strategy. We're going to continue with veterinarians, leveraging the broad portfolio that we have and providing them integrated solutions to help capture share. We're going to focus with pet owners, as I mentioned, leveraging DTC to help broaden that market. But importantly, focus on affordability, which is clearly a major issue for them at the point of sale through loyalty and some affordability options we're providing. We'll also focus as well as retail and home delivery to optimize access there. So we think we've got a strong portfolio there that we can continue to build on. And I also don't want to undermine the strength we saw in diagnostics and livestock in the U.S. and across the globe. But with that, Wetteny, I'll turn it over to you. Wetteny Joseph: Yes, Mike. The first thing to really note here and importantly, is that our initial guidance already contemplated some first half to second half dynamics. Now clearly, the quarter ended up below our expectations. But this dynamic around the persistence of competition and macro was something we contemplated and we are seeing. And so we expect those to continue in the guidance that we give today. But to the point Kristin just raised, we do see stabilization in a number of areas, including Librela with our OA Pain franchise as we are launching our long-acting products in a couple of markets -- in a few markets here in the quarter as well and across our Simparica franchise and so forth. Now as we noted in our prepared commentary, you heard that this end market demand softness also caused purchasing patterns to be a headwind for us in the quarter. But we ended the quarter at a level that we believe is also normalized for how we go from here versus being a headwind given they ordered less during the quarter that they were shipping out to clinics. So with those and the actions that we are taking, we have widened the range in the guidance given we do see a remaining uncertainty in the markets that we operate, but we're also executing against those, hence, the guidance that we have issued today. Operator: We'll move next to Erin Wright with Morgan Stanley. Erin Wilson Wright: I want to dig into that a little bit more. So what does guidance imply now for the quarterly progression for companion animal, I guess, given the implied ramp here, even backing out the easy realignment comp in the fourth quarter, which is about 1 point, like are you baking in some distributor or retail then restock? Is that what you're implying after the destock? And why is that just given the increasing competition? And how much of a headwind was that in the quarter? And were there significant changes in purchasing patterns, I guess, at retail as well? You mentioned script denials. Can you talk a little bit more about that? And is that that's now going back to their typical conflicts of interest there with online scripts and denying scripts there? And can you clarify a little bit more about what we're lapping here from last year in terms of stocking and destocking dynamics? Because I want to make sure just we're aware, given some of the unforeseen dynamics in the current quarter on stocking, destocking dynamics and how much you're leveraging the channel. And I guess one bigger picture question just on guidance as well. You talked about the 200 basis point benefit from the accounting change now embedded in the guide. I just want to confirm one point of that will not recur in 2027, right? So as we think about 2027 and beyond, how do you kind of mitigate that? And when could we get back to your typical 6% to 8% operational revenue growth? Wetteny Joseph: Sure, Erin. Look, with respect to unpacking the guidance, starting with companion animal and then we'll get to your bigger picture question in terms of comps going into 2027. We are not embedding an assumption that inventory picks up in terms of the level of inventory that is in distribution. We typically don't do that. As you may recall, you've been around with us for a long time. In '23, we saw quite a step down in terms of level of inventory that distributors take. We have not assumed that those would come back into the channel, and they have not. We've been operating at a range that is well below where we were pre-2023. And within that range, we're now operating at the low end of that new range, if you follow, as we exit the first quarter of '26. So we are not baking in some rebound in that. It is reflective of what the end market demand has been and is reflected in the performance that we shared today with respect across our key franchises. And so what we are embedding here -- and by the way, we are also assuming headwinds related to competition that is to launch and continued pressure from a -- in terms of what we're seeing from a competitive, similarly in macro perspective. And so the script denials have been an impact as we look at retail. Retail continued to grow faster than the clinic, though, but not at the rate that it had been over the last couple of years. I mean, if you go back to last year and the year before, you were seeing retail growth somewhere in the 25% to 30% range. That growth rate in retail is in the low double digits as we look at this quarter, somewhere in the 10% or so range in retail. So clearly, a step down and part of that is what we're seeing in terms of script denial. Again, we're not assuming those necessarily come back. It's really the actions that we're taking to drive commercial execution as well as the easier comps that we face as we get into the back half of the year that's playing here. Now we won't get ahead in terms of what 2027 looks like. Clearly, the 200 to 250 basis points that we're talking about is a combination of coming into Q1 and then what the Q4 comp is versus the prior year. And so that will clearly be a headwind you go into 2027, all else being equal. However, we are executing to what the market is showing, both in the top line to drive performance there as well as the bottom line, which is why you see a guidance that shows leverage through the P&L down to the bottom line. Operator: We'll take our next question from Brandon Vazquez with William Blair. Brandon Vazquez: Maybe I can start with a high-level question. Kristin, you were talking a lot about kind of the headwinds you guys are seeing from a macro perspective, right? Let's just ignore some of the competitive and company-specific issues, but we're talking about price being a lever here. We're talking about markets not expanding. We're talking about more competition, even generic competition. These are all very uncharacteristic, I think, of what this market historically used to be. It used to be resilient. It used to take price. It used to not really have a lot of generics and it used to be powered by brand. And so the question being, it feels like what you're describing is entering a new world in this market, one that maybe is less durable and less attractive for Zoetis. Is that true? What is -- I mean, clearly, you guys are assuming something improves. What is it that's giving you hope that this kind of reverses back into the old animal health market we used to know? Kristin Peck: Sure. I mean for starters, I'd say, look, the demand for veterinary care remains structurally very strong given the importance of the human-animal bond and the large number of untreated populations. That's clear. If you look and as I mentioned in my prepared remarks, we're continuing to see strength in urgent care, and we're continuing to see strength in diagnostics and areas like that, which says to me the pet owners still wants to get care. I think they're in a period where they're a little bit struggling with the price increases over the last few years. We ultimately believe that will stabilize. I think that clinics are really trying to address that and trying to get the pet owners back in. As us and others have mentioned, we saw about 3% growth of revenue in the clinic, but that was all driven continued by price, with clinic visits down about 3%. Ultimately, that will stabilize. We firmly believe that. We're also really optimistic as we've seen of the sequential trends we've seen in areas like OA Pain and in paras. We think that the strength of our portfolio, the differentiation, the innovation we provide will endure. I don't think we're moving to a world of generics. We are not expecting generics in any of our key categories. We're not expecting it in derm. We're not expecting it in pain or in paras in the near term. So for the next many years, we will not see that. There's certainly, as we saw in Cerenia and Convenia, which are blockbuster products, but not ones we talk about, we did see some increased competition from generics there. The competition we see today is not generic in our major therapeutic areas. It's products that have launched that we've been -- in categories we've been in for a while. We ultimately believe some of these price-driven promotions will stabilize over time. And we also believe the differentiation, I think we have with our portfolio, the strength of our brand and importantly, the strength of the service we provide veterinarians will endure. So no, I don't see it the way you do. I think innovation matters. I think the service we provide matters. And I think ultimately, given the strength of the human-animal bond and the structural demand for veterinary care that this will stabilize over time. Operator: We'll take our next question from Chris Schott with JPMorgan. Christopher Schott: Just 2 for me. Can you just comment on your latest assumption around pricing this year given some of the comments you're making around the promotional activity you're seeing from your competitors. Is that something you're reacting to on price on your side? Or is that more -- we should be thinking about share loss as we think about those near-term dynamics? And the second question, sorry if I missed this in the remarks, but when I think about U.S. companion growth and what's reflected in guidance, can you just talk a little bit about how we should be thinking about growth for this year? I know you're assuming a recovery from the down 12% this quarter. But is this a business we should assume is down this year within livestock and some of the international dynamics driving growth? Or do you think this is a business that can kind of get back to flat or growing as we go through the year? Kristin Peck: Sure. I'll start on the price one and then Wetteny can take the guide. As we've always said, we are not planning to compete through price as our main strategy. Our focus, as always, will remain on our differentiated portfolio, the breadth of it, the service we provide and execution. We are a premium innovative brand, and that is not going to change. We did take price, as you saw in the quarter. I think we can continue and Wetteny can talk where it is relative to historic price challenges. Obviously, in areas where we've seen generic competition, we have taken selective price actions there. We'll obviously continue to leverage promotions. But our priority remains innovation, differentiation and service to our customers. And we continue to believe we can take price, albeit maybe at lower levels than right now given the challenges we're facing right now. But I'll let Wetteny put that into perspective and also talk about an impact on the guide. Wetteny Joseph: Chris, as you know, we don't typically provide guidance down to the species, but I would share a couple of things that I think might be helpful for you. Just keep in mind, we are running a global diversification business with companion animal both in the U.S. and outside the U.S. And in the quarter, our International segment, companion animal grew 7%. I would add also, given the dynamics that we described and the headwinds that those created in the quarter, including how distributors order pattern and retail had a more pronounced effect on the first quarter. We do see stabilization across companion animal as we go with the key franchises. And what we're seeing now is we expect our key franchises to grow in the low to mid-single digits, which is a step down from what we said when we initially issued guidance. And so, when you take all that into consideration, yes, we do expect livestock to continue to drive momentum here. I put livestock in the mid- to high single-digit growth range for the year, but the balance would be growth across companion animal without getting into specifics on guidance. Operator: We'll move next to Jon Block with Stifel. Jonathan Block: Maybe just the first one, Wetteny, I believe you said the channel is now normalized. I do think that U.S. Pet Health number surprised everyone. So is there a way of calling out the impact in 1Q '26 from the channel, what that was specific to U.S. Pet Health. And then, Kristin, just to back up at a higher level, I'm just trying to dig in on the competitive response and maybe I was a little confused. So is anything changing from Zoetis among your approach to, call it, the atopic derm or the Trio franchises regarding price? If it's not sort of unilateral, are there any targeted promotions or no? Because it seemed like you acknowledge the consumer wants a cheaper alternative or is looking for that. And then I was a bit confused if Zoetis is pivoting there and trying to deliver on that or just really focus on the bundling and the services. Wetteny Joseph: Yes. Perhaps, Jon, I'll take the normalization point around inventory. Clearly, it is, I would say, difficult to separate out the macro and the soft end market demand versus what the patterns are and what distributors and retailers did in terms of adjustments. Again, they ordered less from us than they were shipping out to customers given the softer end market demand and promotions that did not execute to the level that we expected coming into the year, right? And so that certainly had a pronounced impact, but I would put that back to the macro and the competitive dynamics that we're seeing and the impact it has in terms of end market demand. Kristin Peck: So Jon, I'll build off the second part of your question. My point is we're not overall lowering our list price on products. We continue to run promos as we always have seasonal promos for paras. We can do cross-portfolio promos in the United States, leveraging both derm and other categories. But I think what I was really focusing on is addressing the affordability issue, which is actually a pet owner. That's not what we sell into the vet. It's the pet owner at point of sale. We've always had loyalty programs, as you know, but those loyalty programs are you scan your receipt and then you get a cashback card to spend later. Given the affordability issue that is more urgent, we're looking at more point-of-sale loyalty programs, more ability to deal at point of sale with the challenges the pet owner may be having economically. So our real focus there is not as much on the vet but on the pet owner issue. We have these programs today. But as I said, we're looking to alter them to make sure we can do that more at point of sale versus just over time where they can use it in 1 month or 2 months, et cetera. We're really trying to make sure we address that with our programs both in the United States and across the globe. Operator: We'll move next to Steve Dechert with KeyBanc. Steven Dechert: I guess just first, on price sensitivity, is that still limited to the Gen Z and Millennial age groups? Or is that spread more into other age groups now? And then just on Lenivia, as you move closer to U.S. launch next year, how tied is the performance of that drug? Do you expect it to be tied to Librela? Just -- or should we view those as 2 completely separate products? Kristin Peck: Sure. So I'll start with your question with regards to Lenivia. With regards to Lenivia, we did get approval in the -- in certain markets in the EU and in Canada, and we just launched that product. So we look forward to having more information on how that launch is going as we go into the next quarter. As we talked about, this is not long-acting Librela. We think the efforts, the multipronged strategy we've been executing across OA Pain, really focusing on awareness that treating OA Pain as a serious condition is important, making sure we spend time with vets and specialists understanding OA Pain will continue to be important. Also making sure we share the science and the positive experience that many of our customers have and investing in that Phase IV research. We think building this understanding in OA Pain will be important as we launch long-acting. Certainly, that's what we're experiencing right now in certain markets in the EU and in Canada. And we think that long-acting provides, again, to the issue that pet owners are having on just convenience as well as affordability, a great new option. So we're excited for that. I think you asked the second question with regards to demographics on Gen Z and Millennials. I mean, I think affordability is more based on the economic situation that a pet owner is in. It's not just based on age, to be honest. So we're really targeting the affordability issue, not at generations, but just at pet owners overall who are facing those challenges. Operator: And we'll move next to Navann Ty with BNP Paribas. Navann Ty Dietschi: A follow-up on the pricing strategy. So you discussed the pricing against that price sensitivity. And I'm also curious of your pricing strategy to defend against the competitive pressure in derms, which is further intensifying and also your pricing strategy for your upcoming innovation in renal oncology and cardiology, that price sensitivity environment is maintained? And then I have a second question on derm specifically because we are seeing that the competitor has raised prices on the JAK. So would you say that the competition is now not only on price, but also some efficacy in frontline use as well? Wetteny Joseph: Sure, Navann. I'll take your question on pricing strategy. And look, the way we approach pricing is always down to each market, each product and what is the value that we bring and what is the competitive landscape at the time. And as Kristin referenced earlier, we now have an aggregate price expectation. This is not by product, of course, for the company that's in the 1% to 2% range when we started the year at 2% to 3%, and we've been higher than that over the last couple of years. So clearly, we have adjusted our expectations, not getting down to specific pricing actions and strategy on a specific product for competitive reasons here on this call. But certainly, we are taking those into consideration. And as we launch new products, which we do extensive market research on prior to launch, we, of course, will be looking at what is the value that we're bringing clinically and what is the willingness to pay for that, which we continue to see sustaining across the industry. So that will be what we'll put into place. In terms of competitors' prices, look, as you've said, historically, we've seen competitors come in with list prices that are somewhat slightly below where ours are, but with aggressive promotions initiated to get the products embedded into clinics and so forth. So we've certainly seen that. The price sensitivity in the market is translating to that lasting longer, I would say, than we've seen historically. But they are, in many instances, and including you referenced one, are raising prices well above where we're raising. It still remains that there's a gap between where our pricing is versus where theirs is, but it is closing in effect. And so we'll continue to monitor those, but also executing on our actions against those, including the breadth and strength of our portfolio. Operator: We'll move next to Daniel Clark with Leerink Partners. Daniel Christopher Clark: Also I wanted to ask about the 2026 updated guide. How are you thinking about the macro and sort of competitive intensity as we head through the year? Should we expect similar levels of both as we saw in 1Q through the rest of the year? I guess, how are you thinking about that? And then secondarily, I just wanted to quickly ask, how did -- how much did key derm grow ex U.S. if we strip out any of the alignment impact? Wetteny Joseph: Sure. In terms of our expectations on the macro, we are expecting that to persist. And so we're not expecting a rebound nor a significant deterioration in terms of what the macro looks like. We've seen the impact that it has both in terms -- in terms of end market demand and then therefore, directly impacts to where distributors and retailers are replenishing their inventory levels, which created a headwind for us. And so that's the answer on that one. In terms of -- keep derm and what the implications might be related to FIA, we have not broken those down to individual products -- to individual markets to be able to get to that level. We believe we've been very helpful in our comments, which is what the overall impact is and what we would have expected to be the guidance impact, which is around 200 to 250 basis points lift in our guidance. And clearly, given the performance we've seen and the persistence that we're expecting in the macro and competitive dynamics, that has not come to fruition in the guidance that we're giving today. Operator: We'll move next to Andrea Alfonso with UBS. Andrea Zayco Narvaez Alfonso: I just have a quick question around margins. So on gross margins, you did 71.8% this quarter, and it looks like your updated guidance calls for 71.5% for the full year. I know you don't provide quarterly guidance, but just sort of looking at the trajectory for the remainder of the year, it does look like you're lapping a pretty tough comp in 2Q. I guess more broadly, how do you think about that trajectory and sort of frame the levers that you have at your disposal to deliver there given that pressure on some of your higher gross margin products? And then, if I could squeeze in a separate housekeeping question. If you could just confirm that the 2% to 5% revenue growth outlook constant currency does not include any benefit from Neogen potentially closing in the second half? Wetteny Joseph: Sure. I'll take both of those. If you look at our gross margins in the quarter, they were down about 10 basis points. But if you strip out the impact of FX, they're actually up about 140 basis points. So we have been very pleased with the execution across our manufacturing enterprise. And certainly, you see that reflected in our performance in the quarter. We will continue to drive actions across the company, including in this segment that will contribute to the performance for the year and the leverage that we have on the P&L. Do keep in mind that the mix in terms of products is an element to consider here. As you've seen in our guidance, and as I shared just a moment ago, we expect livestock to continue to drive momentum here and grow faster than companion animal. There is some mix impact to that with respect to what you see in gross margins. And in terms of FX, you've seen the U.S. dollar impact in terms of revenue, but that has some converse effects when you get down to cost of sales. So that is a consideration here as well in terms of where you're comparing in terms of comps as we go through the rest of the year. But very pleased with the performance in terms of what we're doing on cost of sales despite the mix that we see in some geographical implications as well. With respect to the guidance range on 2% to 5%. We do take a number of factors into consideration, including when competitive launches are going to come in, how aggressive they'll be. And so that range, which we widened by a point here for the uncertainty associated with those is in here. And so within the guidance range, you could have the impact of potential the closing of the deal with Neogen within that range. Operator: We'll move next to Steve Scala with TD Cowen. Christopher LoBianco: This is Chris on for Steve Scala. First, what is Zoetis' level of interest and confidence in FTC approval of large-scale transformational business development? And second, do you see any opportunity to significantly pull forward launch time lines for products for new markets like renal and oncology, e.g., by changing trial designs or filing based on surrogate endpoints? Kristin Peck: So sure, let me start with your BD question. As always, our focus is on incremental BD. We don't see transformational BD as a major strategy for the company. As we've spoken about before, from a capital allocation perspective, first and foremost, we are investing in our business. We obviously will continue to look at business development. And I think Neogen is a great example where we think there's incremental technologies or additional portfolios such as what we've done in Australia for sheep, et cetera. So we'll continue to look for that. I wouldn't -- you should not expect large transformational BD. I think the deal like Neogen is what our sweet spot has historically been and will continue to be. Was there a second part of your question? Christopher LoBianco: Just on launch time lines and potential to pull forward filings for some of the newer market products like renal and oncology. Kristin Peck: Sure. We're always focused as we think about our pipeline of how we can pull forward. I would say anything that you see in the next few years is already in clinical trials. We're certainly partnering with the FDA, myself and the other industry leaders to look at ways to speed innovation and to find new innovation pathways with the FDA. We're certainly leveraging AI, as I've spoken about before, within our portfolio, both in discovery, research, development and importantly, preparing our dossiers for submission. We think all that can certainly speed it up. And we're also focused on once we get approval, how we can speed time from approval to in market across our portfolio. Operator: Thank you. At this time, we've reached our allotted time for questions. I'll now turn the call back over to Kristin for any additional or closing remarks. Kristin Peck: As always, everyone, thank you for your questions and your continued interest in Zoetis. I do want to recognize before we close our colleagues around the world whose commitment to their customers and their resilience has really helped us navigate this environment. We will continue to keep you updated on our progress and our priorities. We are focused on executing with discipline to position the business to return to growth, and we remain committed to delivering long-term value for our shareholders. Thanks so much for joining us today. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the CrossAmerica Partners First Quarter 2026 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, May 7, 2026. I would now like to turn the conference over to Randy Palmer, Investor Relations. Please go ahead. Randy Palmer: Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners First Quarter 2026 Earnings Call. With me today are Maura Topper, CEO and President; and Jon Benfield, Interim Chief Financial Officer. We'll start off the call today with Maura providing some opening comments and an overview of CrossAmerica's operational performance for the first quarter, and then Jon will discuss the financial results. We will then open up the call to questions. Today's call will follow presentation slides that are available as part of the webcast and are posted on the CrossAmerica website. Before we begin, I would like to remind everyone that today's call, including the question-and-answer session, may include forward-looking statements regarding expected revenue, future plans, future operational metrics and opportunities and expectations of the organization. There can be no assurance that the management's expectations, beliefs and projections will be achieved or that actual results will not differ from expectations. Please see CrossAmerica's filings with the Securities and Exchange Commission, including annual reports on Form 10-K and quarterly reports on Form 10-Q for a discussion of important factors that could affect our actual results. Forward-looking statements represent the judgment of CrossAmerica's management as of today's date, and the organization disclaims any intent or obligation to update any forward-looking statements. During today's call, we may also provide certain performance measures that do not conform to U.S. generally accepted accounting principles or GAAP. We have provided schedules that reconcile these non-GAAP measures with our reported results on a GAAP basis as part of our earnings press release. Today's call is being webcast, and a recording of this conference call will be available on the CrossAmerica website for a period of 60 days. With that, I will now turn the call over to Maura. Maura Topper: Thank you, Randy. Thank you to everyone joining us this morning. We appreciate you making the time to be with us today. I would like to lead off by saying that I'm excited and grateful to be with you today in my first call as CEO. Stepping into the CEO role over the past 2 months has been both humbling and energizing. I'm grateful for the opportunity to lead this organization and to keep learning alongside our team every day. I also want to take a moment to thank Charles Nifong for his care and thoughtfulness as our CEO over the past 6 years. We have become a larger and stronger organization under his leadership. I have learned much from him over the years that we have worked together, and I deeply appreciate his mentorship. I'm also happy to introduce Jon Benfield as our Interim Chief Financial Officer, who will be going through the quarterly financials in more detail. Jon has been with the partnership since 2012 and has worked in various capacities in our accounting and finance team over the years. Jon's deep familiarity with the partnership makes him exceptionally well suited for this role, and I'm glad to have him with us on the call today. We are working with a strong foundation here at CrossAmerica. Over the past few years, we have been deliberately shaping the partnership, increasing our exposure to retail operations and retail fuel pricing through our class of trade conversion activities and utilizing targeted real estate asset sales to generate capital to reinvest in the business. These portfolio optimization efforts have positioned CrossAmerica to perform well across a range of economic environments as I think our first quarter results demonstrate. Our team remains focused on ensuring the competitiveness of our sites in the markets where we operate with continued investment to drive growth and enhance the durability of our earnings. The result is an organization that is both disciplined and flexible and one that we believe is well positioned to capitalize on the opportunities ahead. If you turn to Slide 4, I will review some of the operating highlights of our first quarter. Overall, we had a strong first quarter, generating $35 million of adjusted EBITDA, a record amount for the first quarter and a 45% increase when compared to the first quarter of 2025. We benefited from strong gross profits from our retail segment, driven by motor fuel margins and merchandise sales and focused expense control across our operations. For the first quarter of 2026, our retail segment gross profit increased 18% to $74.3 million compared to $63.2 million in the first quarter of 2025. The increase was driven by an increase in motor fuel gross profit due to higher retail fuel margins for the quarter compared to the prior year, along with strong growth in merchandise gross profit. For the quarter, our retail fuel margin on a cents per gallon basis was $0.437 per gallon compared to $0.339 per gallon in the first quarter of last year. We experienced a strong start to the year on a fuel margin cents per gallon basis during a relatively benign pricing environment in January and February, helped by better sourcing costs and a favorable retail market conditions. As we entered March and continuing into April, we, along with the broader industry, have experienced a generally rising but also very volatile price environment. Historically, that type of rising fuel environment would have resulted in fuel margin compression, though with pockets of volatility providing margin opportunities. During this period of rising prices, however, fuel markets have generally remained rational with retailers quickly transmitting their increased costs to the pump, providing a practical floor to fuel margins during this period, which benefited our results. The corollary to our fuel margin cents per gallon results is obviously fuel volume. On a same-store basis, our retail segment reported a 7% decline in volume year-over-year, though with fuel gross profit ultimately $8.7 million higher than last year as a result of our strong cents per gallon results. Our team remains focused on ensuring our retail locations are competitively priced to balance long-term customer loyalty with the day-to-day volatility we are currently experiencing. Our volume results differed between the two classes of trade in our retail segment, company-operated locations and commission locations, which I'll spend a few moments talking about. Same-store volume at our company-operated locations was down approximately 4% for the quarter, with January and February experiencing less of a decline and March, a higher decline as we and the industry began to feel the impact of the higher fuel price environment we find ourselves in. This volume performance is relatively in line with reported industry averages for the first quarter of 2026 from the sources we review. For our commission class of trade, our commission same-store site volume was down approximately 14% for the quarter. As we have noted for the last 2 quarters, the decline was due in part to our decision at select sites to adjust our pricing strategy to better balance volume and margin while ensuring competitiveness within our markets whenever possible. Our commission location volume was also impacted by the overall volume decline in the market. Moving from our retail fuel operations to our store sales. Our first quarter 2026 results continued a series of important positive performance trends in this critical area of our business. On a same-store basis, our overall inside sales were up 2% for the first quarter compared to the prior year, with growth in the areas of packaged beverages, other tobacco products and food, both branded and proprietary. As we've noted in a number of our recent quarterly calls, during 2024 and 2025, we made important investments to expand our food operations at locations across our company-operated footprint with those investments contributing to both our results and customer traffic at this point in their life cycle. The first quarter of 2026 was also a high watermark for the partnership for our merchandise margin percentage. We reported a merchandise margin gross profit percentage of 29.7%, up 180 basis points from the prior year. We benefited from a better merchandise mix and better execution that improved margins on some of our core categories. This includes such promotions around breakfast sandwiches and chicken tenders that we ran during the quarter. A good example of our team leaning into growth, a focus on execution and providing value to our customers. The strong sales and margin percentage results contributed to an increase in our merchandise gross profit of 8% to $27 million. Jon will touch on this more in his comments, but we also had a very positive quarter focusing on expense control in our retail locations. Our results in this area [ took ] great amount of focus from our operations team as well as technology-assisted improvements that are benefiting our operations. Closing out my comments on the retail segment, we finished the quarter with 340 company-operated retail sites, down 12 sites from the fourth quarter of 2025 and 36 sites relative to the first quarter of last year due to our asset sale and class of trade conversion activities. We remain up 85 locations from the end of 2022 when we began our strategic activities to increase our retail operations. While the pace of our class of trade conversions has slowed in recent quarters, we continue to focus on maximizing the value of each site through class of trade conversions while focusing on being in retail in the right markets. In the period since the quarter end, we have benefited from continued strong fuel margins through April in spite of the rising price environment, so with volumes experiencing more pressure than our first quarter results. Moving on to the Wholesale segment. For the first quarter of 2026, our wholesale segment generated gross profit of $23.3 million compared to $26.7 million in the first quarter of 2025. The decrease was primarily driven by a decline in fuel volume and rental income, primarily driven by our class of trade change activities. As a reminder, our wholesale segment rental income declines when we convert sites to our retail class of trade and when we divest locations. Wholesale segment fuel volumes are also impacted by conversions to the retail segment, though less so by divestitures as we look to maintain a supply relationship with most sites we are divesting. Our wholesale motor fuel gross profit decreased 8% to $14.5 million in the first quarter of 2026 from $15.8 million in the first quarter of 2025. This was driven by a 3% decline in fuel margin per gallon and a 6% decline in volume for the quarter. Our first quarter fuel margin of $0.094 per gallon was a generally strong quarter as we continue to benefit from our fuel sourcing efforts. With regards to our volume performance, our same-store volume in the wholesale segment was down approximately 2% year-over-year, with the remaining decline primarily due to the net loss of independent dealer contracts. Our same-store volume performance in the first quarter of 2026 continues our outperformance relative to national benchmarks that we have seen for several quarters in a row now for our Wholesale segment. I'll close out my comments with a few words on the asset sale portion of our portfolio optimization activities during the first quarter. We continued with our real estate rationalization work during the first quarter, selling 16 properties and realizing approximately $12.7 million in proceeds that we primarily used to pay down debt. As we discussed in February, 2025 was the biggest year ever in regards to property sales for the partnership. We are continuing our targeted real estate sales efforts in 2026, and we continue to have a strong pipeline for the balance of the year, though at a lower level than 2025. Jon will touch on this more during his comments, but I did want to mention that we reduced our credit facility balance by approximately $10 million during the quarter and decreased our credit facility defined leverage ratio from the prior year. These both highlight our disciplined approach to our balance sheet in conjunction with our strong first quarter. The first quarter was a solid quarter for the partnership with a material increase in our EBITDA versus the prior year and solid operational results across the business. Our priorities remain paying down debt, generating strong and durable cash flow for our unitholders and investing in the quality and competitiveness of our network. And I believe our first quarter results reflect exactly that continued focus. Before I turn it over to Jon, I want to be sure to thank our team members around the country for their hard work and dedication this quarter. We navigated the winter months in a volatile fuel price environment together, and our results speak for themselves. Our organization succeeds because of our people, and we thank all of you for your hard work. With that, I will turn it over to Jon for a more detailed financial review. Jonathan Benfield: Thank you, Maura. First of all, I am humbled and grateful for the opportunity to serve as Interim CFO, and I'm excited to work more closely with the broader organization in this expanded role. Now if you would please turn to Slide 6, I'll go over our first quarter financial results. We reported net income of $10.7 million and adjusted EBITDA of $35.1 million for the first quarter of 2026 compared to a net loss of $7.1 million and adjusted EBITDA of $24.3 million for the first quarter of 2025. Adjusted EBITDA increased 45% or $10.8 million year-over-year. Net income increased primarily due to the increase in adjusted EBITDA and a decline in interest expense from $12.8 million for the first quarter of 2025 to $10.8 million for the first quarter of 2026. Net income also benefited from lower impairment charges included in depreciation, amortization and accretion expense. As I mentioned, adjusted EBITDA increased significantly compared to the prior year period. As Maura noted in her comments, this increase was driven by a series of positive factors across the business, including an increase in motor fuel margin per gallon and an increase in merchandise gross profit in the retail segment as well as a decline in operating expenses. Our distributable cash flow for the first quarter of 2026 was $21.5 million, more than double over the $9.1 million for the first quarter of 2025. The increase in distributable cash flow was primarily due to higher adjusted EBITDA, along with lower cash interest expense and lower sustaining capital expenditures. The decline in interest expense we experienced during the quarter was due to a lower average interest rate and a lower average outstanding debt balance on our credit facility during the period due to our strong results combined with our asset sales. Our distribution coverage ratio for the first quarter of 2026 was 1.07x compared to 0.46x for the same period of 2025. For the trailing 12 months, our distribution coverage ratio was 1.25x compared to 1.04x for the trailing 12 months ended March 31, 2025. During the first quarter of 2026, the partnership paid a distribution of $0.525 per unit. Turning to the expense portion of our operations. In total across both segments, we reported operating expenses for the first quarter of 2026 of $56.4 million, a $2.4 million decrease year-over-year and our sixth consecutive quarter of declining operating expenses across the organization. Retail segment operating expenses for the first quarter declined $1.7 million or 3% and wholesale segment operating expenses declined by $0.7 million or 10%. In our Retail segment, our average segment site count was down approximately 4% year-over-year. On a same-store, store-level basis, operating expenses in our retail segment were down approximately 3% for the first quarter of 2026 compared to the first quarter of 2025. The decline was primarily driven by reduced store-level employment costs as we remain focused on efficient staffing in our stores as well as continued reductions in repairs and maintenance spending year-over-year at both our company-operated and commissioned class of trade locations due to realized ongoing efficiencies in our maintenance operations. As we have touched on during the last few quarterly earnings calls, we have cycled through the first year of operations at many of our locations in their new classes of trade, which typically results in elevated expenses to onboard and upgrade the converted locations. As a result, we are experiencing a stabilization of our expense profile in our current class of trade site count. We will, of course, continue to experience seasonality of certain types of operating expenses in our stabilized portfolio, like increased labor in the summer and increased snowplowing in the winter. Returning to our Wholesale segment. Operating expenses declined by $0.7 million or 10% for the quarter. This decline was driven primarily by a 23% decline in lessee dealer or controlled site count within the segment year-over-year due to asset sales and to a lesser extent, conversions to our retail class of trade. We reported G&A expenses for the quarter of $6.5 million, a $1.2 million decline year-over-year, primarily driven by lower legal fees and equity compensation expense. We remain focused across the organization on efficient expense management at our locations as well as at the corporate level, ensuring that we are investing in customer-facing areas at our locations that will drive the long-term health and sustainability of our sites and driving operating efficiencies in our above-store operations. Moving to the next slide. We spent a total of $3.4 million on capital expenditures during the first quarter with $2.1 million of that total being growth-related capital expenditures and $1.3 million of that being sustaining capital expenditures. The decline in sustaining capital expenditures versus the prior year and the 2025 quarters is in line with our expectations as we experienced a stabilization of our current class of trade site count as well as a reduction of our real estate assets controlled site count. Regarding our growth capital spending, we remain focused on our company-operated locations, especially in food-related investments that will contribute to our merchandise sales and margin results. One additional item I wanted to touch on is that we entered into an amendment of our lease with Getty in January of this year that covers 106 of our leased sites and extends the term by 10 years to April 2037. The amendment triggered a reassessment of our lease accounting, which resulted in us accounting for this lease fully as a finance lease. While the economics overall are not all that different, the change in accounting will result in $3 million of the rent payments under this lease being accounted for as principal and interest, whereas previously, that $3 million was accounted for as rent expense. For the same reason, we will have higher interest expense on lease financing obligations going forward, although the impact to the quarter was negligible. Lastly, our finance lease obligations on the balance sheet increased $56 million from the December 31, 2025, balance. Turning to our balance sheet. The asset sale activities that Maura noted in her comments helped us reduce our credit facility balance by approximately $10 million during the quarter. The decrease in our balance, along with the gains on sale generated from our asset sales resulted in a decrease in our credit facility defined leverage ratio to 3.35x compared to 4.27x as of March 31, 2025. Our management team remains focused on the cash flow generation profile of our business, utilizing our normal course operations and our targeted real estate optimization efforts to manage our leverage ratio at approximately 4x on a credit facility-defined basis. Our asset sale activities during the quarter reduced our credit facility balance and the lower average interest rate environment also helped improve our cash interest expense during the first quarter of 2026. Our cash interest declined from $12.4 million in the first quarter of 2025 to $10.3 million in the first quarter of 2026. Our existing interest rate swap portfolio continues to benefit us as well. At this time, more than 55% of our current credit facility balance is swapped to a fixed rate of approximately 3.4% blended and our effective interest rate on the total credit facility at the end of the first quarter was 5.6%. In conclusion, the partnership has started the year with a strong first quarter and with the portfolio positioned for continued success as we move deeper into 2026. Our strong results, along with our asset sales, enabled us to reduce our debt by $10 million this quarter while also positioning our portfolio to generate durable and consistent cash flows into the future. We are looking forward to the summer driving season, maintaining a strong balance sheet and generating value for our unitholders. With that, we will open it up for questions. Operator: [Operator Instructions] Maura Topper: As it appears we don't have any questions coming in at the moment. We want to thank everybody for joining us here this morning and for your interest in the partnership. If you do have any follow-up questions, please feel free to contact us, and have a great day. Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to the Viatris First Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Bill Szablewski, Head of Capital Markets. Please go ahead. William Szablewski: Good morning, everyone. Welcome to our Q1 2026 earnings call. With us today is our CEO, Scott Smith, Interim CFO, Paul Campbell; Chief R&D Officer, Philippe Martin; and Chief Commercial Officer, Corinne Le Goff. During today's call, we will be making forward-looking statements on a number of matters, including our financial guidance for 2026 and various strategic initiatives. These statements are subject to risks and uncertainties. We'll also be referring to certain actual and projected non-GAAP financial measures. Please refer to today's slide presentation and our SEC filings for more information, including reconciliations of those non-GAAP measures to the most directly comparable GAAP measures. When discussing 2026 actual or reported results, we will be making certain comparisons to 2025 actual reported results on an operational basis, which excludes the impact of foreign currency rates. When comparing our 2026 actual or reported results to our expectations, we are making comparisons to our 2026 financial guidance. With that, I'll hand the call over to our CEO, Scott Smith. Scott Smith: Good morning, everyone. We're pleased to report another strong quarter. We're off to an exceptional start to the year. Before I get into the results, we recently presented our plan for long-term sustainable growth, driven by 3 strategic imperatives: driving our base business, fueling our innovative portfolio, and modernizing for sustainable growth. What you're seeing in our results is proof that, that strategy is working. In the first quarter, we delivered total revenues of $3.5 billion, up 3% from a year ago, adjusted EBITDA of $1 billion and adjusted EPS of $0.59 per share. Our overall performance reinforces the growth trajectory of our business. And based on what we're seeing, we're confident in our outlook for the remainder of the year. Let me briefly touch on what's driving that confidence. First, on the commercial side, execution remains strong. Notably, Greater China was a significant contributor this quarter. We're seeing strong execution and our commercial investments are leading to accelerated growth. In Japan, momentum is building following the launch of EFFEXOR for generalized anxiety disorder. We're expecting to see a return to growth with the EFFEXOR launch and several more launches expected in the coming years in this strategically important market. Second, on the pipeline, we're continuing to make progress. We've already achieved regulatory approval for 1 of our 6 product candidates we're anticipating this year, EFFEXOR for GAD in Japan. We remain on track for the remaining 5 regulatory decisions in the second half of the year, including our weekly contraceptive patch XULANE LO and our fast-acting meloxicam. We are excited about these upcoming U.S. launches, which we believe will be important for patients and also accelerate our growth. We have a highly experienced and talented leadership team in place with a strong track record of successful launch execution and we're confident we have the right people and capabilities to deliver. Our Phase III programs for selatogrel and cenerimod remain on track and represent important potential longer-term growth drivers. That said, our near-term focus is squarely on execution, securing approvals, launching products effectively and building momentum. Third, capital allocation. We continue to take a disciplined approach. We intend to deploy our capital in a balanced way, returning capital to shareholders through dividends and share repurchases and investing in the business to support sustainable growth. Business development is an important component of our strategy. We're focused on opportunities that are in-market, accretive and aligned with our capabilities to strengthen the durability of our growth profile. And finally, on the organization. We're making progress on the opportunities identified through our enterprise-wide strategic review to optimize our cost structure, improve resource allocation and drive operational efficiency. We are on track to deliver those savings while also reinvesting in the business to support future growth. In summary, it's a great start to the year. There's strong momentum in the business, and we are well positioned for sustained revenue and earnings growth. Before I turn it over to Philippe, I want to thank Doretta Mistras for her significant contribution as CFO over the past 2 years. Her leadership has played an important role in helping prepare the company to enter a period of sustainable future growth. With Doretta's transition, I'm pleased to have Paul Campbell step into the role of Interim Chief Financial Officer. Paul brings deep experience, a thorough understanding of our business and a long tenure with the company, making him ideally positioned to ensure continuity and maintain operational discipline. With that, I'll turn it over to Philippe to go through some pipeline updates. Philippe Martin: Thank you, Scott. We've had a strong start of the year, continuing to advance our value-added and innovative portfolio while executing on our generic pipeline. Let me begin with fast-acting meloxicam for the treatment of moderate-to-severe acute pain. Our NDA has been accepted for review by FDA. We remain confident that we will receive the regulatory decision by year-end, pending confirmation from FDA on a PDUFA goal date. We continue to believe that the strength of our data supports inclusion of opioid-sparing language in our label, acknowledging that this will be subject to review and discussion with FDA. Regarding [ XULANE LO ], our low-dose estrogen transdermal contraceptive patch. We remain on track against the expected PDUFA goal date of July 30, 2026, and continue to see strong engagement at key medical congresses. Most recently, at ACOG, the American College of Obstetricians and Gynecologists Annual Meeting, we presented 6 abstracts, including positive results from our previously announced Phase III study as well as new data on adhesion performance under both normal and extreme conditions, pharmacokinetics and cycle control. Within our eye care portfolio, the phentolamine ophthalmic solution Phase III data for the treatment of presbyopia has been presented at multiple congresses and our sNDA remains on track against an assigned PDUFA goal date of October 17, 2026. I will now highlight key milestones in Japan. In March, as anticipated, we received approval for EFFEXOR in adults with generalized anxiety disorder. For pitolisant, with regulatory reviews progressing well, we expect PMDA regulatory decisions for 2 indications in the second half of this year for excessive daytime sleepiness associated with obstructive sleep apnea and associated with narcolepsy type 1 and 2. Lastly, we continue to progress our Phase III study of Nefecon for the treatment of IgA nephropathy in Japan and remain on track for a top line readout in the first half of this year. These milestones underscore the successful execution of our strategy to advance a differentiated and increasingly innovative portfolio in Japan, bringing forward value-added therapies that address significant unmet needs. Turning to Creon in Europe, which is considered the standard of care for pancreatic exocrine insufficiency treatment due to different underlying conditions and is another value-added medicine in our pipeline. We conducted a Phase III study in non-cystic fibrosis patients to determine whether dose escalation to double or triple the currently approved dose allows for the achievement of better symptom control and nutritional status. The interim analysis showed that approximately 76% of patients were not adequately treated with the maximum approved dose of Creon for this indication and benefited from a further dose increase. The study medication was well tolerated at these higher doses. Based on this data, together with an increased body of real-world evidence and in consultation with German Health Authority, we intend to file a type 2 variation in Europe before the end of the year and anticipate an approved label update in the first half of 2027. This will be followed by additional submissions outside of Europe where applicable. Together with significantly expanded manufacturing capacity, we expect this will position Creon for sustainable growth and bridge an important unmet medical need for patients. Regarding INPEFA, we continue to progress our regulatory applications and anticipate additional regulatory decisions in key markets this year. Turning to our innovative global Phase III program, selatogrel and cenerimod. For selatogrel, we continue to maintain an enrollment rate of approximately 1,200 patients per month in our SOS-AMI Phase III study, keeping us on track to potentially reach full enrollment by the end of 2026. For cenerimod, our Phase III studies in the SLE OPUS-1 and 2 are fully enrolled, and we expect results for both studies in the first half of 2027. And importantly, regarding our generic portfolio, we continue to drive excellence in execution and are making significant progress in meeting our submissions and approval goals for the year. In particular, with regard to our complex generics pipeline, we remain on track for FDA regulatory decisions this year on our iron ferric carboxymaltose injection and rotigotine patch. Additionally, we have already secured approval of our generic to Abilify Maintena, which is on track to launch in the U.S. before the end of the year. Our continued pipeline momentum reinforces our confidence for the rest of the year and beyond, driven by disciplined execution across our innovative value-added and generic programs and a clear focus on advancing meaningful medicines for patients. With that, I'll turn it over to Paul. Paul Campbell: Thank you, Philippe, and good morning, everyone. Let me begin by briefly introducing myself. I have served as the company's Chief Accounting Officer and Corporate Controller for nearly 10 years. I've been with the company, including legacy Mylan for more than 23 years. With that perspective, I can honestly say that I've never been more excited about the future of the company, and I'm very happy to be with you this morning. Regarding our results, I am pleased to report that we're off to a strong start this year, reflecting the strength of our global portfolio and continued execution of our strategy to enable us to deliver sustainable revenue and adjusted earnings growth. This morning, I'll cover the drivers of our strong first quarter performance and how this performance provides us with confidence in delivering our outlook for the remainder of the year. Beginning with our first quarter results. Total revenues were $3.5 billion, representing operational growth of 3% year-over-year. This performance was driven primarily by accelerated growth in our cardiovascular portfolio in Greater China and strong generics performance in North America. Now let me walk you through the segment performance. In developed markets, net sales increased by 1% versus the prior year, which was roughly in line with our expectations. North America grew 3%, driven by increased demand for estradiol, continued strong performance from Breyna and new product revenue contributions from complex generic launches. In Europe, net sales declined approximately 1% versus the prior year, mainly due to softer market conditions in select countries, anticipated competitive pressure on Dymista and certain supply constraints. That said, the underlying fundamentals in Europe remains strong, driven by the performance of key brands such as Creon, contributions from new product revenues and solid growth in Italy. Turning to emerging markets. Net sales were flat year-over-year, which was below our expectations. Performance was supported by continued strength in our established brands across certain key markets. This was offset by supply constraints in our lower margin ARV portfolio. Within JANZ, net sales decreased approximately 2% versus the prior year, but coming in above our expectations. The decline was driven by anticipated increased competition in Australia and the impact of government price regulations in Japan. This was partially offset by solid performance from key brands, including Creon and Amitiza. Lastly, we delivered a very strong quarter in Greater China with growth accelerating ahead of expectations at 18% year-over-year. The main drivers of this performance were favorable market fundamentals, including an aging population and increasing demand for cardiovascular products, the cumulative impact of our strategic selling and marketing investments and growth across all channels and more specifically, our continued focus on growing demand through e-commerce platforms, where sales more than doubled compared to the prior year. Moving to the remainder of the P&L. Adjusted gross margin was 56% in the quarter, flat versus the prior year. Margins were slightly better than expected driven by favorable product mix. Operating expenses were also favorable versus the prior year, reflecting our disciplined cost management, cost savings from the implementation of our enterprise-wide strategic review and from the phasing of spend. In addition, we continue to generate strong and durable free cash flow. During the quarter, we generated $348 million of cash, inclusive of transaction and restructuring-related costs and taxes. Excluding these items, free cash flow would have been about $459 million. Turning to capital allocation. We continue to expect more than $2.5 billion of cash available for deployment during 2026, providing meaningful flexibility to execute against all of our stated capital allocation priorities. During the quarter, we returned $140 million of capital to shareholders through our dividend. Based on our strong first quarter performance and favorable trends, we are reaffirming our guidance ranges. As we think about our outlook for total revenues, we now expect stronger growth in Greater China in the range of mid- to high-single digits, and delayed competition for Amitiza in Japan. These tailwinds are expected to be partially offset by certain temporary supply constraints related to lower-margin generics and additional competitive pressure across generics in developed markets. Lastly, a comment about foreign currency exchange rates. If current rates were to hold for the remainder of the year, we would expect an incremental 1% tailwind on total revenues and adjusted EBITDA. Turning to phasing for the remainder of the year. Total revenues, adjusted EBITDA and adjusted EPS are still expected to be weighted to the second half at approximately 52% of our full year outlook. This reflects normal product seasonality and the timing of new product launches and takes into account the expected ramp-up in operating expenses through the year. Free cash flow is also expected to be higher in the second half, reflecting the timing of working capital and benefiting from a step-down in onetime operating cash costs. In closing, we are highly confident in the strength and durability of our business. The first quarter demonstrates continued strong execution against our strategy to deliver sustainable revenue and adjusted earnings growth while generating substantial free cash flow for our balanced capital allocation framework. Because of the strong momentum of the first quarter results, we believe we are well positioned to meet or potentially exceed our expectations for the remainder of the year. With that said, I'll hand it back to the operator to begin Q&A. Operator: [Operator Instructions] The first question comes from Glen Santangelo with Barclays. Glen Santangelo: Scott, congrats on finally getting to the point where the quarters are sort of clean year-over-year and it's a lot easier to interpret. When you look at these results, it looks like you've got very strong incremental contribution from both brands and generics and then on the geography side, from China in particular. And in your prepared remarks, you suggested it was strong execution and commercial efforts. But the growth rate doubled in that geography. And so I'm trying to get a better sense of the stability of -- or I shouldn't say stability, the durability of that strength and the momentum that you've seen and trying to reconcile that with maintaining the guidance given that 1Q is already sort of running ahead of, I guess, your overall expectation for the year? And then I just had a follow-up for Philippe. Scott Smith: Yes, relative to maintaining guidance, so I guess I'll take it a little bit backwards, right? It's early. We're really, really pleased with the quarter, clean quarter, as you say, strong quarter. We're pleased that it's just early, and we'll continue to monitor and when we get to Q2, we'll update you at that point in time. But I feel very, very good about it. Yes, it was a clean quarter, driven a lot by revenue in China and North America. You asked about China. I've been involved with business in China since the late '90s. I actually ran China operations for a prior company, and so I'm close to that market. It's the strongest China market over the last 12, 18 months that I've ever seen, both on the innovative side and on the total side. So China is very, very strong, and we're very, very pleased with our performance there. So -- but it's not just the market, right? We also have a very strong team in China. We've made a lot of investments in China, particularly on the e-commerce side, and we're starting to see those pay off now. So we're very, very pleased with the China performance. Paul Campbell: Yes. Maybe I'll just add -- sorry, Glen. Glen Santangelo: No, go ahead. Paul Campbell: Yes, on your question about the durability, I mean, we -- you've heard from my remarks, we've increased our expectation from the beginning of the year of low-single digits to now mid- to high-single-digit growth in China. However, there's always the policy risk that's very dynamic and unpredictable. And as Scott said, it's too early in the year for us to really be that bullish on it, but we'll monitor through Q2, and we'll let you know. Corinne Le Goff: And maybe I can add in terms of the outlook for China, we are very confident that we will see no policy change this year. One thing we have done, and Scott just mentioned it, is that we have consistently invested in our commercial platforms. And switching the -- transitioning the business from hospitals that are most susceptible to policy changes to retail and e-commerce. And e-commerce this year, in this first quarter we've seen a doubling of our sales in this channel. So good success from our perspective. Glen Santangelo: Okay. Maybe if I could just ask a quick follow-up to Philippe. Philippe, thanks for all the detail on all the pipeline stuff. But what I was hoping to try to do is maybe just sort of boil it down a little bit for investors in terms of what you think the biggest opportunities are here over the next 12 months. And I think you said you expect to get a decision on the estrogen patch by the end of July and on fast-acting meloxicam sometime in 4Q. And then I think as we look to 27, we have cenerimod, the readouts coming in the first half of the year and selatogrel maybe behind that in late '27. Are those sort of the 4 biggest opportunities that you see? Or is there something else you'd add to that mix? And I'll stop there. Philippe Martin: Thanks for the question. So as you point out, importantly, in the U.S., we have meloxicam and [ XULANE LO ] this year. I think these are 2 key important launch for us, supported by very strong clinical data. The review process for these 2 assets with the agency, with the FDA is going as planned. And so we have good confidence that we'll get the approval by the time of the PDUFA for [ XULANE LO and later in the second half for meloxicam, we're still waiting for FDA to give us that PDUFA date. It should be coming very, very soon. Japan remains very important for us. As you heard from Scott, we have a number of readouts and approvals in Japan this year, particularly pitolisant is our next approval in the second half of the year, early second half and that will be followed also by important data for Nefecon in IgA nephropathy. So Japan is -- we're getting the approvals we need, and we'll -- we have a strong team there that has experience in launching these types of assets. And then finally, to your point, selatogrel, cenerimod, everything is on schedule. Everything is behaving like we have planned. So everything is working according to plan and we'll get data very, very late this year, early next year for cenerimod and followed by selatogrel in the first half of the year is what we anticipate. Scott Smith: I just want to -- before we go to the next question, just to wrap it up here on meloxicam and [ XULANE LO ]. Very, very pleased with the data, as Philippe pointed out. But I also feel great about the commercial teams we're putting in place to commercialize both those assets. strong teams, a lot of experience in launching blockbuster products in the U.S., and I think they're going to execute really, really well on these products. So we're very focused on making sure that we execute those couple of launches. And then, of course, the opportunity to have readouts on selatogrel, cenerimod, et cetera, is going to be very, very strong for us. Operator: The next question is from Umer Raffat with Evercore. Umer Raffat: I have 2, if I may. First, if you could just expand on the free cash flow year-over-year and what some of the drivers are. But secondly, and perhaps more importantly, I just wanted to expand on the selatogrel trial in the cardiovascular setting. And specifically, I feel like there hasn't been an appropriate amount of discussion on the endpoint. So the way I understand it, and Philippe, I would love for you to correct me. The way I understand it is it's not a composite endpoint. Instead, it's 1 of 6 things that could happen on an ordinal scale. And per patient, the worst thing is taken forward. So I guess my question is, if someone has a STEMI versus a death, how -- is there like a score that's assigned to those 2 different events? But also, I would imagine because there's 5 different things that could contribute into this primary endpoint, and there's probably a score assigned to each one of them, what happens if you have more NSTEMIs and less deaths than you were anticipating in your sample size, would you need to do a sample size reestimation and when will that happen? Scott Smith: Thank you, Umer. Thank you for your questions. First, I'll have Paul talk a little bit about -- to give some detail around the cash flow and then Philippe can get into the selatogrel endpoints, the study design and beyond. Paul Campbell: Sure. So as far as the change year-over-year in Q1, I think it's important to point out that even though it's down, it exceeded our expectations, what we thought was going to happen for the quarter. But essentially, the drivers are timing and net working capital, which is both the timing and then we had business growth this year and last year's comparative period, we had a decline. And then our onetime cost did increase year-over-year. Those are the main drivers. Philippe Martin: Okay. So regarding selatogrel. So maybe we need to spend some time together to go over the actual design and the primary endpoint. But it is an endpoint that we designed in collaboration with the FDA and with our KOL. So we -- it's a ranking endpoint where we have -- where we're ranking the severity of the MI and it can go from a scale of death all the way to an acute MI without a significant impact. And in the middle, you have, as you pointed out, STEMI, non-STEMI as severity of the acute MI. The way it's calculated, it is the worst outcome for the patient that is taking into account. So if you're -- a patient has 2 events, as death and STEMI, for instance, then the death will be the adjudication that will be taken into account for the calculation of the endpoint. What we're intending to see is a relative risk reduction of about 20%. That's how the study is powered, and that's what we anticipate to see as part of the assumption to designing the study. So I think it's relatively straightforward from that standpoint. Adjudication is happening by blinded -- by an unblinded committee that looks at the severity of the outcome and determine which one is for us to take into account. The outcome we anticipate to see is that patients -- you will see a reduction -- if the study works as advertised, you will see a reduction of severity in the selatogrel arm versus the placebo arm, right? So there will be less patient with death, less patient with severe acute MI versus placebo. That's -- that risk reduction, if you will, that will be characterized that way. So a lot more to go -- we can go into a lot more detail about this endpoint, but I think that should answer your question at this point. Scott Smith: Yes. And before the next question and on a much less granular level, I'm really pleased with the execution from a clinical development perspective for selatogrel and for cenerimod, but we've accelerated the enrollment of obviously, both of those fully enrolled now with cenerimod, and right now, we are enrolling approximately 1,200 patients a month in the selatogrel study, which is a pretty strong number. So we're very pleased with how those are progressing. We're looking forward to turning over those cards and seeing those results and see what we get, but very, very pleased with the clinical development execution thus far. Operator: The next question is from Matt Dellatorre with Goldman Sachs. Matthew Dellatorre: Congrats on the strong quarter. Maybe coming back to fast-acting meloxicam just briefly, could you comment on whether priority review is still a possibility there? And then anything further you could share regarding the expected label? I know you said in the prepared remarks, you do expect opioid sparing to be on the label to some degree, but just anything kind of further you could share would be helpful. And then maybe with regard to the cost savings, could you comment on progress with regard to achieving -- I think you've put out an estimate of 30% of that $400 million in net savings this year. And then I realize there's some offsets this year in terms of mix shift and LOEs that you don't expect that to flow through to margins. But perhaps walk us through what the base case and the upside case looks like in '27 and '28 with respect to EBITDA margins. Scott Smith: Thanks, Matt. So let me just overall say we'll address the second question first around the enterprise-wide strategic review and I'll kick it over to Paul for some discussion around margins, but we are completely on track at this point in time to deliver the savings that we outlined before. So you can really see the effect of that as we're starting to get some significant EBITDA leverage with 3% growth and 10% EBITDA growth in the quarter. We are on track to deliver the savings this year and also for '27 and '28. Paul, around the margins? Paul Campbell: Yes. So I think it's important, as Scott said, part of our beat in the quarter was related to OpEx. And OpEx comes -- lower OpEx comes from our disciplined cost management. And then, obviously, there's a little bit of phasing in there. And then the cost savings program, as you pointed out, I think it's about $120 million. If you do the math on what we expected for this year, we're on track to deliver that for this year. And we do expect that operating leverage to continue as the savings flow in, not only the rest of this year but into the next few years also. Scott Smith: Philippe, around meloxicam regulatory and label? Philippe Martin: So we anticipate that the agency -- we're expecting that the agency will be giving us the PDUFA date and timing of review within the next couple of weeks. So we should get much more visibility on that timing, and we will let you know. In terms of the label, there is clearly based on the data our expectation is that the opioid-sparing language will be included as part of the label, where it is exactly in the label will be a matter of review and discussion with the agency. But our expectation is that the data that supports opioid sparing will be included as part of the label, they were our key secondary endpoints. They were discussed and designed in collaboration with the agency. So we have -- we believe that they will be included in the label. Corinne Le Goff: And Matt, this is Corinne. And as it comes to the commercial opportunity for fast-acting meloxicam, having no opioid sparing in the indication section, it's helpful but not essential, I would say. It will be in the label, as Philippe said. And the opportunity is driven by the total clinical profile of this product. And we have demonstrated that fast-acting meloxicam can deliver very fast, rapid, meaningful pain relief. It's a non-opioid option, and that's really what will make a difference in the moderate-to-severe acute pain market. Scott Smith: No, that's a great point, Corinne, that overall, the data is very, very strong. The opioid sparing is an important part of the data, but it's just part of the overall data, which, again, really looks very, very strong, and we're very hopeful about -- and anxious in a good way about getting to the launch and getting it out there. We think it's going to be a very important product for us in '27 and beyond. Operator: The next question is from Les Sulewski with Truist Securities. Leszek Sulewski: Congrats on the progress. I appreciate you providing the new product contribution figure of $71 million. Could you comment on that? How much of that was tied to product sales versus onetime channel stocking? And is this a figure you intend to provide moving forward? And then on the BD front, it appears the market has been -- is a lot more active now. Has the bar for BD changed, given the strong start to the year and the $2.5 billion cash available? And then lastly, how should we think about the CFO transition? Should investors expect any change in capital allocation or disclosure or on the cost savings side? Scott Smith: Maybe we'll just take it from the bottom and go forward. So first of all, on the CFO question, we should expect no changes to capital allocation or financial policy with no expectations at all. And since it's been brought up, the first thing besides the fact there will be no changes, I'd like to thank Doretta for being a great partner to me. She's leaving to pursue another opportunity on the West Coast and her leadership played an important role in helping prepare the company to enter a period of sustainable growth. Having said that, I'm thrilled to have Paul sitting here beside me, I've got tremendous confidence in him as the interim CFO. He's got a long tenure, a tremendous understanding of our business, and we're very, very lucky to have him. So I feel very good about the CFO transition and how that's going. From a BD perspective, yes, it's a little -- there seems to be a lot of activity going on right now. BD priorities have not changed. We're looking for in-market accretive assets that can help fuel our growth as we go into the future. There's lots of things out there, I think, that are sort of in our sweet spot, right, that may be a little bit too small for the big pharma world, but the right size for us. And so we want to -- embedded in the BD question is capital allocation. We want to remain balanced, right? We're going to continue to return to shareholders through dividends and share repurchases, but we're also going to be aggressive in business development and we want to be able to, over the next period of time, continue with the internal efforts on the pipeline, build a portfolio of growth assets to help fuel our future sustainable growth. So we're excited about having the cash available to enter into business development and support the strong base business and the pipeline that we're developing. Paul Campbell: Okay. Yes. On the new product revenue, so I think that's a figure that we generally give out each quarter so that we can all track against it. The $71 million included the launches of iron sucrose and octreotide for us, and it was actually in line with our expectations. We've always said or we said at -- in February that we expected a ramp over the course of the year in the new product revenue. So it's definitely more heavily weighted to the second half. And then as far as the question on channel inventories, our channel inventories are very normal and standard. There's no significant impact or increase in those inventories that drove any of the results for the first quarter. Scott Smith: I think you also said in your question, we're going to continue to give the figures for new product revenues. And yes, we are. However, we're probably going to have to evolve that over time as we're evolving the portfolio. That works really well for the generic and complex generic pipeline. But as we start getting more value-added products, 505(b)(2)s and others, and particularly the innovative portfolio, new product revenue is not just year 1 or 12 months, right? It's -- those are new products for 1, 2, 3, sometimes 4 years that you're developing them. So we're going to have to think a little bit about how we characterize our success in introducing new molecules into the portfolio. Operator: The next question is from Jason Gerberry with Bank of America. Unknown Analyst: This is Melanie on for Jason. On fast-acting meloxicam, can you discuss your specialty sales force strategy? And what percent of the market are you -- do you think you'll be able to access given your HCP and outpatient focus? Scott Smith: Thank you for the question. Corinne? Corinne Le Goff: Yes. Thank you, Melanie. So for the launch of fast-acting meloxicam, we've done a lot of work to really identify the key target for us. We have a specialty approach, meaning that we are going to go after the patients that are treated in the outpatient setting, but really postoperative pain as a start. And in terms of sizing of our sales force, we are thinking of building a sales force of about 150 to 200 reps. And potentially going beyond this through partnerships as we develop this product further and target more nonoperative pain at this point, dentistry and other type of pain. And this we would do in partnership very likely. Operator: The next question is from David Amsellem with Piper Sandler. David Amsellem: So at a high level, Scott, I want to get a better sense of what Viatris is aspiring to be regarding the innovative business in the United States. You've got an immunology program. You've got a cardiovascular program. You've talked about pain. So there's a number of different therapeutic verticals that potentially you're going to have your hands in commercially. So can you help us better understand how you're thinking about leveraging those verticals? And I realize that's a high-class problem to the extent that cenerimod and/or selatogrel work. But I think it would be helpful to illuminate us on how are you thinking about that? And then secondly, I know you talked about accretive M&A, commercial stage M&A. But can you also talk about the extent to which you want to take on additional R&D risk via in-licensing, the kinds where you have relatively small upfront payments, and you're not really doing anything to your capital structure, but you're bolstering the pipeline. Is that something that's going to be a priority in parallel to your priorities related to commercial stage M&A? Scott Smith: Thank you, David. I wouldn't say a priority. I think over a 5-year period, we will likely put some things into the pipeline that are early clinical. But right now, we're focused on in-market accretive assets that we can be good owners of. And so that's our focus. Again, over the next 5 years, there may be some things that come into the pipeline, but it's not the same priority as focusing on things which are in-market accretive and can help drive our revenue and EBITDA in the short term. Philippe Martin: Therapeutic indication. Scott Smith: On the U.S., yes, therapeutic indications. Again, we're a little less focused on therapeutic indications than we are about can we be good owners of these assets? Do we have the right people? Do they fit the portfolios going forward. Even though there may be a couple of different, as you said, a high-class problem, of Phase III programs being successful and also launching in the U.S., we're going to have a specialty focus. These are not huge from a spend perspective. We're not going into primary care. We're not going to have thousands of sales reps out there. We feel we can build strong therapeutically focused sales forces that are able to deliver good results. And the way that I look at it is if you had a positive, for example, result with cenerimod and we're launching cenerimod, that's a cornerstone product in that therapeutic area. We launched that successfully, and we continue to add products there. We don't want to be in everything, right? And we're trying to find good assets that can be cornerstone products, and then we'll build on those from a therapeutic perspective as we move forward. Corinne Le Goff: And David, if I can comment also on how we build infrastructure in the U.S., I think it's very important to understand, and I mentioned it for fast-acting meloxicam that we have a very targeted specialty-driven approach, so the sales force will never be beyond 200 people. It's really what we are looking at doing. And I can give the example of women's health as well where we have a portfolio of products that go to launch with [ XULANE LO ] first, but then we have other products that will launch in a couple of years. Again, a sales force that will be maybe 70 people at the most and that's how we're going to look at launching those products. Beyond this, as I said, it will be in partnerships. Operator: The next question is from Chris Schott with JPMorgan. Ethan Brown: This is Ethan on for Chris Schott. Congrats on the great quarter. Just starting off maybe with generic semaglutide beginning to enter in some specific markets. Just wondering if there's any learnings that you've been taking away thus far and more broadly, how you're thinking about that generic GLP-1 opportunity, including potential sizing and timing of any contribution to Viatris. And then my second question is just on the ARV business. How are you thinking about the go-forward impact of the supply constraints that you highlighted this quarter? Scott Smith: So Philippe, talk a little bit about our GLP-1 strategy, which is going to be important to our future. It's a driver more in the 2030 and beyond time frame than in the short term. But very important to our long-term strategy, the GLP-1 strategy. Philippe? Philippe Martin: Yes. So we are -- we intend to be a significant player in the GLP-1 space. We are developing every GLP-1s that are currently approved. This is, as you know, a market that is very dynamic. And so we got to be ready for whatever changes may be coming and leverage that. I think we are particularly focusing on the U.S. because this is an area -- this is a region where we believe we have the opportunity to differentiate versus other potential generic players, in particular, around our ability to come up with the right auto-injector to be substituted for instance. So we are -- we have developed a significant strategy for GLP-1s and we'll be supplying a significant part of that market with a hyper focus on the U.S. going forward. That does not mean we're not going to launch in other regions, but we'll do that selectively based on the dynamics of a specific region. Scott Smith: It's a complicated area, right? There's a number of molecules out there. There's a number of indications, there's different dosage forms. There's different applications. And so it's very, very complicated out there, but we want to be thoughtful on where we go. We want to make the right kind of investments. And I think as a company, given our device expertise and other things, I think we are uniquely qualified to participate in this marketplace in the future. Paul Campbell: Yes. As far as the ARV business, from a supply disruption perspective, it's important to note that we've mitigated by moving production to additional sources if we can. The team is working very hard to alleviate those constraints. And I think we're getting -- making significant progress there. We're going to hopefully ramp up supply sooner rather than later. But I think it's also very important to point out that in our updated forecast, we've included all the risks that we currently see. So it's all baked into the numbers that give us confidence that we're going to deliver for the rest of the year. And as I said in my remarks, it might be some upside to those numbers. We'll see how the rest of the year goes. Operator: The next question is from Ash Verma with UBS. Ashwani Verma: Circling through a few calls here. And congrats on the revenue growth, particularly strong. I know at the Investor Day, you had outlined the long-term goal of growing 4% organic. And here, you're doing pretty well at 3% in 1Q, just trying to get a sense of how soon can we get there at the 4% run rate. Is that something that's feasible, let's say, later this year or 2027? Or is that more of a subject of some of the branded pipeline kicking in, and that would enable that growth? Scott Smith: Yes. The 4% number is where we expect to get by 2030. And along the way, starting off this quarter with 3% growth, I think, is a strong start to that. We feel very confident in our ability to deliver those long-term targets that we put out there. And again, the strength of this kind of first quarter, it's early, right? relative to long-term targets, but we feel very, very good about where those targets sit and about our performance and our ability to hit those targets. And again, we will have, in this period, significant cash to be able to supplement what we're doing. We've got a very large number of clinical readouts coming, and we've got a lot of launches right now. So we expect to see that growth ramp up as we go into '27, '28, '29. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Smith, CEO, for any closing remarks. Scott Smith: Thank you very much, and thank you all for participating in the call this morning. Obviously, I'm really excited about the exceptionally strong performance this quarter and the momentum that we're seeing in our business. We delivered 3% revenue growth and 10% adjusted EBITDA growth this quarter. We are expecting multiple near-term pipeline catalysts and product launches and we have significant financial flexibility to execute our capital allocation plan and accelerate shareholder value. As we move through 2026, our focus remains on disciplined execution and continuing to build a more durable, higher-quality growth profile. Thank you very much for your time today. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Please standby. Your meeting is about to begin. Good afternoon. My name is Chloe, and I will be your conference operator today. At this time, I would like to welcome everyone to the WhiteHorse Finance, Inc. First Quarter 2026 Earnings Conference Call. Our hosts for today's call are Stuart Aronson, Chief Executive Officer, and Joyson Thomas, Chief Financial Officer. Today's call is being recorded, and a replay is available through a webcast in the Investor Relations section of our website at whitehorsefinance.com. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. Please press star 1 on your telephone keypad. If at any point your question has been answered, or if you should require operator assistance, please press 0. It is now my pleasure to turn the call over to Robert Brinberg of Rosen & Company. Thank you, Chloe, and thank you everyone for joining us today to discuss WhiteHorse Finance, Inc.'s First Quarter 2026 earnings results. Robert Brinberg: Before I begin, I would like to remind everyone that certain statements which are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. WhiteHorse Finance, Inc. assumes no obligation or responsibility to update any forward-looking statements. Today's speakers may refer to material from the WhiteHorse Finance, Inc. First Quarter 2026 Earnings Presentation, which was posted to our website this morning. With that, allow me to introduce WhiteHorse Finance, Inc.'s CEO, Stuart Aronson. Stuart, you may begin. Stuart Aronson: Thank you, Rob. Good afternoon, everyone, and thank you for joining us today. As you are aware, we issued our earnings this morning before the market opened, and I hope you have had the chance to review our results for the period ending 03/31/2026, which can also be found on our website. On today's call, I will begin by addressing our first quarter results and current market conditions, then Joyson Thomas, our Chief Financial Officer, will discuss our performance in greater detail, after which we will open the floor for questions. At a high level, our first quarter results reflected three main themes. One, previously flagged credit marks drove net realized and unrealized losses for the quarter. Two, core earnings moderated, reflecting a lower portfolio yield in Q1 driven in part by one additional investment being placed on nonaccrual. And three, share repurchases provided a meaningful offset through NAV accretion. More specifically, our results for 2026 included net realized and unrealized losses that were largely consistent with the markdown we had forewarned investors about on our last shareholder call. As we shared on that call, we had three accounts where we expected markdowns this quarter, Honors Holdings, Outward Hound, and Lumen Latam, and those positions drove the bulk of our net realized and unrealized losses for the quarter. Q1 GAAP net investment income and core NII were $5.6 million, or 25.3¢ per share, compared with Q4 GAAP net investment income and core NII of $6.6 million, or 28.7¢ per share. NAV per share at the end of Q1 was $11.47, compared with $11.68 at the end of Q4, a decrease of approximately 1.8%. The change in NAV reflected net realized and unrealized losses of approximately 28.4¢ per share, partially offset by share repurchases that were accretive to NAV by approximately 8¢ per share. NAV was also impacted by distributions paid during the quarter, which included a $0.01 per share supplemental dividend. We will continue our distribution policy framework that was previously discussed, where the company intends to distribute a quarterly base distribution of 25¢, as well as make potential supplemental distributions above the base level in the future pursuant to our distribution policy. Turning to shareholder value, our shares have continued to trade at a meaningful discount to NAV, and both management and the board remain focused on actions that we believe can help enhance shareholder value over time. So far, that focus has included disciplined portfolio positioning, selective capital deployment, accretive share repurchases, and steps to support distributable earnings. As we discussed on our last call, the board expanded the company's share repurchase program, and late in the first quarter, we also implemented a 10b5-1 plan to allow us to continue executing on that authorization outside of our normal trading window. In accordance with the plan's terms, we remained active under the program during Q1 and into Q2, and those repurchases were accretive to NAV as I mentioned earlier. Joyson will provide additional detail on the quarter's repurchase activity. More broadly, while our stock continues to trade at a substantial discount to book value, we believe repurchasing shares remains one of the most attractive uses of capital available to us. At the same time, we are continuing to balance that opportunity against new investment activity and our targeted leverage levels. In addition, the adviser has agreed to extend its temporary voluntary waiver of the incentive fee for 2026, reducing the applicable fee rate from 20% to 17.5%. We view that extension as another constructive step to support distributable earnings and shareholder value. As we have said previously, this fee waiver is temporary and any decision regarding future periods will be revisited based on the current conditions and in consultation with the board of directors. We have been encouraged by the alignment shown through open market purchases by certain officers and directors, which we believe further reflects confidence in the underlying value of WhiteHorse Finance, Inc. Turning to our portfolio activity, we had gross capital deployments of $25.4 million in Q1, which was more than offset by repayments and sales of $38 million, resulting in net repayments of approximately $12.6 million before the effects of transferring assets into the STRS JV. Gross capital deployments consisted of three new originations totaling $18.5 million, and the remaining amounts were deployed to fund add-ons to 12 existing investments. In addition, there was $700 thousand in net fundings on revolver commitments during the quarter. Of our three new originations in Q1, one was a non-sponsor deal and two were sponsor. The sponsor deals are targeted to be transferred to the STRS JV. Our new originations in Q1 had an average leverage of approximately 5.5x EBITDA. All of our Q1 deals were first-lien loans. Pricing reflected competitive market conditions; our focus remained on structure and credit quality. Total repayments and sales were primarily driven by complete or partial realizations in three portfolio companies: Trimlight, Monarch Collective Holdings, and Lumen Latam. During the quarter, the BDC transferred two new deals and two existing investments to the STRS JV totaling $18.9 million. At the end of Q1, the STRS JV portfolio had an aggregate fair value of $327.1 million and an average effective yield of 9.9%. We continue to successfully utilize the STRS JV and believe WhiteHorse Finance, Inc.'s equity investment in the JV continues to provide attractive returns for our shareholders. After net repayments and JV transfer activity, as well as realized and unrealized losses recognized during the quarter, total investments decreased from the prior quarter by $35.6 million to $543 million. This compares to our portfolio's fair value of $578.6 million at the end of Q4. During the quarter, we recognized $4.7 million in net realized losses and approximately $1.6 million of net unrealized losses, for an aggregate total of $6.3 million in net realized and unrealized losses in Q1, approximately 28.4¢ per share. The net mark-to-market losses were primarily driven by a $2.8 million unrealized loss in Honors Holdings and a $2.1 million unrealized loss in Outward Hound, partially offset by a $2.6 million gain from the reversal of unrealized losses on investment realizations and approximately $400 thousand of net markups across the portfolio. In addition, we recognized realized losses primarily driven by approximately $3 million from the Lumen Latam sale, as well as $1.1 million from a foreign exchange loss on the repayment of the Trimlight Canadian term loan and approximately $2.2 million from the sale of the ThermoDisc asset. Importantly, the markdowns on Honors Holdings, Outward Hound, and Lumen Latam were the same three credits we identified for investors on our prior call as situations on which we expected to incur markdowns in the quarter. At the end of Q1, 98.8% of our debt portfolio was first-lien, senior secured, and our portfolio continued to reflect a balanced mix of sponsor and non-sponsor investments, with non-sponsor representing approximately 38% of the portfolio at fair value. Weighted-average effective yield on our income-producing debt investments decreased to 10.8% at the end of Q1 compared to 11.0% at the end of Q4. The weighted-average effective yield on our overall portfolio also decreased to 8.7% at the end of Q1, compared to approximately 9.1% at the end of Q4. Yield was affected by the one new investment being put on nonaccrual during the quarter. With respect to nonaccrual status, Outward Hound was placed on nonaccrual during the quarter, and with the final sale of our residual position occurring this quarter, ThermoDisc was removed from our nonaccruals. Excluding the impact of those changes, nonaccruals represented approximately 3.0% of the total debt portfolio at fair value, compared with 2.4% at fair value at the end of the prior quarter. The four issuers on nonaccrual at quarter end were Honors Holdings, New Cycle Solutions, Outward Hound, and PlayMonster. As always, we continue to actively manage our underperforming credits, leveraging our dedicated restructuring resources and the broader capabilities of H.I.G. With respect to Outward Hound, we continue to work with the borrower and believe a debt restructuring is likely in coming months, with an expectation that part of that asset will return to accrual status based on the new structure. Given the complexity of the process, we believe that outcome is more likely to occur next quarter than this quarter, although there can be no assurance until the restructuring is completed as to what will happen and when. On Honors Holdings, also known as Camarillo Fitness, the company continues to struggle; we do not yet know whether we will have a further markdown this quarter. Lumen Latam is now completely exited, so that situation is resolved. At this time, we are not aware of any further material markdowns beyond what I have just described. Aside from the credits on nonaccrual, our portfolio continues to perform well, and in our portfolio reviews on any companies where there is underperformance, we are seeing private equity owners support those credits with new equity, which is an indication from the private equity firms that they have confidence in those companies and borrowers. I would also note that, consistent with what we shared last quarter, we have modest exposure to Internet or software companies. The BDC’s software exposure across six portfolio names represents approximately 11.1% of the portfolio at cost and 9.9% at fair value. Market conditions remain competitive, although for several months, geopolitical events had slowed the M&A market, with transaction volume being lower than normal. That said, over the past few weeks, we have seen a recovery in deal flow volumes, and our team is currently working on deals at close to 100% of capacity. Negative press around direct lending and private credit has resulted in a shift in supply and demand, particularly on larger deals. On the smaller deals, as a result, pricing is up 25 to 50 basis points, and on the midsize and larger deals, pricing is up more like 50 to 100 basis points, with most of that movement being on the sponsor side, where prices had compressed. We had previously shared with the market that pricing was very aggressive. In the lower mid-market, we are seeing pricing of SOFR plus 475 to 525. In the mid-market sponsor segment, pricing is SOFR plus 500 to 550, and in the larger-cap market, pricing is SOFR plus 500 to 575. The non-sponsor market remains stable at pricing of SOFR plus 600 and above. We are also highly focused on minimizing liability management execution risk in new investments and our portfolio. For investors less familiar with the term, LME risk refers to the risk that a borrower can move assets away from the existing lenders and pledge them to new lenders, effectively subordinating the original senior debt. We are working to ensure that structures and documentation provide adequate protection against this risk. Looking forward, there is too much geopolitical and consumer sentiment uncertainty to have any clarity as to where the market is going to be in the balance of the year. What I would say is that the mid-market and lower mid-market that we participate in continue to function. Other than the slight price increase and conservatism on credit standards, including extremely high conservatism on anything software-related, the markets are functioning. In the non-sponsor market, conditions remain stable and less competitive than in the sponsor market. Average leverage is approximately 4.0x to 4.5x, and pricing continues to be generally at SOFR plus 600 and above. With our non-sponsored portfolio performing as well as or better than our sponsored portfolio, we continue to focus significant resources on the non-sponsored market, where there is better risk/return in many cases and much less competition than what we are seeing in the sponsor market. We currently have 21 originators covering 12 regional markets. Given market conditions, we are looking for good risk/return across the market and finding surprisingly good opportunities. Additionally, we continue to expect a normal level of repayment activity over time, although actual repayment timing will be driven by M&A, refinancing activity, and company-specific situations. As for our pipeline, we currently have 10 deals mandated. Of those 10 deals, four are non-sponsor and six are sponsor. All of the non-sponsor deals are priced at SOFR plus 600 or above, and all of the sponsored deals will be targeted for the STRS JV. All of the non-sponsored deals are targeted for the balance sheet of the BDC. While there can be no assurance that any of these deals will close, or whether we have room in the BDC for any or all of those deals, we will be assessing capacity based on repayments and the availability of capital to continue the share buyback. Subsequent to quarter end, no deals have closed in the BDC. With capital reserved for share buybacks, the BDC's remaining capacity is very limited—approximately $15 million for new assets on the balance sheet after reserving roughly $11 million for the share repurchase program. At the end of the first quarter, the STRS JV's remaining capacity was approximately $35 million, and pro forma for recently mandated deals eventually being transferred and anticipated repayments, the JV's capacity is approximately only $10 million. With that, I will turn the call over to Joyson for additional performance details and a review of our portfolio composition. Operator: Joyson? Joyson Thomas: Thanks, Stuart, and thanks everyone for joining today's call. During the quarter, we reported GAAP net investment income and core NII of $5.6 million, or 25.3¢ per share. This compares with Q4 GAAP NII and core NII of $6.6 million, or 28.7¢ per share, as well as our previously declared first quarter base distribution of 25¢ per share and a supplemental distribution of $0.01 per share. Q1 fee income was approximately $400 thousand, compared with $800 thousand in the prior quarter, driven primarily by a $100 thousand prepayment fee from Monarch Collective and a $100 thousand amendment fee from U.S. Petroleum Partners. The prior quarter's fee income included a nonrecurring prepayment fee of $300 thousand received in connection with the prepayment exit of ELM in that quarter. For the quarter, we reported a net decrease in net assets resulting from operations of $700 thousand. Our risk ratings during the quarter showed that approximately 88.3% of our portfolio positions carried either a one or two rating, an increase from the 85.9% reported in the prior quarter. Upgrades during the quarter included our investments in Claridge, which were upgraded from a three to a two rating, while downgrades were primarily driven by moving our position in UserZoom from a two to a three rating. As a reminder, a one rating indicates that a company has seen its risk of loss reduced relative to initial expectations, and a two rating indicates the company is performing according to such initial expectations. Regarding the JV specifically, we continue to utilize the platform as a complement to the BDC. As Stuart mentioned earlier, we transferred two new deals and two existing investments during the first quarter to the STRS JV totaling $18.9 million. During the quarter, the JV had three portfolio investments fully repaid, and as of 03/31/2026, the JV's portfolio held positions in 42 portfolio companies with an aggregate fair value of $327.1 million, compared to an aggregate fair value of $323.6 million as of 12/31/2025. Leverage for the JV at the end of Q1 was 1.08x, compared with 1.07x at the end of the prior quarter. Investment in the JV continues to be accretive for the BDC's earnings, generating a low-teens return on equity. During Q1, income recognized from our JV investment aggregated to approximately $3.6 million, compared to approximately $3.8 million reported in Q4. As we have noted in prior calls, the yield on our investment in the JV may fluctuate period over period as a result of a number of factors, including the timing and amount of additional capital investments, changes in asset yields in the underlying portfolio, and the overall credit performance of the JV's investment portfolio. Turning to our balance sheet now, we had cash resources of approximately $49.4 million at the end of Q1, including $37.6 million of restricted cash representing interest and principal proceeds received at quarter end, as well as approximately $11.8 million at the fund level reserved for the quarterly distribution that was paid in early April as well as for share repurchases. Cash balances at the end of Q1 were elevated due to realizations on our investments as well as the JV transfers outpacing deployments during the quarter. As of 03/31/2026, the company's asset coverage ratio for borrowed amounts as defined by the 1940 Act was 176.2%, which was above the minimum asset coverage ratio of 150%. At quarter end, gross leverage was 1.31x, compared with 1.26x in the prior quarter, while our net effective debt-to-equity ratio after adjusting for cash on hand was 1.12x, compared with 1.15x in the prior quarter. The decline in net effective leverage relative to the increase in gross leverage primarily reflected higher cash amounts on the balance sheet at quarter end as a result of the repayments that Stuart and I noted earlier. In regards to our share repurchase program, the company repurchased approximately 412 thousand shares during Q1 at a weighted-average price of approximately $7.31 per share, which was accretive to NAV by approximately 8¢ per share. Subsequent to quarter end, and through the market close of yesterday, the company has repurchased an additional approximately 210 thousand shares. Cumulatively, since the inception of our share repurchase program beginning in 2025, we estimate that our buybacks have contributed approximately 31¢ per share of NAV accretion, demonstrating our commitment to creating shareholder value. As Stuart noted earlier, certain company insiders and affiliates also purchased shares in the open market during the quarter, further demonstrating our view of WhiteHorse Finance, Inc.'s current market valuation. Before I conclude and open up the call to questions, I would like to discuss our recent distributions and corresponding distribution policy. This morning, we announced that our board declared a second quarter base distribution of 25¢ per share. The distribution will be payable on 07/06/2026 to stockholders of record as of 05/21/2026. As we said previously, we will continue to evaluate our quarterly distribution both in the near and medium term based on the core earnings power of our portfolio, in addition to other relevant factors that may warrant consideration. With that, I will now turn the call back over to the operator for your questions. Operator: Thank you. If you would like to ask a question, press star 1. Once again, that is star 1 to ask a question. We will move first to Heli Sheth with Raymond James. Your line is open. Heli Sheth: Good afternoon. Thanks for the question. On the buybacks, how are you considering repurchasing shares on a go-forward basis in terms of weighing buybacks versus deployments, especially if the more muted M&A market that we have seen recently persists? And then on the pipeline, what are you expecting for the remainder of the year? Are you seeing anything different there in terms of industry sector mix, or incumbent versus new borrowers? Stuart Aronson: Yes. Again, the M&A market has picked up in the last three to four weeks. Pricing is higher than we have seen on deals in about two, two and a half years, so the assets that we are seeing right now are, on a relative basis, pretty attractive. That said, with our shares trading at roughly a 35% discount to NAV, we do get more lift from deploying money into share buybacks. So, with the shares where they are now, or close to where they are now, my anticipation is we will continue to buy back shares, and we do have plenty of capacity left after having increased the allocation to share buybacks last quarter. We are seeing a good flow of opportunities in both the sponsor and non-sponsored market. It is a little bit surprising that, due to market liquidity issues, the pricing on smaller deals is as low or lower than the pricing on larger deals, and that has us currently biased towards the mid-market and upper mid-market deals, where the structures are more conservative based on geopolitical disruption, and the pricing, again, is higher than on the smaller deals. That said, we think the geopolitical situation is highly unpredictable and, notwithstanding the fact that until today the stock market has been very optimistic about what is going on, we think there is a lot of volatility risk. As I mentioned in my prepared remarks, we really cannot give you an assessment of where the market will be going forward. The only assessment I can offer is that today’s market, in terms of pricing and deal structures, tends to be more conservative than what we have seen in the past couple of years, so, again, it is more attractive. In terms of industries, we are not seeing very much on the software technology side, and the things we are seeing we are being very, very cautious about given the ongoing concerns with what AI will do to displacing existing leaders in the technology community. We are seeing a nice mix of both industrial credits and business service credits, with volatility and economic cyclicality risk that ranges from anywhere moderate down to very low. But, again, we are seeing better deal flow now by far than what we were seeing two or three months ago. Operator: Got it. Thanks for the time. Once more, that is star 1 to ask a question. We will move next to Christopher Nolan with Ladenburg Thalmann. Your line is open. Christopher Nolan: Hi. Is there any limit to what you can take the percentage of the total portfolio occupied by the JV? Stuart Aronson: The equity in the JV is considered a bad asset vis-à-vis the 30% bad asset limit we have, and all BDCs have. That said, we are nowhere near that limit right now, and we have the BDC representing most of the use of the capacity of that 30%. We think it would be unlikely that we would change the size of the JV in the near future, though. Christopher Nolan: Alright. Well, if your portfolio is $578 million, 30% of that is $173 million, and your equity in the JV is roughly $55 million, so you have a lot of space to grow that JV. I guess my real question is, it seems that you are running off first-lien loans, and so the percentage that the JV occupies is higher. And, also, given the JV is generating attractive returns, you are in this interesting spot where it is accretive to actually not only buy back your own shares, but, because of the increasing percentage from the JV, you are getting a higher yielding asset overall. Is that the way you are looking at it, or am I missing something? And should we expect the overall size of the BDC investment portfolio to decline in coming quarters? Stuart Aronson: We see the JV as positive and accretive, which is why we have grown the JV over time. And yes, as we buy back shares using on-balance-sheet liquidity, the JV is a slightly larger percentage of the overall portfolio. But, again, in terms of dollars committed to the JV, at the moment, we do not intend to make any changes. At current share price levels, we see buybacks as highly accretive. If we start running short on buyback capacity, the management company and the board will discuss whether it makes sense to allocate additional capital into share buybacks. But at the moment, as I mentioned earlier, there is plenty of capital for the share buybacks, and so we have not taken any additional actions from last quarter. Joyson Thomas: Chris, I was just going to add with respect to the JV specifically, it is a total $175 million program between ourselves and STRS Ohio. Of the $175 million commitments, we still have $14 million uncalled, and that includes both the traditional equity investment as well as the subordinated debt investment that is structured as part of our $175 million commitments in total. Christopher Nolan: Okay. Is the plan to tap that additional equity? Joyson Thomas: That is correct. For instance, in the prior quarter, we had three realizations in the STRS JV portfolio, so by and large, the transfers that we sent down to the JV were funded by those excess proceeds. As we kind of tap out on leverage and any excess cash available at the JV level, we would then call and deploy that remaining $14 million. Christopher Nolan: Okay. Thanks, Tristan. Operator: It does appear that there are no further questions at this time. Thank you. This does conclude today’s meeting. We appreciate your time and participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Charles River Laboratories First Quarter 2026 Earnings Conference Call. This call is being recorded. [Operator Instructions] I would now like to turn the conference over to our host, Todd Spencer, Vice President of Investor Relations. Please go ahead. Todd Spencer: Good morning, and welcome to Charles River Laboratories First Quarter 2026 Earnings Conference Call and Webcast. This morning, I am pleased to be joined by Birgit Girshick, who became our Chief Executive Officer this week, and to introduce our new Executive Vice President and Chief Financial Officer, Glenn Coleman. They will comment on our results for the first quarter of 2026 as well as our financial guidance. Following the presentation, they will respond to questions. There is a slide presentation associated with today's remarks, which will be posted on the Investor Relations section of our website at ir.criver.com. A webcast replay of this call will be available beginning approximately 2 hours after the call today and can also be accessed on the Investor Relations section of our website. The replay will be available through next quarter's conference call. I'd like to remind you of our safe harbor. All remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated. During the call, we will primarily discuss non-GAAP financial measures, which we believe help investors gain a meaningful understanding of our core operating results and guidance. The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP. In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on our Investor Relations section of our website. I will now turn the call over to Birgit Girshick. Birgit Girshick: Thank you, Todd. It is a privilege to speak to you today as the CEO of Charles River. I would like to acknowledge Jim Foster for building this company into an industry leader and reiterate my gratitude for the mentorship that he has provided to me over the years. I step into this role with a clear understanding of Charles River today, what we can become and the tremendous responsibility we have to our clients, to the patients who rely on us, to our nearly 20,000 employees worldwide and also to you, our shareholders. I'm not taking this responsibilities lightly, and I'm energized by what lies ahead as we continue to work to help create healthier lives to capitalize on the significant opportunities ahead of us, both in science and in the marketplace and to enhance shareholder value. Our teams have already put forth significant efforts to plan for the future, and I'm proud to lead the company into its next chapter of growth and evolution. The world is changing rapidly around us. Science is advancing faster than it ever has, and our clients require greater speed, best science and more collaboration. As the industry changes, Charles River will evolve alongside it and lead the way. Together as a company, we will create our own future by reimagining the way we operate and embracing the opportunities ahead of us. We will accomplish this through our refreshed strategic framework, which we are calling pathway to purpose. Pathway to Purpose is a disciplined approach to driving growth and shareholder value through the following key priorities: modernizing our company and the industry, strengthening our world-class scientific portfolio by enhancing our capabilities in strategic locations, while delivering a customized client-centric approach. We will also continue to maintain rigorous oversight on animal welfare, biosecurity and regulatory compliance as well as fostering an exceptional employee experience. We have already established a solid foundation, including through the execution of strategic initiatives and enhancements made over the past few years. And this refreshed focus pathway to purpose will enable us to realize our full potential and ensure our future success. This will lead us to drive profitable revenue growth and optimize our financial performance. We will also continue to take a balanced and disciplined approach to capital deployment, including organic investments, M&A and other uses of capital. We plan to take a much deeper dive into our overall pathway to purpose strategy and these priorities when we host an Investor Day in September. For now, I will provide a high-level overview of each priority as well as some of our recent accomplishments. First, we are diligently working on opportunities to modernize Charles River by building a future version of the company that will be faster, more agile and connected and data-driven. We endeavor not only to transform operationally by driving greater efficiencies and streamlining and simplifying processes, but by creating an environment that allows scientific insights and information to move more quickly. This will enable us to partner even more seamlessly with our clients and expedite the speed at which we're able to deliver solutions, supporting their goals and deepening our relationship with them. We have already made substantial progress in our efforts to drive greater operating efficiencies and optimize processes. As previously discussed, we expect to generate at least $100 million in incremental cost savings this year above the 2025 levels, primarily driven by efficiency initiatives. Cumulatively, we expect to generate over $300 million in cost savings on an annualized basis from actions taken over the past few years. However, our pursuit of operating efficiency does not stop here. We are evaluating new initiatives designed to enable us to continue to modernize the company and how we operate and drive additional savings to generate meaningful operating margin expansion in the future. We have already made great progress on our efforts to further strengthen our leading scientific portfolio, including through actions taken as part of our comprehensive strategic review last year. As we mentioned last quarter, our acquisition of the assets of K.F. Cambodia earlier this year, now Charles River Cambodia, further strengthens and secures the non-human primates supply chain for our Safety Assessment operations. Combined with Noveprim, in which we acquired a controlling stake in 2023, we own and expect to internally source most of our future NHP supply requirements for the DSA segment. In April, we completed the acquisition of PathoQuest to continue advancing our NAMs or new approach methodologies capabilities by adding this in vitro next-generation sequencing platform for quality control testing for biologics drugs. We are pleased to have completed the previously announced divestiture of the CDMO and Cell Solutions businesses on May 6. We also expect to complete the planned sale of our certain European discovery sites later this month in May. These strategic transactions will help us refine and refocus our portfolio on our core competencies and drive synergistic growth in areas in which we have differentiated scientific expertise, including drugs development testing. In addition to our efforts to modernize the company and drive incremental efficiency savings, these divestitures and the K.F. acquisitions are expected to be meaningful levers for future operating margin improvement, including the principal drivers of margin expansion for the year. As we move forward, providing the best science will remain paramount at Charles River. With the combined strength of our core capabilities and scientific rigor, we intend to set new standards for what modern science can achieve and to help our clients enhance the efficiency and speed to market for their life-saving therapeutic programs. We will continue to build our world-class portfolio by investing in core growth areas and providing scientific solutions that are critical to our clients. In particular, we will further strengthen our capabilities in a regulated testing environment, including early-stage drug development, where we remain the industry leader and in complementary testing opportunities to support the clinical and commercial phases. We have identified areas of future growth, including in vitro and related testing services to extend our existing capabilities as well as adding additional NAM solutions and continuing to evaluate our geographic presence, particularly in Asia. To further enhance our growth profile, we are doubling down on our client-centric approach with a go-to-market model that deepens and further customizes client relationships and reinforces our position as a preferred partner to the biopharmaceutical industry. We are leveraging technology, including AI, to improve sales effectiveness, KPI transparency, and lead generation while investing in collaborative tools that enhance how we engage with clients and generate insights. Our Apollo cloud-based platform has already been a core enabler of our client-centric strategy and differentiates us in the marketplace through the speed that we can work with our clients. Apollo delivers a seamless self-service client experience with real-time access to scientific data and decision support tools. Its scope has expanded from RMS e-commerce and DSA pricing into study design, CRADL and our manufacturing businesses with further expansion underway. Technology is embedded throughout our strategy and in everything that we do. We are investing in broadly using technology to help harmonize and streamline processes, including through digitizing core work streams and lab automation, which will enable us to gain better data insights, enhance connectivity with our clients and accelerate their speed to market. AI has been a particular focus in the recent months. Our view is quite simple. AI will support the work that we and our clients do. We believe the efficiencies gained from AI over time will be reinvested in R&D by our biopharmaceutical clients, enabling them to work on more programs throughout the regulated drug development process, including safety assessment. To support this constructive view, recent discussions with our clients and industry surveys indicate that large biopharmaceutical companies are primarily utilizing in R&D to enhance the speed and efficiency of the early discovery process, including target identification, drug design and screening capabilities and also around clinical trial monitoring and logistics. In addition, the Deloitte survey last year indicated that nearly 60% of surveyed biopharmaceutical R&D executives expect AI and lab automation investments will result in an increase in IND approvals due in part to a faster pace of drug discovery over the next several years. Like NAMs the use of AI will be an exciting but gradual evolution led by science and the proper validation of new capabilities. We are leveraging AI and machine learning across the company, including as part of our strategic priority to strengthen our NAMs portfolio through our pioneering approach to virtual control groups or VCGs for safety assessment studies. The recent independent scientific review demonstrated the effectiveness of our VCG process, which preserves scientific integrity with no observed adverse effects compared to traditional control groups while reducing reliance on animal models. The VCG program is guided by our Alternative Methods Advancement Project, or AMAP initiative, focused on reducing the use of animals in research and is also a key priority for our Scientific Advisory Board led by our Chief Scientific and Innovation Officer, Dr. Namandjé Bumpus. Before I discuss our first quarter financial performance, let me provide a brief update on the end market trends. The overall biopharma demand environment stabilized last year, and we are currently seeing pockets of improvement for both global biopharmaceutical and small and mid-sized biotechnology clients. Many of our global biopharma clients progress through their restructuring and pipeline reprioritization activities and demand trends have improved even so overall spending levels aren't yet back to historical norms. Revenue from our global biopharmaceutical client segment increased in the first quarter. From a biotech perspective, demand trends from our biotech clients improved over the past 2 quarters as a result of the reinvigorated funding environment as we exited 2025 and continued health in 2026. The recent increase in biopharma M&A activity has also provided another source of capital infusion for an exit strategy for biotechs, which we also feel favorably. Mid-sized for the more mature biotechs have better access to capital as they approach IND or enter the clinic, while demand from start-up biotechs remains tepid because the earlier-stage and seed funding environment remains constrained despite a recent uptick in IPO activity. Overall, revenue from our small and mid-sized biotechs declined in the first quarter, primarily reflecting softer DSA booking activity last summer and a normal lag between booking and revenue generation. However, even the recent biotechs KPIs, we expect the revenue trend to improve in the next upcoming quarters. Government uncertainty, including funding-based pressures at the NIH has modestly impacted client spending levels, but revenue from our global academic and government client base remained stable in the first quarter, reflecting the essential nature of research solutions that we provide to them. Moving to our financial performance. Let me start by providing several key takeaways from the first quarter. First, we delivered our first quarter results despite the anticipated pressure from several discrete margin headwinds and now have a clear line of sight into the meaningful operating margin improvement that we have forecasted in the second quarter and beyond. In addition, the DSA demand environment remains solid as demonstrated by a net book-to-bill of 1.04x in the first quarter and continues to support a return to DSA organic revenue growth in the second half of the year. And finally, due to the execution of our strategic initiatives around acquisitions, planned divestitures and efforts to modernize our operations, we continue to expect to generate significant operating margin expansion of approximately 120 to 150 basis points in 2026, which supports our goal of driving profitable growth for many years to come. Overall, the first quarter results were in line to slightly favorable compared to our prior outlook. In the first quarter and as expected, revenue declined 1.5% on an organic basis. The non-GAAP operating margin declined 280 basis points to 16.3% and the non-GAAP earnings per share declined 12% to $2.06. The quarterly operating margin earnings decline were largely driven by several discrete factors, including higher stock compensation expense, NHP study-related costs in the DSA segment as well as lower NHP revenue in the RMS segment, primarily due to the timing of shipments. RMS revenue declined 5.5% organically, driven principally by lower revenue for small models in North America and for NHPs due to the timing of shipments. However, these declines were partially offset by solid demand for small models in China from mid-tier biotech and CRO clients. DSA revenue declined 1.4% organically, driven by lower revenue for discovery services, although revenue for Safety Assessment services was essentially unchanged in the quarter. As previously mentioned, we are encouraged that the overall DSA demand environment is tracking to our expectation, resulting in a net book-to-bill of 1.04x and a slight sequential increase in backlog to $1.92 billion at the end of the first quarter. Net bookings totaled a solid $622 million, remaining above the $600 million threshold, driven by continued strength from our small and mid-sized biotech client base. Over the past 2 quarters, Biotech's net book-to-bill and net bookings were at the highest level in over 2 years, showing a resurgence in demand on the heels of the robust funding environment. Demand trends for global biopharmaceutical clients also remained solid in the first quarter, but declined moderately year-over-year after pharma bookings rebounded to start 2025 following a period of budget cuts. Proposal activity posted a healthy increase in the first quarter, a signal that the positive bookings momentum may continue. The strong bookings performance at the end of 2025 and a continuation of favorable trends to start this year leave us cautiously optimistic that the net book-to-bill will average above 1x for the year and support the upper end of our DSA outlook, including a return to organic revenue growth in the second half. However, as a reminder, our business isn't linear, so this does not mean net book-to-bill will be above 1x every quarter. Manufacturing revenue increased 2.9% organically, driven by continued solid demand for Microbial Solutions. Overall, underlying demand trends for Microbial Solutions and Biologics Testing, our manufacturing quality control testing business remains strong as clients continue to advance their late-stage development and commercial programs. The Biologics growth rate is expected to rebound as the year progresses after we anniversary a client-specific challenge that has been a headwind for the past several quarters. As we look ahead, I'm energized by our refreshed strategic vision, and I am confident in the path we are taking to create the future for Charles River. Our focus remains on enhancing our clients' experience, delivering results and increasing long-term shareholder value. I also want to thank our employees for their continued dedication, hard work and commitments to our clients and mission, as well as our shareholders for their continued support. I'm pleased to welcome our new CFO, Glenn Coleman, who joined Charles River on April 6. As I mentioned last quarter, Glenn is a seasoned financial leader and operationally oriented CFO with over a decade of experience in the health care industry. Glenn has been CFO for 3 public companies and also has extensive international operating experience. Glenn will help to ensure that we continue to take a balanced and disciplined approach to capital deployment, including M&A and also ensure we maintain the rigor to drive additional cost savings and efficiencies across the company. Now I will turn the call over to Glenn to provide more details on our first quarter financial performance as well as our 2026 guidance. Thank you. Glenn Coleman: Thank you, Birgit, and good morning. I'm pleased to be joining the Charles River team as Chief Financial Officer. I was joined to the company because of its mission-driven culture and is positioned as a leader in the life sciences industry. Over the past 3 decades, I have led global organizations through financial and operational leadership roles and have been committed to instilling operational and financial discipline, effective capital allocation and driving long-term shareholder value. I look forward to leveraging that expertise and experience as I partner with Birgit and the leadership team to build upon Charles River's strong foundation. As I step into this role, my priorities are clear and fully aligned with supporting our pathway to purpose strategy and driving profitable growth. I'll be focused on continuing to efficiently manage costs, including the delivery of over $100 million in incremental savings this year and identifying new areas of efficiency and process improvement to generate additional savings and drive future operating margin expansion. We will maintain a disciplined and balanced approach to our capital priorities and invest to drive our growth strategy forward. This includes executing on M&A opportunities that strengthen our core capabilities, ensuring the successful integration of acquisitions and regularly evaluating all areas for capital deployment, including organic investments, stock repurchases and debt repayment. Before discussing our financial results, I'll remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition and divestiture-related adjustments, costs related primarily to restructuring and efficiency initiatives and certain other items. Many of my comments will also refer to organic revenue growth, which excludes the impact of acquisitions, divestitures and foreign currency translation. I'll now provide highlights of our first quarter 2026 performance. Overall, our financial performance in the quarter was in line or slightly better than expected across our key financial metrics. We reported revenue of $996 million, representing growth of 1.2% compared to last year. On an organic basis, revenue declined 1.5% and was in line with our February outlook of a low single-digit organic decline. The operating margin was 16.3%, a decrease of 280 basis points year-over-year. The expected decline was primarily driven by lower NHP third-party revenue in the RMS segment, the timing of stock compensation related to the CEO transition and higher NHP sourcing costs and study starts in our DSA segment. As I will discuss in more detail shortly, we do expect the second quarter operating margin to improve meaningfully from these levels as many of these first quarter discrete margin headwinds subside, and we begin to see a margin benefit from divestitures. Earnings per share were $2.06 in the first quarter, a decrease of 12% from the first quarter of last year, primarily driven by the lower operating margin. This exceeded our prior outlook of a high teens decline, largely due to better-than-expected operating performance in the Manufacturing and RMS segments. Another highlight from the first quarter is the repurchase of approximately $200 million in shares under the $1 billion stock repurchase authorization approved last October. This supports our balanced and disciplined approach to capital deployment as well as the confidence we have in our long-term growth and strategic plan. Moving to details on our segment performance. DSA revenue was $597 million in the first quarter, a decrease of 1.4% on an organic basis compared to the first quarter of 2025. Lower revenue for discovery services due in part to prior site consolidation activities was partially offset by stable revenue for Safety Assessment services. The DSA operating margin decreased 290 basis points to 21.0% in the quarter, mostly due to increased study-related direct costs, including higher NHP sourcing costs and study starts. In RMS, revenue was $208 million, representing an organic decline of 5.5% year-over-year due to lower sales of small and large models as well as research model services. Small models revenue was pressured by lower volume in North America, partially offset by a solid increase in China volume. As previously anticipated, large model revenue is primarily affected by the timing of NHP shipments with NHP unit volume in the first quarter expected to be the lowest point for the year. The RMS operating margin declined by 240 basis points to 24.7% in the first quarter due largely to an unfavorable revenue mix from the timing of NHP shipments and lower sales volume of small models in North America. The Manufacturing segment reported first quarter revenue of $191 million, an increase of 2.9% on an organic basis due to strong growth from the Microbial Solutions business, primarily driven by Endosafe and Celsis manufacturing quality control testing platforms. The segment operating margin improved by 280 basis points to 25.9%, driven largely by leverage from higher revenue and the benefit from cost savings. As a reminder, the first quarter CDMO growth rate was negatively impacted by the loss of a large commercial client last year. And as a result, the CDMO performance reduced the manufacturing organic revenue growth rate by approximately 350 basis points in the first quarter. However, this comparison will no longer have a meaningful impact going forward because of the completion of the CDMO divestiture this week. Moving on to other financial metrics. Unallocated corporate costs totaled $63 million in the first quarter or 6.4% of revenue compared to 5.3% last year. The anticipated increase was primarily due to the timing of stock compensation expense related to the CEO transition. For the full year, we continue to expect unallocated corporate costs will be approximately 5.5% of total revenue. Net interest expense was $26 million in the first quarter, a decline of $0.8 million year-over-year. For the full year, our net interest expense outlook has increased by approximately $8 million to a range of $103 million to $108 million, primarily attributable to short-term borrowings to fund stock repurchases in the first quarter. At the end of the first quarter, our net leverage was 2.6x. The non-GAAP tax rate in the first quarter was 22.5%, a decrease of 20 basis points year-over-year due primarily to the favorable impact from last year's enactment of OB3 or the One Big Beautiful Bill. Our non-GAAP tax rate guidance for the full year remains unchanged at 22% to 23%, although it's currently trending towards the lower end of the range due to a favorable geographic mix. Free cash flow was negative $15 million in the first quarter or a reduction of $127 million compared to the prior year period. This decline was expected and mainly driven by higher performance-based cash bonus payments for 2025, which are paid in the first quarter. CapEx declined modestly to $56 million or approximately 5.6% of revenue in the first quarter from $59 million last year. Our free cash flow outlook remains unchanged at $375 million to $400 million in 2026. Turning to 2026 full year guidance. We are reaffirming our organic revenue and non-GAAP earnings per share guidance, which have previously factored in the impact of the divestitures. All of our guidance referenced today assumes the planned divestiture of certain European Discovery sites being completed in May. And as Birgit mentioned, we have completed the divestiture of the CDMO and Cell Solutions businesses this week. We continue to expect an organic revenue decline of 0.5% to 1.5% and non-GAAP earnings per share of $10.80 to $11.30 or 5% to 10% growth over 2025. This guidance includes earnings accretion of approximately $0.10 per share from the divestitures. On a reported basis, we reduced our revenue outlook by 50 basis points to a 4.0% to 5.5% decline because FX rates have become less favorable this year due to the recent strengthening of the U.S. dollar. From an earnings perspective, this FX headwind compared to our original outlook will be essentially offset by the accretion from stock repurchases. As a reminder, the acquisition of the assets of K.F. or Charles River Cambodia, the divestitures and incremental cost savings from our efficiency initiatives are expected to result in meaningful operating margin expansion this year. We expect approximately 120 to 150 basis points of improvement in 2026, with most of the benefit generated in the second half of the year. Combined with the abatement of the discrete margin headwinds in the first quarter, we expect the second half of the year operating margin will be over 500 basis points higher than the first 6 months of the year, with over half of this improvement being driven by completed acquisitions and divestitures as well as the planned sale of certain European Discovery sites. From a segment perspective, our organic revenue outlook for each of the segments remains unchanged from February. Our reported revenue outlook for the segment has been updated to reflect the impact of the divestitures as well as less favorable FX impact. As a reminder, the divestitures are expected to reduce our reported revenue outlook by approximately 500 basis points in 2026. By segment, we now expect a reported revenue decrease in the low to mid-single digits for the DSA segment and in the mid-single digits for both RMS and Manufacturing segments. We expect the most significant margin improvement in 2026 will come from the Manufacturing and DSA segments. Moving to our second quarter outlook. As I mentioned earlier, we expect financial results to improve substantially on a sequential basis due primarily to operating margin improvement and normal seasonal trends in the DSA and biologic testing businesses. We expect reported revenue to decline at a mid- to high single-digit rate year-over-year due primarily to the impact of the divestitures, while organic revenue is projected to decline at a low single-digit rate year-over-year, similar to the first quarter. However, we expect second quarter earnings per share to improve significantly on a sequential basis, increasing at least 30% from the first quarter level of $2.06. The first quarter headwinds from the timing of NHP shipments in RMS and the NHP sourcing costs and study starts in the DSA segment are expected to subside in the second quarter. In addition, the manufacturing operating margin is expected to benefit from the CDMO divestiture. As a result, we expect all 3 segments will show a sequential improvement in operating margin in the second quarter. To conclude, as I step into the CFO role, I'm focused on driving initiatives to generate profitable growth through the disciplined execution of our pathway to purpose strategy. This includes advancing our M&A priorities, successfully integrating acquisitions and delivering on our efficiency initiatives. Collectively, these efforts will strengthen our foundation and position us to deliver long-term shareholder value. Finally, I look forward to meeting many of you in the coming months. As Birgit mentioned, we plan to host an Investor Day in September, where we will provide a more comprehensive update on our strategy, priorities and long-term financial outlook. Thank you. Todd Spencer: That concludes our comments. We will now take your questions. Operator: [Operator Instructions] We'll take our first question from Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: Welcome, Glenn. Nice to be with you again. And for my question, I wanted to just sort of double-click maybe on the demand environment. I appreciate all of the questions comments about the environment. Can you talk about the typical seasonality that we sort of think about in terms of the demand cycle? I know we've typically seen a little bit of a slower start to the year sometimes as people get ramped up in January and February. And then it sort of seems to do that plus obviously, what you were talking about, about some of the funding environment. And then as a funding -- follow-up question, I was wondering if you could comment on sort of NAMs and what you're sort of seeing, any updates in terms of demand conversation with clients? Birgit Girshick: Certainly. Thanks, Elizabeth. Happy to update on demand seasonality and names. So let me start maybe with the seasonality. So we have several of our business see somewhat seasonality in terms of bookings, even proposal volume. Our DSA business is one of them where we're seeing proposals and bookings starting a little slow in the beginning of the year, sometimes also on a revenue basis that we see a slow start. And it generally has to do with budgets being approved, our clients coming back to work, often in January, there's a reprioritization of programs. So it just takes a little while to ramp up. We have a couple of other businesses. Our biologics testing business definitely has a seasonality. They support manufacturing of biologics. And more often than not, the Christmas time is the time that manufacturing is closed down for maintenance and revalidations. And so we are not seeing the same amount of samples coming in. Our microbial business is another one where we see definite seasonality into the fourth quarter actually for this business, where the business is ramping up often in the fourth quarter because companies may have budgets they want to use up because this is there basically a range you can keep on the shelves in inventory often, we see a spike in businesses there. So nothing abnormal. We have seen the same seasonalities in some manner this year. It's expected, and we generally consider that when we do our budgets and our guidance here. As far as the demand environment, I think we all share cautious optimism. Biotech funding quite a bit better over the last couple of quarters, IPO reopening, again, cautiously optimistic that this will continue. And then our pharma clients have definitely worked through a lot of their restructuring, reprioritization of programs. Any discussions we have with them is about speeding up their work, getting more programs through the pipeline rather than holds and reprioritization. So from that perspective, we're quite comfortable with what we're seeing. But certainly, it's early stage, and we always will be cautious about going too far over on our skis. Then let me jump into the names or new approach methods. So names new approach methods are a part of what we do. So they are part of a toxicology study. And we have spent basically 3 decades on the reduction of animals. Names have always been a part of that. NAMs availability has accelerated a little bit over the last maybe decade we have made some acquisitions in this space. We just did one literally a month ago. So the PathoQuest acquisition is squarely in the names category. So as we continue to evolve our business, we will continue to bring names into our business model, either through organic development, in-licensing or M&A. And as technology evolves, as maybe AI -- the ability of AI to predict insights evolves, we will evolve our business model with it. It's an evolution. It's not a revolution. So it will take time, but you will hear more and more and more about us bringing those technologies in. What I want to point out, it's not a separate business. It will always be part of our DSA and other divisions revenue model, and it will just continue to grow. I hope I answered your question. Elizabeth Anderson: Yes, that was super helpful. Operator: We'll turn now to Max Smock with William Blair. Max Smock: Glenn, maybe just following up on that prior question around activity so far here. Start to hear there was some commentary in the deck around seeing a healthy increase in proposals in the first quarter. Wonder if we could just get some more color around what proposals looked like year-over-year and sequentially? And then just more detail around how proposals trended among each client segment would be helpful. Birgit Girshick: Yes, happy to. So we've been quite happy with the proposal volume year-over-year in both segments, so both in our global biopharmaceutical as well as in our biotech segment, proposals were up quite nicely in the, I would say, high single digits. And which would -- gives us a lot of confidence that our booking trend will continue and our net book-to-bill trends will continue. So it does show us that there is a lot of clients that are ready to get restarted on work and the smaller clients and that our pharmaceutical clients, as they have indicated verbally to us, are looking to put more work, more programs through the pipeline to get to more INDs, to get to more programs into the clinic. So quite happy to see that. Glenn Coleman: And I would just add there on a sequential basis, we've seen proposals come up 3 quarters in a row sequentially. So positive trends sequentially as well. Max Smock: Got it. So the high single digit was year-over-year for both cohorts. And then Glenn, you're saying you've also seen some improvement sequentially as well. Glenn Coleman: Correct. We're 3 quarters in a row. Max Smock: Okay. Maybe another unrelated question here on AI. Birgit, it sounded like your comments -- your prepared remarks, it sounded like you feel pretty comfortable with this idea that AI investments in drug discovery are going to lead to more preclinical testing longer term. Are you seeing that play out at all yet? Or is that more something that we really probably don't see until we get a couple of years into the future here? Birgit Girshick: Yes. Thanks for that question. So I'm actually personally very excited about AI and what it will do for the industry and for Charles River in particular. So right now, the sample set of AI discovered or assisted, I should say, drug programs is very, very small. So it's hard to make a real conclusion from that. What I can tell you is that AI-assisted drug discovery companies generally work on a lot of different programs rather than one program at a time. And as we're working with most of them or all of them on their programs as they are wet lab, I'm optimistic that this trend will show itself and that we will see more programs coming through from AI. It also should still need to be seen, lower the cost of early discovery. And with that, there's more money for reinvestment. But again, it's very early days. There's so few programs in the pipeline that are AI assisted. But just theoretically, hypothetically, we know that AI will have a nice impact on that. Operator: We'll move next to Patrick Donnelly with Citi. Patrick Donnelly: Glenn, maybe one for you on the margin side. Certainly appreciate the color on the 2H step-up. And again, it feels like you guys have real tangible reasons to kind of do that build. Can you just talk through a little bit? It sounds like half of it is M&A, half of it some of the other moving pieces. Can you just talk through kind of the bridge there on 2H? And then any reason why that momentum wouldn't kind of continue to build into -- obviously, it's early to talk '27. But just going forward, given the K.F. acquisition, what that means to margins, any reason that momentum wouldn't continue into the go forward? Glenn Coleman: Sure. No, thanks for the question. If we look at the first half of the year, obviously, year-over-year, we're expecting to be down, but we do expect a pretty significant sequential increase in our margins going from Q1 to Q2 that supports the greater than 30% increase in earnings per share. So we do expect a pretty meaningful step-up in our operating margins. That being said, when we look at the half-to-half numbers, we're going to be in the high teens margin-wise in the first half of the year and expect 500 basis points improvement in the second half of the year. I did mention in my prepared remarks, over half of that improvement just coming from acquisitions and divestitures. In addition, if you look at our corporate costs, the onetime discrete items in Q1 that don't recur and some cost savings initiatives, that will drive another big portion of the half-to-half improvement, coupled with the timing of the NHP shipments in RMS and some additional lower costs we're expecting to come out of DSA. So we've got clear line of sight. I know it's a big jump when you look at the half-to-half numbers, but we feel very confident in the numbers, and we've got a clear line of sight about how we get there. Relative to 2027, I think the only comment I'll make is from an acquisition and divestiture point of view, we've already given numbers around the annualized impact of acquisitions and divestitures. So we said for acquisitions on an annualized basis, about $0.60 from K.F. and for divestitures is $0.30. And for this year, in 2026, the equivalent numbers on a part year basis is $0.25 for acquisitions and $0.10 for divestitures. So said differently, if you take the $0.90 less the $0.35, you can expect roughly $0.50 to $0.55 of accretion just from the acquisitions and divestitures in 2027 versus 2026. I think that's the only comments we're going to make around the '27 margin numbers. Patrick Donnelly: Yes. Makes a lot of sense. And then, Birgit, maybe just on the demand side, I certainly appreciate all the color you've given. Can you just talk about that kind of small mid-sized early biotech portion, what you're seeing there? Obviously, to your point, the funding has looked really healthy here for a couple of quarters. How much improvement are you seeing in those conversations? Are those dollars really starting to show up? Where are we in the cycle of that early piece from your perspective? Birgit Girshick: Yes, happy to. So the -- when we talk about our biotech clients there's obviously considerable size differences between the clients. A lot of the funding we're currently seeing IPOs are a little bit bigger companies, later stage. They have easier access to funding. That's definitely also where we're seeing quite a bit of an uptick in their demand. I would say the smaller biotechs, very early stage, that is still a little sluggish, and we see that the funding is a little lower and then also the discussions are still more cautious in that regard. We do see that clients often when they see just general funding come in, get more confidence in their ability to get funding later on and start spending. So we're seeing that a little bit. But we still have this segment was that early company starts being a little bit lower than we would like to see. So we have areas of our business like our CRADL business unit where we don't see the demand being where we would like to see it yet. So still a little bit mixed and still opportunity for improvement there. Operator: We'll hear next from Kallum Titchmarsh with Morgan Stanley. Kallum Titchmarsh: Just as we think about the business review and some of the acquisitions and divestitures announced over the past 6 months or so, any incremental ambitions to add or subtract from the business today? Or can we assume most impactful changes have been actioned. And obviously, see the buybacks, too. So maybe just level set us on capital allocation ambitions from here. Birgit Girshick: Yes, happy to, Kallum. So we will continue and always have to look at our businesses to see which ones are synergistic to the business, which are profitable, where should we be located, what solutions should we provide to our clients. So that will be an ongoing review that we do with our Board. And at times, you will see certainly that we will either consolidate a site or close a site or divestitures could come up again. So that is just the nature of how we run our business. From an M&A perspective, you already saw a couple of M&As this year. We have a clear road map of where we believe the company should be investing in, in terms of M&A and a couple of other smaller partnerships. That is hard to predict as you quite never know when the target is available, can you actually acquire the target? Does it make sense from a returns perspective? And then we continue to invest organically in our business. And then you already mentioned the buyback. So we will continue to look at all areas of capital allocation and make decisions for the best returns for long-term strategy execution as well as shareholder value. Kallum Titchmarsh: Great. And I think you called out $200 million of annual DSA revenue from NAMs before. I'm not quite sure where that is post these acquisitions and divestitures, but could you just give us a sense of the latest slides and how that's been growing? Birgit Girshick: Yes. So that was the number we had provided, I think, in 2020 -- late 2024, 2025 and since then, we have added a few different programs and actually in M&A, so the PathoQuest acquisition is squarely in the NAMs space, where we are replacing in vivo virology work with next-generation sequencing, a really good technology. And then you're right, with the divestiture of the discovery assets in Europe, there is roughly -- we will retain roughly 2/3 of the NAMs revenues that we had called out. So if you take those 2 together, a little bit of organic investment we have done in other areas, we're probably kind of back to where we were. But we will continue to drive that and our focus is on the regulated space here where most of our business is. So it continues to be a very strong commitment of Charles River. And we have established a Scientific Advisory Board under Dr. Bumpus. And we have a lot of activities going on in that space right now. So you will continue to hear about technologies and how we look at this, how we bring new technologies in, what it will replace. We also just made an announcement on virtual control groups and was actually part of our remarks. Just another example of how we look at NAMs for our business and we see it as an integrated approach where we will bring in more and more technologies and run them as hybrid studies together with our conventional approach. Operator: We'll hear next from Justin Bowers with Deutsche Bank. Justin Bowers: So 2-parter for me. One, can you talk about the conversion rates and the velocity of decision-making that you're seeing across the increasing proposal volume over the last 3 quarters? And then part 2, I just wanted to clarify on the comment on large pharma verbally saying that they want to put more work into the INDs. Does that imply that pharma is increasing their overall budget or intend to for preclinical spend this year and beyond? Birgit Girshick: Yes, happy to. So let me start with the conversion rates. So if you look back to the, I guess, the COVID time lines where capacity was quite tight, companies had to plan way ahead. Discussions were like literally 2 years ahead of placing a study. So really long. customers booked out very long because they had to. What we're seeing currently is quite an acceleration of when clients come in, want a proposal and then book and place the study. Generally, when we model it, we're saying from a discussion to proposal to bookings, it's 1 to 2 quarters and then maybe 1 to 2 quarters to get to revenue. However, in some instances, particularly with customers we have a long-term relationship with, that often accelerates because they got scientific data or they're reprioritizing a program, and we sometimes see literally from a proposal to getting revenue within the same quarter. And so conversion rates are obviously generalized accelerated. And this is actually something that gives us a better quality of our backlog because we know that those programs are actually being run and not being canceled later on because reprioritization of budgets have changed. To the second question about the INDs, as you can imagine, every pharma company we talk to talks about more programs into IND, more programs into the clinic. And our counterparts, our contacts will always talk about, but we have to do it with the same budget. But you can imagine that's obviously not possible. But we do see a refocus on the preclinical and earlier-stage efforts in those companies. Otherwise, they would not get the programs to the clinic. Operator: We'll hear next from Joshua Waldman with Cleveland Research. Joshua Waldman: Birgit, I wondered if you could comment more on what you're seeing from global pharma accounts here to start the year? Were bookings from these accounts any better or worse than you expected? And then did the trend improve through the quarter? It sounded like you saw a slow start, but I'm curious if you were more encouraged based on what you saw here in March and April. Birgit Girshick: Yes. So for the Global Biopharma, bookings specifically was below last year's bookings. But let me take you back to last year. We had an incredible booking quarter last year because a lot of the global pharma companies had literally reprioritized for months and then they -- early in the year, they got their new budgets, and there was just a slew of bookings that came in. So this isn't something we didn't expect. We feel bookings are adequate and they are supporting what we're hearing from them that they want to do more work. So with that, I would say that overall, this is a segment that is quite stable and increasing for us. We also see proposals up for them, which will -- which tells us basically that in the next quarters, we should see that bookings rate to come up. Joshua Waldman: Okay. And then you mentioned more biotech M&A being favorable in terms of funding for these accounts. But I'm curious, in the past, have you seen higher M&A activity drive improved access to biotech wallet share? I guess just given your stronger share position in large pharma, do you think large pharma accounts acquiring small biotech ultimately means you get better access to these accounts? Is this a dynamic you've seen historically? Birgit Girshick: Yes. So a lot of times, we actually do work with those small biotechs before they get acquired from pharma. And in that case, we retain the work, and we'll continue to work with them. Some cases, they get acquired, and we actually -- we work with a pharma company and any new programs we get access to. So it's a little bit of a mixed model. So as long as they continue the program, and that's why they're actually acquiring them, we will get our share -- our focus is certainly on making sure that we get a higher and higher share of the wallet from our -- particularly from pharmaceutical companies. And that is why our client centricity program, our initiative of making working with our clients easy and easier, providing them with better solutions and faster time lines is so important. So it could go either way. But in general, it's not a headwind. It is either a tailwind or it's just net neutral. Operator: We'll turn next to Cassidy Vanepps with Jefferies. Cassidy on for David Windley today. Cassidy Epps: So digging a little bit more into margins. So with most of your NHP supply now internally owned, how should we think about the margin impact specifically within DSA? And does this change management's longer-term margin framework for the segment? Glenn Coleman: I'll jump in and take this one. Just keep in mind, we're still working through some higher NHP costs really for the first half of the year. It will get a little bit better in the second quarter, but the real big improvement is Q4 for our DSA segment. We're not going to specifically call out the margin improvement. I think a big part of the reason why we bought K.F. was the supply chain resiliency and giving us better predictability of the supply chain. And obviously, with that, you come improvements in our financial performance, but we'll give more guidance on 2027 and what it means when we get to February of next year. Cassidy Epps: Okay. Perfect. And then following up, so how much of the NHP supply from Noveprim and K.F. is still obligated to external customers? And then when does that fully become available to Charles River? Birgit Girshick: Yes, I can talk about that. So the external customer that you're referring to is actually from our Mauritius farms. And the -- and when we bought the Mauritius farm, we bought the external relationship with the supply. Ultimately, the goal is to use the animals on safety assessment studies and moving them over. And that will kind of be a transition over the next few years. And as you can see, you'll probably see that we already have more and more animals on our safety study. And then that will kind of end over the next few quarters. Operator: I'll turn now to Casey Woodring with JPMorgan. Sebastian Sandler: This is Sebastian Sandler on for Casey. I wanted to first double-click on expectations for biotech revenue pacing over the balance of the year. Within that bigger, later-stage client segment that's been benefiting from M&A and funding starting towards the end of last year, do you expect this specific segment to return to growth in 2Q, maybe ahead of smaller biotechs and biopharma? Or should we just expect more of a back half rebound consistent with your expectation for total DSA growth? Birgit Girshick: Yes. So if you -- so what we're currently seeing in Q1 is that this segment from a revenue perspective is still down. That is coming from the lower bookings last year. And we think -- we believe that will rebound over the next quarter or 2 because of the bookings we're currently seeing. So there's a lag of about a quarter to 2. And so we will definitely see this segment to rebound to more of a growth rate as we enter, I would say, Q3, Q4 for sure. Unknown Analyst: And then you called out strength in research models in China. Can you remind us of the revenue base in China within RMS, what that grew in the quarter and then just expectations for the full year? And then more broadly, how are you thinking about your current exposure to the China market within RMS and DSA outside of the recent NHP acquisitions? And what is your overall level of interest in expanding that through M&A in the future? Birgit Girshick: Yes. So our RMS China business is a small part of overall Charles River revenue. It's approximately 5% and -- or actually less than 5% but it is a critical asset for us as it provides us access to the Chinese market. So the Chinese RMS business is one of the leaders in the industry for providing research models as well as many services that are -- that we also offer here in the Western part. From other services and solutions, specifically the DSA that you asked, we currently don't have any facilities in China. We do get some work from companies that work in China or want to file INDs in China, but not a physical presence. We are continuing to watch this market very closely as a lot of the drug programs are in-licensed from China because of the accelerated innovation. And we certainly will continue to look at this to see if we should expand our structure in China based on customer demand growth rates, but also looking at geopolitical risk on that. Operator: Our next question will come from Ann Hynes with Mizuho Securities. Ann Hynes: Your $300 million cost program, can you remind us what you'll be annualizing as we exit 2026 and any incremental uptake for 2027 and 2028? And then secondly, just on AI, and there's been in the news a lot, some of the big pharma companies investing in AI. And I know during the Great Recession, a lot of the big pharmaceutical manufacturers closed their capacity for early development. Do you think there could be a risk that they increase their capacity again over the next few years? Birgit Girshick: Yes. Let me start and then on the cost savings, and then I will move over to AI. And if Glenn has any additional add-ons to the cost saving, I will ask him to chime in here. But -- so the cost savings are roughly $300 million of costs that we have taken out over the last several years, about 5% of our cost base. For this year, we said it's an incremental $100 million. It's too early to talk about '27 and '28. But as we said, we are continuing to look for cost efficiencies, modernizing the company, seeing how we can reduce time lines, making the operations more efficient. So you should continue to think that -- think about us having cost efficiencies, but we're not in a position right now to give you any specific numbers on '27 and '28. We will provide long-range financial numbers probably through in our Investor Day, and we will also talk more about where those cost efficiencies are coming from. AI is an interesting topic, both for cost efficiencies but then also for how drug development is being performed. So for us specifically, we invest in AI in multiple areas to, a, be more efficient, maximize our capacity, streamline our communication with our clients and also to reduce the number of animals needed on a drug program. Our clients are investing primarily in the early stage and a little bit in the clinical space. In the early stage, that is things like target identification, molecular design that will allow them, hopefully, at some point, if AI delivers to bring drugs into the regulated safety assessment space faster and maybe more programs. I do not think that our clients will want to in-source any of the work that we are doing. So our work that we do is very highly outsourced and not a lot of companies still have capacity nor the skill set to do the work. So -- and from what we're hearing with our clients and the discussions, they are actually looking more for a collaboration on how they can utilize AI in the earlier stage. So before we get the work rather than doing the work that we are doing. So you might see more of in-sourcing in the really early or even in the clinical trials. But definitely, I would not expect it in the preclinical stage. There's just so many complexities and capacity and regulated expertise that is required, it would not make any sense. Glenn Coleman: Birgit, the only thing I would add to your comments is a lot of the great work the team has done over the last couple of years of taking out all of these costs and $300 million of cost has been needed to preserve margins because the top line has not been growing. And so a lot of the cost increases that we see in the business for inflation and normal increases across the business have been offset by these initiatives and cost reductions. I just want to make that point. Operator: We'll turn next to Yujin Park with Baird. Yujin Park: You mentioned that for RMS, 1Q saw increased demand in small models from CRO clients. Was that comment specifically on China? Or was it broad-based geographically? And is this a normal pattern? Or could this be a signal of improving market dynamics? Birgit Girshick: So that comment was specifically to China. We have said that we saw much better demand in China and specifically for CROs and biotech. So we see this as an indication that the Chinese market is rebounding and accelerating and for the need and the demand of the research models that we're providing to them. So a positive indication for the business. Operator: We'll move next to Charles Rhyee with TD Cowen. Charles Rhyee: I'll just leave it with one question here, and this is just kind of going back to the demand environment. Birgit, you kind of mentioned in the slides, biotech kind of highest levels you've seen in the last 2 years, maybe more large pharma kind of slowly rebounding or maybe just more of a year-over-year comps. It kind of suggests maybe that biotech is going to present more opportunities perhaps over the next couple of years? And does that change at all sort of your go-to-market strategy? And maybe any kind of impact on how. Maybe give a sense of how any of those businesses are priced on either side of that? And any kind of comments on that and where you see that mix going? Birgit Girshick: Yes. So we are pretty balanced in our revenue stream from pharma versus biotech. So we have -- historically, we have a very big share with the pharmaceutical clients, but we are -- also have a considerable share with the biotech industry. So our go-to-market strategy for years has focused on a customized approach to make sure that we cater to both small as well as large companies, making sure that they get the collaboration they need and that our teams are basically on the same table with no matter if it's a small or a large company. So -- and that won't change. However, we are investing in a lot of tools and platforms and training to make sure that we are continue to improve this go-to-market customer centricity program that we have in place, so we can be an even better partner for our clients, but also get more of a share of their wallet. In terms of pricing, we see a pretty stable pricing environment. It has really not changed over the last couple of years. Discounting is still strategically, it's still happening. Pricing will change when capacity is changing. So something that will come probably automatically. But at the current time, we are making sure that we stay competitive and that we get the share of the wallet that we want from our clients. And from our proposal volumes, bookings and capture rates, I think we're on the right track here. Charles Rhyee: Great. Congrats on the results. Operator: Our final question will come from Ryan Halsted with RBC. Ryan Halsted: Maybe going back to the discussion on Asia, but asking it from a different perspective from a competitive standpoint. A lot of attention, I think, has been made on competition from Asia and drug development work. And just would appreciate your perspectives on the competitive landscape for the business. Birgit Girshick: Yes. Thanks, Ryan. Interesting question. So yes, so from an Asia perspective, specifically China, a little bit in India, there definitely has been a trend of more outsourcing, early-stage routine work outsourcing going to lower-cost countries. And this is something that we have evaluated for quite a while. We still don't see a lot of outsourcing going to China in complex work or regulated work where we do most of our revenues, but we are evaluating that. And that is also why we said a couple of times now that overall, we're looking at the Chinese market to see how or when we should play in a larger scale there and what are the solutions that we have the right to play with in a marketplace like that. From another perspective, obviously, the in-licensing of more programs from China into the U.S., into global biopharma is another area that we are watching. A lot of times, we actually get to work on some of those programs, but it will have an impact on the industry itself, and we'll need to see where this is playing out too. So definitely, China, a little bit of India outsourcing is a focus areas of us to make sure that we understand what's going on there. But at this point, our core market and our core relationships are very, very strong here in North America, the EU and a little bit in Asia, and we will continue to double down on that. Operator: With no further questions in queue, I will turn the conference back to Todd Spencer for closing remarks. Todd Spencer: Thank you for joining us on the call, and we look forward to seeing you at upcoming investor events. This will now conclude the call. Thank you. Operator: Thank you. That does conclude today's Charles River Laboratories First Quarter 2026 Earnings Call. Thank you for your participation. You may now disconnect.
Operator: Welcome to Sensus Healthcare, Inc. First Quarter 2026 Financial Results Conference Call. 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 Leigh Salvo with New Street Investor Relations. Please go ahead. Leigh Salvo: Good afternoon. And thank you all for joining today's call to discuss Sensus Healthcare, Inc.'s First Quarter 2026 Financial Results. Joining me from Sensus Healthcare, Inc. are Joseph C. Sardano, Chairman and Chief Executive Officer, Michael J. Sardano, President, Chief Commercial Officer and General Counsel, and Javier Rampolla, Chief Financial Officer. As a reminder, some of the matters that will be discussed during today's call contain forward-looking statements within the meaning of federal securities laws. All statements other than historical facts that address activities Sensus Healthcare, Inc. assumes, plans, expects, believes, intends, or anticipates, and other similar expressions such as will, should, or may occur in the future, are forward-looking statements. The forward-looking statements are management's belief based upon current available information as of the date of this conference call, 05/07/2026. Sensus Healthcare, Inc. undertakes no obligation to revise or update any forward-looking statements except as required by law. All forward-looking statements are subject to risks and uncertainties as described in the Company's Forms 10-K, 10-Q and other SEC filings. During today's call, references will be made to certain non-GAAP financial measures. Sensus Healthcare, Inc. believes these measures provide useful information for investors, yet they should not be considered as a substitute for GAAP, nor should they be viewed as a substitute for operating results determined in accordance with GAAP. A reconciliation of non-GAAP to GAAP results is included in today's press release. With that, I would like to turn the call over to Joseph C. Sardano. Joe? Joseph C. Sardano: Thank you, Leigh, and good afternoon, everybody. We appreciate you joining us today. 2026 represents an important transition period for Sensus Healthcare, Inc. With the dedicated CPT codes for superficial radiotherapy now in effect as of January 1, we are operating in a fundamentally different environment than ever before. We are tasked with the responsibility of helping our entire industry pivot to the new reality. For quite some time, two factors weighed heavily on our business: customer concentration and the absence of reimbursement clarity. Today, we believe both of those factors are beginning to shift in a meaningful way. I would like to frame our discussion around five priorities that we believe will define our progress in 2026 and provide a clear framework for tracking our execution over the course of the year. Number one, educate the market on the new reimbursement and train them on how to utilize the codes. Two, drive customer adoption following CPT code implementation. Three, grow our recurring and utilization-based revenue streams. Four, diversify and strengthen the commercial model. And last, number five, deliver sustainable profitability. Our entire first quarter was dedicated to helping existing customers and new prospects better understand the new reimbursement coding. Initial results are excellent. The coding is simple and straightforward, and for those who have billed CMS under the new coding, they are already seeing a smooth transition by the payers as our users receive reimbursements. Both physicians and patients will continue to grow in confidence that SRT is receiving full funding. Which brings us to customer adoption and CPT impact. One of our strategic priorities is converting the new reimbursement environment into broader customer adoption and a more diversified installed base. During the first quarter, we began to see the benefits of the new CPT codes move from concept to commercial reality. With reimbursement now clearly defined and physician economics significantly improved, including approximately a 300% increase in the per-fraction delivery code, we are seeing increased inquiry levels, stronger pipeline development, a growing pipeline of qualified opportunities as of quarter end, and greater engagement from dermatology practices and hospital systems. We shipped 14 SRT systems during the quarter, including 10 direct sales and four placements under the Fair Deal Agreement program as well as rental arrangements. Importantly, these shipments reflect continued progress in broadening our customer base and meaningfully reducing historical customer concentration. We were able to match our sales from Q4, which we believe we will improve upon quarter over quarter for the balance of the year and into 2027. We saw strong momentum coming out of several major dermatology conferences during the quarter where physician interest and engagement levels were among the highest we have experienced. These events continue to be a critical driver of our pipeline growth and customer education as awareness of the new reimbursement environment increases, in addition to the benefit of SRT as a non-invasive alternative to Mohs surgery. Patients are deciding more and more their preference to avoid surgery. Recurring revenue growth and the FDA plus software. Another priority is expanding recurring revenue streams tied to utilization of our installed base and new prospects. There are still groups who prefer a shared service program, as indicated by the four of 14 units shipped in Q1. We are confident this will continue to grow. Our Fair Deal Agreement program continues to be a driver of utilization-based revenue. During the quarter, treatment volumes increased 8% over 2025, and we continue to increase the number of patients. We ended the quarter with 18 active FDA sites and nine pending activations. As we have said previously, FDA placements often serve as a bridge to system ownership, and we continue to see that dynamic play out as customers better understand the economics under the new reimbursement environment. Importantly, we are now taking additional steps to expand recurring revenue through software and services. The introduction of SensusLink represents an important evolution of our model, enabling enhanced workflow, treatment documentation, and operating intelligence across our installed base, while creating a scalable recurring revenue opportunity tied to treatment activity. We view this as an important step in evolving our business model toward a more predictable and recurring revenue profile in the future. Over time, we expect recurring revenue including FDA, service, and software to represent an increasing percentage of total revenue, which historically has been about 10%. Commercial expansion and diversification. Our next priority is broadening commercial reach through access to our technology and reducing volatility by creating more ways for customers to acquire and use Sensus Healthcare, Inc. systems. We are seeing increased interest across a wider range of customers including independent dermatology practices, group networks, hospital systems, and private equity-backed platforms. To support this, we recently launched Sensus Healthcare Financial Services, which provides a streamlined pathway for customers to acquire our systems through flexible financing options. Since launch, we have begun actively engaging with prospective customers to utilize this platform and are seeing improved conversion rates on late-stage opportunities. We are also seeing a shift in customer preference towards purchase compared to prior periods where Fair Deal Agreement program participation was the primary entry point. We now have to ask the question: Why do you want to give up 50% of your revenue when one patient procedure per month represents your breakeven? Profitability. Our priority is translating stronger demand, a growing recurring revenue base, and disciplined expense management into profitability. We are entering this new phase with a strong balance sheet, including $18.3 million in cash and no debt. While our first quarter results continue to reflect transition away from historical customer concentration, we believe the combination of improved reimbursement, a more diversified customer base, expanding recurring revenue streams, and disciplined expense management positions us to deliver improved financial performance over the balance of 2026 with the objective of achieving full-year profitability. With that, I will turn the call over to Michael to provide more detail on our commercial execution and growth initiatives. Michael? Michael J. Sardano: Thanks, Joe. I will focus on how our commercial model is evolving and how we are executing against the priorities Joe just outlined. The most important change we are seeing is that reimbursement clarity has fundamentally reshaped how customers evaluate and adopt SRT. Importantly, this is shifting SRT from a considered option to a financially actionable decision for more and more practices. Customers now have multiple pathways to adoption, including outright purchase, leasing structures, and the Fair Deal Agreement program. In the first quarter, approximately 70% of systems shipped were purchased versus FDA. Average breakeven for customers is now two patients per month, and we are seeing a higher percentage of customers electing ownership earlier in the adoption cycle. From a pipeline perspective, we are seeing increased conversion activity across the board as customers move from evaluation to decision making. A key driver of this momentum has been our participation in several major dermatology conferences during the quarter. These conferences generated new leads, physician engagements and demos, and a meaningful increase in follow-up activity and site evaluations. Importantly, our decision to refine our conference and trade show strategy to prioritize high-yield events where purchasing decisions are actively being evaluated is paying off in our pipeline. Physicians are becoming more aware of the new CPT codes and improved economics of SRT. On the recurring revenue side, our focus is on increasing utilization across the installed base and expanding monetization through additional capabilities. SensusLink is an important part of this strategy, as it enables us to bring advanced functionality to both new and existing systems while also creating a pathway for ongoing service and software revenue tied to treatment workflows. On the installed base, total SRT systems now stand at approximately 965 units globally. We expect the rollout of SensusLink, which provides advanced operating capabilities to our SRT-100 installed base, to begin to take shape and increase interest in SRT significantly this year. Over time, we believe this will support increased utilization, improve customer retention, and create a recurring revenue stream tied directly to system usage. International markets continue to represent an important growth opportunity for Sensus Healthcare, Inc. We are seeing continued demand in key markets such as China and expect additional diversification over time as we expand into new regions. International sales also provide attractive margin characteristics due to lower servicing requirements. Domestically, we are taking a disciplined approach to scaling our sales organization in 2026. Our focus is on expanding selectively, increasing market education, and improving conversion efficiency. Overall, the underlying performance of our business will continue to improve as a combination of reimbursement clarity, expanded adoption pathways, and a more diversified commercial strategy positions us well for sustained growth and profitability. With that, I will turn the call over to Javier for a review of the financials. Javier Rampolla: Thank you, Michael, and good afternoon, everyone. I will briefly review our financial results for 2026, starting with revenue. Revenue for the quarter was $3.4 million compared to $8.3 million in the prior-year period. The year-over-year decrease was primarily driven by the absence of sales to our historically largest customer as well as a lower number of total units shipped. As a reminder, the prior-year period included a significant number of direct sales to that customer. In the current quarter, we had no sales to that customer, which reflects our ongoing transition towards a more diversified customer base. Importantly, excluding sales to that customer in the prior-year period, revenue increased compared to $2.7 million, demonstrating underlying growth driven by a broader mix of customers. In addition, a portion of systems shipped during the quarter were under the Fair Deal Agreement program and rental arrangements, where revenue is recognized over the term of the agreement rather than at the time of shipment. As a result, these placements contribute to revenue over time rather than upfront. Turning to cost of sales. Cost of sales was $2.4 million compared to $4.0 million in the prior-year period. The decrease was primarily driven by lower unit volumes, again reflecting the absence of sales to our historically largest customer, as well as the shift towards FDA and rental placements. Moving to gross profit and margin. Gross profit was $1.0 million compared to $4.4 million in the prior-year period, and gross margin was 29.2% compared to 52.2% in 2025. The decline in gross margin was primarily driven by product mix. This includes a higher proportion of international shipments, which carry lower average selling prices, as well as costs associated with the new system placements under our Fair Deal Agreement program. As utilization increases, these arrangements are expected to contribute more meaningfully to revenue and margin over future periods. Turning to operating expenses. General and administrative expense was $2.0 million compared to $2.2 million in the prior-year period, with the decrease primarily driven by lower professional fees. Selling and marketing expenses were $1.7 million compared to $2.2 million in the prior-year period. The decrease was primarily due to our decision to lower trade show-related spending to focus on events with the highest potential for sales generation. Research and development expense was $1.6 million compared to $2.6 million in the prior-year period. The decrease reflects lower lobbying costs related to reimbursement efforts as well as reductions in headcount and product development spending for next-generation systems. Adjusted EBITDA for 2026 was negative $4.2 million compared with negative $2.5 million for 2025. Adjusted EBITDA, a non-GAAP financial measure, is defined as earnings before interest, taxes, depreciation, amortization, and stock compensation expense. Please see our earnings release issued earlier today for a reconciliation of GAAP and non-GAAP financial measures. Other income was $0.1 million compared to $0.2 million in the prior-year period and relates primarily to interest income. Net loss for the quarter was $2.6 million, or $0.16 per share, consistent with the prior-year period. Finally, we continue to maintain a strong balance sheet, ending the quarter with $18.3 million in cash, no debt, and inventory of $16.5 million, an increase from $14.6 million as of 12/31/2025. This inventory level positions us to continue to meet demand in the coming quarters for both direct and for placements under the Fair Deal Agreement program. Before I turn the call back to Joe, I would like to provide some perspective on how we are thinking about the remainder of the year. We expect second quarter revenue to be higher than first quarter, and we also expect revenue in the second half of the year to be higher than the first half as we continue to build on the momentum we are seeing in our pipeline and customer engagement. From a margin perspective, as discussed earlier, first quarter gross profit and margin reflect the impact of product mix, including a higher proportion of international shipments, as well as costs associated with new system placements under our Fair Deal Agreement program. As utilization under these arrangements increases and revenue is recognized over time, we expect these dynamics to evolve over the course of the year. With that, I will turn the call back to Joe. Joseph C. Sardano: Thank you, Javier and Michael, for those updates. Before we open the call for questions, I want to reiterate that we believe SRT is increasingly being viewed as a compelling noninvasive treatment option that allows practices to expand patient access, improve workflow efficiency, and offer an alternative for treating patients with non-melanoma skin cancer. The new dedicated CPT codes for superficial radiotherapy significantly improve physician reimbursement and support broader adoption of our technology while benefiting patients with certainty of coverage for noninvasive treatment options. As we move through 2026, we remain focused on executing against our five priorities: education and training, accelerating customer adoption, expanding recurring revenue, broadening our commercial reach, and driving Sensus Healthcare, Inc. toward profitability. We believe we are still in the early stages of this transition and look forward to updating you on our progress throughout the year. Thank you for your continued support. Operator: We will now open the call for questions. Your first question today comes from Anthony V. Vendetti with Maxim Group. Anthony V. Vendetti: Joe, how are you doing? Hey, Mike. My first question is a two-part question. Your largest customer, which I think you had 15 units sold to in 2025, so with zero in first quarter 2026, it is not too surprising that revenue is down over 50%. When you said second quarter should be higher than first quarter, should we look at your largest customer, who is not buying any units right now, as upside if they come back? Are you internally assuming they do not come back, and if they do, it is upside? And then I have a follow-up question. Joseph C. Sardano: If they do come back, it is upside. We have not included them in our model for this year, but that does not mean they cannot figure out the new model they have to come up with so that they can remain strong in the market. Anthony V. Vendetti: Okay. So it is still a possibility. Then, with the new CPT codes that took effect January 1 and the approximately 300% increase in the per-fraction delivery code, are you seeing that translate into shorter sales cycles or a bigger pipeline of new business? If there is a pipeline, has it just not yet converted into revenue and you expect it to in time, or is it taking a while for the pipeline to build even though the code has significantly increased? Joseph C. Sardano: I will give you an overview, and then I will let Michael handle it since he was responsible for working directly with CMS to gain those codes. What we are seeing on an overall basis is that interest has increased significantly because of the dedicated and guaranteed coding system for SRT for dermatology. In the past, that did not exist. They were orphan codes that mostly came from ASTRO, and these new codes are specific to dermatology and to SRT. So we are excited for all of that. Regarding the interest from the field, more and more offices are contemplating bringing SRT into their practice because of those codes. Very clear, very obvious. Many are deciding whether they want to go with an FDA, an outright purchase, or a fair market value lease. They are taking it seriously because now all of these sites can consider this a long-term decision for their practice since those codes are in place. Michael? Michael J. Sardano: Sure. Thanks, Anthony. Great question. Joe covered most of it. The thing I will add is that on January 1, 2026, all of the codes took effect, but when it comes to coding and reimbursement, you do not know whether you are going to get paid or how the structure works until after you bill that patient and wait the four to six weeks. So people were not able to see the EOBs of these patients until mid-February to early March when you started treating patients. With those EOBs coming in, now we have actual proof, like Joe said, that we are getting paid. Private insurance, Medicare, Medicaid, CMS, etc., are paying these new codes the way they are supposed to. Now that we have that black-and-white proof, it is in our sales team’s hands, and we are giving it to the market. A big point we did not touch on is that our largest show of the year, AAD, took place March 27 to 31. Those leads could not close in Q1, so they are moving into Q2. I am very confident going into Q2 compared to Q1. As I said on the call, we expect to continue to grow and improve throughout the year, quarter over quarter. As Javier mentioned, we have more recurring revenue shipments than we have ever had before. From an FDA standpoint and also this rental model, as we get 10 rental contracts, then 30, then 40 or 50, we are quickly transitioning to a more recurring revenue base that will require patience. We are transitioning in a way investors have asked for over the last ten years—more recurring revenue, not solely focused on one revenue source—and now we are achieving that. I think we will see improvement on that. Anthony V. Vendetti: That makes sense. As best you can, can you timeline it for us? As you build this pipeline of recurring revenue and the Fair Deal Agreement, do you feel like, whether this quarter, next quarter, or sometime in 2026, you lap that pipeline and then it is easier to see revenues grow? Is there an inflection point you are looking for? Michael J. Sardano: As the education continues to roll out, for instance, we just had two or three more meetings this past April with large roll-up groups in addition to Florida-, Arizona-, and California-based meetings. As that happens, you are going to see education expand. The black-and-white codes greatly help us. This is the first time in our sixteen years that I have been able to go in a room and tell a doctor that these are black-and-white codes with no gray area. As that comes in, you will see a lot of people who were not interested over the last ten years now become interested because their accountants and lawyers can make sense of it. That is about education. The longer you give us, the more we can educate, and more people will adopt SRT. It is here to stay now. CMS has given us exclusive codes for SRT for the first time ever. We do not have to go to Washington as much anymore, which is good for time and money. We are excited. The sales team is fired up. We have already hired three more salespeople into territories—some new and some rehires. We are very excited to keep going. Joseph C. Sardano: Let me add one thing to your question about the recurring revenue piece. One of the codes involves radiation physics and the consults for radiation physics. This code has to be applied to every patient, and our introduction of SensusLink is a main focus for our customer base. They can charge that code once per week. For example, if their protocol uses 20 treatments at two treatments per week over ten weeks, this radiation physics code can be charged at an average of $93.85 per week across the country. That is ten weeks of treatment, or about $930. With our software, we will be sharing that revenue with our customers. The only way that they can access that reimbursement is through SensusLink. That is an important piece of our business that we did not have before. Anthony V. Vendetti: When did SensusLink officially go live? Joseph C. Sardano: It is live now and performing in several accounts already. Anthony V. Vendetti: Great. That was great color. Thanks. I will hop back in the queue. Appreciate it. Michael J. Sardano: Thanks, Anthony. Operator: Seeing no additional questions, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Joseph C. Sardano: I think everybody heard where we are headed this year. We believe we are going to have a profitable year, with each and every quarter being better than the previous. We have a very solid start to the year and are looking for increased revenues throughout. With that being said, we look forward to a very successful second quarter and to talking to you again at the next earnings call. Thank you so much. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
James Hart: Good day, everyone, and welcome to the Progyny, Inc. earnings conference call. At this time, all participants are placed on a listen-only mode. If you have any questions or comments during the presentation, you may press star 1 on your phone to enter the question queue at any time, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to hand the floor over to your host, James Hart. Thank you, and good afternoon, everyone. Welcome to our quarterly conference call. With me today are Peter Anevski, CEO of Progyny, Inc., and Mark Livingston, CFO. We will begin with some prepared remarks before we open the call for your questions. Before we begin, I would like to remind you that our comments and responses to your questions today reflect management's views as of today only and will include statements related to our financial outlook for both the second quarter and full year 2026, any assumptions and drivers underlying such guidance, the demand for our solutions, our expectations for our selling season for 2027 launches, anticipated employment levels of our clients in the industries that we serve, the timing of client decisions, our expected utilization rates and mix, the potential benefits of our solution, our ability to acquire new clients and retain and upsell existing clients, our market opportunity, and our business strategy, plans, goals, and expectations concerning our market position, future operations, and other financial and operating information, which are forward-looking statements under the federal securities law. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business as well as other important factors. For a discussion of the material risks, uncertainties, assumptions, and other important factors that could impact our actual results, please refer to our SEC filings and today's press release, both of which can be found on our Investor Relations website. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During the call, we will also refer to non-GAAP financial measures, such as adjusted EBITDA. More information about these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures, is available in the press release which is available at investors.progyny.com. I will now turn the call over to Peter. Peter Anevski: Thanks, James. Thank you, everyone, for joining us today. We are pleased to report that we have had a good start to the year, with record first-quarter revenue coming in at the higher end of our expectations, and net income, earnings per share, and adjusted EBITDA all above our guidance ranges. These results reflect that we continued to see healthy member engagement during the quarter, with utilization trending to the high end of our historical range, and our continued discipline in managing the business, which yielded strong margins overall as well as healthy cash. In addition, we also made meaningful progress during the quarter in laying the foundation for future growth through our planned investments to expand the capabilities of the platform, enhance our already industry-leading member experience, and extend our position as a solution of choice in women's health and family building. As the second quarter begins, engagement is pacing consistent with the typical seasonal patterns following the start of the year. Mark will take you through the details shortly, but we are pleased to issue ranges for Q2 that reflect sequential increases from Q1 across all the key results. We are also raising our full-year expectations for adjusted EBITDA, net income, and EPS as well. In short, we have begun 2026 on a strong positive note and are excited for the rest of the year ahead. Contributing to our excitement is the level of activity and energy we are seeing in the market. One example is at the recent Business Group on Health Conference, which is one of the most impactful events for the benefits industry. We had the honor of sharing the stage with one of our largest clients. During this joint session, our client discussed the results of a study they commissioned using a third party to analyze their claims data warehouse, which included all claims, not just family building, from Progyny, measuring the impact of our program over an eight-year period versus what they experienced prior to Progyny. The findings reaffirm what we have been reporting to this client regarding outcomes and value that we have been delivering since program inception. They showed that we increased the number of fertility-related pregnancies per year, doubled the pregnancy effectiveness of each treatment, decreased the multiples rate, lowered the miscarriage rate, and more than halved the preterm delivery rate. These results, in turn, lowered the average cost across fertility and related pregnancies, cost per baby, and their NICU costs. The client put it best when they said this is the kind of story they feel needs to be told, as it achieves the trifecta of member experience, improved health outcomes, and cost avoidance, all of which delivers hard ROI. As an aside, this type of analysis has also been performed by a handful of our other jumbo clients, independently analyzing their respective claims data warehouses, and they have all come to similar conclusions. Thought-leadership events like this, where HR leaders and decision-makers come together to share their experiences and help determine their priorities for the year ahead, are just one aspect of our selling season. This activity, amongst others, has the 2026 selling and renewal season off to a good start, with the level of activity and overall engagement we are seeing affirming how family building and women's health solutions remain a priority for every type of employer. Our overall pipeline and the early build of new pipeline are substantially favorable versus a year ago, and early commitments are pacing ahead of this time last year. Additionally, on the renewal side, we have meaningfully de-risked the season by securing early favorable notifications from some of our largest clients whose agreements were up for review this year. Consequently, the remaining renewal exposure, measured in dollars on the book of business yet to be secured, is at its lowest level at this point relative to prior years. Separately, regarding pipeline, we are encouraged by the activity with aggregators and other distribution partners for our Progyny Select offer. While the timing for its incremental contribution to pipeline will be later in the year due to normal buying patterns for these groups, we are pleased with the progress so far relative to our first-year expectations around Select. Taking all of our pipeline activity together, we believe this once again demonstrates not only how important family building and women's health are to employers, but also highlights the market's recognition that our evidence-based solutions drive measurable value to employers through proven cost containment. Let me spend a few minutes walking you through the drivers to pipeline and overall activity. First, we are seeing good traction across our health plan partners overall, and with Cigna in particular. You will recall this is our first full season with Cigna as a partner, and as expected, we are seeing a good inflow of opportunities from that channel. Second, we are seeing a good contribution from our traditional demand generation activities, where our opportunities remain distributed across greenfields and brownfields—companies looking to add the benefit for the first time or considering a switch from their existing provider. Lastly, we are seeing significantly stronger activity from RFPs on business that is currently with stand-alone competitors. In fact, the activity there has thus far already outpaced what we saw across all of last year. Conversely, we are seeing fewer RFPs than we normally expect from our existing client base, and as previously mentioned, two of our largest clients who were up for review this year have already indicated their intention to continue with us. In short, we believe we are well positioned for the season ahead, we are excited about the activity we are seeing, and we look forward to reporting our progress in the coming quarters. We believe one of the reasons for this positive market activity is that employers are increasingly looking for cost-effective solutions that can address the large and growing portion of their workforce being impacted by infertility and who are in need of coverage and support in order to realize their family building and overall health and well-being goals. The CDC recently reported that the number of births in the U.S. and the overall fertility rate have continued to decline, reaching record lows and extending the trends that began nearly two decades ago. Fortunately, if we peel back the layers of this data, we see something more insightful and certainly highly actionable. While the overall birth rate is declining, it is being driven entirely by women aged 29 and younger. On the other hand, birth rates amongst women aged 30 and over have continued to increase, such that women 30 and over now comprise nearly 53% of all births. This is the highest proportion ever for that age group. I will remind you that the population we serve in our family building solution is generally 30 to 42 years old, with the average age of a woman going through IVF at 36. What all this data tells us is that society has increasingly chosen to defer family building to later in life, and while that may be the preferred path to parenthood for the clear majority of people today, there is a biological reality in that conception without the use of assisted reproductive technologies often becomes more difficult as we age, and for many, unaffordable. We believe this is a macro trend that employers simply cannot afford to ignore. This is no less true even given the heightened focus on the state of the labor market, particularly as it relates to the potential for disruption from AI. As just one data point on that topic, the Wall Street Journal recently reported on a survey of 750 CFOs who concluded that the impact of AI is only expected to reduce their companies' headcount by just 0.4% as compared to what it otherwise would have been for 2026, and that impact is largely expected at entry-level roles or clerical and administrative functions where the tasks are more easily automated. This is all the more reason why having family building benefits in a company's overall benefit offering is critical. We recognize that investors are pricing into our valuation the potential for a negative impact on member engagement or on employer demand for our services. To be clear, we are not seeing any signs of either. As we see it, these concerns are more rooted in what we have called headline risk as opposed to accurately reflecting a shift in market dynamics, which we do not believe will adversely impact our business. Before I turn things over to Mark, let me conclude by saying that we believe our results and outlook reflect that we are as well positioned as we have ever been for this opportunity. This is highlighted by five key areas: early sales commitments; our overall pipeline; the progress we are making with our channel partners; our de-risking of the renewal season and the favorable notifications we have already received; and the traction we are seeing with Progyny Select. We view all of this as evidence of the continuing macro tailwinds, and we believe we are in the best position ever to take advantage of those. Although some headwinds always exist, the outsized emphasis of what is seemingly anticipated in our current valuation runs contrary to what we see. We have seen this play out before throughout our history, when in past years there were concerns at varying times regarding high inflation, tariffs, a potential recession, general macro uncertainty, and the loss of our largest client two years ago. Yet we continued to grow through all of the above, and we expect to continue to do so in the future. We recently completed our $200 million share repurchase program, and Mark will take you through those details shortly. Our board is currently evaluating potential options for a new share repurchase program. We anticipate a decision around May, and we expect to make an announcement at that time. Let me now turn the call over to Mark to walk you through the quarter. Mark Livingston: Thank you, Peter, and good afternoon, everyone. Before I begin, I will note that the 8-K we filed a short while ago includes our usual slide presentation, which summarizes both the results in the quarter and highlights some of the longer-term trends that we believe are important in understanding the health and direction of the business. We have also posted that on our website. Rather than repeating what is covered by that material, I will focus on the key themes that impacted both the quarter and how we think about the rest of 2026 and beyond. The first theme is that this quarter's results reflect once again that member engagement has remained healthy and at levels that were consistent with what we were seeing when we issued the guidance in February. The consistency we are seeing in overall engagement continues to demonstrate that members are pursuing the care and services they need in order to achieve their family building and overall well-being goals. As a result, first-quarter revenue came in closer to the high end of our guidance range, reflecting an increase of 1.4% on a reported basis and more than 12% when excluding the contribution from a large former client who was under a transition-of-care agreement in 2025. As a reminder, the transition agreement pertaining to this client ended as of June 30, 2025. Accordingly, the second quarter that is now underway will be the last quarterly period you have to take that into account when looking at our comparative results. The second theme is that we continue to maintain healthy margin performance even as we continue to invest to expand our product platform, enhance features for our members, and lay the foundation for future growth. Gross margin expanded as we continue to realize efficiencies in care management and service delivery, as well as the anticipated reduction in stock compensation expense. And while adjusted EBITDA reflects investments for our longer term, our adjusted EBITDA margin remains healthy even at a higher level of investment. Our first-quarter CapEx was $6.3 million, reflecting a $3.5 million increase over the prior-year period. I will remind you that we were still ramping this investment program over the early part of 2025. Our third theme is the flexibility to both invest in the business while also returning value to our shareholders. We generated approximately $446 million in operating cash flow, yielding over $200 million on a trailing twelve-month basis, a level we have maintained for five consecutive quarters now. Through our ongoing focus on process improvement and revenue-to-cash management, we also continue to drive further improvements in DSO, which was 11 lower than the first quarter a year ago. This improvement occurred even with the customary build in DSO on a sequential basis from Q4 as we work to establish the payment flows with our newest clients who launched on January 1. As of March 31, we had total working capital of $266 million, which includes $225 million in cash, cash equivalents, and marketable securities. There are no borrowings against our $200 million revolving credit facility and no debt of any kind, and we have no planned use for the facility at this time. The fourth and final theme is that during the quarter we repurchased more than 5.5 million shares for approximately $116 million under our most recent share repurchase program, which began in November and provided us with up to $200 million overall. We have now completed that program through the repurchase of approximately 8.8 million shares in aggregate. Turning now to our expectations for the second quarter and the remainder of 2026, as the second quarter begins, member engagement is pacing consistently with the typical seasonal patterns following the start of the year. Although the unexpected variability in engagement that we previously experienced has not recurred since 2024, the assumptions we are making today, particularly at the low end of the ranges, reflect the potential that further variability in activity and treatments could occur. To be clear, this is the same approach we have been following for more than a year when setting our guidance range. The table at the back of today's press release also outlines our assumptions at both ends of the ranges. In terms of utilization, we are maintaining our full-year assumption of 1.04% to 1.05%, which is consistent with our long-term historical ranges. We are also maintaining our assumption for ART cycle consumption per female unique at 0.93 at the low end of the range and 0.95 at the high end. For the second quarter, we are assuming the customary sequential increase reflecting the ramping of member journeys. On the basis of these assumptions, we are projecting revenue between $1.365 billion to $1.405 billion, reflecting growth of between 5.9% to 9%. If we exclude the $48.5 million in revenue from the client who was under a transition-of-care agreement over 2025, our full-year revenue growth is projected to be between 10.1% to 13.3%. At these levels, we expect 2026 to be our eighth straight year of double-digit top-line growth since we became a public company. With respect to profitability, we are increasing our full-year adjusted EBITDA, net income, and EPS expectations. For adjusted EBITDA, we expect a range of $232 million to $244 million, with net income of $103.7 million to $112.3 million. This equates to $1.23 to $1.34 in earnings per diluted share and $1.98 to $2.09 of adjusted EPS on the basis of approximately 84 million fully diluted shares. As it relates to the second quarter, we expect between $342 million to $355 million in revenue, reflecting growth of 2.7% to 6.6%. Again, if we exclude the $17.2 million in revenue from the client under the transition agreement in the year-ago quarter, our second-quarter guidance reflects growth of 8.3% to 12.4%. On profitability, we expect between $58 million to $62 million in adjusted EBITDA in the quarter, along with net income of between $25.8 million to $28.7 million. This equates to $0.31 to $0.35 of earnings per diluted share or $0.50 to $0.53 of adjusted EPS, on the basis of approximately 83 million fully diluted shares. At the midpoints of the ranges for both the quarter and the year, you can see that we are expecting a consistent adjusted EBITDA margin throughout the year, at a level that is also consistent with our full-year result from 2025, even with the investments we are making to grow the business. We will now open the call for questions. Operator, can you please provide the instructions? Operator: Certainly. Everyone at this time will be conducting a question-and-answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you are listening on speakerphone to provide optimum sound quality. And once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Jailendra Singh from Truist Securities. Your line is live. Jailendra Singh: Thank you. Thanks for taking my questions, and congrats on a strong quarter. My first question is on the early sales activity commentary—very encouraging comments there. A few follow-ups. First, how are these early commitments split between not-nows from last year who might have delayed versus employers looking at this benefit for the first time? And then you also called out, Peter, that you are seeing more RFPs from employers who are currently with your competitors. Are there one or two consistent themes that you are hearing from these employers that are driving more pickup in this RFP activity from competitor clients? Peter Anevski: Regarding your first question, as always, early commitments—a higher proportion of them do come from not-nows. But either way, it is positive overall activity and commitments to date versus last year, as we mentioned. As it relates to your second question, nothing really constructive that I could share relative to what we are hearing. Normal general reviews and general comments, but none that are constructive to share here. The bigger, more important data point is the level of activity that we are seeing versus last year and really any other year relative to potential opportunities around solutions that are with current competitors. Jailendra Singh: Okay. And then my quick follow-up. Last quarter, you called out membership changes because of administrative changes. I know the number of eligible lives is a less important metric for you guys to focus on, but given your experience last quarter, have you made any changes in the process over the last two to three months to make sure you get more regular updates from your clients and we do not get any more surprises like what we saw last quarter? Peter Anevski: We are getting regular updates, but what we are also doing is we are in the process of getting full eligibility files as opposed to just updates relative to numeric headcounts from our clients. We have already increased the level of eligibility files that we are getting from our clients since year-end and expect to continue to do so throughout the year, and by year-end, expect to have eligibility files from the significant majority of our clients. Throughout the year, a combination of the periodic updates and having full eligibility files will help mitigate and identify that again. Jailendra Singh: Great. Thanks a lot. Peter Anevski: Thank you. Operator: Your next question is coming from Brian Tanquilut from Jefferies. Your line is live. Analyst: Hi. Congrats on the quarter. This is Cameron on for Brian. I am just wondering if you could give me some more color on the increase you saw in revenue per ART cycle. Can you walk us through the moving pieces of this? Was this ancillary uptake rate? And do you expect this to persist throughout the year? Thank you. Mark Livingston: Sure. In the beginning of the year, you will see a slightly higher rate of overall revenue per ART cycle because you have a higher proportion of clients—particularly for the new ones—that are starting their journey, so they are in the initial consultation phase. There is revenue associated, but not ART cycles. That was a little less evident last year because the revenue that was contributed from the large client that was under the transition-of-care program was more skewed towards ART cycle activity by the definition of how that transition-of-care program worked. What I would say is more instructive is looking back a couple or few years to see how that progresses through the year. Analyst: Thank you. Operator: Thank you. Your next question is coming from Michael Cherny from Leerink. Your line is live. Analyst: Hi. Good evening. This is [inaudible] on for Michael Cherny. Congrats on the great results. As we think about the investments that you are making in future growth, can you give us an update on the pipeline in terms of new products and maybe some timing on that as well? And could you also give some color on what you are seeing and expecting in terms of upsells of new products both this quarter and this year? Thank you very much. Peter Anevski: Regarding your second question, it is a little early to comment on upsells, but simply to say that upsell activity is also positive. Other than that, it is early relative to any more color than that. As it relates to expectations around new products, the investments and capabilities are not necessarily new products, but additional capabilities for the existing products and/or expanded products that address the same areas for our global population. Analyst: Great. And just as a follow-up, what is embedded in the guide in terms of expectations for upselling of new products for the rest of the year? Peter Anevski: The guidance—everything in guidance—is what is already committed. We do not generally put in expectations of any material kind relative to upselling or new activity. The upsell activity impacts materially the following year. Analyst: Got it. Thank you very much. Operator: Thank you. Your next question is coming from Scott Schoenhaus from KeyBanc. Your line is live. Scott Schoenhaus: Congrats on the quarter and the guidance. It seems like you are managing as best as you can the renewal process and seeing a great start to the selling season, so congrats on all. My question is on utilization, and your previous comments when you said this last selling season this year produced higher-utilizing clients. I guess you are still seeing that, but what drove that utilization towards the higher end? Was it this new cohort? How are they progressing? And so far in April and May, your comments were in line with seasonal activity. Is the new cohort seeing elevated utilization through the first month and a half of the quarter? And then I have a follow-up for Mark. Peter Anevski: Thanks for the comment. If you recall, when we talked about it, it is not that the new cohort is having higher-than-normal utilization as a cohort, but it is because the sales in the cohort this year were weighted more towards a higher contribution of certain industries. Overall, it is generally performing as expected. I would not say it is higher or better or anything else like that, but as expected, as we have talked about. Scott Schoenhaus: Okay. Great. And my follow-up for Mark is clearly you beat on the bottom line here despite the investments. Maybe you can walk us through what further investments are needed throughout the rest of the year and where you could potentially see upside to the margin guidance throughout the rest of the year because you did such a solid job in the first quarter? Mark Livingston: I would say that even since February, we have contemplated the investments and phased them throughout the year, so I think they are already well factored in. We had a good quarter, and we have had some puts and takes—nothing that I would call out specifically—but the things that we felt were recurring, we have already now baked into the full-year guide. We brought up the low end of the range a little bit. We kept the high end of the range the same on the top line, but we have increased the adjusted EBITDA, and that is really just reflective of some of the efficiencies that we were able to gain in Q1 that we see recurring through the rest of the year. Scott Schoenhaus: Thanks, guys. Operator: Thank you. Your next question is coming from Sarah James from Cantor Fitzgerald. Your line is live. Sarah James: Thank you. I am wondering if a larger portion of this year's early pipeline sales are coming from clients that were not-nows in past years—so people that you have been talking to for a while—and, if so, why the uptick this year in the decision process to start benefits? Peter Anevski: In general, early commitments—a higher proportion of them—come from not-nows. This is no different. If you recall, some of the things we talked about last year were that the pipeline build was later than normal, and as a result, that could be part of the contribution to early commitments. Either way, the early commitments are just one indication of the selling season. The overall positive activity and all the things I already mentioned that are driving it are, I think, how I look at the overall activity for the selling season, including the early commitments. Sarah James: Got it. And one more just on the general market. How do you see the mix of client demand between case rate versus back-end savings? Is the market trending in one direction, and would you ever consider a product model that has back-end savings? Peter Anevski: You are talking about some sort of value-based care model and risk? We have not needed to do that to win business, and the back-end savings are part of what drives our success in client retention. The current model has served us well, and we are not getting real pushback on it in terms of the current model versus a back-end savings model with risk and upside, etc. So I do not have any plans to modify. Mark Livingston: I would just point out that in Peter's prepared comments, he highlighted the third-party study that was done by one of our largest longstanding clients, and I think the major takeaway is that the savings are demonstrated by our current model. Sarah James: Great. Thank you. Operator: Thank you. Your next question is coming from David Larsen from BTIG. Your line is live. David Larsen: Hi. Congratulations on a good quarter. Can you just remind me what the revenue growth would have been in 1Q, excluding that one major client from the year-ago period, please? Mark Livingston: A bit more than 12%. David Larsen: Okay. And then with regards to growth in your existing clients, it is my sense that the cost of oil affects everything. The stock market broadly speaking had pulled back significantly a couple of months ago, at the end of last year and first quarter. It has now rallied back up. Are you seeing positive signs from your existing client base in terms of adding employees, which would potentially add to your life count in maybe '26 or into '27? Basically, did this Iran war cause the 400,000 lower count at the start of the year? And could it come back up now that things seem to be getting resolved? Mark Livingston: The Iran war, I do not believe, had anything to do with the true-ups we reported before. In general, we are seeing our existing client base, from a lives perspective, stay relatively flat. The good news is, as it relates to everything costing more, as you said, we are not seeing any impact, including what we are seeing so far in Q2. And as we all know, the war has been going on now for a couple months, give or take. We are not seeing any impact on engagement or anything else like that as well. David Larsen: Okay. And then just any comments on Select? What is the market reception to Select? Thanks. Peter Anevski: The market reception is positive. We are signing up aggregators and distributors. Reaction is positive, and we do not expect to see pull-through on that until really the end of the year when small employers normally make their buying decisions and then renewal period is. Nonetheless, so far we are pleased with the activity and the reception. David Larsen: Thanks. Congrats on a good quarter. Peter Anevski: Thank you. Operator: Thank you. Your next question is coming from Alan Lutz from Bank of America. Your line is live. This is Dev on for Alan. Analyst: Pete, I just wanted to touch on the market growth for ART cycles. I think the latest data CDC put out—it was about a 10% CAGR for ART cycles. Progyny, Inc. is now moving closer to that range, but obviously still appears to be taking share. I would love to get your view on what you think the ART cycle growth is for the market and how we should think about that over the medium term? And I have one follow-up. Thanks. Peter Anevski: There is no data I have gotten that suggests the growth rate has changed relative to what we saw over the last ten years based on the most recent data that is available. That is really all I can share. Relative to growth, some of the pharma manufacturers are reporting growth—they are not giving me exact percentages—but they are reporting growth. It continues to grow, but I cannot comment by how much. Analyst: Okay. Great. No problem. And then, sorry to hop on this—true-ups on the administrative side—but just curious what that came in like this quarter. From what I understand, it is a quarterly process. Was that a positive this quarter? Just commentary from what you are hearing from your employer clients around the health of the employees and retention there. Thank you. Mark Livingston: We are basically at the same level as we have seen in most typical quarters. There are some that are up a little, there are some that are down a little—they have largely offset. As Peter highlighted on an earlier question, we are doing a lot of work to gain actual eligibility files on a recurring basis from these clients, which should help us refine and avoid adjustments like that in the future. We already have some coming in, and we expect to have a majority of our clients providing eligibility files on a regular basis by the end of this year. All of that should help. The last thing I would point out is the revenue growth is exactly what we expected. As we tried to highlight on our last call and since, it is really not a driver per se of activity, but an indicator around it, and those adjustments have not seemed to have any effect on our expectations around revenue. Analyst: Great. Thank you. Operator: And our final question comes from Richard Close from Canaccord Genuity. Your line is live. Analyst: Hi. John Penny on for Richard Close. Thanks for the questions, and congrats on the quarter. First, good to hear on the Business Group on Health study. I know it is early in the selling season, but just qualitatively, is there anything about the value proposition of your services that is resonating more this selling season or anything different than past selling seasons that you would comment on? Peter Anevski: I would say no. I spoke more to the demand, even though the pacing of commitments is ahead also. It is more about demand in the pipeline. We are now in the normal process of articulating our capabilities, differentiating ourselves, and articulating the value that we deliver. Nothing substantially different, but just emphasizing, as we always do, that we manage for each individual member on a sponsor's behalf that goes through the program—good outcomes and favorable outcomes—but we also manage overall program cost containment, which is really important for sponsors as they review their alternatives. Analyst: Alright. Just as one follow-up, non-GAAP gross profit or gross profit margin was very strong in the quarter. Anything in particular that is driving that? And is this level sustainable, or is there going to be some coming back here the rest of the year? Mark Livingston: A couple of key things. We have been highlighting that stock compensation expense will be coming down as some of the recognition period for older grants begins to expire. It really started last year in the middle of the fourth quarter, so that is a significant piece of that savings. There is also recurring, regular efficiency that we have been able to gain, which will recur. Both are recurring throughout the balance of the year. It is part of what is contributing to the improvement in adjusted EBITDA that we have now included in the guidance versus what we did a couple months ago. Analyst: Alright. Thanks. Operator: Thank you. That concludes our Q&A session. I will now hand the conference back to James Hart for closing remarks. Please go ahead. James Hart: Thank you, and thank you, everyone, for joining us this afternoon. We know it is a busy day. For those we will not see next week at the conference, please feel free to reach out to me at any time for any follow-ups. Thank you again. Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Tandem Diabetes Care, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Morrison, Executive Vice President and Chief Administrative Officer. Ma’am, please go ahead. Susan M. Morrison: Hello, and welcome to Tandem Diabetes Care, Inc.’s First Quarter 2026 Earnings Call. Today’s discussion will include forward-looking statements. These statements reflect management’s expectations about future events, our product pipeline, development timelines, financial performance, and operating plans, and speak only as of today’s date. There are risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in our forward-looking statements, which are described in our press release issued earlier today and under the Risk Factors portion of our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q. Today’s discussion will also include references to both GAAP and non-GAAP financial measures. Unless otherwise noted, the financial metrics discussed today will be on a non-GAAP basis. Please refer to our earnings release issued earlier today and available on the Investor Center portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measures and other information regarding our use of non-GAAP financial measures. John F. Sheridan, Tandem Diabetes Care, Inc.’s President and CEO, will be leading today’s call, and he will be joined by Leigh A. Vosseller, Executive Vice President and Chief Financial Officer. Following their prepared remarks, the operator will open up the call for questions. Thanks in advance for limiting yourself to one question before getting back into the queue. With that, I will hand the call over to John. John F. Sheridan: Thanks, Susan, and welcome, everyone. In the first quarter of 2026, we delivered strong financial and operational performance, setting the stage for another successful year. This momentum reflects the dedication of our team and our commitment to our strategic objectives. Building on these results, we actively advanced several key initiatives that position Tandem Diabetes Care, Inc. for both immediate impact and long-term growth. By modernizing our commercial operations, reshaping our business model, and introducing new technologies, we are not only achieving notable short-term gains, but also laying the foundation for sustained growth, profitability, and innovation. I will now walk you through updates on each of these initiatives, beginning with the modernization of our commercial organization. Globally, we have assembled a talented and impressive team. The group is deeply committed to bringing the benefits of our technology to people living with diabetes, and we are working to further support them by strengthening our systems, infrastructure, and processes. For example, in the United States, we continue upgrading our sales and customer management infrastructure as part of our multiyear system investment to optimize sales efficiency, enhance effectiveness, and drive deeper customer insights. Internationally, a key first-quarter highlight was our launch of direct commercial operations in the UK, Switzerland, and Austria. By doing so, we are better positioned to serve our customers, strengthen HCP relationships, and drive continued growth. The transition has been progressing smoothly, and we plan to continue expanding our direct operations later in 2026 and again in 2027. This approach deepens our engagement with the diabetes community while providing Tandem Diabetes Care, Inc. greater ASP and improved margins. The second key initiative I will be discussing today is reshaping our U.S. business model through our transition to a multichannel strategy. On our last call, we discussed how adopting pay-as-you-go, or PayGo, in the pharmacy channel provides us the opportunity to bring significant advantages to customers, health care providers, and payers, while delivering favorable economics to Tandem Diabetes Care, Inc. Throughout March, we began executing contracts adapted for PayGo, covering both t:slim and Mobi pump supplies, and continued to expand access with an increase to approximately 40% formulary coverage today. It is an important leading indicator for how quickly we can transition our business. Operationalizing PayGo in the pharmacy channel is an end-to-end change in the way health care providers prescribe our technology, the way we service customers, and the way we process and fill orders. We knew this transition would take time. It is still early in the process, and we are working to improve our efficiency and customer satisfaction by enhancing the pharmacy experience. Our early introduction of PayGo through the pharmacy reinforces our conviction in the meaningful opportunity this transition presents for our business and for our customers. Finally, I will provide an update on our new technology across our portfolio. In March, we were excited to announce that Tandem Mobi, the world’s smallest durable automated insulin delivery system, is fully available for use with Android smartphones in the U.S. By expanding to Android, we are bringing the benefits of Tandem Mobi to even more people living with diabetes, underscoring our commitment to delivering choice in diabetes technology. In the second quarter, we are on track to deliver on a number of exciting new offerings. In April, we received FDA clearance for use of Control-IQ+ in pregnant women with type 1. This is significant, as it makes the t:slim X2 and Mobi the first and only commercially available AID systems cleared for use during pregnancy in the U.S. We are also awaiting CE Mark for this indication in Europe. Pregnancy requires a much tighter glycemic range, and we have demonstrated that Control-IQ+ is designed to effectively support the unique therapy needs of pregnant women, in addition to women considering pregnancy. We will be hosting a product theater highlighting pregnancy management with Control-IQ+ at the upcoming American Diabetes Association meeting in June. We are also preparing for the international launch of Abbott’s FreeStyle Libre 3+ integration with the t:slim, starting in select European countries in Q2 and scaling to additional countries throughout the year. This integration with Abbott’s latest-generation sensor will allow even more CGM users to access the life-changing benefits of our Control-IQ technology. Additionally, in Q2, we will begin the commercial rollout of Tandem Mobi outside the United States. This brings together the best-in-class outcomes users have come to expect with Control-IQ+ and the benefits of Mobi’s form factor. Rounding out our Q2 launches, we will be upgrading both t:slim and Mobi for compatibility with Dexcom’s G7 15-day sensor, ensuring we continue to provide our customers with the latest-generation technologies. It is also exciting because this software update will enable Tandem pumps to provide CGM data directly to our Sugarmate app, with future plans to add insulin data. This provides visibility to sensor information across our device platforms for users and their loved ones. These launches are designed to be global and deployable to all markets where the relevant system combinations are available, which represents an important accomplishment by our team. While progressing these new offerings to commercial availability, we also made great strides with our pipeline products. We are particularly excited about Mobi Tubeless, our novel infusion-site option for the existing Mobi pumps that transforms it into a tubeless AID system, allowing for interchangeability between tubed and tubeless wear with one platform. This will be Tandem’s first tubeless pump offering and the world’s first with extended wear technology. We plan to file our 510(k) submission for the Mobi Tubeless in the second quarter. Finally, we continue to make good progress preparing our pivotal study for Tandem’s first fully closed-loop system and remain on track to start it this year. As you can see, we continue to make meaningful progress across the business while demonstrating strong financial results, which Leigh will now discuss. Leigh A. Vosseller: Thanks, John. As a reminder, unless otherwise noted, the financial metrics discussed today will be on a non-GAAP basis. In this quarter’s performance, we continued the momentum from last year by achieving new first-quarter records for pump shipments and sales, as well as robust margin improvement and solid cash generation. We are reaffirming our annual 2026 guidance as we continue to execute on our bold business model transformation in both the U.S. and international markets. We set new first-quarter records with more than 29,000 pump shipments worldwide and $247 million in sales. Our U.S. performance drove this achievement, where we shipped more than 19,000 pumps, representing approximately 10% year-over-year growth. Renewals continue to account for more than 50% of our shipments, and new starts were predominantly MDI patients, representing roughly two-thirds of new customers. As John discussed, a key milestone in the quarter was our March launch of PayGo in the pharmacy channel. Throughout the month, we successfully increased our formulary access outside of the traditional cycles for PBMs and payers. Adoption was within our range of assumptions in these first few weeks. Fewer than 5% of customers ordered a pump through their pharmacy benefit. Similarly, less than 5% of our installed base purchased their supplies through this channel. Our transition and pricing assumptions for the full year of 2026 remain unchanged. U.S. sales were $161 million, growing 7% year over year, also representing our highest first-quarter U.S. sales. This reflects the headwind of approximately $1 million from the adoption of PayGo, as well as slight pressure in infusion set sales due to a key supplier’s shortages. Overall, pharmacy sales represented 6% of sales in the U.S., which was significant based on our volume. Looking ahead to the second quarter, we are confident in our ability to deliver pump shipment growth with a seasonal curve similar to 2025, and expect U.S. sales of approximately $175 million. This factors in an increasing PayGo headwind, the magnitude of which will depend on our pace of execution. Turning to our international performance, we shipped more than 10,000 pumps and are executing well on our go-direct strategy. International sales totaled $86 million, representing 3% growth year over year. Direct channel sales increased to approximately 11% of total international sales from less than 5% historically. This is the highest international sales quarter in our history, due in part to favorable currency dynamics. Also, as a reminder, the first quarter of 2025 included a $5 million benefit from timing of distributor orders, creating a tougher point of comparison. Our international business had a few puts and takes during the quarter compared to our original assumptions, including a delay in timing of expected headwinds from going direct, a one-time benefit in Switzerland related to the buyout of existing customer rental contracts from our former distributor, and the same infusion set shortage I referenced in the U.S. In the second quarter, we expect that international sales will be approximately $80 million. This steps down from the first quarter due in part to the delayed impact of $3 million to $4 million headwinds associated with our go-direct transition. This also incorporates expected order phasing tied to Mobi availability as we scale launch, with some distributor demand shifting into the third quarter. Turning to margins, gross margin for the quarter exceeded expectations at 55%, an improvement of nearly five percentage points year over year and the highest first-quarter gross margin in the company’s history. Notably, we started the year higher than our full year 2025 average, reflecting continued execution on our key drivers, including pricing discipline and product cost improvements. Both operating and adjusted EBITDA margin reflect a meaningful improvement year over year due largely to $75 million IPR&D costs in the prior year. Beyond that charge, we demonstrated leverage as operating expenses of $154 million remained essentially flat year over year. This included a slight reduction in R&D spending that offset increased commercial investments in support of global growth initiatives. As a result, adjusted EBITDA was approximately 1% of sales, an improvement of 32 percentage points based on the IPR&D charge alone and an additional three points of operating leverage. Operating margin improved even more substantially by 40 points to negative 7% of sales. This was due largely to a reduction of stock-based compensation expense from 11% of sales in 2025 to 6% this quarter. With our focus on cost discipline and achieving our profitability goals, we generated $5 million in free cash flow this quarter. We also completed a convertible debt financing in February, yielding net proceeds of $276 million with 0% interest, to further strengthen our balance sheet and provide flexibility as we execute against our strategic priorities. As a result, we ended the quarter with $570 million in total cash and investments. Overall, we remain confident in our ability to deliver on our goals for 2026 and are reaffirming our 2026 financial guidance. Worldwide sales are expected to be in the range of $1.065 billion to $1.085 billion. This includes U.S. sales in the range of $730 million to $745 million and international sales in the range of $335 million to $340 million. For the second quarter, worldwide sales are expected to be approximately $255 million. We expect gross margins of 56% to 57% and adjusted EBITDA of 5% to 6% for the year. Second-quarter margins are expected to remain consistent with the first quarter. Further details on our guidance and assumptions for the year can be found in the earnings call slide deck posted in the Investor Center portion of our website. With that, I will turn the call back to you, John. John F. Sheridan: Thanks, Leigh. Before I wrap up our prepared remarks, I would like to extend my thanks to the full Tandem team. Your unwavering dedication, commitment to innovation, and teamwork have been the driving force behind our achievements. I also appreciate your resolve as we continue to navigate challenges from our infusion set supplier. While they may only impact a small percentage of our customers, the impact on them and the health care providers is significant. I appreciate the extra care and service that you are providing during this time. Thank you, everyone, for all you do. In conclusion, we are encouraged by the start to the year and are confident in the strategic direction that we have set. Our operational and commercial goals are firmly in focus, and we are committed to providing best-in-class technology to our customers in a more efficient and cost-effective way while advancing our global business model and driving meaningful long-term value for our shareholders. Thank you again for joining us today. We are excited about our opportunities ahead and look forward to sharing our progress in the upcoming quarters. Operator: Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In fairness to all, we ask that you please limit yourself to one question. If you have additional questions, please reenter the queue, and we will answer as many questions as time allows. One moment for our first question. Our first question is going to come from the line of Matthew Stephan Miksic with Barclays. Your line is open. Please go ahead. Matthew Stephan Miksic: Great. Thanks so much, and congrats on a really solid quarter here. Appreciate all the color and exciting to see you turn the corner here into PayGo. So I had one question on just the, as you, I am sure you noticed, one of the other companies in the space talked a little bit about the market, some tone or seasonal, I do not know what it was exactly, but maybe sounded like some temporary slowness. So great to get your perspective on that, what you have seen, and then also any way that you would characterize the major drivers of the growth in the quarter, whether it is uptake in type 2, whether it is uptake through pharmacy, whether it is new sensor and the integration. I hate the “all of the above” answer, but anything you can do to give us a sense of the major drivers for the quarter? John F. Sheridan: Matt, I will just start off and talk a little bit about the market and whether it is growing or not. I think you know it is still large and very underpenetrated. It is great to have type 2 as part of the market for us now. We are excited about the fact that we are bringing a great deal of new technology and business model changes that we believe will really help us grow new starts from MDI. If you look back in 2025, there are a number of pump companies in the market and I think they all did pretty well. I would say it definitely appears to us that the market is growing. We are very excited about this year in particular because we have so much technology and business model modifications that are really going to position us for growth this year and beyond. I will let Leigh answer some of the questions about seasonality. Leigh A. Vosseller: Sure. I will just say that we did not see anything unusual or different from what we typically see in the DME space starting off the year. Our pump shipments came in line with where we expected, which was about a 30% sequential decline in the U.S. from the fourth quarter. Nothing really to note there. Unfortunately or fortunately, the answer to your question about the major drivers is it really is a little bit of all of the above. We have a lot of things, as John suggested, working in our favor this year with our new product launches and our business model transformations. As we start to gain traction, everything is coming together to drive us towards a very successful and strong growth year altogether. Matthew Stephan Miksic: Thanks, guys. Operator: Thank you. One moment for our next question. Our next question will come from the line of Christopher Thomas Pasquale with Nephron Research. Your line is open. Please go ahead. Christopher Thomas Pasquale: Thanks. I was hoping you could dig in a little bit on the international business. International pump revenue was up despite pump shipments in that segment being down. You talked about a couple of one-time items. So were those two things related? And could you maybe unpack some of the one-timers that you had this quarter, just so we can think about the go-forward run rate? Leigh A. Vosseller: Sure. You are right. There were a lot of moving parts internationally, and the answer varies depending on if you are comparing to last year or to expectations. I will touch on a few of those. Year over year, a significant part of the growth was coming from currency fluctuation, so there was favorability in the environment that helped that growth. Looking at last year’s first quarter versus second quarter, it is a tougher comparison for us because last year there was a shift in timing of sales that was more favorable by about $5 million in the first quarter versus second quarter. As we go into Q2, it will be an easier comparison for us. Within the quarter, compared to when we set our guidance expectations, there were also a few moving parts. One was that we had estimated a headwind of approximately $5 million for going direct in certain international markets, and we are seeing a bit of a timing difference there. We realized about $1 million of that, and we expect $3 million to $4 million to push into the second quarter. Also, we did have some favorability in our Swiss market—a one-time accounting benefit—which was largely offset by some of the infusion set noise as we managed through shortages in the quarter. Overall, we are very excited about the international operations. We still see strong demand in the market for our products, and in the markets where we have gone direct, we are already hearing a very positive reception as we are closer now to the physicians and the patients. Christopher Thomas Pasquale: Okay. Thank you. Operator: Thank you. One moment for our next question. Our next question will come from the line of Matthew O’Brien with Piper Sandler. Your line is open. Please go ahead. Matthew O’Brien: Good afternoon. Thanks for taking my question. On Mobi Tubeless, I know filing here in Q2, still nothing expected for revenue in 2026. If you do get the approval late this year, is it fair to think you do not want to disrupt the typically stronger DME part of the year, so more of a bigger launch next year and in 2027, so no real disruption from launching Mobi Tubeless or as people are expecting it? I just do not want an air pocket in any of the quarters as people are waiting for that system. Thank you. John F. Sheridan: Thanks, Matt. When it comes to our submission, we are on track to submit this quarter. We also plan on getting clearance in the second half. There is some uncertainty with the FDA, but they have been doing a really nice job lately in getting things done quickly. As you know, when it comes to guidance, we typically do not include new products until they are actually in the market. If we get clearance in the second half, we have a phased commercialization process where we observe the product in small groups first, then increase the size of the group, and ultimately get to full commercial launch once we are confident there is nothing we need to address. This is a practice we have used from the beginning. While we do an excellent job of testing, you cannot find everything until you use it over time with larger groups. We will go through that process. If we can get it to the market before the fourth quarter starts, I think we would want to do that, but we will have to wait and see when clearance occurs. Operator: Thank you. One moment for our next question. Our next question is going to come from the line of Michael Holden Kratky with Leerink Partners. Your line is open. Please go ahead. Michael Holden Kratky: Hi, everyone. Thanks for taking our questions, and congrats on a great quarter. It looked like U.S. sales through the pharmacy maybe ticked down slightly from 7% in the fourth quarter to 6% in the first quarter. Can you talk about how that lined up with your expectations, what factors contributed to that, and what you have seen so far this quarter to support your confidence in the 15% for the year? Leigh A. Vosseller: Great question. Most importantly, you really cannot compare our pharmacy experience this year in 2026 to what we saw in 2025. It is a whole different world with the change in the business model. Last year, our pharmacy contracts included reimbursement for the pump that was a premium to even what we received in DME, so it is a very different environment. In the first quarter, we had two major workstreams. One is building up coverage, and we are pleased to report that we are already at approximately 40% formulary coverage. We expect to increase that across the year. The other piece is operational—implementing an end-to-end change in our workflows. It changed how physicians prescribe, how we engage with patients, and how we process and fulfill orders. That execution really started late in the first quarter, in the last few weeks, so we are at the very early stages. So far, we are excited about the opportunity. Nothing has changed our conviction in our ability to grow and scale that across the year. We look forward to future quarters when we can report the headwinds that are coming from the volumes we are bringing through. Michael Holden Kratky: Understood. Thanks, Leigh. Operator: Thank you. One moment for our next question. Our next question will come from the line of David Harrison Roman with Goldman Sachs. Your line is open. Please go ahead. David Harrison Roman: Great. This is Phil on for David. Thanks for taking our questions. I think maybe touch on pricing. I saw on the slides that it was reiterated, and I think I heard in your comments as well, Leigh. We heard from a competitor yesterday that so far it sounds like everybody is acting rationally or fairly. Can you talk about how negotiations around pricing have gone so far and what is baked into that $3.50 number for the year? What level of conservatism is in there? Thanks. Leigh A. Vosseller: Sure. I would agree that we are all behaving rationally when it comes to pricing. We are excited to be in this market and take advantage of the pricing opportunity that was already set in the pharmacy channel for insulin pump products. When we set expectations for the year, I would call them modeling assumptions because it is new for us and it is an early experience. We said to expect about $3.50 per month per patient as they order supplies. What is factored into that is an array of contracts with varying rebate structures. At this point, we do not have enough experience to say what that mix will look like on a sustainable basis. That is the baseline we have set for now. It is still the right way to think about it, and as we start delivering more volumes and gain more traction and experience, we will update those assumptions. David Harrison Roman: That is great. Thanks. Operator: Thank you. One moment for our next question. Our next question is going to come from the line of Richard Samuel Newitter with Truist Securities. Your line is open. Please go ahead. Richard Samuel Newitter: Hi. It is Ravi on for Rich. Thank you for taking the questions. Two for me, and I will ask them both upfront. First, on the infusion set shortage, would you mind quantifying that and suggesting what the impact might be in Q2? It looks like you are guiding a little bit below consensus for Q2 but reiterating the full-year guide, so curious if there is any impact there. Second, on the salesforce expansion, this seems to be a theme running across your peers and now Tandem Diabetes Care, Inc. as well. Can you talk about what the opportunity is that the salesforce is going after and what patient population they can unlock? John F. Sheridan: I will talk about the infusion sets and Leigh can address guidance. It is unfortunate. Our supplier has had some capacity challenges that began in the fourth quarter and continued to pressure us in the first quarter, both in the U.S. and internationally. We have been working very closely with them—practically daily calls with the operational and executive teams—and it is a top priority for us. It is a small number of SKUs that are really subject to the capacity shortages, but for those people who are impacted and the HCPs who support them, it is significant. We are doing everything we can to be creative—options in terms of lengths, colors, and other details—to provide intermediate solutions until this is resolved. We are also managing inventory to provide as broad coverage as possible. Unfortunately, this is something that probably will not be resolved for a quarter or two. We expect to see some progress in the second half of the year, but that is what we are dealing with right now, and we are taking it very seriously. Leigh A. Vosseller: From the perspective of the impact, all we are sharing is that it was a modest impact in the quarter, both U.S. and internationally, and we factored that same level of impact into our expectations for the second quarter. As John said, we are managing it closely. We see a line of sight to the end of this in the longer term. Operator: Thank you. One moment for our next question. Our next question will come from the line of Jeffrey D. Johnson with Baird. Your line is open. Please go ahead. Jeffrey D. Johnson: Hey, guys. Good afternoon. Leigh, I will follow up on the comment you made on the infusion set impact. I know you are not quantifying it, but let me go after it this way. Supplies missed our model by about $11 million this quarter. It could be we are just bad modelers. If our model missed by $11 million, does a lot of that get attributed to the shortfall, and is it also that you are assuming a similar shortfall in Q2 even though you are trying to move patients over to other infusion sets? I am trying to understand: does the year-over-year impact stay the same in Q2 as it was in Q1, and am I anywhere near the ballpark based on my model points? Thank you. Leigh A. Vosseller: Thanks for the question, Jeff. I would say that is on the high side for the impact. We would put it as more modest than that. There are a couple of ways to think about the size. There are backorder situations, but as John noted, some of the ways we are helping solve the problem for patients involve offering alternatives. Just because we had some backorders does not mean that we have not recovered sales in other ways to satisfy patient needs. It is not near that big. We expect it to be a bit disruptive again in the second quarter, but it is something we can work through. We can continue to talk more about modeling assumptions in supply sales—price or other pieces that might not be working there. Operator: Thank you. One moment for our next question. Our next question is going to come from the line of Matthew Charles Taylor with Jefferies. Your line is open. Please go ahead. Matthew Charles Taylor: Hi, good afternoon. Thanks for taking our question. This is Matt on for Matt Taylor. I wanted to ask on product expansion. First, on your clearance for type 1 pregnant women—can you help us frame the size of that opportunity and how incremental that could be? And second, on adding Android capability, is there any analog we can look at for thinking how that adds incremental growth in your coming quarters? John F. Sheridan: We are very excited to have received pregnancy clearance just a few days ago. It was based on data from the CRISTAL trial that was published in JAMA recently. We are the first and only AID system approved for pregnancy in the U.S. for both Mobi and t:slim using Control-IQ. We also expect CE Mark this quarter. In the clinical data, the Control-IQ group experienced a 12.5% improvement in time in a tighter range of 63 to 140 mg/dL, which is about three more hours per day, sustained for the length of the pregnancy—really substantial improvement. When it comes to the size, it is pregnant women and also women considering pregnancy. It is not a really large group, and I cannot put a number on it at this point, but it is a meaningful and important group, and we are very happy to have this. We are kicking off training and events for HCPs, including a symposium at ADA. Relative to Android, roughly 60% of our mobile app users for t:slim are on iOS, so Android represents a big opportunity. Many users have been waiting for Android availability. It is another meaningful opportunity to drive MDI growth in 2026 and beyond. Operator: Thank you. As a reminder, please limit yourself to one question before reentering the queue. Our next question will come from the line of Joanne Karen Wuensch with Citi. Your line is open. Please go ahead. Joanne Karen Wuensch: Thank you so much. Sticking with the one-question rule, with Mobi Tubeless being submitted to the FDA in the second quarter and on track for second-half approval, and assuming there is nothing in your guidance for it, how do we think about kicking off 2027 launching that product, and how are you preparing for it? Thank you. John F. Sheridan: For launching the product, as I mentioned, we have a phased commercial process. We are hoping to get it on the market this year, but timing will dictate. When you think about the market today, there really is a tubed market and a tubeless market. The tubed market is growing low single digits, whereas the tubeless market is growing in the ~20% range. That is a significant opportunity. Looking at competition, we are in the pharmacy now, we will have a tubeless device, and we believe we have a better algorithm. There is a big opportunity for us to drive MDI conversions to our device and also competitive conversions. It is a big opportunity, we recognize that, and we are really excited about it. Operator: Thank you. One moment for our next question. Our next question will come from the line of Suraj Kalia with Oppenheimer. Your line is open. Please go ahead. Suraj Kalia: Sorry about that. John, can you hear me alright? John F. Sheridan: We can. Yes. Suraj Kalia: Perfect. John, I am going to cheat and sneak in a two-parter if I could. To Joanne’s question, how would you define the low-hanging fruit for seven-day Mobi Tubeless? Would there be a price differential? Leigh, if I could quickly, U.S. sales were up 5%, pump units up roughly 12%, and then there is a 6% PBM contribution. Can you help us thread the needle here? Thank you. John F. Sheridan: I think the financial benefit, Suraj, is that the infusion patch lasts seven days, whereas an infusion set lasts three today. There is a margin benefit from extended wear. It is also a substantial customer-experience improvement, as they do not have to change as frequently. All of this adds up. We are doing everything we can to get gross margin up, and this certainly helps. The real benefit is customer experience, and that is our focus. Leigh A. Vosseller: To your question on the first quarter in the U.S., on a rounded basis the actual growth rate in pump shipments was 10%. The spread between the shipment growth and sales growth is not as substantial as it might seem. It really is pricing that is the differential. Operator: Thank you. One moment for our next question. Our next question will come from the line of Lawrence H. Biegelsen with Wells Fargo. Your line is open. Please go ahead. Lawrence H. Biegelsen: Thanks for taking the question. Leigh, I will ask the new-start question. By my math, it looks like new starts were down slightly year over year in Q1 and down modestly sequentially. Is that right, and do you still expect new starts in the U.S. to grow in 2026? Leigh A. Vosseller: Thanks, Larry. Yes, your math is accurate year over year, and they were down sequentially, mostly due to the regular seasonal impact we see. This is how we structured the year in our modeling assumptions: a slight decline in the first quarter with a return to growth as we look ahead. We are very convicted in the ability to return to growth because we have been seeing improvement over the last few quarters from our low in the middle of last year. It is the traction we are seeing on our new product launches. We look forward to pharmacy making a real difference now that we have removed the upfront cost barrier so more people can move to pump therapy without worrying about upfront cost. As we build on pharmacy and drive these launches, we expect a return to growth this year. Operator: Thank you. One moment for our next question. Our next question will come from the line of Michael Polark with Wolfe Research. Your line is open. Please go ahead. Michael Polark: Hey, good afternoon. I am interested in learning about the process to convert someone in the base to pick up supplies at pharmacy. I get the incentive for a new user with no upfront, but for that compliant, happy user through DME, how do you get them to the pharmacy? What does the outreach from you to them look like? What is the outreach from you to a physician? And on the financial incentive, how different is patient out-of-pocket for supplies only in DME versus pharmacy? Thank you. Leigh A. Vosseller: Glad you asked. There is work involved. First, when a customer comes in to place their order, which is usually quarterly, we check their benefits to see if we have on-formulary coverage. We then share out-of-pocket benefits. That is the true motivator—out of pocket is typically lower, or with copay assistance can be lower. Once they are ready to move forward, it requires a new prescription, which requires reaching out to the physician. Getting their attention and time can be a factor since many want to focus on customers who have not yet moved to pump therapy. It is a process and one of the key drivers as we look ahead to maximize the pharmacy opportunity. It is not only bringing more patients to Tandem Diabetes Care, Inc., but also converting the existing base. If you think about moving potentially 300,000 people and getting that price benefit, that makes a significant difference on our revenue growth and margins. It is a major focus area for us. Operator: Thank you. One moment for our next question. Our next question will come from the line of Analyst with UBS. Your line is open. Please go ahead. Analyst: Hey, thanks so much for the question. Really nice to see the cash flow generation in the quarter. Q1 has typically been a heavy cash burn quarter for you. Would love to hear about what changed this quarter and how sustainable this level of cash generation is going forward. Thanks so much. Leigh A. Vosseller: Thanks. A lot of this comes from our cost discipline. While we are focused on growing revenue, we are equally focused on driving improved margins. This year, we demonstrated a 1% positive EBITDA in the first quarter, and I believe that is the first time we have done that since 2022. Q1 is a tougher quarter because of seasonal dynamics in our business, so it is meaningful that we showed positive EBITDA and cash flow generation. We appreciate you noticed that. Operator: Thank you. One moment for our next question. Our next question is going to come from the line of Elaine Cui with Raymond James & Associates, on behalf of Jayson Tyler Bedford. Your line is open. Please go ahead. Elaine Cui: Hi, this is Elaine on for Jason. Thanks for taking my question. I had a question on the gross margin and how you are thinking about the cadence for the year. You gave us guidance for Q2 and Q4, and we can get to an implied Q3. Why would it stay relatively flat for the first three quarters, according to my math? And when we think about the year-over-year expansion, how much of it is driven by Mobi scaling versus the pharmacy transition? Thank you. Leigh A. Vosseller: Great question. First, Q1 to Q2 being relatively flat is really product mix. From Q1 to Q2, both U.S. and internationally, more of the step-up is coming from supplies. Globally, supplies still have a lower gross margin than pumps today, even though supplies will eventually have a better gross margin in the U.S. with our new pharmacy reimbursement model. That mix drives relative flatness into Q2. It should then start to step up from there, scaling toward about 60% in the fourth quarter. The step-up will come from pricing benefits both with our direct operations outside the U.S. continuing to build and with the pharmacy benefit as we convert more customers’ supplies to pharmacy in the U.S. Price will be a very prominent driver of gross margin this year. We are also continuing to see benefit from Mobi as it scales. For pumps, we started seeing that in 2025. For supplies, we will really start to see that difference this year, contributing to gross margin improvement across the year. Operator: Thank you. One moment for our next question. Our next question is going to come from the line of Jonathan Block with Stifel. Your line is open. Please go ahead. Jonathan Block: Great, guys. Thanks. Maybe I will follow up on an earlier international question. When I look at international pump ASP, the ASP seemed to step up nicely from recent quarters. Leigh, any color on how much is FX, how much is the direct transition? Does this trend higher from the current 1Q result as the percent of business that is direct continues to increase? Maybe most importantly, any way to think about an exit-’26 pump ASP as we head into the following year? Leigh A. Vosseller: The assumption we have made in guidance for the year is that pump ASPs outside the U.S., with changes from going direct, should land somewhere in the $2,800 to $2,900 range. We did see extra benefit in the first quarter because of a one-time accounting benefit in Switzerland. We were able to recognize a higher level of revenue there because of the acquisition of certain existing customer rental contracts from our distributor. This one-time benefit is what really drove the incremental pump ASP in the first quarter. Otherwise, it should settle into that $2,800 to $2,900 range for the rest of the year. Operator: Thank you. One moment for our next question. Our next question is going to come from the line of Anthony Charles Petrone with Mizuho Financial Group. Your line is open. Please go ahead. Anthony Charles Petrone: Thanks. Good afternoon, everyone. Maybe on the U.S. side, a competitor had a recall announcement and the FDA came out in April reporting more adverse events on one of the primary competitors. What is the chatter out there? Is that creating any opportunities for share capture, certainly as you look to Mobi or otherwise? A little bit on the competitive dynamics in the quarter. And then a follow-up on spend as you get ready for the Mobi Tubeless launch—thinking about DTC— is there a big DTC campaign planned around Mobi Tubeless? Thanks. John F. Sheridan: Regarding recalls, it is unfortunate, but that is one of the things that happens in this marketplace. The intent of a recall is to ensure the diabetes community is aware of safety issues that might impact product use. It happens to everybody. When it happens to us, we do our best to assure patients are safe and understand the risks. I do not think that gives us any benefit. You do not like to see it happen, but you recognize it as part of dealing in a market with life-saving technology. On competition generally, it is a large and expanding underpenetrated market with new entrants. Q1 was consistent with our expectations. It is highly competitive, but nothing specific to point to that changed. We are very confident in our ability to deliver new technology. The team has done an amazing job in the last several quarters. Moving to the pharmacy benefit, where out of pocket is substantially lower, will also be a big benefit. We feel very good about where we are heading competitively. Specifically to the marketplace today, it is very competitive, and nothing has really changed. Operator: Thank you. One moment for our next question. Our next question is going to come from the line of Mathew Blackman with TD Cowen. Your line is open. Please go ahead. Mathew Blackman: Good afternoon, everybody. Can you hear me okay? John F. Sheridan: We can. Mathew Blackman: Great. Thanks for taking my question. Leigh, I think I heard you say 40% formulary coverage to date. I am trying to figure out the proper context. That feels like a lot of progress for being a quarter or quarter and a half into the year, but I do not know how to frame it relative to where you need to be at the end of the year to hit your goals. Could you frame that relative to expectations? Is the next step—say from 40% to 60%—a heavier lift? Any framework to think about where you are to date and where you need to be by year-end to hit pharmacy mix goals? Thank you. Leigh A. Vosseller: Happy to add context. Typically, new formulary additions happen on a January 1 or July 1 cycle. We are very excited that we have been able to add coverage across the quarter—off-cycle—which shows the receptivity to us moving to PayGo and the acceptance of our products in the channel. The team is not stopping. I regularly see announcements of new formulary additions, some bigger and some smaller. We are working to drive that up across the year. In order to achieve our pharmacy goals this year, we are right on pace with where we need to be. I am not going to share a specific coverage target, but we are very well positioned to drive pharmacy access to hit the targets we have set. Operator: Thank you. One moment for our next question. Our next question will come from the line of William John Plovanic with Canaccord Genuity. Your line is open. Please go ahead. William John Plovanic: Hi. It is Zachary on for Bill. Thank you for taking the question. As for the type 2 ramp, can you give more context as to how that is going? You have talked about in the past difficulties you have with the C-peptide testing requirements. Can you give us an update on what is happening there? John F. Sheridan: First of all, we are really excited about type 2. It is a big opportunity, even less penetrated than the type 1 market in the U.S. and internationally. Our focus is on market development at this point. I am not going to talk specifically about numbers today. We want to see sustained trends before reporting numbers. It is early for us. There are many positive sources of growth happening now and in the near future. We expect tailwinds from FreeStyle Libre 3, from Mobi Android, Mobi Tubeless, pharmacy—those are all great. We anticipate positive news from Medicare access, and we think they are going to get rid of the C-peptide requirement, but we will have to wait and see. As a company, we are focused on creating awareness clinically and on product benefits. Big market, underpenetrated, with a lot of positive dynamics. We anticipate seeing growth in type 2 MDI starts this year. Operator: Thank you. One moment for our next question. Our next question is going to come from the line of Travis Lee Steed with Bank of America. Your line is open. Please go ahead. Travis Lee Steed: Hey, thanks for the question. Maybe focus on March 2026 where you are moving PayGo into the pharmacy. Help us understand how that went. Are you seeing an increasing ability to ramp into April and May? And the 40% coverage that you have, how much of that is tier 1 at this stage? John F. Sheridan: I will answer the first part. Our early experience reinforces our conviction that this is a great opportunity for the business and for our customers. We are moving forward aggressively—it is our top priority. Operationalizing pharmacy involves a lot of change: physician processes, how we service our customers, and how we process and fulfill orders. We are working to improve the experience. There is behavioral change, a learning curve, and efficiency opportunities. We are very focused on these, and we have a strong team making good progress. It starts off slow and will gradually increase as we get through the year. This will be a meaningful part of our business by the end of this year and as we move into 2027. Leigh A. Vosseller: On tiering, we have a variety of contracts across different tiers. The difference to us is the amount of rebate we pay in various tiers and the influence on out of pocket and the amount of copay assistance we might have to use. We are not sharing any breakdown of individual contracts. We are on tier 1 in some, tier 2 in some, and tier 3 in some. It varies across the board. Travis Lee Steed: Okay. Thanks a lot. Operator: Thank you. One moment for our next question. Our next question comes from the line of Shagun Singh Chadha with RBC Capital Markets. Your line is open. Please go ahead. Shagun Singh Chadha: Great. Thank you so much. I just had a quick one on Mobi Tubeless, and I apologize if it has been asked. Can you talk about how you think about the mix between the products you will be selling with Mobi Tubeless coming on board, how we should think about pricing, how you expect to compete with the current patch form factor—more from MDI conversions or competitive share gains—and anything you can share on the go-to-market strategy that you have not already discussed? Thank you. John F. Sheridan: The first important point is that we already have about 325,000 customers in the U.S. A significant portion of those use the pump today already, and this is an infusion set option for them to choose. We think there will be pretty good conversion among those people. Many will try both ways and see what they like. For new starts, now that we will have a tubeless product in the market, we expect to benefit because tubeless is very important to people as a form factor. We expect to see a lot of progress there. Leigh A. Vosseller: To your question on pricing, because it is the Mobi pump, it is the same pump hardware regardless of which infusion set they choose. Pricing for the pump is the same. On supplies, you can think about pricing as being similar to other lease supplies. It is a supply pricing discussion, not a pump pricing change. Operator: Thank you. This will conclude today’s question-and-answer session. Ladies and gentlemen, this will also conclude today’s conference call. Thank you for participating, and you may now disconnect. Everyone have a great day.
Operator: Greetings, and welcome to the Full House Resorts, Inc. First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adam Campbell, Corporate Controller. You may begin. Adam Campbell: Thank you, and good afternoon, everyone. Welcome to our first-quarter earnings call. As always, before we begin, we remind you that today's conference call may contain forward-looking statements that we are making under the Safe Harbor provision of federal securities laws. I would also like to remind you that the company's actual results could differ materially from anticipated results in these forward-looking statements. Please see today's press release under the caption “Forward-Looking Statements” for a discussion of risks that may affect our results. Also, we may reference non-GAAP measures such as adjusted EBITDA. For reconciliations of these measures, please see our website as well as various press releases that we issue. Lastly, we are also broadcasting this conference call at fullhouseresorts.com, where you can find today's earnings release as well as all of our SEC filings. With that said, we are ready to go, Lewis. Lewis A. Fanger: Good afternoon, everyone. We will be quick with our prepared remarks today since I know there is another call about to start. We had a solid first quarter. Revenues were $74.4 million in 2026, which compares to $75.1 million in last year's first quarter. Within this, American Place was up about 7%. Also, keep in mind that last year's number included $1.3 million of revenue from Stockman's, which we sold in April 2025. So on an apples-to-apples basis, revenues grew by 0.9% in the first quarter. Adjusted EBITDA in 2026 rose to $13.2 million. That is almost 15% higher than our adjusted EBITDA in last year's first quarter, which was $11.5 million. We had growth at almost all of our properties: American Place, Chamonix and Bronco Billy's, Silver Slipper, and Rising Star all had large percentage increases in EBITDA. At Grand Lodge, which is our smallest property, we continue to be impacted by refurbishment work that, when it is done, should meaningfully upgrade the overall experience. Regarding our sports skins, last year we had an additional active skin. So the decline in 2026 reflects that fact. At American Place, our temporary casino continues to show significant growth. Revenues increased by 7% to $31.8 million in 2026. Adjusted property EBITDA rose 8% to $8.3 million in 2026. Our table games hold was 1.2 percentage points lower than in last year's first quarter. For April 2026, the state's gaming revenues just came out. We had a very good April, which you probably already saw yesterday, with total gaming revenues up almost 6% versus April 2025. Our table hold percentage was off again in April 2026. If we held as expected, our total gaming revenues would have been up almost 16% versus April 2025. Turning to Chamonix and Bronco Billy's, our revenues were down slightly to between $11.3 million and $11.6 million. Revenues were affected by several things. First, the Bronco Billy's casino was pretty torn up in January and February as we replaced carpets and installed new ceilings. The Bronco Billy's side now feels quite complementary to the Chamonix experience. Second, the unseasonably warm weather resulted in less cash business in the quarter. Two of Cripple Creek's biggest events both occur in the winter—Ice Fest and Ice Castles—both great experiences, and each one brings more than 100 thousand people to town. But warm weather hindered those experiences and adversely affected city visitation. Third, we had some unprofitable promotional activity in the prior-year period. We have an entirely new management team that joined us beginning in April, and they are working to make sure that our marketing spend is much more efficient. We had a good quarter in Colorado despite those factors. In last year's first quarter, adjusted property EBITDA was minus $2.3 million. In this year's first quarter, it was minus $1.3 million, an improvement of 42%. It is a seasonal market strongly favoring the upcoming summer months. With the new property team, we have spent a lot of time focusing not just on efficiency and cost, but also on our overall marketing efforts. That analysis continues to show a huge opportunity for us. Awareness and penetration in Colorado Springs remains extremely low. As guests visit us for the first time, they realize that we did not build a commodity product of more slot machines. They realize that we created a very unique experience. We often compare Chamonix to Monarch in Black Hawk, as both have similar levels of quality and are targeting a similar type of guest. The total Black Hawk gaming market, not including the neighboring casino town of Central City, was about $875 million over the last 12 months. Monarch has a third of the hotel product in Black Hawk, so it is reasonable to think that they have at least a third of the gaming revenue. The reality is they could be higher than that given their skew toward a higher-end guest. Using those numbers as a basis, our slot win per day at Chamonix and Bronco Billy's was about one-fourth of Monarch's slot win per day. Our table win per day was about 16% of Monarch's. Therein lies the opportunity. The numbers that Monarch is generating are not unusual when an underserved gaming market is presented with a high-quality destination. If we can improve our win-per-day figures so they are just 45% of Monarch's, then we will have earned a very good return on our investment in Chamonix. Part of that improvement will involve ramping our hotel occupancy from 41% today to the 80%+ that Monarch achieves. And so the marketing team is laser-focused on awareness. There are about 1 million people in the broader Colorado Springs area. There are another 400 thousand people that live in the southern suburbs of Denver. That is about 1.4 million people for our 300 guest rooms and 700 gaming positions. Within that geographic spread, there are several specific ZIP codes that can meaningfully move the needle, and those ZIP codes are receiving a lot of our attention in a new digital campaign that we are rolling out. Preliminarily, April had good numbers with an estimated 9% increase in net slot win and a 20% increase in net table win. On the balance sheet side, we had about $41 million of liquidity at the end of the quarter, including the undrawn portion of our revolver. The summer season tends to be our strong season. That, combined with a lack of any major construction spend right now, should benefit overall cash flow in the near term. We have been very transparent about our efforts to fund the permanent American Place casino as well as refinance our existing debt. If you recall, we mentioned on our last earnings call that we have been working with a funding source that is prepared to fully fund construction of the permanent American Place casino. We have funded the gaming license, land, slot machines, temporary casino, assembly of the workforce, and the mailing list—all at a total investment today of about $170 million. The new financing will provide the approximately $300 million needed to move into the permanent facility. That solution requires a lot of legal paperwork, which the team is diligently making its way through. We continue to feel very good about that solution and look forward to giving you more details once we can, potentially in the next few weeks. We are confident enough on that financing that we expect to commence construction within the next few weeks. The early stages of construction take time but not much capital. By starting now, we hope to open the permanent American Place about two years from now. Our earthmoving drawings were approved a couple of weeks ago by the City of Waukegan, and we are working to obtain the other government approvals needed to begin construction. We have put together a good construction team that is well-versed in building regional as well as destination casinos. They include Power Construction, which is currently building the new Hollywood Casino in Aurora, Illinois—one of the largest builders in the Chicagoland area. We have W.A. Richardson Builders, who will act in an oversight role—one of the largest construction firms here in Las Vegas with great experience developing casinos from their days at Mandalay Resort Group, including the Grand Victoria Casino in Elgin, Illinois. They also recently built the Fontainebleau and Durango resorts here in Las Vegas. And then we have WATG as architects. Their team has a long list of hospitality projects under their belts, including The Venetian in Las Vegas and the Hard Rock in Rockford, Illinois. Lastly, we are concurrently allowed to operate our temporary until August 2027. In conjunction with our anticipated financing, a bill was introduced in the Illinois legislature to extend that date by 18 months. That would ensure a smooth transition from the temporary to the permanent, including continuation of the approximately $30 million per year in gaming and other state taxes that we currently pay. Typically, items like this in the legislature are voted on late in the session, which ends on May 31. That is everything I had, Dan. What did I miss? Daniel R. Lee: I do not think you missed it. Lewis A. Fanger: Let us go to questions. We will now open the call for questions. Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. Our first question comes from the line of Jordan Bender with Citizens Bank. Please proceed with your question. Jordan Bender: Hi, everyone. Good afternoon, and thanks for the question. Maybe not the quarter that you wanted necessarily in Colorado, but on the expense side, that continues to look better. I see my math gets me to expenses down about 10% in the quarter. How much more do you think you have left to take out if we do not get any material revenue uplift from here? Daniel R. Lee: There is a lot of blocking and tackling that has happened, and we will continue to control costs. But there is stuff like we have an outsourced housekeeping service, which only cleans about nine rooms a day, and we end up paying for that. Down at the Silver Slipper, we clean 14 rooms a day. So we are looking to bring that in-house, and we have to hire about 30 housekeepers to do that. Our laundry service—we think we can get more efficient. We hired an AGM in the first quarter who has a background in hospitality and food and beverage, and he was in a similar role at the Ameristar in Council Bluffs, and before that the Ameristar in East Chicago. He is a really good guy, and he is working on that sort of thing. We also hired a finance director in the first quarter. Frankly, we are getting much better reporting out of it, and that is helpful. But to really get to where we want to be, we need to improve the revenues. We have a lot of new marketing people working on that, and it is much more sophisticated than it was a year ago. It is a constant process to try to make the marketing spend more efficient and targeted—like Lewis mentioned, digitally approaching certain ZIP codes. That is a more efficient way to do it. Of the other things we are looking at doing, the business there is very—like most casinos—slanted towards the weekend. You are trying to hire people in a somewhat difficult place to hire them up in the mountains. So we are looking at going out and offering people a $5-an-hour premium if somebody only wants to work on weekends. The backstory on that is if somebody is willing to go on our payroll working only, say, Friday and Saturday, they will not qualify for the health plan because it is less than 32 hours a week. The health plan costs us more than $5 an hour per employee. You might find somebody who is already gainfully employed, or maybe they are retired non-Medicare, but they like the idea of being a barista in our coffee place on Saturday mornings—it gets them out of the house. We would love to have that employee. We are looking at all sorts of ways to be more thoughtful, efficient, and effective. It does not happen overnight, but it is happening. Frankly, the April numbers are pretty encouraging because I feel like we have our footing on the marketing stuff, and we are starting to show really strong numbers. April was a good month. May looks pretty good so far. Hopefully we continue to build on that going into the summer. We are controlling costs, but ultimately it is about growing the revenues. Lewis A. Fanger: And those incremental revenues—you have probably heard me say this before—at this point the cost structure is pretty fully baked, so the flow-through from those incremental revenues should be pretty steep. We did just reopen a Mexican restaurant that had been closed for a while. We revamped it, promoted from within a new food and beverage manager who is a very talented chef, and he did a phenomenal job on new menus and recipes. I would argue we probably have the best Mexican restaurant in Colorado at this point. We renamed it Don Juan's—it is a fun name—and we also tied it into the elevator to get to it. We are going to start offering brunch on Saturdays and Sundays in 980 Prime, which is a wonderful venue for a brunch. We are doing it in ways where we know on Fridays, Saturdays, and Sundays there is demand for that brunch, and we are not doing it every day of the week. Jordan Bender: Great. And on the follow-up, good to hear in Waukegan that is going to get going here in the next couple of weeks. Just curious your view on the casino proposal up in Kenosha and kind of where that stands, and how you underwrite that property in relation to yours. Daniel R. Lee: First off, our customers primarily come from Lake County, and to the extent they come from outside of Lake County, it tilts towards the south. If you drive north from us to Kenosha, there is some farmland out there, so there is kind of a gap. They would have a much bigger impact on the Pottawatomis in downtown Milwaukee than they would on us. That tribe is pretty powerful. Which brings up the second question: do they ever get there? They have been working on this for 20 years. This is not an Indian tribe from Kenosha. This is the Ho-Chunk Nation. They have a small casino a couple hundred miles away in the middle of Wisconsin. They are trying to create a whole new piece of land and reservation trust strictly for commercial purposes to cut into the Pottawatomie business. So it is more of a tribal war than it is an issue for us, and I do not think it would have much impact on us. If they get there, it is going to take them a long time. If everything went smoothly for them, it would be a few years before they got open. Even when they did get open, I do not think it has much impact on us. My first guess is they never get there, because what they are trying to do is not easy. It is one thing if you are a poor Indian tribe trying to get a casino on your reservation—you are somebody that deserves empathy, if you will. This is not a poor Indian tribe trying to get a casino on their reservation. This is reservation shopping and trying to get in a commercially better spot than where their existing casino is. It takes a lot of different regulatory approvals and state approvals, and they are a long way from having it. Lewis A. Fanger: I will tell you that the legal hurdles preventing that are still a very, very long list. Daniel R. Lee: Where this really gets us is there is an analyst out there who is negative on us. He brings this up every time. If he did not have this, he would have something else. I heard yesterday that six months ago he was telling everybody to invest in the Affinity bonds instead of us, and it was with great pleasure to tell you that Affinity is shutting everything down they have in Primm. So he has some mud on his face, and that mud is getting thicker by the day. Jordan Bender: Thanks, everyone. Daniel R. Lee: Thanks. Operator: Thank you. Our next question comes from the line of Ryan Sigdahl with Craig-Hallum Capital Group. Please proceed with your question. Ryan Sigdahl: Hey, guys. Good afternoon. On the financing for American Place, good to hear the progress—should hear something in the next couple weeks—is fantastic. On the last call, Dan referred to it as acceptable terms. Lewis, you referred to it as attractive terms. Curious if you could give an update on how it is trending at the moment. Daniel R. Lee: We are not a AAA credit, and we are not borrowing money at 5%. But it is also not 15%. We think we can get our existing debt refinanced and the incremental money, and all be not a little bit higher than where our debt is today, but not much. Lewis A. Fanger: I do not have anything to add other than what we have said. I do not think you are going to have to wait too much longer. The amount of work that has happened behind the scenes has been extensive, and we continue to push forward and certainly feel better about where we are today than we did at the last earnings call. Daniel R. Lee: It is understandable. The firm on the other side of this does not want us to disclose their name or details until we have the final docs signed. We are working to do that, and that is understandable. I will look on the positive side. The world has been such a mess lately with everything going on in the Middle East, and the high-yield market has hung in there. It has been pretty stable through all this, which is somewhat remarkable and encouraging. Lewis A. Fanger: The high-yield markets have held up. Daniel R. Lee: American Place has continued to display pretty strong numbers. Chamonix is starting to hit its stride. There is a lot of good happening, so all in, I think we are sitting in a good spot. Ryan Sigdahl: Good. Chamonix is a good transition. It is good to see the scrappy nature of spending and cost efficiencies across that entire property. But ultimately, to go from losing a couple million in EBITDA to making a couple million—we want to get to tens of millions—you probably have to really start to ramp the revenue as well. Have you had any renewed thoughts around how to drive that new customer to try the property and really start to build the base of business there on the revenue side? Daniel R. Lee: We are firing on all cylinders here. We now have a four-person sales force, and we are looking for another person, focused on meetings and conventions. They are putting quite a bit on the books, but that stuff is ahead of time, so it really starts to bear fruit in 2027 and 2028. We have a new advertising agency. We have a chief marketing officer here. We have a new director of marketing at the property. We have an advertising person here that we have added. We have subscribed to some third-party research firms who are giving us much more detail on not only who our customers are, but who is out there. We are getting a lot more sophisticated in our targeting. April was the first month where we said, “Okay, this is starting to bear fruit.” Hopefully we will continue to show good results every month going forward. Some months you are going to have off win percentage or something, but I think we have a base to build on. We lost only a little bit of money through the worst part of the year seasonally, so we will end up making money this year—not as much as we would like given our investment—but I think it forms a good base this year and then better results next year. We have also been working with the City of Cripple Creek to get them more focused on how to build it as a destination. If you pull up Telluride, Colorado—believe it or not, its population is not that much more than Cripple Creek. Of course, they have a famous ski area, but they are four-and-a-half hours from any metropolitan area. They have a festival every weekend all year long—everything from a country music festival to a film festival. Our single biggest weekend of the year is Ice Festival, where the city buys blocks of ice, puts them on the street, and people carve them with chainsaws. It sounds kind of hokey, but it gives people the excuse to come up, and our biggest weekend of the year is in the middle of the winter when normally we are summer seasonal. We are now working with the city, which has hired a new director of marketing, to have more of these festivals. We just celebrated Cinco de Mayo. How do we do more of that? The city is starting to get smarter about it. This little town has the potential of being a pretty significant destination for people from Colorado Springs and Denver, but you have to get them up there. Lewis A. Fanger: People do forget sometimes—and not to make myself sound old—but if you go back to when Ameristar took over their property in Black Hawk, they relaunched a rebranded and expanded, much nicer Black Hawk casino in 2006, and opened their hotel tower in 2009. It was a multiyear process—they took over a failed Hyatt casino 100%. If you compare their revenues from 2005 to 2010, the five-year CAGR of gaming revenues was about 24%. That is phenomenal. They were the ones that reinvented that market and said, “Look, there is actually something nice in Colorado to go and gamble at.” What Monarch benefited from was that, 20 years ago, someone changed the mentality in Denver and said, “There is something nice.” When Monarch opened, people were already accustomed to a nicer building in Black Hawk. We did not have that. We are only starting to get that. When we look at penetration—when I say it is massively low, in the ZIP codes I mentioned, we have like 8% penetration. There is no reason why it should be that low. That is exactly why we are focusing the digital efforts. We are not talking about finding hundreds of thousands of new people; we are talking about finding 20,000 new people to bring into the building on a regular basis. That is what moves the needle to a very good investment. We feel very good about where the marketing sits right now. The new ad agency started late in the fourth quarter; it took a few months to get their hands around things, so their true efforts did not really launch until March. We are showing very good signs in April; May is off to a good start. Looking at the penetration stats and the win-per-day stats I mentioned earlier, I think it is harder to think that we cannot achieve those than that we can. Daniel R. Lee: Sometimes we are so used to the numbers. The American Gaming Association has a survey that shows that 30% of American adults visited a casino within the past 12 months. That is the U.S. average. Colorado Springs is less than a third of that. Ryan Sigdahl: Very good. Dan, well done—you never fail to have me learn something new, and “mushroom festival” is one. Well done, and I look forward to a 24% CAGR over the next five years, Lewis. Good luck, guys. Daniel R. Lee: Thank you. Operator: Thank you. Our next question comes from the line of John DeCree with CBRE. Please proceed with your question. Maxwell Marsh: Hey, guys. This is Max Marsh on for John. Still clearly in the early innings of GGR penetration in Colorado, but is there any difference in what you are seeing on the database side? Any insight into the database sign-up trends would be helpful. Thanks. Lewis A. Fanger: The database trends are good. If you look in the month of April as an example, new sign-ups were up 12%, rated visits were up 19%, and win per rated visit was up about 14%. Short answer: the trends are good. We continue to grow the database pretty meaningfully, and we are also bringing in a higher volume of higher-rated guests through the doors. Daniel R. Lee: By the way, I am smiling because he is reading that off a daily operating report. We hired a new finance director from outside of the casino business with a lot of experience in the hotel business, and he has gotten it organized pretty fast. A year ago, we would not have had those numbers by this point in May, and if we had them, they probably were not reliable. Now we are getting them on a daily basis, and they are quite reliable. That is one of the first steps in getting this thing going well. Maxwell Marsh: Great. Thanks for that. And could you give us a little bit more detail about what is driving the growth at Silver Slipper? I know we have a new management team there as well. Is that coming from better OpEx management, or could there be some broader tailwinds there? Lewis A. Fanger: It is a little bit of both. It is probably a little more on the OpEx side versus the revenue side, but it is a little of both. On the OpEx side, we have a new GM there. She is looking at things differently than the prior GM and is finding more efficient ways to do some of what we are doing. A big part has been on the marketing side—being smarter about the marketing dollars that go out the door. As an example, we used to have a weekly seniors day where we would give you a breakfast buffet for $0.99. We found out that a nearby senior center was bringing people in for their weekly nearly free breakfast. When we ran the numbers as to how many of those people were actually in the database and gambling in the casino, the answer was very, very few. It is about taking a fresh look at different marketing ideas and making sure there is a return there. Maxwell Marsh: Gotcha. Thank you, guys. Lewis A. Fanger: Thanks, Max. Operator: Thank you. Our next question comes from the line of Chad Beynon with Macquarie. Please proceed with your question. Sam: Hi. This is Sam on for Chad. Thank you for taking our questions. Switching over to Waukegan, now that you have made more progress toward the permanent construction of that property, any updated thoughts on the earnings power of that property? I know in the past, $90 million of EBITDA was put out there. Any update or color on the timeline to get to that point and what is needed to get to that level? Daniel R. Lee: Even the temporary continues to progress. The run rate today is in the ballpark of $40 million per year of EBITDA. If you start thinking about it, we have indicated it takes about $300 million to build the permanent, and the cost of that money is probably a little higher than our existing bonds—but use 10% for a big round number. Ten percent on $300 million is $30 million a year. The permanent casino is roughly twice the size of the temporary in terms of square footage. It has more restaurants, a much better street appeal, much better decor. In terms of slots and tables, it is not quite double, but it is up significantly. We expect the permanent to do much more business than the temporary. There are a lot of examples, like the Hard Rock in Rockford, which also went from a temporary to a permanent—their revenues doubled. You see it in the Hollywood in Joliet that moved from an old boat to a permanent building. You see it in New Orleans at Treasure Chest, and others, where people went from temporary to permanent, and in every case it has shown a big increase in revenues and profitability. So we do think it gets to $100 million—you said $90 million; I actually think it is $100 million. It does not happen overnight. It might take three years or something. If it takes us two years to build and we open two years from now, then five years from now it is doing $100 million. Lewis A. Fanger: We say it does not happen overnight—although in all the examples we threw out, it did happen overnight—but nonetheless, we assume that it does not and builds over time. Daniel R. Lee: I think even in the temporary, it continues to grow. At some point, you start to max out on weekends—our win per slot machine per day is pretty high in the temporary. We will continue to show growth even before we build the permanent, and then you will have a step to a new plateau in the permanent and then it will grow from there. Sam: Thank you. Appreciate that. And then switching over to your sports skins, wondering on the outlook for those—if you see upside or downside to the current run-rate EBITDA related to those sports contracts over the next few years. Daniel R. Lee: At this point, we only have two. In that industry, we used to have agreements with Wynn and Churchill Downs in markets, but DraftKings and FanDuel—and to a lesser extent, BetMGM—have moved in and dominated the market. A lot of these other guys have pulled away. In Indiana, we have one. They paid us in advance because for a while they had not been paying us, and we said if you want to extend the contract, fine, but you have to pay us in advance. The accountants do not let us book it all at once, but we already have the money. We are going to recognize that income over time. Lewis A. Fanger: It is the initial access fee, recognized over the life of the agreement. Daniel R. Lee: The other one is with Circa, who is a niche player. Their sportsbook here in Las Vegas is probably the biggest single sportsbook in the country, and they have a good forte with that. In Illinois, you only get one license. We had three skins for our license in Indiana, and we also had three skins in Colorado. We only have one in Illinois. The population of Illinois is much bigger, and that is by far the most valuable skin. That is with Circa, and I think they are doing okay. They know that business probably better than anybody, and they are good at it. We will have a beautiful permanent sportsbook in our new facility, which I think they are quite excited for. We continue to look for people who want to get into the sports business, but frankly, at this point there are not a lot of new companies looking to get in—it is so dominated by DraftKings and FanDuel. Lewis A. Fanger: On the flip side—not that I expect this to happen anytime soon—our agreements only include sports betting. They do not include anything for true online casinos. To the extent that were ever to happen, there is the potential for more upside as we would monetize that bit. Daniel R. Lee: I had forgotten—at Tahoe, we had a tiny sportsbook that had been run for a long time by William Hill. A former CEO of William Hill started a new company called Boomers. He came to us and made us an offer, and he is paying us significantly more in rent than we were getting. It is still not a big number, but it is roughly two times what it used to be, and he is promoting it much more than William Hill was. The sports betting companies are also having to deal with competition from prediction markets. They have started branches where they are going into prediction markets under the auspices of being commodities trading firms, offering sports betting in places like Texas and California where it is not been legal, and doing it without paying any state gaming taxes. From DraftKings and FanDuel, that is like, “If they can do it, why cannot we?” Nevada came out and said if you do that, then you cannot operate in Nevada, so they both backed away from operating in Nevada. That opened the opportunity for Boomers, who is not going to try to operate elsewhere. There is a little turmoil there, and we will see where it goes because from the gaming industry's perspective, the idea that somebody can start taking bets on the Super Bowl in Texas without any approval of the Texas legislature—given that the Texas constitution forbids gambling—is problematic. These people are offering Super Bowl bets in places like Texas—unregulated and untaxed—and not surprisingly, they are probably making pretty good money with it. Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to Full House Resorts, Inc. CEO, Daniel R. Lee, for any closing remarks. Daniel R. Lee: We are making good progress, and I think it is going to be an exciting quarter because we are going to get under construction and get this financing done. By the way, we do not take this lightly, but starting construction will cost us a couple million dollars, and you do not normally want to do that unless you are certain you have the money to finish. We are confident enough that this financing is going to come through that we are going to start, because otherwise the opening day keeps sliding. The initial stages of construction are guys driving bulldozers around—it is not a lot of money—so we are going to go ahead and start because we are pretty confident that it is all going to come together here. Lewis A. Fanger: Thank you. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Good day, and welcome to the Trex Company, Inc. First Quarter 2026 Earnings Conference Call. Participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Note, this event is being recorded. I would now like to turn the conference over to our host. Please go ahead. Unknown Speaker: Thank you for joining us today, and good morning, everyone. With us on the call are Adam Zambanini, President and Chief Executive Officer, and Prithvi Gandhi, Senior Vice President and Chief Financial Officer. Trex Company, Inc. issued a press release earlier this morning containing financial results for the first quarter of 2026. This release is available on the company's website. This conference call is also being webcast and will be available on the Investor Relations page of the company's website for 30 days. Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of federal securities laws. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see our most recent Form 10-Ks and Form 10-Q, as well as our 1933 and other 1934 Act filings with the SEC. Unknown Speaker: Additionally, non-GAAP financial measures will be referenced in this call. A reconciliation of these measures to the comparable GAAP financial measures can be found in our earnings press release at trex.com. The company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. With that introduction, I will turn the call over to Adam. Adam Zambanini: Thank you, and good morning, everyone. Turning to the quarter, I want to acknowledge my first earnings call as CEO of Trex Company, Inc. Having been with the company for over 20 years, most recently as COO, I approach this role focused on continuity, execution, and accelerating the strategy already in place. Our five-year plan is clear. Our priorities are set, and our focus remains on disciplined growth, operational excellence, and delivering long-term value for shareholders. As part of that work, our leadership team has sharpened Trex Company, Inc.’s vision, mission, and values to ensure that we remain aligned as we scale. This is an evolution, not a reset, and it reflects both where Trex Company, Inc. is today and where we are going. Trex Company, Inc.’s vision is to shape the future of outdoor living through purposeful innovation that enriches people's lives. To support our ambitious growth and galvanize the organization, we recently codified five long-term strategic priorities. These priorities are designed to sharpen our focus and better leverage our strengths across marketing, innovation, and execution. Given their importance to our future growth, profitability, and long-term shareholder value creation, I would like to touch on each priority in detail. Our five long-term strategic priorities are as follows. First, to create an unbreakable bond with our end users—homeowners and pro contractors. Our goal is to deepen the Trex Company, Inc. brand preference and loyalty through superior marketing, product experience, and service. Trex Company, Inc. remains the undisputed brand leader in the wood-alternative market; we are committed to further strengthening that position through continued investment. We have already increased our investment in branding and marketing, highlighted by the launch of the next phase of our consumer- and pro-focused campaign centered around the “performance engineered for your life outdoors” brand platform. This multichannel media campaign will sharpen the focus on wood-to-composite conversion while also emphasizing many of our key differentiators, including technical innovations like our heat-mitigating technology as well as our marine and fire-rated solutions. I am excited about the momentum this campaign has produced and expect Trex Company, Inc. to become increasingly visible with both homeowners and pro contractors moving forward. Meanwhile, we are investing in technology to improve proactive lead generation among our programs to better support our valued pro contractors. This last quarter, we experienced a significant double-digit increase in lead generation, pointing to the early success of this investment. We are confident that these actions will help drive Trex Company, Inc.’s future growth. Next is our continued focus on high-performance innovation. As I mentioned on last quarter's call, driving high-performance innovation remains a central pillar of my leadership mandate. Shortly after joining the company, I led the development and launch of the game-changing technology that redefined the standards in the decking category, Trex Transcend decking. It was the first cap composite decking product that set a new standard of performance and aesthetics while serving as a catalyst to drive market share expansion over the following decade. At its heart, Trex Company, Inc. is the world leader in material science. We intend to sharpen our focus and leverage our tremendous development capabilities to invent and deliver a continuous stream of next-generation outdoor living solutions designed with what we believe is separator technology that makes the hardest innovation in the building products category imaginable. Our goal is to move beyond simply competing with our industry by introducing products with highly differentiated performance that effectively place us in a category of one. Building on the legacy of Transcend, our current pipeline focuses on category-defining performance. We are currently on track for a potential game-changing regional launch in 2027, followed by a more impactful national launch in 2028 through 2030. We are excited about our best-in-class products and our innovation pipeline and look forward to sharing more in the future. Our third priority is to optimize the channels for growth. Distribution remains a key component of the Trex Company, Inc. business model, ensuring that our products are readily available for pro contractors and homeowners. As a reminder, Trex Company, Inc. already has the most comprehensive distribution network with national coverage by two-step distributors and one of the very few brands in the world with a meaningful presence at both national home centers. The distribution channel has seen changes over the last five years with significant consolidation among both distributors and dealers in the two-step channel. We have seen rapid expansion of the home center retailers into the pro channel segment as they move beyond a purely on-shelf DIY focus. We expect the distribution landscape to continue evolving. Our goal remains clear: to maintain strong channel relationships at both the two-step channel and the home center retailers so that our products reach both homeowners and pro contractors across geographies. Our recent additional shelf-space wins at the home center, along with expanded territories with two key distributors, are proof of Trex Company, Inc.’s strong distribution network and demand for our comprehensive portfolio of products. And our recently redefined incentive and marketing programs have been well received by our two-step partners as we convert business away from the competition, further strengthening these valued relationships. Our fourth priority is more of a specific target—namely, lowering the cost of railing. Railing represents a material and rapidly growing part of our revenue mix, and with a large target of doubling our railing business in five years, its importance will only increase. Due to greater manufacturing complexity and a broader range of raw material components, the railing portfolio currently operates at a lower margin than decking, presenting opportunities for operational and cost optimization. We are applying the same continuous improvement initiatives and vertical integration strategies that successfully elevated our decking margins to our rapidly growing railing portfolio. And of course, as the product line continues to grow, we expect natural margin expansion due to economies of scale and greater utilization. Over time, we believe railing margins can approach those of the core decking products, contributing to an overall lift in the corporate margin. Our fifth and final priority, growth enablement, underpins all the others. This priority defines our approach in investing in our culture, technology, and talent to enable long-term profitable growth. We are strengthening our organization by building capabilities in digital and commercial excellence and fostering an innovation-driven culture that empowers teams to move with speed and discipline. We have already enhanced our leadership team, particularly in finance, adding significant capabilities in data analytics and forecasting, creating a new internal pricing group to implement a more nuanced portfolio-level pricing strategy that balances share and margin while improving responsiveness. Over the remainder of the year, I plan to add key senior roles, including a newly created Chief Commercial Officer who will integrate sales, marketing, and IT—which will enable technology, data and analytics, and customer insights—by providing sales and marketing the tools for commercial visibility that create revenue generation. Finally, we are aligning innovation and advanced manufacturing under a newly appointed Chief Operations Officer, Zach Lauer, to enable better coordination on commercializing initiatives in parallel. Our digital transformation is directly linking consumer inspiration to contractor execution, providing the TrexPro network with highly qualified leads and accelerating the wood-to-composite conversion cycle while optimizing our pricing analytics. As you can see, we are not waiting for repair and remodel demand to recover. Instead, we are taking proactive, disciplined action to accelerate growth, strengthen margins, and position Trex Company, Inc. for sustained outperformance. We are confident that these strategic priorities provide a clear roadmap for Trex Company, Inc.’s long-term success. Our team is laser focused on execution, and I look forward to updating you on the tangible progress we are making in these priorities. Turning to the quarter, we started the year with solid results, especially in light of adverse weather conditions and a continued uncertain economic environment leading many consumers to defer large-scale discretionary repair and remodeling projects. However, we are actively taking advantage of the current market environment to aggressively invest, ensuring that we capture a disproportionate share when demand normalizes. The trends underpinning our industry's long-term growth runway—the ongoing conversion from wood to composite materials, demand for low-maintenance outdoor living, and significant long-term repair and remodel tailwinds—have not changed. With that context, I will turn it over to Prithvi, who will walk you through the quarter in greater detail. Prithvi Gandhi: Thank you, Adam, and good morning, everyone. Unless otherwise noted, all comparisons are on a year-over-year basis. As Adam mentioned, we had a solid start to the year with net sales of $343 million, an increase of 1%. First-quarter volume is driven by both consumer sales and channel stocking to support the second- and third-quarter peak buying season. With our level-load production strategy implemented in 2025, we elected to reduce channel inventories for the early part of 2026 and rely on our own inventory to support peak channel requirements later in the year, resulting in lower first-quarter volume. From a channel perspective, we saw strong home-center-driven DIY demand early in the quarter, which shifted over the course of the quarter towards greater strength in higher-end pro-contractor-driven products. Gross profit was $139 million with gross margin of 40.5%, about 100 basis points better than we expected. A favorable mix of higher-margin premium decking products and lower sales of railing and margin improvements from continued operational excellence helped to offset an increase in depreciation expenses related to decking lines coming into production readiness at our Arkansas facility. Importantly, we did not experience any noticeable cost pressures related to the increase in oil prices related to the conflict in the Middle East. I would like to spend a few minutes diving a bit deeper into our raw material exposure, as it is the majority of our COGS—especially recycled LDPE. While recycled LDPE is a petrochemical, its pricing dynamic is quite distinct from virgin polyethylene, which is tied directly to the price of oil. Historically, recycled LDPE prices tend to lag virgin polyethylene by several quarters and generally exhibit less volatility. This reflects the substitution dynamic—users of virgin polyethylene typically need to see sustained higher prices before adjusting their production to incorporate even modest levels of recycled content, which in turn increases demand and prices for recycled LDPE. And supply of this material is not an issue, as we are entirely domestically sourced. As a leader in the use of recycled content, this is a significant competitive advantage, particularly during periods of raw material inflation when competitors relying on virgin inputs are more exposed to volatility. And while we are seeing increases in certain other input costs, such as diesel fuel and aluminum, we have a range of mitigating levers available, including cost-out initiatives, operational efficiencies, and product-specific pricing actions. Importantly, the same inflationary pressures also affect our competitors. Moving on to selling, general, and administrative expenses, which were $56 million in Q1, representing 16.2% of net sales. Excluding digital transformation costs of $1 million and Arkansas facility startup expenses of $200 thousand, SG&A was $54 million. SG&A came in below our expectations despite continued investments in branding and marketing programs to drive future growth. Lower self-insured medical costs and the timing of expenses more than offset higher investments in the quarter. Because we are in the final stages of the Arkansas facility build-out and did not finish as expected in Q1, interest expenses were capitalized on the balance sheet, resulting in no P&L impact. Our full-year guidance for interest expense now reflects completion beginning in Q2. Putting it all together, adjusted EBITDA of $103 million grew 2% in the quarter due to positive pricing and mix, cost control, and the timing of expenses. Free cash flow was negative $143 million as we built inventory and accounts receivable ahead of our peak selling season. This was an almost 40% improvement versus the prior year. As our capital investment needs declined significantly now that we are finishing the Arkansas facility, our balance sheet remains strong with our net debt leverage of 1x EBITDA at the low end of our target range of 1x to 2x. We are confident in our long-term free cash flow generation and continue to have balance sheet capacity to pursue our capital allocation agenda, which prioritizes an unwavering commitment to first drive growth, then return cash to shareholders through share repurchases, and lastly, to pursue disciplined M&A. In the quarter, the company took advantage of an opportunity in the stock price by executing continued aggressive share repurchases. For the first time in the company's history, we implemented an accelerated share repurchase, or ASR, to quickly buy back a large amount of stock. This $100 million ASR was part of our larger $150 million share repurchase announcement. We will be completing the full $150 million repurchase during the second quarter, and I am pleased to announce that the board has authorized a 10 million share increase to the company's existing share repurchase program, reflecting their confidence in the long-term intrinsic value of Trex Company, Inc. Turning to outlook. We are maintaining our full-year guidance based on our solid start to the year and our continued expectation for the broader repair and remodel market to be flat to down this year. We remain minimally exposed to input cost inflation. Our vertically integrated domestic recycling infrastructure and approximately 95% recycled content drive a highly stable cost profile, which helps protect margins during periods of petrochemical volatility. We continue to expect fiscal year net sales of $1.185 billion to $1.230 billion, adjusted gross margin of approximately 37.5%, and adjusted EBITDA of $340 million to $350 million. For the second quarter, we expect net sales in the range of $388 million to $403 million, and we expect to see a reversal of the gross margin benefit from product mix that we saw in Q1. Before turning the call back to Adam, I want to touch on two key metrics. The first is sell-in/sell-out. Sell-in represents Trex Company, Inc.’s sales to its distributors and home centers. Sell-out represents the sales from our distributors and home centers to dealers and end consumers. As we discussed in the past, quarterly sell-in and sell-out results can be influenced by timing, seasonality, and channel dynamics and, as a result, may not always reflect the underlying long-term trends of the business. To provide a clearer view of performance and how we manage the business, we are introducing a rolling 12-month sell-in and sell-out metric, which we will report each quarter going forward. This metric smooths short-term volatility and better captures fundamental demand trends by accounting for seasonality and other factors that are not fully reflected in quarterly movements. For Q1, growth for our trailing 12-month sell-in was 7% and growth for our trailing 12-month sell-out was 6%. The second metric is one which we believe will experience meaningful improvement not only this year, but for many years to come: free cash flow. As many of you are aware, we plan on ramping up production at our new Arkansas facility beginning next year. More importantly, the CapEx associated with the plant build-out will end this year, with the majority of our Arkansas-related spend finishing in the first half. We anticipate a total of $100 million to $120 million, down from $224 million in 2025—a more than $100 million improvement. And with construction substantially completed by the end of this year, we expect another meaningful decline in CapEx in 2027 to maintenance levels of approximately 5% to 6% of revenue, driving further improvements in free cash flow. We have built Arkansas to effectively more than double our revenue potential with just the purchase of additional lines. So this upfront investment will provide us with years of capacity expansion ability with minimal additional CapEx. This gives us a strong line of sight to continuous robust free cash flow generation regardless of the exact timing of a significant rebound in consumer demand. With our organic expansion needs met through our Arkansas campus, our capital allocation priorities will next focus on additional share repurchases and then on accretive bolt-on acquisitions. Trex Company, Inc. will return to the free cash flow generating machine that it had been before the recent necessary investment in capacity expansion, which started during COVID and will end this year. I will now turn the call back to Adam for his closing remarks. Adam Zambanini: Thank you, Prithvi. Hopefully, you can feel the excitement of the Trex Company, Inc. team about the great opportunities we see in front of us. While the current market environment remains challenging, we are investing in our business and aggressively innovating to capture a greater share of the growing addressable market. We remain the undeniable leader in our market, and we are infusing our team with a more focused, nimble, entrepreneurial culture that we had in the early days of my career at Trex Company, Inc. We are confident this is the right time to evolve our approach, leveraging our great history and brand. Before we close, I want to recognize our people. Their commitment, discipline, and focus on the customer continue to be the foundation of our performance. The progress we discussed today is a direct result of their work, and they remain committed to our long-term success. We believe when our people succeed, our shareholders succeed. Operator, we would like to open the call to questions. Operator: We will now open the call for questions. The first question comes from an analyst with Jefferies. Analyst: Hey, guys. Congrats on a really strong quarter—really good execution. And Adam, congrats on the new role. It was very noticeable in terms of the energy you laid out in longer-term strategic plans. Give us a little perspective on some of the things you are looking to impact. We have noticed leadership changes. You called out the new COO role and certainly a new head of marketing. There appears to be a bigger focus on innovation and streamlining efforts so you can put out product quicker. Help us think through how you are approaching things perhaps a little differently and how that potentially unlocks the growth engine and gets products to market a little quicker. Adam Zambanini: Good morning. Thank you for the kind words; we really appreciate it. When I look at the marketplace today, it is a very dynamic and challenging market. You start to look at the consolidation of national accounts and inflation, and you have to ask: do we have the right strategy in place—which I believe we do, and we laid it out on the call. Do we have the right people? Absolutely. Do we have the right structure? And that is really what I am focusing on—making sure that we have the right structure to execute the strategy. Now on top of that, once we have that structure in place, we innovate, and I think that is where I add the most value to Trex Company, Inc., because when I talk about separator technology, it is about what is going to make Trex Company, Inc. a category of one. And so that focus right now is to take what Trex Company, Inc. used to have—let us say 100 initiatives—and boil that down to 20 underneath five imperatives. So we are working on fewer things that are more impactful to the organization. We want $100 million programs on everything that we work on. That has been our focus as an executive team, and I think it has provided the organization with a tremendous amount of clarity moving forward. Analyst: In an uncertain macro backdrop, how did sell-out trends shape up in the quarter? I appreciate the LTM number, but any more color on how that progressed intra-quarter? And perhaps how things are looking in peak decking season—April and May—and how the channel responded to programs you have rolled out and any marketing efforts? Prithvi Gandhi: Okay, a lot to unpack there. Overall, in terms of the quarter itself, as we said in my remarks, we managed sell-in to the channel based on our level-loading strategy, and essentially overall demand is progressing as we expected in our assumptions for the year. As we go through the busy season, the channel is on the lighter end in terms of the inventory they are carrying—closer to 30 to 40 days of inventory. Assuming a normal busy season, we expect more impetus for sell-in as we progress through the second and third quarters. Adam Zambanini: The lower inventory on the channel side is a function of our decision to take out volatility. For some high-level context as we look at Q1, January and February were fairly challenging. I think most people came out of those two months wondering how this year was going to pan out, but we saw a nice rebound in March as we moved into April. Everybody is still projecting flat to slightly down in the market, but we are expecting to outperform. One trend we have seen over the last year or two is more national accounts acquiring independent lumber yards and carrying less inventory. In many cases, they would carry 90 or even up to 120 days of inventory, and now we see some of them carrying around 30 days. That means probably fewer trucks in Q1, but when in-season demand hits in Q2, you must make sure you have inventory on the ground to execute because there is going to be quick pull-through. Analyst: Thank you. The next question comes from an analyst with William Blair. First topic is gross margin. You beat your internal expectation nicely. Can you unpack what happened? It sounds like mix might have been favorable. Prithvi Gandhi: Yes. Thanks for the question. In Q1, relative to our forecast, we were ahead by about 100 basis points, largely driven by favorable mix from decking. If you recall, we announced a price increase around our aluminum railing in January, and we did see some pull-forward in Q4 and, as a result, a lower mix of railing in Q1. That was the primary driver of why gross margin performed better in Q1. Analyst: Got it. And then SG&A also beat a little bit. I guess the guide still assumes that it is up year over year the rest of the way. Was there some timing issue in Q1? Prithvi Gandhi: In Q1, SG&A came in about $5 million lower than we had planned, driven by two things. One is favorability in medical claims, and that is a hard one to forecast. We feel good about the full year, but in any quarter, things can move around, and that is what we think happened here. Second, there was timing around certain expenses related to our investments in growth and brand awareness. We expect those to come through in the second quarter. To level set, we still expect full-year SG&A to be around 18% of sales. In Q2, we expect a significant sequential dollar lift in SG&A, based on certain expenses that should have been incurred in Q1 moving into Q2 and our continued investment in marketing and innovation that drive growth and brand awareness. With those things, you should see a dollar step-up from Q1 to Q2. Adam Zambanini: We also were trying to be responsible. The war in the Middle East broke out in Q1, and we managed the manageable. That was one area we looked at from an SG&A perspective. As things have calmed down, we are going to continue with the execution of our plan. Analyst: Thank you. The next question is from an analyst with UBS. Good morning. The revenue outlook seems to imply a decent deceleration in the second half. It does seem to imply roughly 5% year-over-year growth in the second half despite a fairly easy comp in the fourth quarter. Is this really just conservatism given the conflict in the Middle East and macro uncertainty, or is there anything else you are trying to message? Prithvi Gandhi: You nailed it. In terms of growth, it is around 5%—our number is about 4%. When we look at this year, there are still some things we want to see in terms of how the war is going to pan out. If it keeps going on over the next several months, then yes, there is some conservatism. If we think this will settle down, there are opportunities for us in terms of execution. One wildcard is the lower-end consumer, who is still struggling. We still see the high end doing really well on the decking side, and we are definitely focused on converting more of the wood market—about 75% of the market is still wood—and we are getting more creative as to how we will convert that opportunity. A couple other things around the second half. We introduced a refuge PVC product; most of those sales will occur in Q2 to Q4. That should help revenue growth. Second, in line with the industry, we announced a mid-quarter price increase again around aluminum railings; that was not in our prior forecast. Third, our continued investments in marketing and innovation are showing green shoots—lead generation, sample orders—all progressing really well, and we expect to drive some conversion from that. Analyst: That is helpful. On the quarterly cadence of adjusted EBITDA margin, second-quarter revenue is expected to be up sequentially, but is it possible EBITDA margin is actually down quarter over quarter given factors like the step-up in SG&A? Prithvi Gandhi: From Q2 2025 to Q2 2026, you should expect EBITDA margin to be lower this year. We expect a little more than half of the Q1 gross margin favorability to reverse in Q2, and SG&A will see a significant dollar step-up between Q1 and Q2. Those two together create a different EBITDA profile versus Q2 of last year. Analyst: But sequentially, Q1 to Q2, EBITDA margin could be down as well? Prithvi Gandhi: Yes, Q1 to Q2 as well—you should see some decline in EBITDA margin. Analyst: Thank you. The next question comes from an analyst with J.P. Morgan. Analyst: Hi, this is [inaudible] in for Michael. First, on cadence throughout the year and the back half, can we get an update on how you are looking at the R&R backdrop and how that connects to the full-year guidance range? Prithvi Gandhi: Looking at the home center business, there has been a lot of forecasts from negative 1% to 1% growth. We have seen many forecasts at flat to slightly down. We are doing low- to mid-single-digit growth. For the full year, it is about 3% right now in terms of our year-over-year growth. Our overall macro assumption on repair and remodel is unchanged—still flat to down with the back half better than the first half, in line with indicators like LIRA. Analyst: You mentioned the relative strength between DIY and pro and how it shifted through the quarter. Could you provide more detail and how you are thinking about that going forward? Adam Zambanini: We are a marketing powerhouse, so we had to get back to our roots. That is the territory I have come from. We reinvested in that platform, made structural changes in marketing, and filled out that department. I feel like we are in a great spot. That really helps drive the high end of the marketplace. Once again, products like Trex Transcend and even our Select decking are doing really well, along with higher-end lines of railing. Those are the consumers buying right now. The focus is also on converting the low end—converting more wood users over to Trex Company, Inc. On the high end, there has been focus on the PVC area—not just with the introduction of Trex Refuge; we have other products that compete in the fire segment. There is plenty of opportunity, and a lot of the mid-to-premium end is doing well because our marketing is working. Analyst: Thank you. The next question comes from an analyst with D.A. Davidson. I was hoping to talk more about the shelf-space commentary. Can you help frame the magnitude of that expansion and how you expect that business to ramp over the next couple of quarters? Maybe some sense on price point? Prithvi Gandhi: Good morning. We would characterize it as meaningful. We have picked up both decking and railing slots in the recent line reviews. Trex Company, Inc. was one of what we believe are two winners at retail, and some peers did not do as well. We will not give a specific number, but it is meaningful for growth. In terms of timing, shelf resets are always challenging to time exactly. We will start to see some of those reset and some products in place now as we move into Q2, with momentum building from Q2 into Q3 and Q4. Analyst: A two-parter on railing. Can you talk about the pace at which you can drive improvements in controllable costs and how M&A may factor? Second, does lowering cost act as a catalyst for market share objectives and the pace of volume growth? Adam Zambanini: Great question. Railings are about material science. We have seen things this year that we are going to unlock on the material science side of the portfolio that will lower raw material cost of railing. In many cases, this will drive margin expansion. Trex Company, Inc. is aggressively priced in every segment—from the opening price point at home centers that can be $20 to $25 a foot, all the way up to systems at $250 a foot. Most of the material science benefits will drop to the bottom line. On vertical integration and acquisitions, these are very small companies we are looking at, but with meaningful impact in lowering raw material streams. In some cases, we can be more aggressive to convert, but we are satisfied with where railing sits today. The focus is on expanding margins. Prithvi Gandhi: Just to add, back in 2023 we said we would double our business by 2028. We are on track to do that. Analyst: Thank you. The next question comes from an analyst with Goldman Sachs. Analyst: Good morning. This is [inaudible] in for Susan. On the high priorities you mentioned earlier, where do you see the biggest opportunity to drive above-market growth in the near term relative to those more helpful in the long run? Analyst: Could you repeat which priorities? Analyst: Yes—within the five you mentioned, which provides the biggest near-term upside to drive above-market growth versus those that are longer-term? Adam Zambanini: Near term, it is creating an unbreakable bond with end users—getting back to basics on marketing and having the right people in the right spots to convert more downstream with contractors and consumers. Not far behind that is launching high-performance innovation. We will start regional launches in 2027 and see a much more meaningful impact from 2028 to 2030 with national launches. But near term, it is the unbreakable bond with end users. Analyst: You talked about optimizing channels for growth. Does that mean expanding presence in retail versus making changes to wholesale? We are seeing consolidation at the wholesale level—how does that provide more opportunities, and where do you see the biggest ones? Adam Zambanini: We created a pricing department to price our products by channel. You want to avoid channel conflict between home centers and the pro channel, and sometimes products cross-pollinate. Our perspective is to have the right products in the right channels at the right price. The market is very dynamic with a lot of consolidation at the dealer and distributor levels. As there is consolidation, there will be channel changes long term. We need the right pricing strategy for each channel with the right products. We have been creating that structure to allow us to take market share while maximizing margins over time. Analyst: Thank you. The next question comes from an analyst with BMO Capital. Analyst: Good morning. Looking at your full-year guidance, what is embedded within that in terms of sell-out—both decking and railing? Prithvi Gandhi: In total, our sell-in growth is about 3%. In terms of sell-out, we are assuming something close to that in the overall market. Analyst: That would imply a meaningful slowdown from the trailing 12 months, which was about 6%. But you are not seeing anything today that suggests that slowdown is happening—is that fair? Prithvi Gandhi: As Adam said, the year started slow, some of it driven by weather. Since March we have seen good order intake, and that continues through April. Overall, we do not see anything that would cause us to think otherwise. Analyst: Switching to capital allocation. You talked about CapEx coming down. As we sit here today and you have been active with share repurchases, can you talk about the M&A pipeline and how you rank priorities between repurchases and M&A? Prithvi Gandhi: Good question. Lee just joined us a couple of months ago, and we are actively doing the work. Adam has talked about areas of interest: number one, vertical integration and margin expansion; two, the whole outdoor living space from the fence back to the deck and house; and third, more distant, the exterior building envelope. That is the playfield. We are doing the strategy work now to identify targets and areas that would be very synergistic. We should have a point of view shortly, and then we will build out the pipeline. It is still early days around M&A. In terms of capital allocation, I always look at M&A against share buybacks—where is our share price, how much cash flow do we have, what is the intrinsic value, and the return of buying back shares versus using that capital for an M&A transaction. The big difference is M&A gives you future growth options; buybacks do not. That is the analysis we go through. Analyst: Thanks. The next question comes from an analyst with Wolfe Research. On your goal to lower the cost of railing and drive margin improvement, are there any numbers you can put around the opportunity in terms of cost reduction or margin improvement? You talked about eventually pushing margins closer to decking—can that happen in a five-year time frame? Adam Zambanini: In our strategic plan, that can happen in a five-year time frame. We have it broken out by year, but we are not sharing that detail at this time. Analyst: Expectations for inflation in 2026. You mentioned reasons why you should be shielded from inflation on LDPE. Can you put numbers around potential inflationary impact and what you are expecting in terms of price/cost relative to that inflation? Prithvi Gandhi: As we said at the start of the year, price/cost for the full year is relatively neutral, and we continue to have that expectation. Three areas have some exposure, but we have taken steps to mitigate it. One is around virgin resins—on that front, we essentially have a fixed cost for the rest of the year, and that is baked into the forecast. Second is diesel prices—we pay for inbound freight and transfers between plants. We have pushed back against vendors on the cost of raw materials to offset some diesel inflation and are managing internal transfers to mitigate impact. Third is PVC—the new product we have introduced. Our costs are fixed through the balance of 2026 with our third-party sourcing. On all these fronts, we are well positioned in managing any inflationary impact. Analyst: Thank you. The next question comes from an analyst with Loop Capital. You mentioned the cold start to the year in January and February. Did you see delays with the start of the spring selling season in seasonal markets such as the Northeast that could benefit Q2 sell-through? Adam Zambanini: Looking at the northern markets—New England across to Minnesota and that upper northern belt—we were down double digits in Q1. In the Mid-Atlantic—draw a line across the U.S.—about flat. In the southern U.S., we started to see double-digit growth again. We could see the weather influence, and we are just now starting to see some northern territories wake up. The promising part is where the weather has been good, we have seen nice numbers across the board. Analyst: Very helpful. And on the mid-quarter railing price increase, any impact from the new Section 232 valuation on your railing products, and will the increase fully offset inflation pressure you are seeing? Prithvi Gandhi: In terms of tariffs, in our overall cost position it is less than a 5% impact, and through our pricing initiatives we are able to cover most of that cost increase. Analyst: Thank you. The next question comes from an analyst with Benchmark Company. Most of my questions have been asked. Follow-up about inventory in the channel and your own inventory. Your inventory looks a little higher than usual in Q1. Is that just an extension of level-loading? Was it in part because of the slow start to the year? Or being prepared for a bounce-back? Adam Zambanini: We have our level-loading strategy in place. We want to be there to serve the market when demand is ready. Channel inventory is about flat to prior year, but with pricing in there, on a lineal-foot basis external to Trex Company, Inc., inventory is slightly down. As discussed earlier, larger customers like national accounts did not take as much inventory. We believe demand will be there in Q2; therefore, we have a little higher inventory now in Q1 because those customers are going to need it right away as we move into Q2. That is the key change. Analyst: Thanks, and congrats again. The next question comes from an analyst with Stephens. I want to dig into the railing impact on margin a bit more. You mentioned that lower railing sales helped margins in Q1. I think the expectation was for a higher mix of railing sales through this year to have roughly an 80-basis-point impact to gross margin. Is that expected to normalize in Q2 fully? With movements in raws and pricing and initiatives to grow margins—which I understand you are not ready to fully quantify—is that still the best way to think about the margin impact for this year, and then improvement from there more in 2027? Prithvi Gandhi: Let me start by reminding everyone of what we said back in November when we reported Q3 2025 results. At that time, we stated we expected about 250 basis points of headwind to adjusted gross margin in 2026 on a full-year basis. We continue to have this expectation for 2026, and we finished 2025 with adjusted gross margin of 40% for the full year. Also in November, we said 170 to 180 basis points of that 250 was entirely from the depreciation associated with bringing Arkansas to production readiness. The balance—70 to 80 basis points—is from railing growth, and we continue to expect that for the full year. In Q1, we saw about 100 basis points of gross margin favorability from railing being smaller in the mix. In Q2, we expect a little more than half of that to reverse, and the rest will reverse through the balance of the year. That is how to think about it. Analyst: Thanks. And Adam, you mentioned Trex Company, Inc. has historically been a marketing powerhouse and you are getting back to your roots. Is the thought that branding and marketing spend will continue at a similar level as a percentage of sales and grow with sales, or will there be a need to ramp that up more with new product rollouts? Adam Zambanini: As long as I am here, we are going to be investing in marketing. The 18% is a really good number. During COVID, you saw SG&A plummet—we were out of capacity—and we delivered strong numbers. If I go back in time, I would have invested more then to create more awareness around the Trex Company, Inc. brand. Will there be some leverage over time on SG&A? Sure, but it will not be 100 or 200 basis points. It might be 10, 20, 30 basis points as we expand and grow, because I want to make sure we are still investing in that platform to get more contractors and more consumers to buy Trex Company, Inc. We will continue to invest; when we can leverage, we will, but investing in marketing will remain very important. Analyst: Last one—on M&A appetite. Is there potential or appetite for larger deals, or more tuck-in, complementary stuff? Adam Zambanini: Our five-year strategic plan is tuck-in M&A, and we have been very consistent. Number one, vertical integration—this is about margin expansion. Number two, we have the license to own the backyard—from the threshold of your sliding glass door all the way out to the fence, Trex Company, Inc. could be anywhere in that backyard. That is where we would go next. Lastly, the envelope of the house. We view this as smaller tuck-in acquisitions that can add value. Our brand is our number one asset; there are a lot of smaller companies where the Trex Company, Inc. brand makes a lot of sense and helps us potentially grow our TAM. We reside in a $75 billion outdoor living market. Our TAM is around $14 billion, and if we can expand that over four to five years to $20 billion to $25 billion, that benefits Trex Company, Inc. in terms of opportunities to grow market share. Analyst: Thank you, and congrats on the quarter and new role. The next question is from an analyst with Barclays. First, on capacity dynamics: given demand trends and contractor sentiment, how does this support your strategy around incremental capacity, and how would you adjust the capacity network as the Arkansas facility ramps? Is Arkansas displacing any production elsewhere? Adam Zambanini: At the contractor level, we still see books out six to eight weeks on the low end, and in some areas eight to ten weeks. In some cases, contractors feel slightly better this year than last year. Part of that is our marketing investment—we are seeing significant double-digit growth in leads we are giving to our contractors, which may be extending backlogs. On capacity, we have been consistent: as we look at Little Rock and our growth, we would be looking at opening that in 2027 from where we sit today. Even if we did not see as much growth, Little Rock provides leverage—it is going to be our lowest-cost facility. We have one facility in the Winchester footprint that is over 30 years old. We will maximize our manufacturing footprint over the longer term. Our expectations are for good growth in 2027 through 2030, and we are going to need all that capacity—from Little Rock to Winchester to Nevada. Analyst: With the introduction of your PVC product, how is it faring regionally—Northeast, West Coast? And more broadly, on pro versus DIY, is higher-end luxury still outperforming the opening price point? Adam Zambanini: We still see outperformance from the middle to higher-end consumer, which has been consistent over the last several years. Trex Company, Inc. is putting more marketing effort into conversion from wood. We have a new campaign called “No Regrets.” If you have seen it on TV, it shows a dock owner maintaining wood versus a dock owner with a Trex deck who can go enjoy the boat for the day—No Regrets. It is a strong visual. Targeting wood is a huge focus. On PVC, we had a great rollout on the West Coast and are ahead of expectations on manufacturing. We are getting increased supply from our supplier. The largest market for PVC is in New England and the Mid-Atlantic, and we have quickly opened those two regions as we rolled into Q2. It is a roughly $0.5 billion market, and Trex Company, Inc. had not played in it. We plan to expand that over time as a great growth opportunity. Analyst: Thank you. The next question is from an analyst with Bank of America. Can you talk about the right level of leverage for the business longer term, and would you be open to buying back more stock as free cash flow frees up next? Prithvi Gandhi: Thanks for the question. We want to manage company leverage between 1x and 2x. This year, free cash flow will increase by about $100 million versus last year. We expect to complete $150 million in buybacks by the end of this quarter. Then we will look at the rest of the year—where free cash flow is and how the business is doing. With the board's new authorization, we have capacity to do more buybacks. Based on where the stock price is relative to intrinsic value, it is still a compelling opportunity. Going forward into 2027, we will have even more free cash flow because we will essentially be done with capacity expansion. Share buybacks will continue to be a significant part of capital allocation. Analyst: And on reinvestments you are making, can you give more color on allocation and priorities between hiring more sales versus marketing? Adam Zambanini: A bigger portion will be marketing-related and the investments we are making to create awareness—linear TV, streaming, podcasts, and all forms you can think of to get the Trex Company, Inc. name out. Then drive to trex.com—there are investments in the website—and investments in innovation. If you want game-changing innovation, you have to invest in R&D. The major buckets are marketing and innovation, with some in sales to support and execute the strategy longer term. Operator: That concludes the question-and-answer session. I would like to turn the floor to management for any closing remarks. Adam Zambanini: Thank you, everyone. Prithvi and I look forward to speaking to you and seeing you at upcoming conferences in the coming weeks. Operator: This concludes today's teleconference. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Thank you for your continued patience. Your meeting will begin shortly. Team will be happy to help you. Welcome to Forward Air Corporation's first quarter 2026 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. Lastly, if you should require operator assistance, please press 0. I would now like to turn the call over to Tony Carreño, Senior Vice President of Treasury and Investor Relations. Thank you, operator. Tony Carreño: Good afternoon, everyone. Welcome to Forward Air Corporation's first quarter earnings conference call. With us this afternoon are Shawn Stewart, President and Chief Executive Officer, and Jamie G. Pierson, Chief Financial Officer. By now, you should have received the press release announcing Forward Air Corporation's first quarter 2026 results, which was also furnished to the SEC on Form 8-K. We have also furnished a slide presentation outlining first quarter 2026 earnings highlights and a business update. The press release and slide presentation for this call are accessible on the Investor Relations section of Forward Air Corporation's website at forwardair.com. Please be aware that certain statements in the company's earnings release announcement and on this conference call may be considered forward-looking statements. This includes statements which are based on expectations, intentions, and projections regarding the company's future performance, anticipated events or trends, and other matters that are not historical facts, including statements regarding our fiscal year 2026. These statements are not a guarantee of future performance and are subject to known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For additional information concerning these risks and factors, please refer to our filings with the SEC and the press release and slide presentation relating to this earnings call. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this call. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law. During the call, there may also be discussion of metrics that do not conform to U.S. Generally Accepted Accounting Principles, or GAAP. Management uses non-GAAP measures internally to understand, manage, and evaluate our business and make operating decisions. Definitions and reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in today's press release and slide presentation. I will now turn the call over to Shawn. Shawn Stewart: Good afternoon, everyone, and thank you for joining us. I appreciate your interest in Forward Air Corporation. There are three main topics that I would like to cover on today's call. First, I will provide an update on the customer transition and our strategic alternatives review that we announced in our press release. Second, I will share some thoughts on our first quarter results and the logistics market in general. Third, I will comment on recent awards earned by our team before turning the call over to Jamie. Let me start with the customer transition. While no formal notices have been delivered, we are in discussions with one of our largest customers to transition a significant portion of their business to other providers. How much of the business will be transitioned and the timing thereof are still being discussed, but we are currently anticipating that the majority of what will ultimately transition will start in early 2027 and take place throughout the balance of the year. It is important to note that we believe this has little, if anything, to do with the impeccable level of service that we provide them and more about their own internal diversification strategy. We are still in active discussions to retain as much of the business as possible, and we are doing everything we can to minimize the impact to our company. I want to reiterate that we believe the customer's decision is entirely related to their own operation and supplier diversification initiatives and has nothing to do with the exceptional service we have provided them during our long-term partnership. This leads me to an update on our strategic review and the new actions we are now pursuing to enhance value and help offset this potential impact. As you know, in January 2025, the Board initiated a comprehensive review of strategic alternatives to maximize shareholder value. We have had extensive negotiations and discussions with multiple parties. However, due to a variety of factors, including the developments that I just mentioned, no actionable proposals for sale of the company were received. We continue to consider all opportunities to enhance shareholder value, and we are now pivoting our focus to pursue a sale of non-core assets, including our intermodal segment and two of our smaller legacy Omni businesses, which in aggregate represent approximately $394 million of our 2025 revenue. These targeted sales are intended to advance our efforts to delever the balance sheet and further focus our services around the core of what we do every single day, which is providing service-sensitive logistics to our customers around the world in air, ocean, ground, and contract logistics markets. With that, let us turn to the second topic, our quarterly results. In the midst of an incredibly complex integration, a fairly weak industry backdrop, changing tariff regulations, and the disruption in the Middle East, our team continues to make progress executing our transformation plan, overhauling operations, and improving the quality of our earnings results, which is reflected in our results. For the first quarter, we reported operating income of $20 million compared to $5 million last year, and consolidated EBITDA, which is calculated pursuant to our credit agreement, was $70 million compared to $73 million a year ago. Regarding the overall logistics market, domestic transportation supply has continued to tighten, driven in large part by increased regulatory and enforcement actions over the past year. These dynamics have accelerated carrier exits, particularly among smaller operators, while limiting capacity additions. A tightening supply environment is a component in rebalancing the freight market and supporting a return to more favorable market dynamics after years of prolonged freight recession. However, supply is only one side of the equation. Improvement in demand will ultimately determine the pace and sustainability of a recovery. Encouragingly, early indicators suggest that the industrial economy, which has weighed on freight demand, may be approaching an inflection point. Manufacturing PMIs have now remained in expansion territory for four consecutive months. Readings above 50 have historically served as a leading indicator for increased freight volumes, as rising manufacturing activity typically drives higher shipment of raw materials and finished goods. Additionally, the ratio of inventory to sales continues to decline. Outside of the post-COVID destocking, the current levels are at or slightly below the 10-year average, with shippers operating with conservative inventory levels amid ongoing tariff uncertainty and evolving trade policy. Depressed freight demand in the most recent past also creates the potential for a restocking cycle, which could serve as a meaningful tailwind for freight volumes when demand improves. Also, do not lose sight of the recent increase in truckload spot rates and corresponding spike in tender rejection rates. That said, while the VIX may have settled, macroeconomic risks remain. Ongoing geopolitical tensions in the Middle East and the associated rise in fuel prices introduce a key source of uncertainty. Sustained increases in energy costs could pressure manufacturers and consumers, raising input costs, compressing margins, and ultimately dampening demand. Outside of this week's announcement and subsequent sell-off in oil, if elevated fuel prices persist, they could lead to tempered demand, offsetting some of the positive momentum emerging in the industrial economy and delaying a recovery in the freight markets. While we are optimistic about the improving freight dynamics, we remain focused on prioritizing customer service and thoughtful cost management. We have been operating as one company for over two years now, and I am proud of what our team has accomplished and even more excited about our future. Finally, it gives me a great deal of pride for our team of dedicated logistics professionals to be recognized for their hard work, diligence, and commitment to our customers. Forward Air Corporation was recently named the 2026 Surface Carrier of the Year by the Air Forwarders Association, whose members are freight forwarders that rely on our expedited ground network to maintain the integrity of their airfreight schedules. This recognition reflects the strength of our network, our team's performance, and our commitment to delivering exceptional service on a consistent basis. Forward Air Corporation was also recently named to Newsweek's list of the Most Trustworthy Companies in America 2026. The annual ranking recognizes companies across industries that have earned strong trust among customers, employees, and investors. This award follows the company's selection to Newsweek's list of Most Responsible Companies in 2025. This recognition underscores the significant transformation our team has achieved over the past two years in optimizing operations, improving performance, and enhancing customer relationships. Both of these honors are a reminder of the high service standards that we are known for. They reflect the dedication of our people whose efforts continue to drive our reputation for excellence. With that, I will now turn the call over to Jamie to go through the detailed results of the first quarter. Jamie G. Pierson: Thanks, Shawn, and good afternoon, everyone. As you heard from Shawn, we reported consolidated EBITDA of $70 million in the first quarter compared to $73 million in 2025. As a reminder, the comparable results a year ago were favorably impacted by $4 million of annualized cost reduction initiatives that were actioned in 2025. The credit agreement allows for the inclusion of the unrealized and pro forma savings from these actions to be included in our historical consolidated EBITDA and requires that they be spread back in time to the period in which the expense would have occurred. On an LTM basis, consolidated EBITDA was $3[inaudible] million. Like we normally do, we have detailed the information used to reconcile the adjusted and consolidated EBITDA results on Slide 30 of the presentation. On an adjusted EBITDA basis, we reported $70 million in the first quarter compared to $69 million in the first quarter of last year. Turning to the segments. Expedited Freight reported EBITDA improved to $28 million compared to $26 million a year ago, with the exact same margin of 10.4%. The Expedited Freight segment's first quarter results also improved sequentially compared to the $25 million of reported EBITDA and a margin of 10.1% in 2025. At the OmniLogistics segment, reported EBITDA of $25 million in the first quarter of this year was in line with the $26 million we reported a year ago. The margin improved from 7.9% to 8.3% year-over-year, driven by an increase in contract logistics volume with a higher margin compared to a decrease in air and ocean volumes that have lower margin. At the Intermodal segment, we continue to see a challenging market, especially from reduced port activity. International trade-related softness among several core customers contributed to declines in shipments and revenue per shipment compared to a year ago. In the first quarter, the Intermodal segment reported EBITDA and margin were $5 million and 10.1%, respectively, compared to $10 million and 16.4% a year ago. Externally, and going back into the back half of the year, we expect to see capacity tighten as JIT supply chains for our BCO customer base loosen as tariffs stabilize, and as additional capacity exits the market due to financial difficulties and bankruptcies of smaller drayage carriers. Internally, we have a strong pipeline and have recently enacted strategic rate increases to several key accounts. Turning to cash flow and liquidity. Net cash provided by operating activities in the first quarter was $46 million, an improvement of $18 million, or more than 60%, compared to $28 million in the first quarter of last year. As for liquidity, we ended the first quarter with $402 million, which is an increase of $35 million compared to the end of 2025 and about a $10 million increase from last year's comparable $393 million. The $402 million is comprised of $141 million in cash and $261 million in availability under the revolver. And as usual, I would like to leave you with a couple of additional thoughts. The first of which is liquidity and how we manage the business, especially in uncertain times. As you heard earlier, our ending liquidity included $141 million in cash, which is the highest ending cash balance in the past eight quarters. When compared to our publicly traded peers, we are at the upper end of the spectrum when calculating liquidity as a percent of both total assets and LTM revenue. And on Slide 22 of the earnings presentation, you will also see, on a non-GAAP basis, we generated $58 million in operating cash flow in the first quarter, which is approximately $12 million better than last year's comparable result. Secondarily, as you heard from Shawn, we are cautiously optimistic about improvements in freight demand, especially in the most recent past. However, there are numerous crosscurrents, including potential continued improvement in the freight demand counterbalanced by ongoing headwinds from inflation, subject to consumer confidence, and macroeconomic risks. We will need these to play out to see if the improvement in demand is sustainable. Regardless of when we see the market fully turn in a positive direction, we plan to continue focusing on the customer, increasing sales, and tightly managing expenses. I will now turn the call over to the operator to take questions. Operator? Operator: We will now open the call for questions. The floor is now open for questions. To provide optimal sound quality. Thank you. Our first question is coming from J. Bruce Chan with Stifel. Your line is now open. Andrew Cox: Hey, good afternoon, team. This is Andrew Cox on for Bruce. I just wanted to touch on the customer loss or customer transition here. We understand that nothing is set in stone, but we are talking about 10% of total revenue. Would just like to get some more details on what segment it is in and what the margin profile is, and how much fixed or structural costs are associated with this customer, and how fast you expect to be able to flex down either the cost or backfill the revenues? Thank you. Shawn Stewart: Hey, Andrew, thank you for the question. Yes, it is quite diverse and dynamic in terms of the service offerings we provide them. It is mainly in contract logistics and some transportation. So margins are different depending on what segment of that business it sits in. We are still in conversations, so it is very fluid. Obviously, we do not want to be overly transparent today. But we are still in heavy conversations, and it is a very good relationship. So it is not a situation of anything other than what we understand and believe to be diversifying their overall supply chain portfolio between providers. Jamie G. Pierson: Yes, if I can add on there, Andrew. We are positioning ourselves to hold on to as much of this business as possible. Shawn said it perfectly, which is our belief that this is about their growth and their concentration with us. It is a simple diversification play. It is important to note that we do not see any meaningful impacts to the current year, and as you noted, it is ongoing. To date, the conversations have been positive. Stephanie Moore: Hi, good afternoon. I guess maybe going back to the situation with the customer, maybe I will ask this a little more directly than the prior question. I am trying to understand how much leeway or time you saw this coming. Has this been a conversation that has been going on for some time? It is hard to believe for a customer of this size to make these changes quickly. If you could give a little bit of color on what services this customer provides or end market, just to get some color there, maybe a little history on other customer losses. If it is not due to service and it is just diversification, that is obviously having a really large impact this year. If you could touch a little bit more about when this started happening, and then at the same time, what can be done on your end to hopefully try to retain this as much as possible? Jamie G. Pierson: Hey, Stephanie, Jamie here. In terms of the timing, it is still happening. The dialogue to date is active and constructive. We are putting ourselves in the best possible spot to hold on to as much of the business as we can. If it were a service-related issue, I might feel differently, but if we look at our service KPIs with this customer, they are incredible, in my opinion. These are my words, Stephanie, not anybody else’s. We are incredible. So it is more about their concentration with us. They have grown with us. They have been a long-term partner with us. I think it is more about a risk management perspective on their behalf than anything else. In terms of how quickly, it is May. It is going to take some time. The best that we can tell is there is not going to be any impact to 2026. It will not be until early 2027 that we see anything meaningful and material, if at all. We are not throwing in the towel, but we felt that it was the right thing to do to let you know that we are in these discussions as quickly as we possibly could. Stephanie Moore: I worded it today, and then in the release, that part of the strategic alternative review process was impacted by this development with this customer. As we think about this, how much does this weigh on the strategic process? And then once there is some definitive decision—whether it is bad or if this customer does decide to walk away—what does that mean in terms of ongoing strategic processes once this is cleared up? Jamie G. Pierson: I cannot answer that second question about what will happen after it is cleared up. In terms of the impact, anytime you have a large customer concentration like this, it is going to weigh either positively or negatively. In terms of its impact on the strategic alternatives process, the fact that you look at a customer that is approximately $250 million, plus or minus, in revenue is going to have an impact. Stephanie Moore: Absolutely. I guess one last one for me—just on the core business itself, we wanted to get a sense of the ongoing pricing environment. There are certainly some green shoots and some positives in the freight environment. If you could talk a little bit about pricing across your business and your level of comfort given we are seeing what appears to be a bit of an uptick in the underlying freight market? Shawn Stewart: Hi, Stephanie, it is Shawn. We feel really strong about pricing. We had the hiccups in a prior period, and I feel strongly that we are extremely solid in all of our revenue streams, whether it be in the global freight forwarding market, the ground LTL business, or in truckload. I am extremely confident in what we are doing both on a cost management basis and on a revenue generation basis. And as you can see, the consistency in our margins and profitability is proof that we learned a lot and have continued to enhance our sales from there going forward. Jamie G. Pierson: If I can jump in. If you look at the spot rate over the last six months, it is up about 40% since late last year. Tender rejections are up almost 2x, so up 100%. Inventory-to-sales ratios continue to lean out. PMIs have been positive for four months in a row. I think the macro indicators are pointing in our direction. My experience in this space is it generally takes three to six months for it to really take effect, and we are coming into that third to sixth month now. We are not pricing for yield, and we are not pricing for volume. We are pricing for profitability. Scott Group: Hey, thanks. Good afternoon, guys. Just to follow up on the business trends. Tonnage was down about 2% and yields ex-fuel down about 1%. What are you seeing as the quarter progresses so far in Q2? Are things accelerating? I know you said you feel good about price, but yield ex-fuel down a little bit—just a little more color would be great. Thank you. And then, Jamie, I want to clarify that you said the business that you are selling is $390 million of revenue. That is intermodal plus the two smaller Omni businesses, right? What are the two smaller Omni businesses? Any sense of profitability there? And then your intermodal business—are there containers here, or is it all asset-light? What exactly is your intermodal business? I do not think it is like a J.B. Hunt intermodal business, but maybe I am wrong. And do you own trucks, or do you have owner-operators? Lastly, with this customer loss, I know the leverage thresholds as the year plays out start to get a little bit harder. Maybe this customer is more 2027, but any conversations with the lending group at all? How should we be thinking about this? Shawn Stewart: Hey, Scott. I am going to let Jamie go because I know he wants to say he is not going to give you guidance, but great question. Let us see if he is nicer today. Jamie G. Pierson: At the risk of not giving guidance, I would say over the last two weeks of the quarter and going into April, we have seen a fairly strong volume environment from our perspective. I do not want to preordain that the recovery is here. I stick by what I said about the spot, the tender, the inventory-to-sales ratio, and the PMI—there is a lag. But I would say the last couple of weeks of the quarter and going into April, we have seen a fairly strong volume environment. On the asset sales, that is exactly right—about $390 million of revenue across intermodal plus the two smaller legacy Omni businesses. I am not going to disclose which those two are; there is confidentiality with buyers. You can see the $390 million, with roughly $230 million intermodal, so you are talking about approximately $160 million that is remaining for the two Omni businesses; it is not that much. On intermodal, it is mainly port and railhead drayage with what we call C/Y or container yard management—storage of containers on chassis—and mainly port and railhead drayage to final customers. We utilize owner-operators and we have owned and leased chassis. On leverage and the lending group, it is the right question. We ended the quarter with $40 million in cushion. This is a small step down from where we ended the year, but we ended the quarter with the highest cash balance we have had in two years and over $400 million in liquidity. If you look at liquidity as a percent of total assets or liquidity as a percent of LTM total revenue, we are at the upper echelon of that spectrum of our publicly traded peers. So $40 million in cushion is a position I can live in, and $400 million-plus in liquidity is a very good place to be. Harrison Bauer: Hey, thanks for taking my question. One quick follow-up on the Omni businesses that you are selling—about $160 million. Is there any crossover of the potential lost business of the $250 million? And then taking a step back—general competitive dynamics. With the announcement of Amazon Supply Chain Services this week, is there any relation to that and the loss of this business at all? Are there other areas of your business that are potentially exposed to what Amazon is trying to lay out and some aggressive pricing actions they may take? Lastly, in the remaining Omni business and in Expedited LTL, now that you have a handful of capacity that you may need to backfill, how are you thinking about pricing for that going forward—the trade-off of volume and price? Jamie G. Pierson: Not that I can think of, Harrison. If there is any crossover, it is certainly not material. Shawn Stewart: I will take the Amazon question. There is no correlation between Amazon and our customer. The news of Amazon is fairly new, but we know them extremely well over the years. We are not surprised by their announcement, but we also need to let things evolve a bit and see where it goes. Ultimately, we are not particularly susceptible to this announcement by our volumes, etc. We respect what they are doing and respect Amazon a lot. We will keep an eye on it and not be naive, but we are not overly concerned today as we sit here about the impact to us from this announcement. On pricing and backfilling, we are not going to get into any kind of desperate situation. We have a great organization, great solutions, and a fantastic product, and we will continue to price aggressively but with profitability in mind. We will get strategic where it makes sense in a given customer or a given origin-destination pair, but not at the detriment of the company and our overall margin. You have seen us pick up new logos and new business, and we will continue with that mantra. We are not going to overreact—we will stick to what we do well and move forward with replacing any potential loss in different areas as we see fit. Christopher Glen Kuhn: Hey, guys. Good afternoon. Thanks for the question. I just wanted to clarify. So that customer loss is $250 million—that is the total amount of the customer's business with you, and you may or may not lose all of it. You are in negotiations for that right now. Is that the case? And if you do lose some of this, would that change the margin profile—within the Omni business—or is it relatively similar to where your EBITDA margins are? And is the negotiation on price? Because the service seems pretty solid there. What would be the issue aside from just diversification? Lastly, if you lost any of it, is there a way to backfill it with another customer? Is there a plan for that? Shawn Stewart: It is a total 2025 revenue of $250 million. We are giving you a holistic view of what the revenue is. That does not, by any means, state that we are losing $250 million. That was the total spend in 2025. Jamie G. Pierson: It will be less than that. Shawn Stewart: On the nature of the discussion, it is diversification. You have to think about what we do for some of our customers—we handle an incredible amount of their supply chain. It is wise from a risk management perspective for them not to put too much of a percentage in any one particular supplier’s hands. Throughout the years, we have grown with them and provided that level of service. In our opinion, it is simply a diversification play, and that is understandable. Jamie G. Pierson: We do not talk about margins on any one particular customer. We will see how this shakes out here in the near future. The takeaway is threefold. One, the conversations have been both active and constructive. Two, we see no impact occurring in 2026 given the complexity of what we do for our customers. And three, the discussions have been fairly positive to date, and we will continue them. Shawn Stewart: On backfilling, that is the plan every day, whether we are losing customers or seeing down-trading customers. Growth is the number one strategy of our combined organization. It has been a tough market, but at the same time, you have seen us be very sustainable over the last two years. We need this market to turn, but we are not changing anything because of this announcement. We may just run a little faster, with an already sprinting organization. Jamie G. Pierson: The only thing I would add, Chris, is that, as best as I can tell going back and looking at history, we are a fairly high-beta performer. We do better in times of volatility and especially when capacity gets tight. We all do well when capacity gets tight; we seem to do better than our peers when that occurs. That is certainly part of the plan. Christopher Glen Kuhn: You have talked about this in the past, but have you seen any truckload-to-LTL conversions in your business? Shawn Stewart: We have heard “yes” because of rising truckload rates, and I do not want to get too far ahead of ourselves—back to Scott’s question, we are seeing volumes—so it could be, but we do not have enough information to say that definitively. As you have probably been watching in the true domestic intermodal market, you are seeing a lot of diversions from over-the-road onto the domestic intermodal. You are also seeing, slowly, an influx of the ocean containers coming back in. There is going to be a point of inflection where a lot of things are going to shift as the demand comes through. It could be the early stages, but do not quote me on that; we are watching it. We have heard from certain customers that the transition is starting because of the overall price of truckload. Operator: At this time, there are no further questions in queue. Let me turn it over to Mr. Stewart for any final remarks. Shawn Stewart: Thank you so much for your time, attention, and interest in our organization. In closing, in recent quarters, we have navigated a challenging environment with discipline and focus while taking actions to strengthen our company and our overall business. We are extremely confident in the foundation we are building and the steps we are taking to improve our performance. We really appreciate your time today. As usual, if you have any follow-up questions, please reach out to Tony directly. Thank you. Operator: This concludes Forward Air Corporation's first quarter 2026 earnings conference call. Please disconnect your line at this time and have a wonderful evening.
Operator: Hello, and thank you for standing by. I will be your conference operator today. At this time, I would like to welcome everyone to the AerSale Corporation Q1 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to withdraw your question, press 1 again. I would like to now turn the call over to Christine Padron, Vice President, Global Trade and Compliance. Christine, please go ahead. Good afternoon. Christine Padron: I would like to welcome everyone to AerSale Corporation’s first quarter 2026 earnings call. Conducting the call today are Nicolas Finazzo, Chief Executive Officer, and Martin Garmendia, Chief Financial Officer. Before we discuss this quarter’s results, we want to remind you that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the federal securities laws, including statements regarding our current expectations for the business and our financial performance. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results. Important factors that could cause actual results to differ materially from forward-looking statements are discussed in the Risk Factors section of the company’s Annual Report on Form 10-K for the year ended 12/31/2025 filed with the Securities and Exchange Commission, SEC, on 03/10/2026, and its other filings with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those indicated by the forward-looking statements on this call. We will also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of those non-GAAP metrics to the nearest GAAP metric can be found in the earnings presentation material made available on the Investors section of AerSale Corporation’s website at investors.aersale.com. After our prepared remarks, we will open the call for questions. With that, I will turn the call over to Nicolas Finazzo. Nicolas Finazzo: Thank you, Christine, and good afternoon, everyone. Thank you for joining us today. I will begin with an overview of our first quarter performance and key operational developments, and then discuss how we are progressing against our strategic priorities for 2026. I will then turn the call over to Martin to walk through the financials in more detail. This quarter, our team stayed focused on executing our strategy across Asset Management and TechOps: prioritizing (1) disciplined acquisition and monetization of flight equipment and used serviceable material—you will hear me say USM; (2) expanding and optimizing our MRO capabilities; and (3) building a recurring and more predictable revenue base through MRO services and leasing while maintaining our high standards for safety, quality, and on-time performance. First quarter revenue was $70.6 million, an increase of 7.4% from the prior-year period. Adjusted EBITDA also increased by $4.2 million, or 131.9%, to $7.4 million from the prior-year period. Excluding flight equipment sales, which tend to be volatile quarter to quarter, revenue increased 2.2% year-over-year, reflecting growth in leasing and increased demand across our [inaudible] compared to the prior-year period. We placed an additional Boeing 757 freighter aircraft into service, ending the quarter with three aircraft on lease and one additional aircraft under a letter of intent for lease. We continue to engage in discussions with potential customers, as increased demand for cargo continues to make us bullish on deploying the remaining four 757 freighters reconverted in 2026. We also expanded our engine lease portfolio, ending the quarter with 18 engines on lease compared to 16 engines in the prior-year period. Higher average lease rates and improved utilization contributed to stronger asset yields across both aircraft and engines, and reflect our continued progress toward building a larger and more consistent recurring revenue base. Partially offsetting the increased leasing revenue was a decrease in USM sales resulting from the internal consumption of engine material for our own engine builds. At present, we have multiple engines in work where most of the material required has come from our own inventory, and our decision to utilize this USM results from our determination that we will achieve a higher value and total dollar margin consuming this material rather than selling USM piece parts to third parties. Across our TechOps platform, we continue to make progress on several strategic growth initiatives. At our on-airport MRO facility in Millington, Tennessee, we commenced work under a recently awarded long-term, multi-line aircraft maintenance agreement for a fleet of CRJ700 and CRJ900 regional jets. In addition, operations began at our expanded facility located in Hialeah Gardens, Florida. Both initiatives contributed to higher TechOps revenue in the quarter. As expected when ramping up operations at new facilities, we incurred incremental training costs and early-stage operating inefficiencies that created margin pressure during the quarter. We view these impacts as temporary and expect margins and throughput to improve as volumes continue to increase and operations stabilize. TechOps was also impacted by lower MRO parts sales in the quarter. Lastly, our Roswell facility experienced revenue and gross profit declines due to fewer aircraft in storage during the quarter. Related to our Engineered Solutions products, AirSafe continues to remain strong in advance of a Federal Aviation Administration November 2026 compliance deadline for the Fuel Quantity Indication System airworthiness directive related to fuel tank safety systems. We closed the quarter with a backlog of $15.3 million, of which the majority will close in 2026. In addition, we continue to market our revolutionary enhanced flight vision system, AeroWare, to select interested customers. We are also continuing our efforts to educate our U.S. regulators and the agencies responsible for the safety of our air transportation system on how the unique features of AeroWare can improve safety and provide economic efficiency to the industry. During the quarter, we deployed $25.1 million in feedstock acquisitions to support future leasing and monetization opportunities. We remain disciplined in our acquisition approach and continue to focus on assets where we see strong long-term demand and attractive risk-adjusted returns. Our win rate in the quarter was 6.3% compared to 10.4% in 2025, which shows our commitment to discipline on pricing as we continue to evaluate opportunities to redeploy and monetize inventory in ways that improve velocity and cash conversion without compromising value. Looking ahead, our priorities for the remainder of 2026 remain consistent with those we have previously outlined. These include increasing the number of assets deployed in our lease pool, including the placement of the remaining four 757 freighters during this year; continuing to monetize our inventory through USM sales; filling available capacity across our MRO network; and improving overall operational profitability as recent expansion initiatives continue to gain scale. Despite the expected start-up costs incurred in the first quarter, we remain confident in our ability to deliver improved financial performance as we progress throughout the year. With a strong inventory position, an active leasing pipeline, and expanded operational capabilities, we believe AerSale Corporation is well-positioned to deliver more consistent and growing earnings. With that, I will turn the call over to our Chief Financial Officer, Martin Garmendia. Thanks, and good afternoon, everyone. Martin Garmendia: I will walk through additional details on our first quarter financial performance, then touch on cash flow, liquidity, and our outlook for the remainder of 2026. Revenue for the first quarter of 2026 was $70.6 million compared to $65.8 million in the prior-year period. Flight equipment sales totaled $5.2 million and consisted of one engine sale compared to $1.8 million from one engine sold in 2025. Excluding flight equipment sales, revenue increased 2.2% year-over-year, driven by growth in leasing activity, partially offset by lower USM and MRO parts sales. As we note each quarter, flight equipment sales can vary meaningfully from period to period. As a result, we believe performance is best assessed over time with a focus on feedstock acquisition, monetization of those investments, and profitability trends. Adjusted EBITDA for the quarter was $7.4 million, or 10.4% of revenue, compared to $3.2 million, or 4.8% of revenue, in the prior-year period. The EBITDA dollar and margin increase was primarily driven by higher leasing revenue and flight equipment sales during the quarter. Asset Management Solutions revenue increased 10% year-over-year to $43.1 million in the first quarter. Excluding flight equipment sales, revenue grew modestly, supported by an expanded lease pool and favorable engine mix, but partially offset by lower USM volumes. We ended the quarter with 18 engines and three Boeing 757 freighters on lease compared to 16 engines and one freighter on lease in the prior-year period. Technical Operations revenue increased 3.4% year-over-year to $27.5 million, driven primarily by higher on-airport MRO activity. Growth was led by increased activity at our Goodyear and Millington facilities, including the initial ramp-up of CRJ work at Millington. These gains were partially offset by lower MRO parts sales during the quarter. Gross margin for the quarter was 26.7% compared to 27.3% in the same period last year. The modest and temporary decline reflects start-up and training costs related to the CRJ line in Millington and the Aerostructures expansion, as well as higher labor costs at Goodyear as we maintained elevated staffing levels in anticipation of increased demand expected later in the year. We expect these margins to normalize and begin to improve as we increase labor and facility utilization. Selling, general, and administrative expenses were $22.2 million in the first quarter, down from $24.6 million in the prior-year period. The decrease reflects the benefits of our ongoing efficiency initiatives and the absence of one-time severance costs incurred last year. Current-year expenses included $1.8 million of share-based compensation expense compared to $1.2 million in the prior year. Net loss for the first quarter was $3.5 million compared to a net loss of $5.3 million in the prior-year period. Adjusted net income was approximately breakeven compared to an adjusted net loss of $2.7 million last year. Adjusted EBITDA for the quarter was $7.4 million compared to $3.2 million in the prior-year period, benefiting from a higher-margin product mix and lower expenses. Year-to-date cash used in operating activities was $26.7 million, primarily related to feedstock acquisitions of $25.1 million as we continue to make disciplined investments to grow the Asset Management segment. We ended the quarter with inventory of $369.5 million and aircraft and engines held for lease of $121.5 million. Available liquidity at the end of the quarter was $41.8 million, which included $2.1 million in cash and $39.7 million of availability in our $180 million asset-backed revolver, which can be expanded to $200 million. This available liquidity, growing performance, and our strong inventory position provide us with the tools needed to continue to grow our business through the remainder of 2026 and beyond. In conclusion, we remain focused on monetizing the investments that we have made. In a competitive market, we have built a strong inventory position that will allow us to continue to grow our leasing and USM activities. The commencement of a multi-line maintenance program at our Millington facility and new work commencing at our expanded Aerostructure facility put us on a positive trajectory to exceed the incremental $50 million revenue expectations for our expansion initiatives, with the expectation that margins will improve as we increase utilization of our additional capacity and start-up initiatives mature. All of this will allow us to continue to grow both our revenue and profitability in a more predictable and recurring manner quarter over quarter. With that, operator, we are ready to take questions. Operator: We will now open the call for questions. Thank you. At this time, I would like to remind everybody that in order to ask a question, please press star followed by the number 1 on your telephone keypad. Our first question comes from the line of Kevin Liu with RBC Capital Markets. Your line is open. Analyst: Hey, good afternoon, Nicolas and Martin. Thanks for taking the question. Could you talk about what you are hearing from customers in light of the ongoing conflict in the Middle East as it relates to your business, whether that is in USM, spare parts, or lease rates? Nicolas Finazzo: Hi, Kevin. Thanks for the question. We are not really hearing much from our customers at this point, and that is something we ask internally: how is the Middle East situation going to affect us in the short run? We are not seeing it yet. What do we expect? We expect that if this continues for a prolonged period of time and we see airlines park more aircraft, the result will be more aircraft in storage, which would benefit us, and there may eventually be a downturn in the demand for used serviceable material parts. However, as I have said, every quarter this question gets asked: is there enough USM out there to support demand? And the answer is, for the proper amount of USM—I do not mean every part from every engine, but the parts that sell from an airframe or engine—there continues to be more demand than available inventory. Until that eventually equalizes, if a number of airplanes are grounded—certainly during the COVID environment there were enough airplanes on the ground that there was very little requirement for USM because aircraft could be cannibalized for parts, and engines were not going into the shop because engines on wing were being cannibalized to keep other aircraft flying. Over time, if this prolongs, if fuel costs stay high, and that results in a substantial grounding of the fleet, then we expect that will have an impact. But I do not know when that would be. I believe that impact would still be years off unless you had a COVID-type event where a substantial amount of the fleet is grounded. So the short answer is we are not seeing an effect at this point, and based on the type of USM that we sell, we do not expect there to be an effect, certainly not in the short run. Analyst: Okay. Got it. Thank you. That is helpful. And then on a separate note, could you give us an update on your current capacity additions in MRO and talk about the potential impact to revenues in your business, both this year as well as in 2027? Martin Garmendia: Sure. As stated in the prepared remarks, Millington has come online and we have started a CRJ line there. We have gone through some start-up costs and a learning curve, but right now that is potentially going to expand to three aircraft that will be at full capacity at the Millington location, under a very profitable contract with a very good customer to whom we can provide multiple services. At our Goodyear facility, we continue to ramp up work, especially from the lows incurred last year after a long-term contract had finalized, and we continue to be bullish there. We continue to serve multiple operators, including Spirit, and we are seeing a ramp-up of return-to-service work for them with some of those overall aircraft. Based on the recent news, we expect that to accelerate during the remainder of the year. At our Roswell facility, we primarily do storage work. We have seen a decline in aircraft being stored, but if, for some reason, the war in the Middle East continues and there is an overall reduction in aircraft operating, we could potentially see aircraft being returned into that location from a storage perspective. On our component MRO side, our Aerostructures facility came online during the first quarter, and we are ramping up there. That is a 90 thousand-square-foot facility. We have a lot of capacity to fill. We have made a lot of inroads with customers, getting that process finalized, so we expect to quickly start ramping up demand there. Our landing gear shop has also been doing extremely well. We are starting two agreements—one with an OEM and one with an international carrier—that are expected to significantly increase our volume at that facility as we progress through the quarter. And our component shop has also seen increased demand, and we continue to pursue additional initiatives to fill that capacity because we have a good amount of available capacity there. As the market continues and there is overall demand, we are poised to grow and to fulfill some of those leads. Analyst: Got it. And just one last follow-up. As you are selling this capacity today, could you give us more color on what kind of margins you are getting on this new capacity and how we should think about the potential EBITDA contribution? Martin Garmendia: On the on-airport MRO side, there is still a need and a limited supply of available slots, so we have been seeing margin improvement in that area. Overall, as I mentioned, in the quarter margins were temporarily impacted by the Millington start-up, but as Millington comes fully online, we expect gross profit margins to be in excess of 20%. And at our Goodyear facility, as we increase return-to-service work—depending on the type of work—we definitely expect margins to be better than they have been historically. Operator: There are no further questions at this time. I would like to turn the call back over to Nicolas Finazzo, Chief Executive Officer, for closing remarks. Nicolas Finazzo: Thanks. Despite nonrecurring start-up costs from our facilities expansion projects in the first quarter, our operating business has continued to improve. These results validate our unique multidimensional and fully integrated business model, and as these units continue to develop and mature, we will be in an excellent position to achieve substantial growth in the years ahead. I want to thank Kevin for his insightful questions today, which I think provide good insight into our business model and will help our investors better understand how we are performing. To all the rest of you, I very much appreciate your interest in listening to our call today and look forward to bringing you up to date during our next earnings call. I wish you all a good evening, and thank you.
Operator: Good morning, and welcome to the Turning Point Brands First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Andrew Flynn, Chief Financial Officer. Please go ahead, sir. Andrew Flynn: Good morning, everyone. Earlier today, we issued a press release covering our first quarter results available in the Investor Relations section of our website at www.turningpointbrands.com. During this call, we'll discuss consolidated and segment operating results, the operating environment and our progress against our strategic plan. Before we begin, please refer to forward-looking statements and risk factors in our press release and SEC filings. We'll also reference certain non-GAAP financial measures. Reconciliations and explanations are included in today's earnings release. With that, I'll turn the call over to our CEO, Graham Purdy. Graham Purdy: Thanks, Andrew. Good morning, everybody, and thank you for joining our call. We started the year with strong momentum, led by accelerating growth in Modern Oral with gross and net sales up 167% and 133% year-over-year and 30% and 26% sequentially. These results are driven by ongoing growth in both brands' D2C platforms, FRE early expansion into larger, higher-volume chain accounts and [indiscernible] very early move into bricks and mortar. In the quarter, Modern Oral accounted for 42% of our total revenue, up from 21% in Q1 2025. Before we dive into details of the quarter, I want to step back and frame the opportunity in front of Turning point brands. We believe we are in the midst of a greater than $50 billion generational shift in nicotine consumption, and we are positioning the business to capture meaningful share of nicotine users in this evolving high-barrier category. We are strengthening that position through foundational investments in our sales force, marketing and commercial capabilities. These investments are critical to building a durable growth platform that can scale into a leading player in the post-cigarette nicotine market over time. While this infrastructure will ultimately allow us to compete across the modern nicotine ecosystem, our priority today is clear: winning in nicotine pouches. We believe the nicotine pouch category is still in its nascent stages of development and can become the dominant revenue and profit driver of the company over time. As we've said before, we expect the market to consolidate around a limited number of scaled brands, and we are increasingly confident that FRE and ALP will be among them. Our confidence is grounded in execution. We continue to see encouraging consumer response across both FRE and ALP, supported by product quality, brand positioning and repeat purchasing behavior. Our outsized share of direct-to-consumer sales, coupled with our continued market share gains in bricks and mortar are evidence that our plan is working in the early innings. Based on our Q1 performance, we believe our results captured mid-single-digit category share of both gross and net sales, giving confidence that we are on track to achieve our long-term goal of double-digit market share by the end of the decade. We are using that momentum to build scale across channels. FRE Continues to expand in the larger regional and national convenience chains. while ALP has moved from a strong direct-to-consumer base into retail faster than we originally expected. We've had several notable chain wins, driving confidence in our growth. We expect our chain store count to increase 70% by the end of 2026 versus the prior year. As you know, we are building an operational foundation to further support scale in Modern Oral. Commissioning our Louisville manufacturing facility is an important step in localizing production, improving supply control and reducing freight and tariff exposure over time. As we build production, we expect that work to strengthen unit economics and support margin improvement as domestic inventory moves through the P&L. At scale, we believe our margins should approach 70% in this category by the end of the decade. We also continue to invest in the commercial infrastructure needed to support growth, including sales force expansion, chain account support, enhanced consumer visibility and manufacturing capabilities. In 2026, we plan to continue investing in our sales force and marketing to secure chain placement, build brand awareness and support our growing distribution footprint. Based on achieving our sales and financial objectives, we expect total sales and marketing investment for the year to range from $80 million to $105 million. Given the strong gross sales growth we have experienced, we are confident that these investments will provide attractive returns for investors over the long term. In short, we are making front-loaded investments in a category where acquiring brand-oriented adult consumers can drive repeat purchasing and strong margins over extended periods. Over time, we believe our investments in physical execution, particularly sales force expansion, distribution support and retail presence will become a more important source of competitive advantage. Overall, we are encouraged by the momentum we are seeing, the progress we are making and the platform we are building to scale profitably. With that, I'll hand the call over to Summer to walk through the progress of our key go-to-market initiatives. Summer Frein: Thank you, Graham, and good morning, everyone. I'll focus my comments on our go-to-market execution in the nicotine pouch segment. This remains our top commercial priority. And as we scale the business, we continue to benefit from the strength of our legacy distribution relationships and broader commercial capabilities. Our strategy is to build demand across both online and retail channels with retail expansion as the key lever to scale the business. To support that effort, we are investing in sales coverage, merchandising support and brand-building programs to help us win distribution and improve in-store execution. That includes securing the right assortment, shelf placement and visibility to support trial, repeat purchase and long-term performance. These investments support both near-term execution and the broader foundation we need to scale the business. In the first quarter, we made progress against that plan. We secured new wins across critical top chain convenience stores that will expand distribution across our portfolio. Our brands are designed to resonate with distinct consumers, and we will continue to promote the expansion of both FRE and ALP into retail stores. We believe our brand credibility, market performance and ongoing marketing support were important drivers of those wins. While nicotine pouch gross sales grew nearly 500% in 2025, we still have meaningful room to build brand awareness relative to category leaders. Our early strategy was to establish distribution first using our existing retailer relationships to build a strong retail foundation. With the progress we made in 2025 and the additional distribution we have secured, we believe we are now at a point where increased brand investment can drive stronger returns. Over time, that should improve consumer awareness, support retail productivity and increase the value of the nicotine pouch opportunity. Accordingly, we are investing aggressively in brand building to support future scale. Last month, we announced a partnership between 3 and 6 TKO properties, including UFC, Zuffa Boxing and PBR. This expansion is a result of the demand and brand alignment success we validated through our initial partnership with PBR, which started in May of last year. We believe this broader platform will help accelerate brand awareness and consumer engagement with adult consumers. We are off to a solid start, already having executed a few events since the announcement, and we'll share more as the partnership unfolds. Building on ALP's success in direct-to-consumer, this was the first quarter that TPB sales organization started to sell ALP on retail shelf. We began with a manageable launch and expect to incrementally add stores this year through our new chain account wins. While it's early innings, we are encouraged by the initial results. With regards to Zig-Zag, we continued executing against our core brand pillars, strengthening the core business while scaling new product innovation and expanding brand presence in target markets. We accelerated growth in new products, including Natural Leaf Flat Wraps by expanding retail distribution through targeted merchandising programs. At the same time, we are growing brand awareness with a focus on under-indexed markets through integrated marketing campaigns and in-store activations that embodies Zig-Zag's new Life's Fast, Burn Slow tagline. Overall, we are seeing encouraging early proof points across both brand building and retail expansion, and we believe that progress positions the nicotine pouch segment to become a major contributor to growth over time. Let me now turn the call over to Andrew to go through our financial results. Andrew Flynn: Thank you, Summer. Starting with consolidated results. Sales were up 17% year-over-year to $124.3 million for the quarter. Growth was driven primarily by Modern Oral. Gross profit of $68.3 million increased 14.6%, driven by Modern Oral. Gross margin was 55%, which was down 100 basis points versus last year. Reported SG&A was $55.8 million for the quarter, which was up $8 million sequentially. The increase was driven primarily by our nicotine white pouch investments, including approximately $1 million of incremental spend tied to expansion of our sales force. We also spent approximately $7 million on increased marketing investment and broader brand-building initiatives. Adjusted EBITDA was $25.9 million for the quarter at a 20.8% margin, which exceeded the midpoint of the guidance. This was primarily attributed to accelerated growth in Modern Oral, offset by our strategy to increase sales and marketing investment and softness in Zig-Zag. Stoker's segment net sales increased 48% year-over-year to $88 million for the quarter. The Stoker's segment now accounts for 70% of consolidated net sales. Regarding Modern Oral, I want to briefly address our disclosure of gross sales. Because most contra revenue investments relate to slotting-related distribution fees, we believe both gross and net sales provide the clearest view of underlying business performance. Support of our growth investments, Modern Oral nicotine pouch net sales [ free and out ] were up 133% year-over-year, achieving net revenue of $52 million. Gross revenue was $69 million, up 167% year-over-year. For the quarter, Modern Oral accounted for 42% of consolidated net sales, up from 21% a year ago. Legacy Stoker's brands net revenue decreased 3.5% year-over-year to $36 million for the quarter, driven by continued share growth in MST that was partially offset by anticipated declines in loose leaf. Stoker's gross profit increased 39% to $47 million. Gross margin decreased 350 basis points to 54% due largely to the impact of tariffs. Zig-Zag segment net sales were down 22% year-over-year to $36.7 million for the quarter. For the quarter, Zig-Zag gross profit decreased 18% to $20.9 million and gross margin was 57.1%, which was up 300 basis points versus last year. First quarter free cash flow was negative $27.4 million, reflective of our investments in trade and brand marketing programs as well as working capital and U.S. manufacturing CapEx. We ended the quarter with $192.4 million of cash. Our expectation is to be approximately cash flow breakeven for the remainder of the year. Our capital allocation approach remains disciplined and aligned with the opportunity we see in nicotine pouch. As we invest behind growth initiatives, the timing of those investments and the timing of their benefits may not always align evenly within a given quarter. That reflects our effort to position the business to capture incremental share in a category with substantial long-term annuity value. Today, we are increasing full year 2026 Modern Oral guidance. We now expect gross sales of $280 million to $300 million, up from a previous range of $220 million to $240 million and net sales of $210 million to $225 million, up from our previous range of $180 million to $190 million. Implied gross revenue growth at the midpoint is 83.7%. We are also introducing full year EBITDA guidance of $70 million to $90 million, inclusive of increased nicotine pouch investments in sales force expansion, merchandising support and consumer marketing. For modeling purposes, we expect the effective income tax rate to be 23% to 26% on a go-forward basis. Budgeted 2026 CapEx is $4 million to $5 million, excluding projects related to Modern Oral, and we expect to spend an additional $3 million to $5 million this year to support our PMTAs. Additionally, as we focus on strengthening our market presence, we expect to spend between $80 million to $105 million to expand our sales force and bolster our marketing strategy in 2026. As we continue to scale, we expect the overall cost structure of the business to become more efficient. Many investments we are making today, [ slotting ] related, brand building and go-to-market spend are tied to building distribution and driving initial trial and growth of our products. As our consumer base grows, these costs should become a smaller percentage of sales. Now let me turn it to Graham. Graham Purdy: Thanks, Andrew. We are encouraged by the momentum we see in the business and by the progress we are making against our strategy. As I said at the outset, we believe we are in the midst of a generational shift in nicotine consumption, and we believe Turning point is uniquely positioned to capture meaningful share in that transition. Our focus remains on winning in Modern Oral by investing in the brands, commercial capabilities and infrastructure needed to scale. We are seeing continued proof points in both consumer traction and distribution growth, and we believe that positions us well to build a meaningful and profitable business over time. And with that, I'll turn it over to questions. Operator: [Operator Instructions] Our first question today will come from Eric Des Lauriers from Craig-Hallum Capital Group. Eric Des Lauriers: Congrats on the strong results. Very encouraging to see nicotine pouch sales reaccelerating into Q1 here. So you raised guidance for Modern Oral net sales by about $30 million and then gross sales by about $60 million. So suggesting a big increase in contra revenues with these national chain wins. How did these wins announced today compared to your expectations coming into the year? Have you won more chains than initially expected? And any national chains that we should expect both FRE and ALP? Or is it mostly FRE right now? Summer Frein: Great question. Thanks, Eric. We were really, really excited about the springtime negotiations that we worked through over the past few months. As Graham noted in his comments, we expect our store count to increase by nearly 70% by the end of the year. I think as you know, every chain account is different. So we're currently in the process of determining the rollout schedule and the doors will come online over the balance of the year. Where we have opportunities to bring both brands in, we will. So you'll hear more about that as the year rolls out, and we're encouraged and excited about the success that we had over the past few months. Eric Des Lauriers: Yes. No, it certainly sounds very exciting. And I guess, Summer, you touched on this in your answer there. And maybe it's just sort of, we'll see over the next couple of quarters. But how should we think about the timing from these wins? When should we expect to see them on shelves? And then how should we think about the sort of impact on gross versus net sales? Should we look for net sales to sort of pick up from these in the back half? Or is that more of a 2027 thing? Summer Frein: Yes. I'll answer the first part, and then I'll turn it to Andrew to answer the second part. But you'll start seeing some of these chain wins roll out over the next few weeks. But as the progress of rolling out these chains requires resets of fixtures and different dynamics that they're sorting out with getting everything situated in store, it just takes time. So you'll see those stores sort of fill out across the balance of the year, but I'll turn it to Andrew to explain how we thought about the dollar impact. Andrew Flynn: Yes. As we think about the net sales trajectory over the course of the year, we would expect to see some pickup in the back half as it relates to the modern oral category. Eric Des Lauriers: All very encouraging. Congrats again on the strong results. Summer Frein: Thanks, Eric. Operator: Your next question comes from Ian Zaffino from Oppenheimer. Ian Zaffino: Great guidance on that [ DMO ] side. So question would be on the PMTA process. How is that going? I know there's articles about that. And any kind of change in discussions there or thoughts about getting kind of final approval? And then how are you thinking about the Louisville plant, which I guess they're kind of [indiscernible]. Graham Purdy: Yes. Great question, Ian. Look, the PMTA process is -- it's a rigorous scientific process. We're not surprised by the timing, to be frank. And our approach is, we respect the process and any additional commentary around sort of where we're at on that [indiscernible] probably wouldn't be appropriate at this time. In terms of Louisville manufacturing, we're threading a bit of a needle here with respect to the PMTA process, and scaling our infrastructure here in Louisville. We've made really great progress relative to laying down the infrastructure to support manufacturing here in Louisville. We've certainly got equipment in Louisville, and we feel really good about where we're at from a throughput on those machines in the early innings. Ian Zaffino: Okay. And then I guess maybe a question for Summer is when you're going to market portfolio, I guess you now have a newly expanded portfolio. And so how are you going to market? Are you going to market as far as 3 being your higher nicotine pouches and ALP being your lower nicotine pouches? Is that the strategy? And also, can you maybe talk about this portfolio -- expanded portfolio, which has significantly more SKUs, how that's resonating with retailers bringing them incremental SKUs? And any other kind of color you could give us maybe about the maybe synergistic effects of having those 2 brands together? Summer Frein: Yes, sure. So I would say the retailers, our consumers and our sales organization are all very excited about us having both brands in the portfolio and in the sales bag to bring to market. And what's been great about both of these brands is that they've built a strong base with consumers, especially ALP, they've created a really strong D2C presence, and there was some pent-up demand at retail that we were really able to start leveraging. And as these brands are being put into market, we're really thinking about the end consumer. So while the product itself is important and they certainly have their differences, what's resonating with retail, what's resonating with consumers is that these brands are really focused on 2 very distinct consumer bases. There is room in this category for both brands to win, and we've seen some really encouraging early results as we've been bringing them to market. Operator: Next up is Nick Anderson from ROTH Capital Partners. Nicholas Anderson: Congrats on the quarter. First for me, just on the rising fuel price environment, have you seen any impact on [ C-store ] visits or consumer behavior? Tobacco is typically more resilient when it comes to higher fuel prices. Are you seeing the same trend emerge within nicotine pouches? Just any discernible changes [indiscernible] would be helpful. Graham Purdy: I think given the backdrop of our results, we feel really good about sort of where we're at today with the consumer. As Summer had mentioned in the last question with Ian, we're really focused in on building brand equities, building brand identity and really winning on the premium front over the long haul. We view the fuel prices as transient. We think where we generally see that more so is in the heritage businesses. And I think what's an interesting aspect of that, historically, consumers tend to not move out of the categories. They tend to look for more value. And I think we feel very well positioned with our Stoker's heritage products with respect to spiking gas prices. Nicholas Anderson: Great. That's helpful. Second for me, just on the retail landscape. With the momentum from TKO and brand awareness obviously ticking higher here, have you seen a different appetite for [indiscernible] to change the carry FRE and ALP? As brand recognition grows, I would assume your negotiations should become smoother, but any color there would be helpful. Summer Frein: Great question. We are really excited about the TKO deal. As you know, we invested in PBR last year. We learned a lot, and that gave us some momentum to build upon because I think having this TKO deal really has us show up as a credible partner that's investing for the long term to win with our brands. And so certainly, while it's early, it has been part of the conversation with retail. We've seen some early consumer excitement. We have some events under our belts and more to come as that partnership unfolds, but encouraged about the credibility it brings to us and sort of the proof point that comes to the table of us being a brand and a company that's investing in the long term here. Operator: The next question is from Gerald Pascarelli, Needham & Company. Unknown Analyst: This is Jack on for Gerald. You've [indiscernible] EBITDA guidance obviously implies a decline relative to last year, which at this point, I think is well understood, but the range is pretty wide. So could you just kind of go through some assumptions that get you to the high end versus the low end? Andrew Flynn: Sure thing. So look, what's driving the EBITDA guide is, as we discussed, we've got big investments in terms of sales force, retail distribution as well as marketing spend. And so those are the big drivers of the year-over-year change. Also, as you know, our freight -- our outbound freight costs are captured in SG&A. That's also up on a year-over-year basis. And so what's kind of driving the range here is, one, the biggest driver is our ability to get that spending and what we will spend on in the future. And so that spending is dependent on what we see in terms of sales because we'll be able to pivot if needed. And we're being judicious about that investment. And so as we monitor it, we may make some changes. So that's really the reason for the guide. And also, there could be a real upside opportunity in terms of the TKO agreement that we just launched, this is very new. And also some of these chain wins are also very new, and that can provide a very large upside for us as well. Unknown Analyst: Okay. That's helpful. And then for the UFC sponsorship, it looks like it can be pretty transformative. It's incremental to your OpEx outlook relative to last time you presented. So as we kind of look forward, is there the potential for Turning Point to enter into some more of these sponsorships? And then if so, can that imply another leg down on EBITDA? Or do you think the low end is the floor at this point? Summer Frein: I'll take the first part of that question, and Andrew may want to chime in on the dollar aspect. But as you know, investing in TKO is a bet for us, we're really excited about. We are also doing other marketing activities, other consumer engagement building activities like with [ motor sports ] and other avenues. And so I think to Andrew's point, we will invest prudently as we go and make changes as we may need to, but excited about the awareness opportunity this gives for the brands, and I'll turn it to Andrew on the dollar aspect. Andrew Flynn: Yes. In terms of what that may mean for the low end of guidance, as I said before, we're going to be judicious about our spending. And so if something makes sense for us to gain incremental market share, we will do that. And so that's really how we think about these opportunities. Operator: And everyone, at this time, there are no further questions. I'd like to hand the conference back to Mr. Graham Purdy for any additional or closing remarks. Graham Purdy: Thanks, operator. I really want to thank everybody for joining the call today. Look, in closing, I think, ultimately, I want to emphasize a couple of points to our investors. For one, I've been in this industry for -- I'm closing in on my 30th year, and I can't tell you how excited I am about the opportunity in front of us with the generational transformation that we spoke of earlier in the script. And what -- how TPB fits into that long term, I think, is incredibly exciting. The Modern Oral opportunity, it's real. It's gaining momentum. I think you're seeing early progress from our company that across our D2C platforms and progress we're making in bricks and mortar gives us a lot of enthusiasm around where we're at in terms of harvesting that long-term opportunity. As Andrew mentioned, our investments in this category are going to be incredibly disciplined and ultimately tied to our sales objectives in this category. And I think lastly, the heritage business for us is still very important. It provides strong cash flows for the company, and it gives us cash flow to invest in the future and ultimately harvest the opportunity that we see in front of us. So it's really exciting times at Turning Point Brands. And with that, I'll sort of close by saying, I look forward to talking to you all in a few months here and updating against our progress against the plan. So thank you so much for joining. Operator: Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.
Operator: Welcome to MACOM's Second Fiscal Quarter 2026 Conference Call. This call is being recorded today, Thursday, May 7, 2026. [Operator Instructions] I will now turn the call to Mr. Steve Ferranti, MACOM's Senior Vice President of Corporate Development and Investor Relations. Mr. Ferranti, please go ahead. Stephen Ferranti: Thank you, Olivia. Good morning, and welcome to our call to discuss MACOM's financial results for the second fiscal quarter of 2026. I would like to remind everyone that our discussion today will contain forward-looking statements, which are subject to certain risks and uncertainties as defined in the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those discussed today. For a more detailed discussion of the risks and uncertainties that could result in those differences, we refer you to MACOM's filings with the SEC. Management's statements during this call will also include a discussion of certain adjusted non-GAAP financial information. A reconciliation of GAAP to adjusted non-GAAP results are provided in the company's press release and related Form 8-K, which was filed with the SEC today. With that, I'll turn over the call to Steve Daly, President and CEO of MACOM. Stephen Daly: Thank you, and good morning. I will begin today's call with a general company update. After that, Jack Kober, our Chief Financial Officer, will review our Q2 results for fiscal year 2026. When Jack is finished, I will provide revenue and earnings guidance for the third quarter of FY '26, and then we will be happy to take some questions. Revenue for the second quarter of fiscal 2026 was $289 million, and adjusted EPS was $1.09 per diluted share. Demand for our products is strong across our 3 end markets, and our backlog continues to build. Our sequential financial performance improved across most key metrics in Q2, including gross and operating margins. Our Q2 book-to-bill ratio was 1.5:1 and orders booked and shipped within the quarter was 18% of total revenue. All 3 end markets had exceptional bookings with notable outperformance in the Data Center. Our backlog remains at a record level, and we believe this strength reflects that we are in the right markets with the right products at the right time. Turning to recent market trends. Q2 revenue performance by end market was as expected, with all end markets growing sequentially. Industrial and Defense was $120.7 million, Data Center was $98.2 million,and Telecom was $70.1 million. Data Center was up approximately 14.5% sequentially, Telecom was up 3% sequentially and I&D was up 2.5% sequentially. Both I&D and Data Center revenues are at record levels. As we look to the second half of our fiscal year, we expect Data Center and I&D revenues to continue to lead our growth. With the exceptional first half bookings, we are positioned for a strong second half. Additionally, we expect to see momentum from our Telecom segment as we enter our fiscal 2027 due to the anticipated timing of LEO space production programs and associated revenues. We believe our growth strategy of strengthening our core technologies and expanding our product portfolio around 3 central themes: Highest power, highest frequency and highest data rate, is working. We believe we are establishing ourselves as a differentiated strategic supplier to our customers. Next, I'll quickly summarize progress on our 5 goals for FY '26, which we outlined on our last call. First, taking advantage of the data center opportunity. We continue to enhance our design and manufacturing capabilities to support our customers in this market. And we are pleased to raise our Data Center FY '26 revenue growth base case from 35% to 40% to over 60%. Second, expanding our 5G market share. We have developed 2 new process technologies, which will provide us with both performance and cost benefits. GaN 4 is our next-generation process for high-power linear amplifiers for 5G base stations, and we expect our new IPD processes will enable us to in-source these components while achieving better electrical performance at a lower cost. Our technology teams have done a great job making these processes a reality. Third, extending our leadership in I&D. I am pleased that we recently received a Defense Manufacturing Technology Achievement Award sponsored by the Joint Defense Manufacturing Technology panel. The panel includes members from various armed services and the Office of the Secretary of Defense. This award reflects our progress to increase manufacturability of advanced GaN technology. Our team continues to innovate, and we look forward to introducing a wide range of advanced GaN MMIC products in the next 12 to 18 months. Fourth, continued development of advanced III-V semiconductor technologies. We continue to strengthen our semiconductor processing expertise and capabilities. As an example, our team has done amazing work on OMMIC regrowth for advanced high-efficiency GaN amplifiers. In addition, we are developing advanced indium phosphide epitaxial stacks for our next-generation optical products for the data center. And last, management of our capital and investments. As we discussed last quarter, we have numerous strategic investment activities that we believe will support our fiscal 2027 and 2028 revenue growth objectives. We take a disciplined approach to managing capital investments for near- and long-term success. Next, I'll take a moment to review each of our 3 core markets in more depth. Data Center. Based on customer engagements and general market trends, we expect 1.6T deployments inside the Data Center to continue to be strong throughout calendar 2026. Today, our revenue growth is primarily being driven by increased pluggable optical modules and optical cable production volumes using our 800 and 1.6T PAM4 products. As a reminder, our portfolio is highly diversified, supporting NRZ, PAM4 and coherent modulations across EML, silicon photonics and VCSEL-based architectures. We are also seeing modest growth from our lower data rate 100G single-mode and multimode products. Demand for our 200 gig per lane photodetectors continues to grow, supporting 800G and 1.6T optical connectivity. Part of our near-term and long-term growth strategy is to expand our photonics portfolio with both higher-speed photodetectors and CW lasers. We are seeing growing interest in coherent light solutions as coherent modulation can enable higher bandwidth performance with significantly improved power efficiency, especially in shorter-reach applications. We believe coherent light solutions will expand, and we are well positioned to support this trend. We continue to promote linear equalizer products to help extend the reach of copper interconnects at 800G and 1.6T. We are working closely with customers to address their specific program requirements and various use cases. In many cases, our newest products are designed for co-packaged and highly integrated architectures like CPO and NPO. We can differentiate in this market based on our strong customer relationships, IC and system design expertise as well as our unique photonic materials. In summary, as we look ahead, we see many new large opportunities in the Data Center. We believe our SAM is increasing due to the combination of AI-driven market growth, combined with our product portfolio expansion. Our strategy is to collaborate with the leaders in the industry and support their connectivity needs, whether it's scale up, scale out or scale across. Turning to our I&D business. We are seeing many growth opportunities across the Industrial and Defense markets, primarily in the Defense segment. Comparing our first half results of FY '26 with the first half of FY '25, our I&D business grew by 22%. Overall demand remains healthy and notably, we expect revenues from our top 25 defense customers to significantly increase from FY '25 to FY '26. Our Defense customer base is large and very broad, and we typically support radar systems, missile and missile defense systems, drone and drone defense systems, communication systems and wideband electronic warfare systems. Today, we support a wide range of production programs across a diverse range of applications. We are also involved with redesigns and upgrades of existing platforms to improve performance against new threats and to improve overall system performance with more capable and modern electronics. Finally, the DoD is pushing our customers for rapid design and deployment of new systems and capabilities, spanning from modern radars to better electronic warfare systems, new space-based sensors and even more secure communications. These systems are typically using higher frequencies, higher RF or microwave power levels and higher levels of integration. In some cases, high-performance optical systems are deployed such as RF over fiber for remote antenna systems. The pace of innovation in the Defense market is accelerating by both the traditional defense primes and the newer, more nimble defense companies. These demanding requirements play directly to MACOM's strengths, and we offer our customers turnkey support from custom chip design to subsystem solutions. All of this is driving incremental semiconductor content growth opportunities and opening up new design win opportunities. MACOM has numerous competitive advantages within the I&D market. At the heart of these is MACOM's deep expertise in high-performance IC design capabilities spanning RF, microwave, millimeter wave and optical domains. We have a growing team of system designers with architectural knowledge, which enable us to engage much earlier in our customers' project design cycles, and we present the full scope of MACOM's capabilities to help solve the customers' technical challenges. MACOM also offers European and U.S.-based wafer fab and U.S.-based hybrid manufacturing capabilities at scale with proven technology, reliability and long-term supply assurance, factors that are increasingly important as defense customers prioritize domestic sourcing and supply chain security. Within the Telecom end market, satellite-based broadband access and direct-to-device, or D2D, opportunities remain robust with numerous LEO networks in the planning and production stages. The number of LEO satellites planned to be launched continues to grow as more companies compete to provide commercial broadband data, voice and video communications by satellite. These networks typically use microwave or millimeter wave frequencies and free space optics or FSO communications for satellite-to-satellite or satellite-to-ground communications. Today, we are supporting LEO broadband constellations and D2D programs that are either in development, low rate initial production, or LRIP, or full production. LEO and MEO constellations have many key areas where MACOM can contribute, including large phase array antennas with active beam steering, D2D links operating at UHF or S-bands, data center-like electronics with high-speed optical links transferring data within or across the satellite, free space optics for satellite-to-satellite communications and ground terminal and gateway linearization for high-power transmitters. I'll note the backhaul networks for these constellations continues to move higher in frequencies. The 40-nanometer GaN technology, which MACOM recently licensed from Hughes Research Lab, HRL, is being transferred to MACOM's fab. This technology will enable high-capacity satellite links using E-band, W-Band and D-band. Ground stations and gateways are also a key part of the LEO networks. MACOM specializes in designing products and solutions that overcome nonlinearity of RF, microwave and millimeter wave signal transmission for satellite communication systems. In many cases, ground-to-satellite links prefer linearization of SSPAs or TWTAs to boost the linear power efficiency of the link. Turning towards the 5G segment of Telecom. Our global team continues to secure new business and macro base stations, driven by the need for high-performance amplifiers and multiband radios. Our RF power team is now sampling our new GaN 4 products to customers, which we believe will further improve our competitiveness. We expect the global RAN market will be flat in 2026 with some regional variations. However, for MACOM, we expect our future 5G growth will be driven by content and market share gains as we have; one, recently added new resources; two, roll out new products and technologies like GaN 4, SOI control products and power amplifier modules or PAMS; and three, gain market share in high and low-power macro and MIMO amplifiers. We are making good progress improving the overall performance and competitiveness of our base station portfolio, especially in the 2.7 to 3.5 gigahertz bands. And last, we believe the cable TV infrastructure market segment is also improving. We have been releasing new products and working with customers on design wins to support the upgrades from DOCSIS 3.1 to DOCSIS 4.0. Before turning it over to Jack, I would like to quickly highlight how teamwork across the organization directly impacts our financial results with operations and engineering being a great example. Our North Carolina fab has been increasing wafer production while simultaneously improving yields and lowering cycle times. This performance is driving improved customer satisfaction and contributing to new business and enabling us to win new customers. Our Massachusetts fab has been installing complex processing equipment to support production ramps in some areas while maintaining production continuity in other areas. Seamlessly adding this capacity is enabling us to gain market share from our competitors. Our global planning team continues to partner with key suppliers and partners to ensure that customers are getting the deliveries they need on time. This results in brand loyalty and enables us to fully leverage our entire technology portfolio into the market and capture market share. These examples illustrate how dedication, commitment to excellence, teamwork and coordination of our manufacturing, engineering and planning community is directly leading to market share gains and revenue growth. In summary, our strategy is to continue to build a best-in-class diversified semiconductor portfolio that will enable MACOM to capture a larger share of the 3 markets we focus on. Our agility and strong teamwork across our organization helps us address opportunities and ultimately beat the competition that are often larger and have more resources. Jack will now provide a more detailed review of our financial results. John Kober: Thanks, Steve, and good morning to everyone. The results from our second quarter improved from Q1, and MACOM again achieved multiple new quarterly records associated with our financial performance. We have seen operational improvements across the organization, which is driving increased revenue growth and profitability. Fiscal Q2 revenue was $289 million, up 6.4% sequentially and up over 22% year-on-year, driven by growth across all 3 of our end markets, with Data Center leading followed by I&D and Telecom. The strong bookings across all our end markets resulted in a book-to-bill of 1.5:1. This was the largest quarterly bookings in the company's history. Adjusted gross profit for fiscal Q2 was $169 million or 58.5% of revenue. This represents a gross margin increase of 90 basis points over the prior quarter. We continue to make solid progress to increase our capacity and improve product yields, and we expect to see ongoing incremental progress across our fab operations during the remainder of fiscal 2026. The increase in product demand across the business have resulted in improved utilization of our operations and supported the recent gross margin improvement. As we move forward, we expect ongoing sequential gross margin improvements through the remainder of fiscal 2026. Total adjusted operating expense for our second quarter was $88.6 million, consisting of research and development expense of $59.1 million and selling, general and administrative expenses of $29.5 million. The anticipated sequential increase in adjusted operating expense compared to Q1 was primarily driven by ongoing R&D investments and employee-related costs. As our business expands, we expect associated OpEx growth will be primarily related to increased R&D investments and higher variable costs. Consistent with past practice, we will remain very focused on managing our OpEx to balance long-term revenue growth and profitability with continued investment in the business to support all of our end markets. Depreciation expense for fiscal Q2 2026 remained relatively stable at $9 million, slightly above the prior quarter. Adjusted operating income in fiscal Q2 was another record coming in at $80.5 million, up 8.8% sequentially from $74 million in fiscal Q1 2026 and up 34.5% year-over-year. I would like to note that our Q2 adjusted operating margin was 27.8% and has increased over the last 3 fiscal quarters. We expect our adjusted operating margin to be approximately 30% next quarter, highlighting the leverage in our financial operating model. For fiscal Q2, we had adjusted net interest income of $6.5 million, a decrease of approximately $200,000 sequentially from $6.7 million in Q1. The slight decrease was primarily due to the planned repayment of $161 million of our 2026 convertible notes during the quarter. We are pleased to have been able to retire this debt and further delever our balance sheet. Our adjusted income tax rate in fiscal Q2 was 3% and resulted in an expense of approximately $2.6 million. We expect our adjusted income tax rate to remain at 3% for the remainder of fiscal 2026. As of April 3, 2026, our deferred tax asset balances were $202 million. We anticipate further utilizing our deferred tax asset balances, including R&D tax credits through the remainder of fiscal 2026 and beyond. Depending on the jurisdictional mix of our income, we expect the U.S. government's recent tax legislation to support a low to mid-single-digit adjusted tax rate for the next few fiscal years. Fiscal Q2 adjusted net income increased approximately 7.8% to $84.3 million compared to $78.2 million in fiscal Q1 2026. Adjusted earnings per fully diluted share was $1.09, utilizing a share count of 77.6 million shares compared to $1.02 of adjusted earnings per share in fiscal Q1 2026. We continue to optimize the business' performance, which has contributed to sequential increases in our adjusted operating income and EPS over the past 11 quarters. Now on to operational balance sheet and cash flow items. Our Q2 accounts receivable balance was $160 million, consistent with our Q1 2026 balance. Our days sales outstanding averaged 50 days compared to the previous quarter at 54 days. Inventories were $252.2 million at quarter end, up sequentially from $238.9 million, largely driven by additional work-in-process inventory at our fabs as well as higher balances to support increasing demand across the business. Inventory turns remained steady at 1.9x, the same level as the preceding quarter. Fiscal Q2 cash flow from operations was approximately $78.7 million, up $35.8 million sequentially. The sequential change was primarily due to the typical timing of supplier payments and other changes in working capital balances. We expect that our Q3 cash flow from operations will be in excess of $80 million. As our business continues to grow, there will be variations in cash flow from quarter-to-quarter. MACOM's business model has demonstrated strong cash flow from operations over the past few years. As an example, our cash flow from operations was $163 million in fiscal year 2024, $235 million in fiscal year 2025, and we believe we are on track for our cash flow from operations to exceed $300 million for fiscal year 2026. Capital expenditures totaled $13.2 million for fiscal Q2. We estimate fiscal year 2026 CapEx to be in the range of $55 million to $65 million as we expand capacity to meet demand requirements across our end markets and also upgrade and enhance our production and engineering equipment as well as our facilities. Next, moving on to other balance sheet items. Cash, cash equivalents and short-term investments as of the end of the second fiscal quarter were $664.9 million. We view our cash balance as a strategic asset that can be used to help fund ongoing investments to support our growing business. We are in a net cash position of approximately $325 million as of April 3, 2026, when comparing our cash and short-term investments to the book value of our remaining $340 million of convertible notes, which mature in December 2029. Our strategy has been to focus on growing our profitability and managing our operating asset base, which has supported an improved return on invested capital over the past several years, demonstrating our goal of building long-term financial strength for the company. During the first 2 fiscal quarters of 2026, the entire MACOM team has contributed to helping achieve these record financial results. This hard work has established a strong foundation for us to build upon, and I look forward to the second half of our fiscal 2026. I will now turn the discussion back over to Steve. Stephen Daly: Thank you, Jack. MACOM expects revenue in fiscal Q3 ending July 3, 2026, to be in the range of $331 million to $339 million. Adjusted gross margin is expected to be in the range of 59% to 60% and adjusted earnings per share is expected to be between $1.31 and $1.37 based on 78.5 million fully diluted shares. We expect sequential revenue growth in each of our 3 end markets. We expect that Data Center will achieve approximately 35% sequential growth, and we expect Industrial and Defense to achieve growth approaching 10% and Telecom to achieve low single-digit sequential growth. As Jack highlighted, we are excited to deliver more growth and profitability during the second half of FY '26. As we continue to scale the business, we expect to see increased operating margins and profitability. I would now like to ask the operator to take any questions. Operator: [Operator Instructions] Our first question coming from the line of Blayne Curtis with Jefferies. Blayne Curtis: Great results. Maybe I want to start on gross margin. Obviously, there's a lot of revenue drivers, but 100 basis points in the quarter. Can you just talk about volume and then mix? And obviously, Data Center is outperforming, so that must be a driver. I just want to see how to think about it, particularly as you go through the rest of the calendar year. Stephen Daly: Yes. Thank you for the question, Blayne. So certainly, volume is contributing to the improvements in the gross margins. We are seeing that our Lowell fab as well as our North Carolina fab have been increasing outputs, and so that's certainly having a positive effect on gross margins. The other thing I'll add is you're correct to notice that our Data Center revenue as a total percentage of our revenue is increasing. In some instances, that's contributing to the improvements in gross margins. And in other areas, it isn't. So we -- in all of our market segments, we have a normal distribution of gross margins. But generally speaking, the team has been very focused on yield enhancement, efficiencies, cost reductions as we're scaling across a whole wide range of technologies, some of which I talked about in the prepared remarks. So generally speaking, a lot of great work. As Jack mentioned in his commentary, we expect continued improvements in gross margin. A few quarters ago, we had said publicly, we were setting a target to exit the year around 59%. And I think today, we're updating that number to be most likely closer to 60%. And Jack, maybe you can comment further. John Kober: I think you covered off on it, Steve. There's definitely multiple factors that are helping to drive our gross margin improvements that we've seen here in the March quarter, where we were up 90 basis points. And then if you look to the midpoint of the guide being up 100 basis points. It does become a bit more challenging as the gross margins go up to squeeze more savings out of it, but our teams are continuing to work hard. And as Steve had mentioned, we expect to see further gross margin improvements as we work our way through this year and into next year. Blayne Curtis: And then I wanted to ask, you mentioned coherent light. There's a lot of talk about scale across these days. Kind of just curious your thoughts on how that market is developing? And then maybe a silly question, is it in Data Center or Telecom? Stephen Daly: So we would put coherent light in the Data Center category. And as you know, historically, we have put the metro/long haul, which is more DCI in the Telecom segment. So we are definitely focused on that, and this is an area where MACOM has really nice differentiation. And so historically, there's been more ZR type platforms, and now they're moving to really higher data rate, higher gigabaud data rates. And just in the last 3 years, you've seen platforms go from 64 gigabaud all the way up to 128 gigabaud. Now even people are talking as high as 192 gigabaud. So this is an area of strength for MACOM. And depending on what hyperscalers do in terms of deploying coherent light, we want to participate. So we are in a very good position. It does touch a number of our product lines where we really have differentiated technology. Operator: Our next question coming from the line of Tom O'Malley with Barclays. Thomas O'Malley: My first is on the SATCOM business in LEO. Through the earnings period here, you've heard companies talk about 7,000 to 10,000 launches over the next 3 years. Would you agree with that number? And then maybe if you could spend some time talking on the content per satellite, if that's possible. You mentioned a lot of the different products, the phase array antennas, optical electronics, et cetera. But just some framework for thinking about the upside that could offer you. And then on the timing of that, it looks like Telecom is up low single digits in June, but you mentioned it improves in the back half of the fiscal year. Do you see a substantial step-up in the September quarter there? Stephen Daly: Thanks for those questions, Tom. There's a lot there. Let me try to address as many as I can. I think it's important to put in perspective that MACOM has been servicing the space market for decades. And so we are a known entity, not only on the defense side, but more and more so on the commercial side. I think you're correct to highlight that there's growth in terms of the pure number of LEOs being launched, and these are typically smaller satellites going on affordable launch vehicles and whether it's servicing broadband, direct to sell or even future talk about data centers in space, we want to participate in those. So we don't necessarily want to comment on what the absolute quantities are. I think there's a lot of information in the market about how much this market is growing. So I think there's good information out there that's probably more accurate than ours. But I would just highlight that we are absolutely engaged with the major players across the market. And as I mentioned in my commentary, it really plays to our strengths. So yes, there's certainly huge demand, and we're trying to focus on getting wins as best we can. In terms of the timing of our various programs, I would just say that we have active LEO production programs today. We have more that are in the sort of LRIP phase. One of the larger programs that we've talked about in the past is in the phase of delivering what we call EM modules. So basically, our customers sort of finalizing their system design. And we do expect that to go into full rate production later this year or early next year, which is consistent with what we've said in the past. I don't think you should expect a step-up. You're going to see a ramp-up, and that will happen during the course of calendar 2027. And just as a reminder to everybody, we're involved in really 3 pieces of the puzzle for these networks. The first is on the satellite, what people refer to as the payload. The second is the gateways. And then the third is that we are seeing opportunities in the terminals with some of our components. And so a very exciting time for MACOM to be participating across so many different customers and our module and our chip design team is very busy satisfying the requirements in this market. Operator: Our next question coming from the line of Tore Svanberg with Stifel. Tore Svanberg: Congratulations on the strong results. I had a question on the Data Center growth now basically targeting more than 60%. Just curious, above and beyond just higher CapEx from some of your end customers, what's some of the delta here, some of the new revenue that's layering in? Stephen Daly: Very much the expansion of our product portfolio. And we have talked about really over the last 12 months, the ramp-up of some of our optical components. And so that has certainly helped drive some of the growth. But I would say, generally speaking, our focus is on 1.6T, 800 gig. These are areas where we're seeing a lot of strength. We expect that strength to continue. And in fact, we're seeing more and more demand as we sort of enter our second half. In terms of the new revenue or the new categories of revenue for our fiscal '27, certainly, the higher data rates, so 3.2T, possibly some coherent light ramp-ups. And also depending on the work that we're doing with our laser portfolio, we may be able to add some revenue to our fiscal '27 or even fiscal '28 on CW lasers. So a lot of good activity there. We have been also, as everybody knows, engaged with people that are deploying copper and providing equalizers not only onboard the PC boards, but also cable-based. So very excited about those opportunities as well. Tore Svanberg: Very good. And as my follow-up, Steve, you talked more than usual on this call about team collaboration, making sure capacity is in place. It sounds like your operations execution is allowing you to gain some share. Just curious why you brought that up on this particular call. Are you seeing competitors perhaps not have enough capacity and not good planning to keep up? Or is there something else that's driving that inflection point? Stephen Daly: Well, I think Jack and I are just privileged to be able to represent our employees. And so I think it's important to highlight the work that they're doing in collaborating to make these results happen. And so as you know, last year, the company grew by over 30%. And this year, we're on a path certainly to be in that range or higher. And we have a lot of different technologies ramping at the same time. And that absolutely requires coordination, collaboration, good, clean discussions with customers to set proper expectations. So we just wanted to highlight that. In terms of sort of opportunities, I'll just note that because there is certainly some constraints within the Data Center market, we believe that's opening up interesting opportunities for MACOM, including, by the way, what I would consider the legacy class of lasers as med customers are, and competitors, are pivoting to more, let's say, the higher power or CW lasers to support silicon photonics, that's creating a little bit of a gap in DFB lasers. And we have a very strong broad DFB laser portfolio that can support what I would consider legacy data center 100-gig modules. And so that could be a great business for us over the next 1 to 2 years, and those products are ready today. Operator: And Our next question in queue coming from the line of Quinn Bolton with Needham & Company. Quinn Bolton: Steve, I just wanted to follow up on the laser question. I think in the past, you said you had a couple of customers that were evaluating your CW lasers. You thought it would still sort of be a 6- to 12-month eval process. But could you give us any update on how you're feeling about the CW laser opportunity? Are you more confident that those could ramp and contribute to fiscal '27 growth? Stephen Daly: Yes. I don't think too much has changed in the last 3 months. We have excellent optical performance of our 75-milliwatt class lasers. Customers have tested and validated performance. What our fab is doing today is dialing in a process of record. That work is not complete. So we continue to tweak the process to optimize really reliability. It's all about reliability. Typically in these systems, the weakest link is the laser. And so you need to make sure you have a very robust laser. So there's a lot of qual work running in parallel with developing a process of record. And so that work continues, and that's all MACOM internal work. When we're ready and we feel like we have a reliable product, then we'll start working with module customers so that they can start their module quals. And then after that comes the hyperscaler qualification. So when you add all that up and look at the time line, you're really talking about potentially, and this is assuming everything goes well and oftentimes it doesn't, a fiscal '27 or '28 time frame of contribution. We are absolutely getting pull from the market. We know there's demand. And so we just have a lot of work to do to convince ourselves that we're ready to ramp this kind of a product into high volume. So I would, at this stage, not put your CW laser in your models, certainly not for fiscal '26 or I would say even '27. I think there's going to be a lot of other great things happening that will allow us to perhaps not only do as well as we've done this year in terms of growth, but maybe even exceed it next year because we have a lot of other irons in the fire. Quinn Bolton: And then I guess I wanted to come back on the utilization rates. I think over the past couple of years, you had mentioned the Lowell utilization rate was sort of suffering from some puts and takes in a couple of the larger defense programs and I think lower demand on the industrial side, MRI in particular. Has that utilization rate come back with the I&D business recovering? Or do you still feel like there's further room for improvement in the utilization rates of Lowell and obviously, that could be a margin tailwind as utilization increases. Stephen Daly: I think you're correct in those comments, and we are seeing increased utilization on our traditional Lowell-based defense business. And our Defense business this year is trending to certainly over 20% full year growth. And that -- much of that, not all of it, but much of it is coming out of our Lowell fab. So that is beneficial to the sort of gross and operating margins. Your commentary about our MRI business, which we categorize as industrial, is also improving. And we have a very strong franchise for high-voltage, nonmagnetic really kilovolt level diodes that are used in these MRI coils. We are seeing positive trends on that business, and we expect those trends to continue. So yes, those 2 things are definitely helping the Lowell utilization. There's 2 other important things going on in our Lowell fab as well. The first is developing the advanced GaN that I talked about in my prepared remarks. And the second is the ramping up of our optical product line within the Lowell, which is an indium phosphide-based product. Operator: Our next question coming from the line of Sean O'Loughlin with TD Cowen. Sean O'Loughlin: Congrats on the really solid results and momentum. First question, I just wanted to get maybe an update or offer you the opportunity to update some of your comments on the fiscal '26 segment growth other than datacom. We got the 60% growth, but I think last quarter, we talked about high teens growth in I&D. You kind of just alluded to maybe over 20% and high single digits in Telecom. Any updated thoughts there? Is that still what we should be thinking about? Stephen Daly: Yes. I'll make some comments and then maybe Jack can also talk about sort of P&L-related items. So I do think we have a solid plan for 2026. As I mentioned, our revenue growth is going to be driven by Data Center and Defense. Today, we're definitely trending towards top line in that sort of 30% range. I can tell you that last year, we did about 32%, and it would be nice to beat that. And we also ideally would like to exit the year with at least 60% margin. We're not sure if that's going to happen. We still have a lot of wood to chop between now and the end of September, which is the end of our fiscal year. But we do see a path to having strong revenue and earnings growth. Earnings growth should be quite nice this year, certainly coming from the second half. In terms of your commentary specifically about I&D and Telecom, I think we're thinking above 20% today for I&D, and we're going to try to push Telecom to be low double digit. John Kober: I think the only other item I would add, and obviously, the Defense piece has been quite strong for us over the past year plus. Industrial, we've been working our way through that. We touched upon the medical piece of Industrial with the last question. But more broadly, within Industrial, it is a fairly broad category. We have seen a bit of an uptick there that's helping out with our Lowell utilization. It's also driving some of that revenue or top line improvement that we see in that combined Industrial and Defense end market. And really, as we look at filling out the rest of the P&L with some of that revenue growth, we are very much focused on improving those earnings and improving the leverage and the drop-through from an operating income and also from an EPS perspective as we work our way through the remainder of '26 and then focus more on '27 as well. Sean O'Loughlin: That's helpful color. A quick follow-up. Just on the input side, I know that indium phosphide is one of the materials that you use. And so I don't want to over-index to these comments, but we've had some comments from public substrate suppliers about price increases and just maybe generally across your manufacturing footprint, is that something that you're either having to absorb and there's a timing mismatch? Or is the pricing environment for a lot of these products such that you're able to sort of pass those through? Or is that not really something that you're seeing outside of the indium phosphide? Stephen Daly: I'm not sure we want to get into the cost basis of any materials we buy. We're constantly buying gases, precious metals, gold, indium phosphide substrates, silicon carbide substrates, and we have a very strong supply chain that works very closely with our partners to make sure we're getting what we want when we need it at a fair price. Although I will mention maybe one thing. You may have seen recently where MACOM announced a small investment in a company called IQE. We put out a press release on April 27, and this is sort of somewhat related to your question. And people may not be familiar with IQE. So they are a U.K.-based company that provides epitaxial services, and they went through a -- recently, they went through a fundraising event where MACOM participated. They raised GBP 80 million. We participated with a GBP 45 million investment. And just to break that out very quickly, it was GBP 30 million in equity for about 11% ownership and a GBP 15 million convertible note. And ultimately, what we did as part of this transaction is put in place a long-term supply agreement to make sure that we have adequate supply of the technologies that we're currently acquiring from them and from others. And so the why we did it really revolves around your question, which is what is MACOM doing to ensure we have strong supply chain security and resiliency. And I think this is a great example of a strategic transaction, which is going to shore up not only our business regarding indium phosphide, but also the silicon carbide. And so where we stand right now with that is it's going through regulatory approval. There will be a shareholder vote, and it's expected to close in the next 30 to 60 days. And so this is sort of an example of MACOM proactively looking at risk and retiring risk. And so this will backstop our expected growth, not only as it relates to indium phosphide-based products, but also silicon carbide-based products and some other technologies as well. Operator: And our next question coming from the line of Will Stein with Truist Securities. William Stein: Congrats on the very strong outlook. The main thing I wanted to ask about was, Steve, in your prepared remarks, you talked about addressing the user terminal market within the LEO satellite industry. And this is, I believe, a pretty big change in strategy, at least relative to what I've heard the company talk about. We had the message previously that your focus was going to be essentially in infrastructure, the satellites and the gateways. User terminals, of course, look more like it's customer premise equipment, right, and sort of the consumer market. That's sort of uncharacteristic for you. So can you talk about what changed? What makes you want to address that market? What products you're selling and sort of timing to ramp there? Stephen Daly: Yes. I think that's a great question. And to be clear, when we look at that market, we're looking to be opportunistic. And so we are seeing some AESA technology basically using a wide range of control products, which would fit very nicely into our AlGaAs diode-based portfolio. So you're correct to conclude we're not chasing SoCs or receivers or highly-integrated customized chips for user terminals. That is not the case. But we are seeing inbound requests for some of our control products. And so we will opportunistically look at that. William Stein: Great. And then as a follow-up, I guess, the big-picture question is you had a huge book-to-bill this quarter. Obviously, that's not all for delivery in fiscal Q3. Can you talk about the spread across end markets and the duration of that? What's changing there? Stephen Daly: Well, certainly, as I mentioned, the strongest portion of our new orders was in the Data Center. But I will say that all 3 markets had a very strong booking event. Typically, these orders will be spread out over multiple quarters. And so I don't really want to get into any more detail than that. We typically, just as a practice, only recognize bookings that are within a 12-month period as well. So this 1.5 book-to-bill really reflects orders that would be delivered within 12 months. Operator: And our next question in queue coming from the line of Christopher Rolland with Susquehanna. Christopher Rolland: Congrats. I wanted to drill down on Data Center, particularly in June. So it's just absolutely inflecting. I don't think we've seen this kind of growth before. And so my question is, why now? It sounds like a lot of it is optical. When it comes to discrete components, I'm just trying to figure out kind of why the inflection? Is it just a units play? Is there something here like new DSPs that don't contain TIAs and drivers? Or is it really this move to 1.6? What's really driving that over $30 million inflection in Data Center sequentially? Why now? Stephen Daly: Yes. Thank you for the question. And so if we pull back and look at the general trends of our Data Center business over the last 3 years, in 2024, we grew our Data Center business by 35%. In 2025, we grew it by 48% and now we're, in '26, forecasting over 60%. So the trend is there to see in terms of the long-term growth. And clearly, we're investing in a variety of technologies that would be suitable for this market. We tend to gravitate towards the highest data rate type products. We were one of the early suppliers to the 1.6T rollout, and that is paying big dividends right now as that use case expands across the data center and various hyperscalers. And so we're able to solidify strong positions there. And of course, we're overlaying our optical components. We talked about the PDs, the photodetectors. We're working on the lasers. They're not quite there yet. So I don't know that there's an inflection point rather than a trend. And the trend is that our portfolio is broad in nature, and we're gaining traction at a wide range of customers selling a variety of functions. And as part of our strategy, we want to be diversified. So as you know, we don't sell DSPs just for the record, but we want to support module manufacturers that are, for example, using LPO or if a particular customer wants to electrify copper or maybe they want to experiment with coherent or coherent light. So these are all things that we're very focused on. These are long-term activities that are now starting to pay dividends. So it's not really an inflection point. I would say it's consistent with really the unit growth within the market as well. And so we're just trying to keep up with the growth, and that's some SAM expansion as well as portfolio expansion. John Kober: The only other item I would add, Steve, is, yes, the higher speeds are definitely helping to contribute to the growth that we've seen, but also some of the lower speeds, 100G and below has continued to hang in there over the past number of quarters and would expect that trend to continue as well. Christopher Rolland: Excellent. Perhaps as a follow-up on copper this time. If you could talk about engagements, particularly on kind of large-scale architectures, whether they're trending towards ACC or LE and kind of your outlook for this market? Do you think this is kind of the next big thing? Or this is, at this point, a little bit more of a TBD? Stephen Daly: Yes. I would put it in the category of a TBD, and we are seeing real demand, real hardware, real production ramps on the optical side. And that is certainly the vast majority of our revenue today. So the electrified cable is a great opportunity for us and will be additive in the future. And of course, as I mentioned, we are going after equalizers not only for sort of traditional high-speed 1.6T, but also PCIe and other applications that are closer to compute, let's say. So we are very active with our equalizer portfolio at various accounts, and there is a wide range of use cases that we're chasing. Operator: And our next question coming from the line of Timothy Savageaux with Northland Capital Markets. Timothy Savageaux: And I'll add my congrats on that guide, pretty spectacular. My question or at least first is just trying to understand more about the size of your photonics or optical device business, which we're talking about more and more here. And I don't know what kind of color you're able to provide. Does that business get to 10% of Data Center revenue in any one of these quarters in the second half? That seems possible? Or is it already there? Or as you look at your sequential growth here in Q3 and heading into the second half of the year, is that a meaningful proportion coming from the optical device side? And then I'll follow up. Stephen Daly: Great. Thanks for the question. And just to highlight that we don't typically break out revenue by product line, and that would be a very -- mainly for competitive reasons. And that -- so that would -- what you're asking is a very specific question that we would prefer to not answer so directly. I will say that we have a very strong product. I think our PD has definite advantages over what we're seeing in the market in terms of our ability to mass produce these with industry-leading dark currents, [indiscernible] chips, lens integrated onto the device. We have developed in our Ann Arbor fab, a very strong epi recipe that is providing the industry with very high levels of sensitivity. So all of those things are certainly playing into some of the successes we're having with the PDs. The other thing I'll note is we demonstrated, I think, a year ago at OFC, the idea of stacking the PDs on our TIAs. And so that has certainly been beneficial in terms of supporting not only TIA growth, but also PD growth. But we do have a diversified portfolio. We're not going to break out how much is concentrated on any one product at any one time because it's constantly changing. Timothy Savageaux: Okay. But it sounds like it's getting to be material. Maybe we can get a binary answer on that. But either way, I do have a follow-up about kind of the inflection. And the question is about within Data Center, customer diversification, right? I mean you have a very big customer in China is doing extremely well, and that could be a lot of it. But could you address maybe your reach throughout other major module suppliers in other places? And to what extent is that a big factor versus growth in your current major module customers? Stephen Daly: Right. And I think embedded in that question is really what's your exposure to the hyperscalers because that -- and so it really starts there in understanding what their needs are and understanding who they're using within their supply chain, and then we try to align ourselves with both. And depending on the hyperscaler, the platforms, the technology they're working, we try to align ourselves either directly to their road maps or to their vendors' road maps. I will say that from maybe a year or 2 years ago, our diversity today is far stronger. And so we see revenue today in scale up, scale out and scale across. So we are actively positioned in each one of these different areas. And that exposure varies by the module manufacturers, certainly varies by the hyperscaler. But at the end of the day, a lot of this is 1.6T. That is sort of the main event. Today, it's going to continue, as I mentioned, throughout the course of our fiscal '26, calendar '26 and even into '27. And if we pull back and we look at the work that we're doing there, as I mentioned earlier, I think we have potential to do really well in our fiscal '27, where obviously, we'll have to wait and see how things go. But we are getting large orders that go out in time that support real production programs. Operator: And our next question coming from the line of Karl Ackerman with BNP Paribas. Karl Ackerman: I have two, if I may. Steve, your book-to-bill of 1.5 appears to be a record, certainly multiyear record anyway. Should we expect meaningful capital investments in fabs to support this backlog? Or do you have the necessary capacity and assurance of supply to address this growth? Stephen Daly: So we are investing in our fabs, and that's -- I think that's a very interesting question to ask, and let me just very briefly talk about that. So about a year ago, we talked about increasing the wafer production capacity in our North Carolina fab by 30%. We said that would take 15 months. That work should be done by the end of this calendar year. And so we invested less than $20 million. That was about $15 million to $16 million. We had the opportunity to buy heavily discounted fab equipment from the market. So that's baked into our numbers and the capital numbers. When you look at our Massachusetts fab, we are investing in equipment for advanced GaN. We're investing in equipment to expand indium phosphide capacity and production, and we're doing general modernization. And then in our French fab, we're moving the entire product line from 3-inch to 6-inch. That equipment is already in place. There's been very little money spent to do that. However, we are installing a new MOCVD reactor in France to support some of the volumes that we anticipate in the next couple of years. So there is definitely moderate investments. As we think about our business and being diversified, you will not see us greenfielding -- building a new fab, building a new factory. We think -- we have a target. Now that we hit $1 billion of revenue, we want to hit $2 billion. And we don't need to buy a fab or build a fab to do it. What we need to do is expand incrementally capacity within the walls of our existing facilities. And that's a very -- and that's why, as Jack mentioned in his commentary, you're going to start to see tremendous earnings growth. Capital should be in that 4% to 5% of revenue range, and we have no major big investments planned. Do you want to add to that, Jack? John Kober: That's correct. So we're -- I think the guide that we put out for the remainder of our fiscal year '26 was $55 million to $65 million, depending on the timing of the completion of some of these items and when the capital was purchased. But we've been very disciplined and don't expect the CapEx number to exceed that 5% of revenue. And I think history has demonstrated that we'll be very prudent with what we're doing, but also opportunistic to make sure we can meet the capacity requirements that are out there. Karl Ackerman: Yes. Very clear. For my follow-up, last quarter, you spoke about how one of your competitors had exited the RF power game market. Do you believe that remains a tailwind for you throughout the second half of this year? Or has the benefit now largely been realized? Stephen Daly: So the benefit has not been realized, and it won't -- if there is a benefit, right? If there is -- so it won't -- it hasn't been realized yet. It won't happen in '26. The revenue will start to shine through in '27. And the reason for that is as we see some of the customers pivot and engage MACOM on new platforms, it takes time for those design wins to translate into revenue. So it's really, I would say, best case, a back half of '27 contribution. And as that competitor exited the market, they put in place last time buys, they built inventory for customers. They're doing it very responsibly. So really, what we're intersecting is new programs and new opportunities as opposed to existing programs that are in flight or in production. Operator: And our next question coming from the line of Vivek Arya with Bank of America Securities. Unknown Analyst: This is [indiscernible] on behalf of Vivek. Congrats on the results as well. A follow-up on earlier gross margin question. And clearly, you said you're investing a lot in incremental capacity. At the same time, you're really scaling a lot in volume and you're improving yields. So I just wanted to know the puts and takes into what really goes inside gross margin medium to long term as you're already kind of at that target model level? John Kober: Yes. Not sure if we've put a target model out there, but definitely been working to try and improve our gross margin. As I've stated previously, there's a lot of moving pieces that contribute to the gross margin, right? We've got some of the normal costs that are out there, including labor, facility costs, equipment depreciation, those types of things as well as material costs that's all working its way through our gross margin. So yes, we've been pleased with the progress we've made over the past few quarters. And as we look out to the remainder of '26, look for continuing improvements on gross margin and also as we work our way through 2027. Unknown Analyst: Got it. And then more of a longer-term question. So obviously, fiscal '26 is really looking exceptional. As we look into '27, and I think a lot of the same drivers should relatively remain. So the 1.6T transition, the 200G PDs and et cetera. So do you see any other potential risks that would lead to results otherwise? So for example, I think an earlier question to supply availability, maybe some component cost increase or any quarterly lumpiness or just your customer exposure mix. Any help in understanding how next year should traject should be helpful. Stephen Daly: Thank you. And I think, yes, to all of those elements that you described, that those are things we deal with on a regular basis. And that's also why we're always hesitant to talk about long-term targets and growth because there's a lot of variables that are outside of our control. But that said, we are in a position where we have -- as I mentioned on my script, we're in the right place at the right time with a great product portfolio, and we have a lot of interest across the 3 markets. So we do expect our fiscal '27 to be a strong year. And we don't think that this growth we're seeing in this quarter is sort of a onetime event. We expect to see solid growth in 2027. I think it's the normal list of risks that you brought up. There's always geopolitical, supply chain type issues that you have to deal with, and we think we do that reasonably well. So that's also, of course, offset by new growth opportunities. And the Defense market right now is very active, not only here in the U.S., but also overseas. We have a growing customer base in Europe. When we were looking at our recent growth rates, between North American and European Defense customers, they're both growing at the same rate, and we are very pleased to see that. So the Europeans are spending more money on electronics and defense systems, and we're participating in that. So that's certainly going to help next year. The Data Center, we're not expecting a slowdown. The hyperscalers continue to invest. That's clear. And on the Telecom side, we're well positioned in SATCOM to have a very strong year in our fiscal '27. Operator: Thank you. And there are no further questions in the queue at this time. I will now turn the call back over to Mr. Daly for any closing comments. Stephen Daly: Thank you. In closing, I would like to thank all of our dedicated and talented employees who made these results possible. Have a nice day. Operator: That does conclude our conference for today. Thank you for your participation, and you may now disconnect.
Operator: Good day, and welcome to Definitive Healthcare Corp.'s Q1 Fiscal Year 2026 Earnings Call. Later, we will conduct a question and answer session. Now I would like to turn the call over to your host. Jonathan Paris: Good afternoon, and thank you for joining us to review Definitive Healthcare Corp.'s financial results. Joining me on today's call are Kevin D. Coop, our Chief Executive Officer, and Casey Heller, our Chief Financial Officer. Before we begin, I would like to remind you that today's discussion may include forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements about our market opportunity, future performance, growth and financial guidance, the benefits of our data and healthcare commercial intelligence solutions, our competitive position, customer behavior, adoption, growth, renewals and retention, planned investments and operating strategy, value creation for customers and shareholders, and the expected impact of macroeconomic conditions on our business, customers, and the healthcare industry. Forward-looking statements are based on our current expectations and assumptions as of today, and are subject to risks and uncertainties that could cause actual results to differ materially. For more information, please refer to the cautionary statement in today's earnings release as well as the risk factors and other information included in our filings with the SEC, including our most recent Form 10-Ks and Form 10-Q. You should not place undue reliance on these statements, and Definitive Healthcare Corp. undertakes no obligation to update them except as required by law. During the call, we will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures, along with related definitions and limitations, are included in today's earnings release and investor presentation, each of which is available on the Investor Relations section of our website. For any forward-looking non-GAAP measures, the earnings release also explains why a quantitative reconciliation is not available without unreasonable efforts and identifies the relevant unavailable items. With that, I turn the call over to Kevin D. Coop. Kevin? Kevin D. Coop: Thank you, Jonathan, and thanks to all of you for joining us this afternoon to review Definitive Healthcare Corp.'s first quarter 2026 financial results. On today's call, I will provide highlights from our first quarter performance and give an update on the progress we continue to make on our key strategic priorities for this year. Let me begin by reviewing our financial results for the first quarter, which were at or above the high end of our guidance ranges on both the top and bottom line. Total revenue was $55.9 million, down 6% year over year. Adjusted EBITDA was $15.3 million, representing a margin of 27%, which was $2.3 million above the high end of our guidance. The outperformance is a reflection of our ongoing success in driving expense discipline across the business while investing in initiatives that we believe will return the business to top-line growth. Additionally, the quarter benefited from a timing benefit that will be neutral to the year and slightly lower R&D expense in the P&L as we shifted more investment to innovation, which is reflected in the capitalized software development spend. We continue to generate solid cash flow, delivering approximately $50 million of unlevered free cash flow for the trailing 12 months. We are off to a solid start for 2026 that puts us on track to meet or exceed the full-year financial targets we provided to investors at the beginning of the year. Before getting into specifics, let me give you a high-level overview of where the business stands. Our diversified and provider businesses, which combined represent over 60% of total revenue, have again demonstrated modest growth after returning to growth last quarter. This is an important achievement and gives us confidence that our efforts are having the expected impact, and we are investing to make this growth durable. Conversely, our life sciences businesses, which make up the remaining portion of revenue, continue to decline and are seeing slower response to the changes we are making. This segment has disproportionately been impacted by the claims disruption we have highlighted in the past, as well as a challenging macro environment. We continue to see positive data points in critical areas. First, net dollar retention rate improved year over year in the first quarter on a trailing 12-month basis, and we are increasingly confident that this will continue to be sustained for the full year. Second, we had our highest win-back quarter in over three years in the first quarter, which we believe is another positive sign that our product, go-to-market, and customer success investments are making the expected impact. Several six-figure win-backs in diversified and medtech highlight common themes we see emerging. First, other vendors continue to fall short in matching the breadth and quality of our datasets, leaving customers with an incomplete view of the market and an unacceptable trust deficit. Second, even customers who were particularly price sensitive and thought alternative vendors would be “good enough” recognize that the cost of an inferior dataset far outweighed the trade-off, and this reinforces the need to remain vigilant on both data quality and service. While there is still more to be done to achieve our objective of returning to overall growth, these data points strengthen our conviction that we are focusing on the right things and that those areas of focus are responding. Importantly, these are areas of focus that are within our control. I would now like to provide an update on our operational progress against our four strategic pillars. As a reminder, these pillars are data differentiation, integrations, customer success, and innovation. Let me begin with data differentiation. Our fall expansion pack release improved the breadth and quality of our claims data, and its release was met with overwhelmingly positive feedback. As you know, data is at the heart of our value proposition, and we are continuing to make investments to source new proprietary data types and extend our lead with our core reference and affiliation datasets. We are increasingly focused on leveraging AI to increase the velocity of data collection and quality assurance. Our data differentiation was key in a six-figure, multi-year win with a life sciences customer who had previously been using a generic multi-vertical data source to target providers treating oncology and rheumatology patients. This customer was frustrated by its limited visibility into affiliation data, prescription patterns, and key opinion leader identification. By deploying Definitive Healthcare Corp., they have meaningfully reduced time spent on research, improved their KOL identification efforts, and improved their sales strategy through better physician targeting. Our second pillar is focused on seamless integrations. Making it as fast and simple as possible for customers to access our data alongside any other data source they need is critical in delivering value and creating durable customer relationships. In the first quarter, we completed nearly 50 new integrations for customers and reduced the time to integrate by nearly 50% year over year. We are continuing our investments in developing new and enhanced integrations. We recently introduced a new HubSpot integration that will enable HubSpot users to access Definitive Healthcare Corp.'s reference, affiliation, financial, and clinical data directly within their HubSpot CRM, giving sales teams a detailed view of contacts and accounts. This is in addition to the enhancements we added in Q4, where we enhanced Salesforce integrations to include our healthcare provider data directly into a customer's Salesforce instance, thereby improving their sales team's ability to identify, segment, and engage physicians. Our data continues to show that customers who integrate Definitive Healthcare Corp. directly into their systems of record and systems of insight utilize Definitive Healthcare Corp. more often. We become a stickier, more strategic component of their day-to-day operations, which in turn strengthens our renewal rates. Turning to our third pillar, customer success. We are witnessing the impact of investments in this area bear fruit. The alignment of all functional teams that support the customer journey has led us to be a more proactive and engaged organization with our customers, which in turn has led to earlier identification of issues before they become problems and a better understanding and responsiveness in identifying opportunities where we can do more for customers. A great example of this in action was an upsell win this quarter with a biopharma customer who is an existing MONACO user. This customer was recently acquired by a larger organization, which gave our team the opportunity to educate the acquirer on the value we are delivering and how it can help the integration efforts of the two organizations by streamlining data sharing across the two groups. Finally, we continue to make progress against our fourth pillar, innovation, and our focus on digital engagement, which is a critical component to our return-to-growth strategy. With the progress made in our first pillar, which fortified our foundation in quality and service, we are shifting more effort to this pillar in 2026. We continue to make progress developing our AI capabilities and expect to launch our first AI-enabled solutions to market later this quarter. Our focus is on embedding a next-gen AI-driven interface in our existing platform that will leverage natural language to allow customers to simply and intuitively query our data to uncover new insights that can then be actioned through our persona-driven workflows. Let me give you a couple of examples. To effectively identify top physicians, a requirement is access to highly accurate reference and affiliation data to resolve treating doctors and verification of roles. Then claims data, leveraging both Rx and MX data, is needed for procedure volumes and patient journeys. Our human-in-the-loop research data, which is also being enhanced with AI, confirms the HCP and HCE status and job functions. It is this breadth and depth, coupled with architectural expertise, that makes this possible. Claims vendors alone, which use modeled reference and affiliation data tied to billing IDs, not treating MDs, or horizontal event data vendors which lack clinical activity entirely, would not be able to achieve the same result. To give customers the right answers to these types of questions requires that contextual expertise as well as longitudinal data, and only our data can provide this. This is the foundation on which our AI-native investments will begin to enhance this coming quarter. In the digital activation area, we now have more than 30 agencies signed up, with more than half of them actively generating bookings for Definitive Healthcare Corp. This is up from roughly a third over the last quarter. Importantly, we are also seeing increased utilization from existing direct and agency customers alongside continued new customer adoption. We are encouraged by the very positive market feedback on audience performance, and with a recent benchmark by a leading biopharma solutions company which showed our audiences delivered a 63% higher click-through rate than a leading competitor. While it takes time for this agency activity to generate revenue, the growing number of active customers gives us confidence that we will be able to start scaling our activation business later this year in 2026 and beyond. To summarize, we are off to a solid start in 2026, and we are tracking well against our full-year objectives. We remain focused on those things within our control, and we are driving improvement across all aspects of the business. We will continue to be opportunistic in investing in high-value areas that we believe will best position Definitive Healthcare Corp. to improve retention and return the company to consistent, predictable revenue growth over time. With that, let me turn the call over to Casey to review the financials in more detail. Casey? Casey Heller: Thank you, Kevin. In all my remarks, I will be discussing our results on a non-GAAP basis unless otherwise noted. As Kevin mentioned, we delivered a solid quarter with our performance at or above expectations across our key metrics. I will walk through the financial results in more detail, including our revenue trends, margin performance, and outlook. In the first quarter, we delivered revenue of $55.9 million, down 6% year over year, adjusted EBITDA of $15.3 million reflecting a 27% margin and expanding approximately 260 basis points year over year, and adjusted net income was $8.5 million resulting in $0.06 of non-GAAP earnings per share in the period, all of which were at or above the high end of our guidance for the quarter. We also delivered $18 million of unlevered free cash flow in the quarter, and nearly $50 million on a trailing 12-month basis. Turning to our results in more detail. Revenue of $55.9 million was at the upper end of our guidance range and represents a 6% decline year over year. Consistent with last quarter, the revenue decline is driven by life sciences. Both diversified and provider end markets, which make up 60% of our business, continue to grow year over year. Overall subscription revenues of $53.6 million declined 7% year over year. Given the timing of when we began revenue recognition on our data partnership agreement last year, we still had about two points of benefit in the first quarter and will be fully wrapped on the benefit in Q2. We did deliver improvement in our renewal rates in the first quarter year over year and quarter over quarter, and we are pleased to share that we saw improvement year over year in our net dollar retention on a trailing 12-month basis, as Kevin mentioned earlier. Professional services revenue in the quarter was strong, up 25% year over year, driven by a combination of delivering on traditional analytics engagements as well as a ramp-up in our digital activations activity. Adjusted gross profit in the quarter was $45.2 million, which is down 4% year over year. As a percentage of revenue, the adjusted gross profit margin of 81% expanded nearly 150 basis points year over year, primarily benefiting from the short-term gap between removing one data source and onboarding an additional source that I mentioned last quarter. And as I mentioned earlier, adjusted EBITDA was $15.3 million and reflects a 27% margin, expanding 260 basis points versus prior year. Despite the continued top-line pressures, we have continued to prudently manage the business and focus investments on the initiatives that will return Definitive Healthcare Corp. to revenue growth over time. Q1 adjusted EBITDA margin expansion was driven by the timing gap on the data source changes I mentioned just moments ago, and the shift in our product development efforts, which is driving a reduction in R&D expense but an increase in capitalized software development spend. Broader operating efficiencies also supported margin expansion and exceeded expectations. This provides additional flexibility to accelerate investments for growth as opportunities arise as we move through the year. Turning to cash flow. Our business continues to generate strong free cash flow due to our high margin model, upfront billing, and low recurring CapEx requirements. Operating cash flows on a trailing 12-month basis were $39.3 million, and we generated nearly $50 million of unlevered free cash flow over a trailing 12-month basis. Our conversion rate of trailing 12-month adjusted EBITDA to unlevered free cash flow was 70%, which is down about 20 points year over year, primarily reflecting unique items that benefited the prior year. This cash generation provides flexibility to continue investing in growth. Consistent with last quarter, we continue to make organic product investments with an emphasis on expanding our AI capabilities, and saw another quarter of increased capitalized software development spend, totaling nearly $3 million, up over $1.5 million from the prior year. At the end of Q1, deferred revenue of $99 million was down 12% year over year, and total remaining performance obligations declined 18% year over year. Current remaining performance obligations of $161 million declined 12% year over year. Total remaining performance obligations and current RPO year-over-year declines are similar to what we reported exiting Q4 and continue to be driven by the shift towards single-year deals versus multiyear commitments that we discussed last quarter. To quickly recap the drivers behind the RPO decline: in 2025, we saw a greater percentage of our new logo additions sign one-year versus multiyear commitments than in prior years. This impacts both RPO as well as CRPO. Last quarter, we explained that if you went back to the end of 2024, there was approximately $100 million of RPO on our books related to commitments that extended beyond 2025. As the year progressed, a portion of this would flow into CRPO this quarter as the contracts progressed. Now, as we fast forward to a year later at the end of 2025, we have $15 million less CRPO tied to multiyear deals expiring after 2026. This makes up a substantial portion of the CRPO year-over-year decline, and this dynamic holds true as we exit Q1. Before moving to our guidance discussion, there is one additional accounting item to mention. The recent stock price decline has caused us to book a further $197 million goodwill impairment charge as of March 31. That write-down also generated approximately $6.6 million of gain on the remeasurement of the TRA liability and a $3.6 million deferred income tax benefit. As a reminder, these are non-cash accounting charges and do not impact our debt covenants and are excluded from our adjusted earnings. We had a solid start to the year and continue to make progress against our financial and operational objectives. Now turning to guidance for the second quarter. We expect total revenue of $55 million to $56 million, a revenue decrease of 8% to 9% year over year compared to Q2 2025. The year-over-year decline worsens modestly versus what we just reported for Q1 largely as a result of the full wrap on the initial contributions from the data partnership. Within the revenue guide, we expect to continue to deliver double-digit professional services revenue growth through the year. This results in expected adjusted operating income of $10.5 million to $11.5 million, adjusted EBITDA of $13 million to $14.5 million, or 24% to 26% adjusted EBITDA margin in the second quarter, and adjusted net income of $5 million to $6 million, or approximately $0.03 to $0.04 per diluted share on 144.2 million weighted average shares outstanding. For the full year 2026, we expect revenue of $220 million to $226 million for a 6% to 9% decline year over year. This remains consistent with the guidance provided on our last call. We have continued to proactively manage our cost base, making targeted investments in growth areas. As we just discussed, higher capitalized software development spend is shifting costs from development spend to CapEx. This is a classification shift and is cash neutral. Translating that into dollars in 2026, we now expect adjusted operating income of $43.5 million to $47.5 million, adjusted EBITDA of $55 million to $59 million for a full-year margin of 25% to 26%. This guide increases the midpoint by $1.5 million and reflects the strong start to the year and our ongoing commitment to maintaining strong margins while investing in our key growth areas. Adjusted net income is expected to be between $23 million to $27 million, and earnings per share are expected to be $0.16 to $0.19 on 144.9 million weighted average shares outstanding. As we wrap up, I want to reiterate that while we are navigating ongoing top-line pressures, we remain focused on sustaining non-GAAP profitability and a strong margin profile while continuing to invest thoughtfully to support a return to growth. We believe our strategy is sound, and we are making steady progress against our key initiatives, which we expect will enhance retention, reaccelerate growth, and drive long-term shareholder value. We will now open the call for questions. Operator: If you would like to ask a question, please press 1 on your phone now, and you will be placed into the queue in the order received. Please be prepared with your question and please limit yourself to only one question and one follow-up. Our first question today comes from Morgan Stanley. Analyst: Hi. This is Jay on for Craig Hettenbach. Thanks for taking my question. Just on the growth side, I understand that life sciences continues to be pressured while diversified and provider have seen some modest growth. So just wondering if you can share your thoughts on whether 2027 could be a return to growth, and if you expect some margin improvement from there? Kevin D. Coop: Yes. Our growth prospects and the progress that we have made on our strategic pillars give us a great deal of confidence that we are focusing on the right things. While improvement has actually occurred across all verticals, it is especially showing up initially in provider and diversified, and that reinforces that confidence. While life sciences is taking a little longer, we think that the shift now from our original focus on data quality, integrations, and service—which is translating into these improved results—toward innovation and digital efforts will help us address some of the challenges that still remain in our life sciences segment. In particular, we think digital is going to start to impact that, and the claims remediation with our fall pack going into the data supply chain—which has put us back to at or above historical levels on claims data—will start to show up in that channel as well. As Casey mentioned, we have seen early indications most pronounced initially in provider and diversified, and we expect life sciences to be a fast follow. Operator: Next, we have Brian Peterson of Raymond James. Johnathan M. McCary: Hi. Thank you. This is Johnathan M. McCary on for Brian. One for you, Kevin. On the integrations, it is good to hear the HubSpot progress building on the Salesforce work last quarter. How far along are we in terms of taking care of those integrations? Are we basically through the low-hanging fruit now and in the later stages, or how would you characterize the progress thus far? Kevin D. Coop: As you know, we have talked about materially higher retention rates in customers that are integrated versus those that are not, which is why we made this such a big focus area. A couple of data points are particularly helpful. First was improving the speed of our integrations. Last quarter, we mentioned we had brought down the average days for integration from over 100 days to 73 days in Q4, and we are pleased to report that continued to improve. Our average number of days in Q1 was approximately 45 days. So we have radically improved the integration timeline from over 100 days to 45 days. In addition, by making this more of a focus with our go-to-market and customer-facing teams, our velocity has also improved. We have completed 75% more integrations over the last six months than we had in the prior six months. So not only are we doing more integrations, we are doing them faster and getting that in the hands of our customers. On productizing integrations, most recently with HubSpot, that enables HubSpot users to access Definitive Healthcare Corp.'s reference, affiliation, financial, and clinical data directly from their HubSpot CRM, giving a quicker, detailed view of contacts and accounts. That adds to bringing physicians data into Salesforce last quarter, and we are continuing to make that a priority. So it is a combination of speed and velocity, making sure integrations happen much faster, and increasing the number of ways customers can access our data in the most effective and efficient way possible. Johnathan M. McCary: Very helpful. And maybe this could be for Casey or Kevin. On the new AI tools you are rolling out later this quarter, how are you thinking about monetization? Is it more of a retention driver, an incremental SKU, or more of a pricing lever? Kevin D. Coop: Great question. We know this will allow us to democratize access more effectively across users. Even though the product is intuitive, it still requires some training to use our UI/UX today, and if customers are getting data through an API or lake-to-lake, that is a different path. With SaaS access, the AI agentic layer allows more people to more easily access that data, which will unlock more value. The most immediate impact will be improved retention and increased value. Since we have always licensed based on value, that fits our model. In the second stage, as we bring out more feature functionality over time, we expect to see more pricing power. Even the democratization layer improves renewal value and has a positive impact to the revenue profile. There is no downside. Retention improves, we deliver more value supporting higher yield on existing solutions, and as we bring new solutions online, they will be easily integrated into the installed base, driving upsell and cross-sell opportunities. Operator: From BTIG, we have David Larson. Jenny Shen: Hi. This is Jenny Shen on for Dave. Thanks for taking my question. On the biopharma demand environment, a large CRO we cover commented that they are seeing green shoots on the emerging biopharma side, with some of the smaller players seeing improved funding, while spending remains more conservative at large pharma. Have you seen that dynamic or any notable changes on your side, or has it been pretty consistent? Kevin D. Coop: Thanks, Jenny. It is helpful to segment the space appropriately. Some providers cover both first-stage and second-stage clinical assets—early-stage R&D and drug trials versus later commercialization. Definitive Healthcare Corp. primarily plays in second-stage commercialization. We have a marquee installed base with very large biopharma customers, which is great, but even if there are green shoots with smaller emerging providers, it is difficult to offset larger customers who are shifting dollars from commercialization to early-stage clinical investment and R&D. We are still seeing second-stage commercialization efforts somewhat muted, which is natural in this type of macro environment and happens cyclically in biopharma. We see more incremental dollars invested in R&D budgets to bulk back up product portfolios, with factors like patent expirations also impacting spend. This presents a potential growth opportunity, as those assets move toward commercialization over time—that is when demand returns for us. In the meantime, our focus on the integration pillar, which seamlessly integrates our data without sacrificing data quality, allows us to offset bundled offerings from other vendors by combining higher quality with ease of use. The fact that we won back 160 customers last year and moved more than 50 this quarter demonstrates that the strategy is working. As those integrated customers move into commercialization, that will start to show up in our life sciences segment as well. Operator: Next, we will hear from Stephens Inc. Jeffrey Garro: Yes, good afternoon. Thanks for taking the question. I want to go further on the life sciences end market. The two highlighted wins in the release are both life sciences or biopharma-related, and you also gave several more examples on the call. Clearly, you have proof points of value with large and sophisticated customers, which contrasts with the broader decline you have described for that segment. Could you elaborate on the overall demand environment, the recent win rate within that segment, and lastly, when the claims disruption will stop being a factor? Kevin D. Coop: I will start with the last point. We have returned to historical levels of claims data and, in the first quarter, are now above historical levels. Often, customers were buying data based on records and size of data payload; when you have, for example, a 30% decline in records, that drove down-sell pressure, which we have largely worked through. Now that we have returned to those historical levels, we expect customers we are entitling today will not experience the same level of down pressure when they come up for renewal. We started to see that shift as we were repairing the claims dataset later last year, but many buying decisions were made earlier than we were able to get that into market. We think we are seeing the tail of it now. We have repaired the data supply chain, and going forward it should be significantly improved. On commercialization, you have to work through the R&D Stage 1 cycle to get to Stage 2, and we do not control that. What we can do is make sure that customers still actively working with our data to commercialize current products—including through our digital activation and ad tech—are maximizing value in the short term while we wait for that spending to return. Operator: From Deutsche Bank, we have George Hill. George Robert Hill: Hey, good afternoon. Thanks for taking the question. There is a lot of talk about AI. How are you using AI to change how you package and productize the data assets that you have? How does it change how clients consume or ingest that data? And do you expect AI to have an inflationary or deflationary impact on your ASPs? Kevin D. Coop: In healthcare, the technology itself is not sufficient to maneuver effectively in a very complex environment. Domain and contextual expertise matter a lot, along with proprietary data. That combination is a durable advantage for Definitive Healthcare Corp. The complexity includes understanding relationships among physicians, practice locations, affiliated locations, pathways to surgery centers and other care sites, and mapping reference data to technographics, insurance networks, and consumer personas. With domain expertise and differentiated, longitudinal data, we are applying AI initially to accelerate what we already do, both internally and externally. Internally, our engineering and development teams are extensively using AI and ML, and we have deployed AI in operational efficiencies for customer success and internal teams. On product, the first elements are coming out this quarter, with more later this year. We have a tremendous amount of diverse data used in multiple ways—e.g., HCP targeting and market share analysis. Our next-generation product architecture that leverages AI will enable customers to more rapidly unlock insights they already rely on, in a more democratic fashion. We believe this will increase usage and access, thereby driving more value, which at the very least protects current revenue and, as we bring more capabilities online, allows for incremental pricing through cross-sell and upsell rather than deflation. Operator: And we will hear from Stifel. David Michael Grossman: Great, thank you. I think there are various dynamics affecting year-over-year compares as we move through the year—on revenue, margin, and also CRPO and RPO. Can you briefly summarize what those are to make sure we have them all? Casey Heller: Sure, David. Starting with CRPO, it is declining 12 points year over year, consistent with where we exited Q4. A significant portion is driven by having sold fewer multiyear deals and seeing a shift toward single-year deals, creating about a $15 million headwind year over year, which is about half of the total CRPO decline. That explains why CRPO is declining at a greater rate than our top-line outlook. Another component of the disconnect between CRPO and revenue is that we continue to expect double-digit growth throughout the year in professional services revenue—a combination of professional services and analytics plus digital activation—which generally does not show up in CRPO because we do not see those bookings until much closer to recognizing that revenue. From a top-line perspective, in Q1 we still had a couple of points of benefit from the data partnership we signed back in 2024; we did not start revenue recognition on that until partway through Q1 last year, so there was a little lift in Q1. We now fully anniversary that, so it is no longer a compare element as we hit second quarter and beyond. David Michael Grossman: Is that reflected in the sequential revenue in the second quarter—the two-point benefit you got in 1Q? Are you losing about that sequentially? Casey Heller: We are not actually losing revenue sequentially because that was the way it showed up last year, from a compare standpoint. If you look at the midpoint of our guide, total revenue is roughly flat as you move through the remainder of the year, with more of a sequential increase at the higher end of the guide. David Michael Grossman: Right, got it. So that is just in the base last year and had nothing to do with the first quarter, right? Kevin D. Coop: Correct. David Michael Grossman: On the CRPO duration dynamic, when do you think you comp out the shift toward shorter duration? Casey Heller: We expect that to live with us for the next several quarters. We can provide more color as we get closer to the end of the year, but we do continue to expect double-digit declines in CRPO for the next couple of quarters, given the multiyear dynamic and when that laps. David Michael Grossman: Does that mix shift continue into 2027 in terms of the year-over-year compare? Casey Heller: It depends on the mix of signings we deliver in the back end of this year and whether there are more multiyear components. If the current shift holds, we are probably another couple of quarters of this, and then I would expect more stabilization and a tighter correlation of CRPO to revenue. David Michael Grossman: Final one on claims disruption. Kevin, you said you are back above historical levels. Does that suggest it is no longer a headwind as we move through 2026? Casey Heller: The new claims data source came online in the early part of Q4, and by then many customers had already made renewal decisions. We do over 30% of our annual renewals in December and January, so adding the new data source did not really have the ability to influence those decisions. In addition to bringing on an additional new data source that will come into product shortly, we think it certainly will not be the headwind it has been as we move forward. We need to see how the next couple of quarters of renewals play out, but we are confident we have taken the right actions to get incremental claims data back into product and into customer hands. Operator: We have no further questions at this time. I will turn the program back over to our host for any additional or closing comments. Casey Heller: Thank you, everybody, for joining this afternoon. We appreciate the questions and look forward to talking to you again in 90 days. Operator: That concludes our meeting for today. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Duncan, and I will be your conference operator for today. I would like to welcome you to Absci Corporation first quarter 2026 business update. All lines have been placed on mute to prevent any background noise, and after the speakers’ remarks, there will be a question and answer session. Now I would like to turn the conference over to Alex Khan. Please go ahead. Thank you. Alex Khan: Absci Corporation released financial and operating results for the quarter ended 03/31/2026. If you have not received this news release, or if you would like to be added to the company’s distribution list, please send an email to investorsasci.com. An archived webcast of this call will be available for replay on Absci Corporation's Investor Relations website at investors.avsci.com for at least 90 days after this call. Joining me today are Sean McClain, Absci Corporation's Founder and CEO; Zach Jonasson, Chief Financial Officer and Chief Business Officer; and Ronti Somerotne, Chief Medical Officer. Before we begin, I would like to remind you that management will make statements during the call that are forward-looking within the meaning of the federal securities laws. These statements involve material risks and uncertainties that could cause results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. These include statements regarding the development and clinical progress of our pipeline programs, including ABS-201; the design, enrollment, product, and timelines of our ongoing Phase 1/2a headline trial of ABS-201 in androgenic alopecia; anticipated timing of interim proof-of-concept data readout for ABS-201 in 2026; the potential advancement of ABS-201 into Phase 3 development; anticipated initiation of a Phase 2 clinical trial of ABS-201 for endometriosis in 2026, and a potential proof-of-concept readout in 2027; the anticipated characteristics and product profile of ABS-201 as a drug product; our target product profile and its attributes; the potential for an expedited development pathway, including the possibility of advancing directly from Phase 1/2a into Phase 3; our plan to engage with the FDA regarding development strategy; and the potential market opportunity and commercial prospects for ABS-201. Certain statements may also include projections regarding potential market opportunity. These estimates are based on various assumptions, including potential regulatory approval, the final approved label, and the evolving competitive landscape, any of which could cause our actual addressable market to differ materially from these projections. In addition, certain research findings discussed today reflect participant responses to a hypothetical product profile and do not represent clinical results for ABS-201. Additional information regarding the risks and uncertainties that could affect our forward-looking statements is set forth in the press release Absci Corporation issued today, our most recent annual report on Form 10-K, subsequent documents, and reports filed by Absci Corporation from time to time with the SEC. Except as required by law, Absci Corporation disclaims any intent or obligation to update or revise any financial or product pipeline projections or other forward-looking statements because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast on 05/07/2026. With that, I will turn the call over to Sean. Sean McClain: Good afternoon, everyone. Thanks for joining us. Today, I will cover three things: where we are on ABS-201, a new addition to our prolactin pipeline, and the strategy driving both. 2026 is going to be a data-rich year for Absci Corporation with multiple readouts in front of us. Ronti will go through the headline trial and discuss early PK modeling that supports our targeted dosing frequency. At a high level, the Phase 1/2a is on track. We expect to share preliminary safety, tolerability, and PK data next month; interim 13-week hair regrowth data in the second half of this year; and full 26-week proof-of-concept data early next year. ABS-201 is not intended to compete with minoxidil. We are aiming to create a new category of hair regrowth therapy—a targeted biologic against the prolactin receptor that provides durable hair regrowth from a few injections. If successful, ABS-201 could represent the first new mechanism of action in androgenic alopecia in nearly three decades and a fundamentally different treatment paradigm for patients. In parallel, we continue to advance towards initiation of a Phase 2 endometriosis trial in the fourth quarter. We recently launched our endometriosis Clinical Advisory Board with leaders from Yale, UCSF, Duke, and Mayo Clinic. They bring deep expertise across reproductive medicine, fertility, and translational research and will help guide ABS-201’s endometriosis program. Endometriosis has the same kind of opportunity as AGA—large, underserved, and underexplored—and ABS-201 has the potential to open up a new category of therapy there as well. As Zach will discuss, our top strategic priority is using our platform to create novel, differentiated assets. ABS-201 in AGA and endometriosis is the clearest expression of that. We go after hard problems, novel biology, and large patient populations with real unmet need. Our platform is built for this, and our philosophy has always been simple: follow the science, and follow the data. One of the places this has taken us is prolactin biology. Prolactin biology is underexplored, underappreciated, and often misunderstood. Even inside the medical community, the name prolactin can read as narrow, and some still think of it as a lactation hormone. It is much more than that. The more mechanistic insight we have generated on prolactin, the prolactin receptor, and related pathways, the more opportunity we see for this target—well beyond AGA and endometriosis. We have started sharing some of these insights with the medical community as part of a broader education effort. Today, we are announcing another anti–prolactin receptor antibody, ABS-202, for an undisclosed I&I indication. ABS-201 in AGA, ABS-201 in endometriosis, and now ABS-202 in I&I are just the start of our prolactin pipeline. The reason we can do this comes back to our people and our platform, OriginOne. We figured out early that having a good platform is not good enough on its own. We need the people who know how to push it, and in this industry, you also need the assets—novel and differentiated programs that can make a real difference in patients’ lives. The places where unmet need is largest tend to be where biology is most complex and underexplored, and that is exactly where our platform and our people excel. That overlap is also where the potential return on investment is highest, both for patients as well as our shareholders. Our focus remains being an AI-native company dedicated to developing and delivering novel, differentiated therapeutic assets for patients. As we roll out our agentic AI workflows across Absci Corporation, each of our functions is scaling. Across Research, SG&A, and other functions, we are unlocking real efficiencies and new capabilities. That is the focus, and that is what we are committed to delivering. With that, I will turn it over to Ronti, who will walk through the ABS-201 clinical program. Ronti? Ronti Somerotne: Thanks, Sean, and good afternoon, everyone. As Sean mentioned, we are pleased to share that our ongoing Phase 1/2a headline trial for ABS-201 is progressing well and tracking according to plan. As a reminder, this trial is a randomized, double-blind, placebo-controlled study. The primary endpoint is safety and tolerability, while secondary endpoints include PK, PD, immunogenicity, target area hair count, target area hair width, and target area darkening or pigmentation. We will also collect patient-reported outcome data from this study. In the headline trial, we have now finished dosing all four planned healthy volunteer single-ascending-dose cohorts and initiated dosing in the first multiple-ascending-dose cohort. To date, emerging safety and tolerability data remain favorable. Additionally, preliminary PK modeling from this clinical trial supports ABS-201’s targeted dosing interval of two or three injections over a months-long period. Next month, we anticipate sharing blinded preliminary safety, tolerability, and PK data from the SAD cohorts. In that update, we plan to share clinical data that support the safety profile and anticipated ABS-201 dosing interval. In the second half of this year, we plan to disclose interim proof-of-concept data, followed by full proof-of-concept data in early 2027. The 13-week interim is, by design, a directional view. The 26-week time point is the trial’s full POC readout. Given the regenerative nature of the mechanism and our targeted dosing interval, the biology may continue to drive hair growth beyond that point, which is consistent with the long-acting profile we are working towards. Zach will speak to how this positions ABS-201 well for commercial success. We also continue to explore plans to execute our targeted, efficient clinical development strategy, which could enable expedited clinical development with the potential of advancing directly to registrational trials following this Phase 1/2a study. With that, I will pass it over to Zach to discuss our business strategy and to provide an update on our financials. Zach? Zach Jonasson: Thanks, Ronti. We remain focused on creating and developing therapeutic programs that offer the highest potential return on investment. Our strategic priority is the execution of the ABS-201 headline trial, which supports our future registrational study plans for AGA and our Phase 2 clinical trial plan for endometriosis. As Ronti mentioned, we plan to share an interim POC readout, including 13-week hair regrowth data, in the second half of this year. Based on the mechanism and our preclinical data, we anticipate the 13-week interim readout will give a directional view of hair growth, with the 26-week full POC providing the trial’s primary efficacy readout. Given the regenerative nature of the mechanism, we anticipate hair growth to continue beyond the 26-week time point. Conversations with the scientific and medical community, as well as patients, continue to affirm our view of the significant return-on-investment potential for ABS-201 in AGA and endometriosis. We estimate that the capital required to advance ABS-201 through registrational AGA trials will be a fraction of the clinical costs required for other large indications, such as oncology and IBD. Moreover, we expect to be able to leverage the SAD and MAD portions of the current headline trial to support Phase 2 initiation in endometriosis, thereby saving time and cost. Considering the significant potential market opportunities of AGA and endometriosis in conjunction with our efficient development strategy, we believe that ABS-201 offers a unique and compelling ROI. Our market research supports a significant commercial opportunity for ABS-201. In our surveys of AGA consumers and dermatologists, we evaluated a target product profile consisting of 2.5 years of hair growth following three injections of ABS-201, with a hair growth effect of approximately 35 hairs per cm² versus baseline, similar to high-dose oral minoxidil. Results from our market research support a potential total available market exceeding $25 billion annually in the U.S., with meaningful potential upside if hair growth exceeds the survey threshold. ABS-201 has the potential to significantly expand the overall AGA market as a new premium category of durable, regenerative hair growth therapy. Our market research indicates the ABS-201 target product profile would attract not only AGA consumers dissatisfied with current standard of care, but also those who elect to use ABS-201 alongside existing standard of care, such as oral minoxidil or new formulations of oral minoxidil. Similarly, in endometriosis, ABS-201 has the potential to define a new category of therapy that has the potential to address not only pain, but also underlying disease. Endometriosis is prevalent in up to 10% of women worldwide, including an estimated 9 million women in the U.S. We believe ABS-201’s differentiated profile could support potential peak sales in excess of $4 billion. As Sean mentioned earlier, our second priority is building and prioritizing an early pipeline of differentiated programs that offer the highest potential return on investment. Accordingly, today, we are pleased to announce the deepening of our pipeline with the addition of a new anti–prolactin receptor antibody, ABS-202. This program, which leverages our prolactin biology expertise and our AI platform, enables us to expand into new indications where we believe prolactin receptor inhibition will offer a novel and efficacious treatment option. Conversely, we have determined that certain programs no longer fit within our strategic scope, and so we will be deprioritizing development of ABS-301 and ABS-501. We will no longer commit internal capital or resources to further development of these programs. Our capital and resources will be directed toward programs that offer the greatest potential ROI within our strategy. In addition to the two previously discussed strategic priorities, we continue to advance partnering discussions associated with our other internal programs, which are at various stages of preclinical and clinical development. Overall, our strategy remains focused on executing the development of ABS-201 in AGA and in endometriosis, and then further building a pipeline of differentiated programs that provide optionality for internal development or partnering. Turning now to our financials. Revenue in the first quarter was $200 thousand, as we continue to progress our partnered programs. Research and development expenses were $19.3 million for the three months ending 03/31/2026, as compared to $16.4 million for the prior-year period. This increase was primarily driven by advancement of Absci Corporation’s internal programs, including direct costs associated with external preclinical and clinical development of ABS-201. Selling, general, and administrative expenses were $9.1 million for the three months ending 03/31/2026, as compared to $9.5 million for the prior-year period. This decrease was primarily due to a reduction in personnel-related costs. Cash, cash equivalents, and marketable securities as of 03/31/2026 were $125.7 million, as compared to $144.3 million as of 12/31/2025. Based on our current projections, we believe our cash, cash equivalents, and marketable securities will be sufficient to fund our operating plans into 2028. Our current balance sheet supports our execution of key upcoming catalysts, including potential proof-of-concept readouts for both AGA and endometriosis, and continued progress of our early-stage pipeline. We also remain focused on opportunities to generate additional non-dilutive cash inflows that could come from early-stage asset transactions and/or new platform collaborations with large pharma. In particular, we believe our early pipeline programs may offer attractive partnering opportunities. At the same time, we are aggressively implementing agentic AI workflows across our organization, including in business and scientific functions. These implementations are already creating meaningful efficiency gains as well as capability gains. Going forward, we expect to continue to realize cost savings and productivity gains from advancement of our agentic workflows. With that, I will now turn it back to Sean. Sean McClain: Thanks, Zach. Before we open up for questions, I want to thank the team at Absci Corporation for the work they put in each and every day. The catalysts ahead this year are: one, preliminary safety and PK data for ABS-201 next month; two, interim 13-week proof-of-concept hair regrowth data in the second half of this year; three, initiation of a Phase 2 endometriosis trial in Q4, subject to data and regulatory review; and last, continued progress on our early-stage pipeline, including our newest prolactin program, ABS-202. Looking into early 2027, we expect full 26-week proof-of-concept data for ABS-201 in AGA. We will now open the call for questions. Operator: If you would like to ask a question, please press star followed by one. Thank you. Your first question comes from the line of Brendan Smith from TD Cowen. Your line is now open. Please go ahead. Brendan Smith: Hi, guys. Apologies. Can you hear me now? Sean McClain: Yes. Brendan Smith: Thanks for taking the questions, and congrats on everything going on here. I guess maybe just a quick follow-up on the 202 conversation. Can you help us understand a little bit more, even on a mechanistic level, the most important distinctions versus 201 in terms of why it would make sense for some indications versus others, and whether there is a difference to product profile or something about actual mechanism that makes sense for that distinction? Thanks. Sean McClain: Yes, absolutely. With ABS-202, we are creating a differentiated profile, and we also want to position this outside of AGA and endometriosis for other indications where there may be pricing differences. With regard to prolactin biology, we are very interested in how prolactin is driving some autoimmune diseases. It appears to sit on a stress–inflammatory axis and is also driving some interesting B-cell biology. You see prolactin receptor expression throughout the body—bone, immune system, endothelial cells, synovium—so we are continuing to expand the biology there as well as going into other indications with ABS-202, and additionally looking at bispecifics that could be synergistic with this mechanism. Brendan Smith: That is super helpful. And then maybe just quickly on the upcoming MAD efficacy readout with 201. Appreciate the color on how you are thinking about some of this data. Given how the space has evolved in recent months, are you thinking comparable efficacy with clean safety and differentiated dosing is enough to win given how big the market is, or do you think you will need to show superior efficacy? Help us understand those dynamics. Sean McClain: Yes, absolutely. Zach can touch on this more from the consumer quant study we did, but we believe having comparable efficacy to oral minoxidil with infrequent dosing would be a home-run product. That convenience factor with equivalent efficacy is compelling, and any efficacy above that increases the overall TAM of the opportunity. Zach? Zach Jonasson: I would be happy to comment. As you know, we conducted sizable consumer surveys and surveys with dermatologists. The takeaway is that the profile of ABS-201 would establish a brand-new category of therapy based on durability, infrequent dosing, and a truly regenerative mechanism. When we test a profile with efficacy consistent with at least some reports of high-dose oral minoxidil—around 35 hairs per cm² in target area hair count—we see massive potential for adoption, and that is how we get to a potential $25 billion TAM on a TPP that looks like that. We think this product would expand the overall AGA market. Many patients dissatisfied with current standard of care would come to ABS-201, and over a third of males and females we surveyed said they would come first line, even before trying a nutraceutical. We also saw many patients would elect to use both—an oral minoxidil in combination with ABS-201. As a premium, new category of therapy, ABS-201 is very well positioned. Analyst: Good afternoon, and thanks for taking our questions. A little bit of a similar question as it relates to ABS-201 and ABS-202. Are there differences in pharmacokinetics or binding? Is there anything you can tell us about upgrades in ABS-202? And I have a follow-up on the ABS-201 program after this. Thanks. Sean McClain: At this point in time, we are not disclosing the specific profile we are looking to achieve for ABS-202, other than the fact that we are planning to take this into a different indication. Analyst: Fair enough. As it relates to the 13-week readout, another company noted “appreciable improvement” at two months. It is a qualitative measure at an early time point. Is this what we should be expecting at 13 weeks, or should we be expecting something more methodical? Thank you. Sean McClain: The 13 weeks is really a directional readout. We want to see hair growth, and the 26-week is where we expect to see the oral minoxidil hairs-per–cm² effect. That is the final readout. The 13-week is directional, and given differences in hair growth and the mechanism, we want to reserve the 26-week as the final definitive readout. Arseniy Shabashvili: Hi, this is Arseniy on for Vamil. Thanks for taking my questions, and congrats on all the progress. You previously talked about 90% receptor occupancy being necessary to achieve the full therapeutic effect with the prolactin mechanism. Has anything you have seen in the trial so far shifted that perspective in any way, and do you think it is ultimately achievable with the dosing schedule that you need? Sean McClain: So far, what we are seeing supports that as achievable. Ronti? Ronti Somerotne: We are not looking at anything like hair growth in the SAD study, and we designed the dosing paradigm conservatively. In our scaling, we are confident we can hit that 90% receptor occupancy. This is something to look forward to with the MAD data and then the hair growth data. Arseniy Shabashvili: One more follow-up. Do you expect variability in therapeutic response among patients you enrolled—because of biomarker profile, age—or is there something about this mechanism where you think essentially every patient will respond at least to some degree? Ronti Somerotne: At this point, we seem to have a balanced enrollment of the various stages of the Norwood classification. There is nothing from a biomarker perspective that I would expect to predict a variation in response in the AGA population. It is a reasonably sized, randomized study, and in terms of baseline hair characteristics, we are pleased with how patients are distributing amongst the arms. At this point, I am not worried about something else causing inter-subject variability in the mechanism of action itself. Sean McClain: We have not seen any such signals in the in vivo or ex vivo experiments we have run to date either. Analyst: Hi, how is it going? This is Alex on for Kripa. Really exciting time at Absci Corporation. Two questions from us. One, when can we expect to learn more about the mechanism and the properties and indication for ABS-202? And then also, in your consumer survey, did you specifically test for patient preference and desire for combination therapy for ABS-201 and other currently approved products? Thanks. Sean McClain: At the moment, we are not planning on disclosing more than we have on ABS-202’s mechanism of action, though we are very excited about the overall opportunities. As we get closer to the clinic, we will disclose more, but from a competitive standpoint, we are not disclosing at this time. Zach, do you want to take the second question? Zach Jonasson: Yes, absolutely. In the survey itself, we did not specifically segment by combination-therapy questions. What we did see, which was really exciting, is very high intent to seek out the product if available: 87% of men and 69% of women said extremely or very likely. In subgroups already on standard of care, such as oral minoxidil, those numbers went up dramatically—to 92% for men and 89% for women. We clearly see stronger interest among those already using standard of care, supporting the new-category definition where patients will look to ABS-201 either to replace standard care they are dissatisfied with or to use on top of standard care. Debanjana Chatterjee: Hi, thanks for taking my question. I have a question on the endometriosis program. I know pain is a very common endpoint for these trials, but historically the high placebo response has been an issue with pain studies. What structural elements would you implement in this trial to control placebo response? And I have a follow-up. Ronti Somerotne: Thanks for the question. I learned a lot in my time at Vertex overseeing the pain program there. The pain aspect of these studies is ultra important. The crux is how you execute the trial. We will spend a lot of time making sure the sites are carefully chosen, the investigators are carefully chosen, and all partners understand how to mitigate placebo response. Placebo training is really important. We will be surveilling the blinded data for evidence of a placebo response. There is a lot of operational work that is not in the protocol because these are things you have to do in execution. We have also engaged the FDA on how we are approaching mitigation of placebo response. It is really important, heavily operational, and done behind the scenes. Debanjana Chatterjee: That is helpful. For ABS-202, I know for competitive reasons you cannot share many details, but is that something for internal development, or would you partner it given pricing differences for I&I indications? Sean McClain: We are open to both options for ABS-202. The current plan is to pursue it ourselves, but given the opportunity and market size, we are considering both internal development and partnering. Analyst: Hey, guys. Can you hear me? Sean McClain: Yes, we can. Analyst: Thanks for taking my question this afternoon. When you talk about the hair growth benchmark for success, you have guided to that for the AGA MAD portion. Can you clarify whether that benchmark is what you expect at the end of the 26th week? And if it is, can you help us think about what you would expect to see at the 13-week mark based on preclinical work? Sean McClain: Great question. Where we want to be at 26 weeks is definitely where oral minoxidil sits. At 13 weeks, we are not putting an official guide on that; we want to see directional hair growth. Given the biology and the new mechanism, we do not want to set unrealistic expectations. The best lens is the 26-week readout, where we want to be around oral minoxidil with infrequent dosing. Zach Jonasson: To add, our survey shows that if we have a TPP with an effect size similar to high-dose oral minoxidil—think in the 30s—with convenient dosing and durability, that is a home-run, category-defining product. There is still a product with efficacy below that as well, but the research suggests that threshold is fantastic. Analyst: Got it. Maybe going back to the PK data you have seen so far. You said the modeling supports a few-times-a-year dosing regimen. Can you give more color on the key parameters driving that conclusion? Ronti Somerotne: We are assessing PK from all SAD cohorts. We just started dosing the MAD cohorts, so we do not have MAD PK yet, but the SAD cohorts are developing nicely. We feel pretty good about being able to dose at least every eight weeks subcutaneously. We will have more color and a more refined estimation of dosing frequency in a few weeks when we share the data. Sean McClain: From the preliminary half-life and PK, we are feeling very optimistic and look forward to sharing the full data in June. Swayampakula Ramakanth: Thank you. Good afternoon, Sean and Zach. I have a couple of questions. One, you stated that you are deemphasizing oncology products. What are the reasons behind that, and what interest are you seeing from outside for these novel drugs? Sean McClain: From a strategy standpoint, ABS-201 in AGA is a direct-to-consumer type of product, and we want to build out products that support this. I&I makes a lot of sense in that context. Oncology does not support that particular go-to-market strategy we want with AGA. We have deprioritized oncology and will not fund those programs internally, putting focus on assets that support the lead asset, ABS-201, in AGA and endometriosis. Swayampakula Ramakanth: On partnerships, you have been talking about generating partnerships, including with large-cap pharma, but the cadence has been slower than in previous years. Are large-cap companies building their own tools, or are the economics not viable for you? Sean McClain: Our focus is driving the clinical development of ABS-201. We are continuing to look for pharma partnerships around our pipeline, but they have to make sense for us. We are a limited team and want synergy, so we are selective about who we partner with and how they help build the portfolio and support ABS-201’s go-to-market strategy. It is a focus, but it has to be strategically sound. Zach? Zach Jonasson: Internally, we have the capability to generate assets, and we believe we have a leading platform focused on challenging targets, as well as leadership in areas like prolactin biology. Our internal analysis shows we can generate better economic terms on partnerships focused on an asset—even at a preclinical stage—versus tying up resources for target-based platform partnerships. We have a number of assets coming toward DC this year, and several are earmarked for partnering to generate non-dilutive cash flow. The risk-adjusted NPV from creating assets and partnering those is a multiple of what it would be for platform target-based deals on a target- or program-by-program basis. The economics point us in that direction. Analyst: Hey, guys. You mentioned adopting more agentic AI into your business. How is this impacting your drug discovery process and business operations, and any near-term cost savings you can point to? Zach Jonasson: We are aggressively implementing agentic AI workflows throughout Absci Corporation, including in Science and R&D and across SG&A. We are already seeing significant efficiency gains and expect to realize those in cost reduction as well as capability gains on a go-forward basis. Even over the next few months, we should start realizing some of those gains. Arseniy Shabashvili: Hi, it is Arseniy on for Vamil. One more on the hair repigmentation opportunity. You previously talked about it as roughly the same size as the AGA market. What do you expect to see there that would be clinically meaningful? Would you consider pursuing it as a separate indication with additional studies, or as an extra claim in the label in addition to the AGA indication? Sean McClain: We are really excited about the potential for repigmentation. We see it as creating an even bigger market opportunity. Right now, it is an exploratory endpoint, and we will see how the readouts go at 13 and 26 weeks and then determine how to proceed. Ronti Somerotne: The repigmentation data emerging elsewhere are interesting and exciting. Mechanistically, it makes sense as a potential finding. We will see what we can see and plan accordingly. Operator: We have reached the end of the question and answer session. This also concludes our call for today. Thank you, everyone, for attending this call. You may now disconnect. Goodbye.
Operator: Good morning, ladies and gentlemen, and welcome to the Murphy Oil Corporation First Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Atif Riaz, Vice President, Investor Relations and Treasurer. Please go ahead. Atif Riaz: Thank you, Rebecca. Good morning, and welcome to our first quarter 2026 earnings conference call. Joining me today are Eric Hambly, President and CEO; Tom Mireles, Executive Vice President and CFO; and Chris Lorino, Senior Vice President, Operations. Yesterday after market close, we issued our first quarter earnings release, a slide presentation and a stockholder update. These documents can be found on Murphy's website, and we will reference them today throughout our call. As a reminder, today's call contains forward-looking statements as defined under U.S. securities laws. No assurances can be given that these events will occur or that the projections will be attained. A variety of factors exist that may cause actual results to differ. For further discussion of risk factors, please refer to our most recent annual report filed with the SEC. Murphy takes no duty to publicly update or revise any forward-looking statements, except as required by law. Throughout today's call, production numbers, reserves and financial amounts are adjusted to exclude noncontrolling interest in the Gulf of America. I will now turn the call over to Eric for opening remarks. Eric Hambly: Thank you, Atif, and thanks to everyone for joining us this morning. I hope you've had a chance to review our stockholder letter, which provides a detailed overview of our first quarter operational and financial performance. Before turning to results, I want to touch on the broader context. Ongoing geopolitical developments, particularly in the Middle East, contributed to elevated volatility across energy markets during the quarter. While Murphy does not have direct exposure to the region, these global dynamics influenced realized pricing and reinforce the importance of operating with discipline and a long-term mindset. On today's call, I will briefly discuss this market environment, review our first quarter performance and provide an update on our exploration and appraisal program. Against the backdrop of significant commodity price volatility, Murphy delivered a strong quarter. Our oil-weighted unhedged portfolio allowed us to fully capture prices as they moved materially higher. We generated cash flow of $429 million and adjusted net income of $47 million, including $67 million of exploration expense related to 2 unsuccessful wells in Cote d'Ivoire. Cash flow was supported by higher oil prices late in the quarter with realized prices exceeding $90 per barrel in March. It's worth noting that March prices were not representative of the full quarter as prices rose roughly 50% from January to March. Our average realized oil price for the full quarter was $72 per barrel. Given the ongoing commodity price uncertainty, we view flexibility as a competitive advantage and have chosen to remain unhedged at this time. This reflects the strength of our balance sheet and our ability to manage through cycles without relying on market timing or hedging for financial stability. On activity and capital, our approach continues to be driven by market fundamentals and our long-term strategy, not short-term price movements. Accordingly, we are maintaining our capital guidance range of $1.2 billion to $1.3 billion. Externally, as our non-operated partners evaluate how to respond to the current environment, we're seeing a range of approaches emerge. We're engaged with our partners on their plans, and we'll assess the merits of participating in any new activity on a case-by-case basis where it clearly creates shareholder value. Turning to operations. What stands out most this quarter is our execution, and that execution starts with our people. I want to recognize our teams for once again delivering robust, consistent execution across our portfolio. We delivered production above the high end of guidance, operated efficiently and advanced key projects across the globe in line with schedule and within budget. Our production outperformance was driven roughly evenly by our onshore and offshore operations. Onshore, Eagle Ford exceeded expectations by nearly 3,000 barrels of oil equivalent per day, supported by strong performance from the 15 new wells brought online during the quarter. Longer laterals and continued innovation in drilling and completions are delivering strong wells efficiently, reinforcing the quality of this asset. Offshore, the Gulf of America also outperformed by about 3,000 barrels of oil equivalent per day, driven by high facility uptime and efficient execution of planned maintenance. Turning to exploration and appraisal. We are making meaningful progress across our program. In Cote d'Ivoire, drilling continues at the Bubale exploration well. We recognize the interest in this well and remain committed to disciplined, transparent communication. We will provide an update once operations are complete and the data have been fully evaluated. In Vietnam, at our Hai Su Vang, Golden Sea Line field, we are finishing operations on the HSV-3X appraisal well and we will move next to the HSV-4X well, the final well in the appraisal program. Together, these wells will help define the field's full potential and inform next steps on development. As we have previously communicated, we will provide results and an updated resource range at the conclusion of this appraisal program. To close, this quarter was a real-world test of our strategy. In an environment defined by rapid price movement and elevated uncertainty, our focus remains unchanged. We executed with discipline, exceeded production expectations and delivered solid financial results while continuing to create long-term shareholder value. Looking ahead, our strong balance sheet positions us effectively across a range of outcomes, providing resilience in a weaker environment and full participation if prices remain strong. With that, we will open the call for your questions. Operator: [Operator Instructions] Your first question comes from the line of Arun Jayaram with JPMorgan. Arun Jayaram: Eric, totally understand how you're not yet at TD and Bubale. But I was wondering if you could maybe comment a little bit on just your overall geologic concept for that well. And we did note that it is taking a bit longer to reach TD. So I was just wondering if you could provide just a little bit more color on your geological concept, how drilling is going and just overall, how you'd characterize progress on that well? Eric Hambly: Yes. Thanks, Arun. Thanks for the question. We are actively drilling Bubale. We have -- the main objective of the well is the Cenomanian target. There is a secondary objective in the Turonian, which is shallower. We are currently drilling the well in the Turonian section. We have experienced slightly slower drilling progress than we had hoped for. So the well is taking a little longer to announce a result because we're still drilling it, and we've had a little bit slower rate of progress drilling. It's just a bit of hard rock to drill in part of that Turonian section. It's taking a little longer than I had hoped. I can assure you, there's no one in the world who would like more than to be able to give an update on Bubale because I'm watching it very closely. I'm happy with our team's progress. We just don't have a definitive result to talk about as we're actively drilling it and have not yet reached the primary objective. Arun Jayaram: I was wondering, as we look forward to your updates on the third and fourth well in Vietnam, and appreciate, obviously, the 3-part series that you held on exploration and the PSC, et cetera. But talk to us about some of the development options that you're thinking about in Vietnam for HSV, which obviously has a lot of promise at this point. Eric Hambly: Yes. We talked a little bit about this on our webinar series. So for anyone who's listening, if you haven't listened to our webinar series, I'd recommend you do that. The concepts that we're currently evaluating for HSV, while it's still early days, are 2 primary opportunities. The first would be an FSO paired with a series of platforms that would be processing platforms and/or wellhead platforms. And the alternative to that would be an FPSO concept, either a new build FPSO or a potential redeployment of an existing FPSO. We don't yet know the ideal approach forward. But we're hoping after we collect the data from our appraisal program, we will use that information we collect to design a field development plan. We will seek an optimal development based on capital efficiency and timing. And we'll probably about a year from the conclusion of our appraisal program, we'll likely have clarity on our path forward. So FPSO or an FSO with some wellhead platforms and processing platforms. Operator: Your next question comes from the line of Carlos Escalante with Wolfe Research. Carlos Andres E. Escalante: I'd like to ask first on your reinvestment rate framework moving into the end of the year into 2027. It looks like the collective aggregate of the estimates of my peers and I have you at around 185,000 barrels of oil equivalent per day for 2027. I know I'm being very specific here, and I'm not asking you for any type of guidance. But if I layer in Chinook first oil at LDV and then you recently sanctioned Banjo and Cello plus your incremental efficiencies in the Eagle Ford, it starts to look like a very conservative read into your 2027 number. So I would ask you to help us calibrate the production versus capital efficiency equation, particularly as nonproductive CapEx converts into producing assets that are free cash flow positive in 2027. So help us think about your reinvestment rate into 2027 relative to 2026. Eric Hambly: Yes. Obviously, Carlos, we don't have a budget for 2027 yet, but I'll give you a little color around what I think is going to be constructive for us as we head toward the end of this year and into next year. The volume addition from the Chinook 8 well that we expect to come online in the second half of this year will be significant. And Lac Da Vang Golden Camel field starting up in the fourth quarter of 2026 and ramping through 2027 will add to additional volumes in 2027. What we haven't yet come up with is a detailed plan for exactly what to do with our onshore assets. I think we have a lot of thinking to do around how much we spend on exploring next year. We have a target-rich environment to explore in Vietnam and some exciting opportunities to test in the Gulf of America in 2027. So we have work to do before we form a 2027 budget around how much we spend on exploration in the Gulf and Vietnam versus deploying for investing in Eagle Ford, Tupper Montney, Kaybob Duvernay. So I don't have clarity yet on exactly what our forecast of production will look like for '27 because we have a lot of choices to make. I think we're fortunate to be in a mode where we can choose all those trade-offs. But just circling back, I think production additions are pretty significant from Chinook and then ramping up with the addition of Lac Da Vang field being online. And then Cello and Banjo is, we expect that will be a 4,000 barrel a day net contribution in 2028, not 2027 because we're expecting to bring it online late in 2027, just for clarity. Carlos Andres E. Escalante: That actually does help a lot. And then if I can come back to Cote d'Ivoire real quick. Following your development plan submitted to the Ivorian government in 2025 for Paon specifically, is that in your mind still -- well, first of all, can you give us a brief overview of what may be taking a bit longer than you expected? What's the sticking point perhaps you're having with conversations with the government? And then second, is that still progressing in your mind as a stand-alone development? And I know this is too much to ask because it's hypothetical, but in the event of a discovery at Bubale, would that underpin a joint development to add scale? Eric Hambly: Yes. Great question, Carlos. So we did submit the field development plan as part of our work obligation. We -- in parallel with preparing and submitting that field development plan, we negotiated with various Ivorian parties to try to come up with a gas pricing arrangement that would allow that development to move forward. The Paon field is an oil field with a relatively thin oil column and a large gas cap. So roughly 2/3 of the BOEs produced from the field, based on our estimation, will be gas and the rest will be oil and gas liquids. So gas pricing is really critical for that project having economics that meet a threshold that we're willing to invest. We were so far unsuccessful in agreeing with the Ivorian government on a gas pricing structure that would inspire us to sanction the project. So while we know what we'd develop, how we would drill the wells and the facilities we would install, pipelines we would install, et cetera, we didn't get to a point where we were ready to move forward with the development. We're not obligated from our agreements with the Ivorians or the PSC to do the project, we are obligated to submit a development plan, which we've done. We're interested in doing the project if it can make money at a threshold we're willing to invest in. Going back to your question in a bit more detail, any resource that is discovered near Paon could help add scale that could make the project commercial at a gas pricing structure that could be maybe lower price, which is in line with Ivorian desire and make the project move more economically. Resource density would help justify the cost of a gas pipeline from the field or fields to the shore to deliver gas for power generation in Cote d'Ivoire. So any discovery even by third parties nearby might also be helpful for bringing that project forward at some point. Carlos Andres E. Escalante: Just to clarify, so would -- does Paon lower the threshold of your consideration of commercial hydrocarbons at Bubale? Eric Hambly: It would, yes. Operator: Your next question comes from the line of Chris Baker with Evercore ISI. Christopher Baker: Eric, hoping you could just maybe help frame up the opportunity in Cameroon, what you guys are seeing there and what sort of next steps we should expect? Eric Hambly: Yes. Thanks, Chris. We are interested in Cameroon for a few reasons. It has attractive geology and allows us to do what we are -- in communicating we're trying to do with frontier and emerging international exploration, which is get into opportunities that are at a relatively low cost of access and allow us to test prospects with relatively low-cost wells that target large resource. Cameroon is a bit interesting and unique in that it offers both shallow and deepwater exposure with a variety of play types, attractive geology, a proven source rock system and discoveries in the country, particularly in shallower water. And it also -- we recently acquired and analyzed some newly reprocessed seismic data, which points to some prospectivity that was not obvious to us when we were previously in Cameroon about a decade -- over a decade ago. And so we see some opportunity that's attractive, and we get into the country relatively cheaply and can assess it. And at some point, if we decide to drill a well, we think we can test large opportunities with low well cost, which is what we're trying to accomplish. That's kind of the setup, Chris. Christopher Baker: That's great. Just as a follow-up, the macro has obviously changed quite dramatically here. It sounds like for the most part, the '26 program has been seeing some early wins and remains largely on track. I guess one of the big themes you've seen from some of your peers this quarter is a focus on flexibility when it comes to cash returns. I'm just curious, as you guys look out for the rest of the year, under a strip scenario, there's obviously quite a bit of excess cash. And I saw in the release, obviously, remain committed to the 50%. Can you just help frame up some of the flexibility and how you're kind of thinking about share buybacks from here and how that fits into the story for the rest of the year? Eric Hambly: Yes, it's a great question. We are committed to delivering a competitive dividend to our shareholders as we've done since 1961. And we also have a desire to be a somewhat consistent repurchaser of our stock so that we can concentrate wealth in our existing shareholders. Having said that, we are not attempting to be very rigorous around a target of share buyback per quarter. We will likely approach share buyback with a bit of a more opportunistic assessment. And if we think that our share price is really cheap, then we'll probably move more quickly. If we think our share price is a little higher in the range, we may be a little more patient. So we'll sort of watch where we think that's heading. If you look at Murphy's share price trading performance over the last several years, even maybe longer, we tend to trade in a very tight correlation with oil price. I think that most prognosticators would guess that oil price will likely come down after resolution of the conflict in the Middle East. And so we're going to kind of watch that and see, does it make sense to move quickly or does it make sense to wait because I anticipate it's likely oil price falls significantly that our share price may come down with it. And so it maybe makes sense. So we're going to be a bit careful and disciplined around that, and we'll act if it makes sense, and we'll wait until a better opportunity if we think that is coming in the future. Operator: Your next question comes from the line of Greta Drefke with Goldman Sachs. Margaret Drefke: My first, I'm just wondering is if Murphy has any exposure to the Gulf specific crude pricing that has seen an outsized positive move in recent weeks and months? And if so, what's the lag on earnings impact to realized pricing that we should be mindful of? Eric Hambly: So we don't have any direct exposure to crude in the Middle East. We benefited from higher oil prices, and we've seen a little bit around pricing differentials move a little bit. I may let Tom, our CFO, who also oversees our marketing team, just give a little more color around differentials and part of our production from the U.S. Thomas Mireles: Yes. We are definitely seeing some more constructive pricing in the U.S. Gulf. Some of our crudes that benchmark to WTI, but the differentials are starting to show more strength than where we were a few months ago. So those lag by about a month. Usually with WTI, our benchmarks, we see those average prices as we market our crude. But the diffs -- the differentials are set. There's a bit of a lag on those. So through April, going forward, we'll start benefiting from those more constructive diffs in our crudes. Margaret Drefke: Great. I appreciate that color. And just my second question is just if you can speak to how the exploration blocks that Murphy was awarded for the new federal lease sales compete for capital relative to other prospective areas in your existing Gulf of America position. Eric Hambly: Yes. The blocks that we picked up in the most recent lease sale from December of last year are a combination of blocks near our existing infrastructure where we'll target what are likely high chance of success, but not very large opportunities that allow us to put additional future volumes over facilities that we own and operate today. And the other part of the blocks we picked up are a little more sort of emerging part of the basin. And we are going to assess and evaluate the optionality we have there and think about an exploration program in '27, '28 that balances near field versus a little more emerging part of the Gulf. Operator: Your next question comes from Leo Mariani with ROTH Capital. Leo Mariani: I wanted to just follow up a little bit on Bubale. I think, obviously, the well is taking longer than expected. You did mention there was some kind of harder rock in Turonian. Was that kind of the primary driver around the well taking longer? Is it just slower drilling? Or was there any other kind of like mechanical snafu or did it get started late? Anything like that? And then I also wanted to ask, it sounds like you're drilling through the Turonian, have you seen any shows in that zone at this point? And do you have kind of an updated estimate in terms of when you think the well is done? Are we just a couple of weeks away? Is it relatively imminent? Just any more color would be great. Eric Hambly: Sure, Leo. Unfortunately, the issue is we've had slower drilling than we'd hoped for. It's not shocking because there are offset wells drilled by other people that have also seen some slow drilling in the section. It is a little slower than we were hoping for. And as I said before, we don't have any definitive conclusive results to talk about, and I don't want to speculate as we're still drilling through and have not even seen the primary objective. So we'll wait until the well is done, and we'll give you an update. Leo Mariani: Got it. Okay. And then just sticking with exploration. Obviously, you announced Cameroon. It seems like it wasn't too long ago where you guys talked about Morocco as well. So it definitely seems like the company is kind of stacking up some opportunities internationally. Clearly, you've had success in Vietnam, which looks very promising. Should we really be thinking about just Murphy kind of continuing to, maybe I'll just say, move some of these exploration priorities come up in the stack. I know you're drilling with more exploration dollars this year. And obviously, that will depend on the oil price environment, but should people just generally think that perhaps over time, Murphy will continue to spend a little bit more on exploration than maybe it has in past years? Eric Hambly: Yes. I think this year, we're spending a little more than typical because we were quite excited about the prospectivity in Cote d'Ivoire, and we felt it made sense to drill those prospects at 100%. So our spend this year is a little higher percentage of our overall capital. And then if you pair that with our Vietnam appraisal program, which is quite active, it's just a bit of a heavier year than normal. I think if you look longer then we're likely to spend probably 10% to 15% of our capital program on exploration, and that would be all forms of spending, that would be on our people, our seismic data and our drilling wells. So that could change if we had a compelling reason in the future, but I think that's a pretty good way of modeling us. We're trying to keep opportunities in front of us. So where we find attractive entry points, where we can do what I said before, which is get in relatively inexpensively and test prospects that have large resource with relatively low-cost wells, we want to set up a stack of opportunities that can do that for us. And these things take time to progress and mature. So we want to have a program where every other year or so, we have a new thing we're testing because we think the world needs ongoing exploration and exploration success to supply demand growth that's expected in crude oil. So that's what we're trying to do. Leo Mariani: Okay. That makes sense. Maybe just last one for me here, Eric. So obviously, Murphy had a bit of a rigorous capital return framework that was laid out a handful of years ago. You commented on this on the call. It sounds like you're kind of moving a bit away from that when maybe that framework made sense when oil was a little bit more range bound. Now that oil has seen just tremendous volatility, should we kind of assume that the rigorous framework is somewhat abandoned here and you guys are just going to be kind of opportunistic and not necessarily give 50% of adjusted free cash flow back? Eric Hambly: Yes, Leo. I think I wouldn't characterize our framework as still fully in place. The only thing that I think we'll try to do is be a little more opportunistic around timing of execution of our framework. We still want to buy back our stock. We still want to occasionally increase our dividend. We still want to use part of our cash flow to target to our balance sheet. Obviously, with our debt towers now, it's very difficult for us to remove -- reduce long-term debt, but we can build cash on the balance sheet to affect net debt. Those are all things we want to do. There's no change to our framework, although I think that we are in the face of what I would characterize as extreme commodity price volatility, we'll probably be a little more opportunistic around timing of executing what we desire to do. Operator: Your next question comes from Phillip Jungwirth with BMO Capital Markets. Phillip Jungwirth: I had a couple of questions on the Eagle Ford, where well performance continues to be really strong. First, can you just talk about what's changed in the program over the last year to drive the better results? Would it make sense to kind of revisit the 30,000 to 35,000 a day plateau for this asset given the inventory? And then just lastly, I wanted to ask if the planned Catarina wells later this year are mostly Lower Eagle Ford? Or does this also again include the Upper and Austin Chalk? Eric Hambly: Yes. I'll give you my high-level thoughts around how we're allocating capital, and then I'll let Chris Lorino provide more context on what's driving well performance. So we have guided kind of a midterm perspective of Eagle Ford in the 30,000 to 35,000 barrel a day range net to us. Last year, we exceeded that on the back of really strong new well performance. This year, our guide is also higher than 35,000 barrels a day, around 38,000 barrels a day because we're kind of carrying that performance in from last year. We did allocate less capital to Eagle Ford in '26 than prior because we saw strength of performance, and we've seen some early strong performance from our Eagle Ford program this year. So really happy with how that's going. We haven't decided yet if we're going to allow that asset to decline back down to a 30,000 to 35,000 range in future years or if we'll try to keep it at 38,000 barrels a day or close. I have a guess that we're likely to try to keep it a bit higher, but that's something that we have choices to make on as we formulate a budget for next year. And so that's kind of how we're thinking about the asset. It's not quite clear to us yet the best use of capital. It will compete for capital with other opportunities we have across our portfolio. So we have to think about that as we formulate a budget for next year. And I'll let Chris Lorino give a little context on what's driving well performance and maybe the well mix that's left the rest of the year. Chris Lorino: Phillip, yes, the performance has been a pretty simple story. It's been a lot around the capital efficiency improvements that we've made, a lot about longer laterals and taking advantage of the additional footage and driving down our cost per foot. So -- and also, we continue to tailor each location to specifics around the rock and all the things that go into what's nearby and what adds up to those locations. So that's -- we've really got down to where we've got it down to a science in each location and continue to see surprises to the upside. And if you look on the earnings deck, you can see some of the Catarina performance, a really great shallow decline that we're seeing there. So we've got a lot of running room in Catarina and continue to have some running room for longer laterals as well to take advantage of these capital efficiency stories. Phillip Jungwirth: And then I also wanted to ask about the Gulf of America lease sale, but more specific to those Alaminos Canyon blocks that you kind of referenced there. I know it's early, but I was wondering if you could at least be able to talk about what drew you to this part of the basin as far as seismic or anything else just because it is a newer area. Eric Hambly: Yes. We acquired some seismic data in advance of the lease sale that pointed us to some opportunities that we thought were compelling enough that we should target those blocks. And we're excited about the potential. We have more work to do to work through our exploration prospect assurance process and get comfortable that we've done everything we can to make a decision around drilling what looks like an interesting prospect or 2, and that work is ongoing. And I think there's a good chance that we may have a well out there in Alaminos Canyon in our '27 or '28 exploration programs. Operator: Your next question comes from the line of Tim Rezvan with KeyBanc Capital Markets. Timothy Rezvan: I want to ask first on expected oil prices in Vietnam. Eric, when I last saw you and the team in Houston in March, you mentioned a $12 premium to Brent you were seeing for oil in Vietnam. And you sort of suggested this wasn't sort of a one-off issue with like refinery demand. So I know volatility is really high across the globe. But can you kind of give some context on what you're seeing on oil pricing in Vietnam and maybe how you think that could look by the time you get first production there? Eric Hambly: Yes. I really wish I knew what oil prices would do in the future. What we expect from Vietnam on a long-run basis is based on location and crude quality, we would expect Brent plus maybe $2 or $3. Right now, there is a significant disruption to oil flows to Asia and physical deliveries of crude in the region have been seeing elevated differentials to Brent. So Brent plus $12 was what was on the market in March, which obviously, that's a fairly -- we expect that to be a short-run thing. I don't know what Brent pricing will be when we come on stream in the fourth quarter. And I don't know how limited physical cargoes will be in Asia in the fourth quarter of this year when we come online. But I do think that we expect to see Brent plus something. I don't know if that will be Brent plus $2 or $3 or Brent plus $12. I think we are fortunate to have a growing business in Vietnam, where there's strong demand for crude. And I think the world is likely to price in crude deliveries to Asia with a little more geopolitical risk premium than maybe they were before the conflict. So I think that sets us up for some success. Timothy Rezvan: Okay. I appreciate the context there. And then as my follow-up, I just want to ask on the CapEx cadence for the year. It's very front-end loaded. It looks like about 68% of the spend in the first half, those of us with gray hair are used to seeing companies really struggle to hold the line on spending when they have such a heavy front-loaded skew. So can you talk about your confidence that you can stick to that budget? And perhaps I know you talked about non-op opportunities, like what may cause you to deviate if Brent does hold at such a high price? Eric Hambly: Sure. I'm very confident in our ability to deliver a capital program that's in line with our guided range. I think if you look at our performance over the last few years, we've been pretty good at coming in really close to the range. Last year, we actually underdelivered on the range. We came in a little lower on CapEx. Our program is front-loaded a bit for 2 reasons, we have a heavy onshore program that's weighted to the first half of the year in terms of drilling and completing wells. And our exploration and appraisal program in Vietnam and Cote d'Ivoire is heavily weighted to the first half of the year. So I feel good about the things that are in our control allowing us to deliver capital within the range. We do think it's possible there may be non-operated opportunities in our Eagle Ford business that come up that may be something that makes sense for us to participate in. I think those things would not be very significant. And I think today, when I look at what may develop, I feel good that our range covers what is likely to happen. I will caveat that with one thing, if we are fortunate enough to have a success at Bubale, we are likely to drill an appraisal well at Bubale immediately. We have a rig available and equipment available to do that. We've signaled that in the past investor engagements that that's something we would likely do if we were fortunate to have success. I don't know what we have yet, so I don't know if that will happen. But another well at Bubale this year is not in our capital range, and it would push us either to the high end or maybe perhaps beyond the high end of that range. [ indiscernible ] Operator: Your next question comes from the line of Josh Silverstein with UBS. Joshua Silverstein: In Vietnam, I wanted to see if you could talk a little bit about the LDT exploration prospects there. I think you guys are set to spud in the back half of the year. Maybe just some similarities and potentially if a discovery, a quick tieback opportunity to LDV. Eric Hambly: Yes. The LDT North prospect is White Camel North. That prospect is targeting the same age reservoir as the Lac Da Trang or White Camel discovery that we made in 2019. It's a different compartment, but the same age reservoir. We are expecting it to have a mean to upside gross recoverable resource range of 40 million to 80 million barrels oil equivalent. Again, our expectation in this basin is it's quite oily. With success there, it would likely be a tieback to the infrastructure that we're developing for Lac Da Vang or Golden Camel. If it happened to be extremely on the large end, it could anchor an additional hub. But I think the most likely outcome is that it will be tied back to the FSO that we're using to develop the Lac Da Vang field, which will be installed later this year. Joshua Silverstein: And then just maybe on the new country entry front, Cameroon this quarter, Morocco earlier this year. Can you just talk about kind of broadly the strategies for entering these new countries and areas versus, say, doing a bit more in the Gulf versus, say, Alaska or other parts of Africa that have kind of established basins there? And maybe along the same lines, how would you kind of think about the risking of these prospects versus, say, what you were doing in Cote d'Ivoire? Eric Hambly: That's great. What we're trying to do is use regional study to guide entry into opportunities that we like. So instead of saying, hey, there's a prospect in one block in one country, let's go get it. We're actively assessing opportunities over a large geography, doing detailed regional study and identifying opportunities where we think we can assess -- cheaply assess and test large opportunities. Those are going to be mostly in what we would characterize as emerging basins. So there's a working petroleum system identified by either past discoveries or other exploration wells that allow us an opportunity to test large resource with low well cost. That's what we're trying to do. If I characterize our portfolio today, I would say that we have a limited ability in the Gulf of America to identify large opportunities. The well costs in the Gulf are expensive because of the complexities of drilling, either the depth or the sub-salt, et cetera, and the resource ranges are becoming smaller and smaller in the Gulf as a trend. We do have some compelling larger prospects in our portfolio. Most of our opportunity set in the Gulf is going to be smaller opportunities near infrastructure, whereas internationally in Vietnam, and Cote d'Ivoire, in Cameroon and Morocco, we have an ability to test larger things with cheaper wells, which is kind of what we're trying to do. I think we're fortunate to have a capability that we've maintained to be an international explorer and we execute generally quite efficiently in our well programs. If you look at the risk profile across our business, the near infrastructure prospects in the Gulf of America are our highest chance of finding hydrocarbons. The opportunities we're drilling in Cote d'Ivoire and the kind of things we'll test in Cameroon are likely to be kind of the next up on the risk profile. I would characterize the Morocco opportunity as frontier and the highest risk profile in our portfolio now. We are planning to do some seismic reprocessing in Morocco, which may help us derisk that prospect. And that's kind of the setup for how we're going to move through assessing the portfolio we have to explore in West Africa and in the U.S. Operator: Your final question comes from the line of Charles Meade with Johnson Rice. Charles Meade: Forgive me if I'm -- I missed the few minutes of your call, I don't know hard time getting on, but -- so forgive me if I'm asking something you already covered. But I wanted to ask you to speak kind of at a high level about Chinook because it's going to be at that 15 MBOE a day gross, that's going to be a big increment to your Gulf production. And I think an earlier caller was asking about that. But can you give us the big setup here? I mean, this field has been producing over a decade. It used to produce a lot more. This looks like it's going to be a big new producer. Can you just give us a reminder, what is the setting of this -- of your reservoir here? Are there follow-up opportunities that are contingent on how this #8 well performs? And how much capacity is there available at the Pioneer FPSO? Eric Hambly: Yes. So the well is targeting the Wilcox, 2 Wilcox sands that are currently producing in another well in the field in the same fault compartment, the same reservoir section. There was a well that had produced back in 2019, and that well had a mechanical issue, and we have not produced that well since. And we believe that the well is something that we cannot effectively produce going forward. So we planned a development well to go develop the reservoir. I would characterize the reservoir as having a large in-place volume and a low current recovery factor. It is underdeveloped and needed additional wells to produce the field. We have identified this opportunity many years ago, but we didn't want to act on it for a couple of reasons. First was we were leasing the FPSO that is used to produce the field. And we identified that the terms were not that great after we took on the assets from our Petrobras joint venture deal, MP GOM. When we got it into our operatorship, we realized it wasn't a great lease agreement, and we worked to purchase the FPSO, which we did last year, which allows us to have improved economics on any future activity in the field. We also have a very expensive well that takes a long time to drill and complete. And while we were on a debt reduction journey to get close to our ultimate debt target, we didn't want to allocate capital to this just because it was a singular very large thing, and we wanted to wait until we had the FPSO purchased. So we've really done a great job, I think, of setting up this field to have a good financial outcome. Again, it's a development well in an existing reservoir. It will add additional production from the same reservoir that's already producing. So we don't really have a contingency plan. It's just an additional development well, kind of effectively replacing a well that had previously been producing in the field, but in a more optimal location. There's probably additional opportunities in this field, both exploring untested fault blocks and maybe an additional production well that we are currently evaluating and the results from this well will also help inform whether or not we think an additional well will be necessary. Charles Meade: Got it. That is great color. And then just as a quick follow-up. I think it was a couple of years ago, we were wondering what was going to happen with the Petrobras assets, your NCI volumes. And that just kind of seemed like it fizzled out. Is there still any process underway or any chance for you guys to acquire that? Or would you have a pref on that if someone else announced a deal for it? Eric Hambly: Yes. We would love to acquire it at the right price. Today, I don't believe that Petrobras is actively marketing their ownership in the joint venture. We do have a pref right if such a deal was struck. So at the right price, it would be great. Operator: I will now turn the call back over to Eric Hambly for closing remarks. Eric Hambly: Thank you all for another engaging Q&A session. Paul Cheng, if you're listening, we had expected you to pop up with a question on this call. Paul covered Murphy as an analyst for over 30 years and just retired from Scotiabank in March. We always appreciate his thoughtful questions, and I'm sure the incoming team will be happy to carry the baton. Thank you all for tuning in, and thank you to our shareholders for their ongoing trust. This concludes our call. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Honest Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference call over to Chris Mandeville, Interim Head of Investor Relations at the Honest Company. Please go ahead. Chris Mandeville: Good afternoon, and thank you for joining our first quarter 2026 conference call. With me today are Carla Vernon, our Chief Executive Officer; and Curtiss Bruce, our Chief Financial Officer. Before we begin, I will remind you that our remarks today include forward-looking statements subject to risks and uncertainties. We do not undertake any obligation to update these statements, and actual results may differ materially. For a detailed discussion of these factors, please refer to our safe harbor statements in today's earnings materials and our recent SEC filings. We will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in our earnings release and accompanying presentation, which are available at investors.honest.com. Finally, please note that all consumption data included in our discussion today, unless otherwise noted, will reflect Circana MULO+ measured channel data for the 13 weeks ended March 29, 2026, as compared to the prior year. With that, I'll turn it over to Carla. Carla Vernon: Thank you, Chris, and hello to everyone joining us. Today, I will provide a high-level look at our first quarter performance and offer insights into how we are successfully executing our strategy to profitably scale the Honest brand. Following my remarks, Curtiss will provide greater detail on our Q1 financial results and discuss our reaffirmed full-year outlook. We are pleased with our start to 2026 as our recent actions to optimize our portfolio are bearing fruit. Our Q1 results demonstrate that Powering Honest Growth is leading to an enterprise that is more strategically focused, growth-driven and structurally profitable. Let me begin with our first quarter results. By bringing a sharpened focus to our right to win categories and channels, we delivered organic revenue growth of 3.9% Delivering this growth on top of double-digit growth in the prior year underscores the momentum across our portfolio. As we continue to increase the availability of Honest products, we are also expanding our business across a broader set of households. Over the last 3 years, we've been disciplined in our focus on driving shareholder value through top line scale and bottom line expansion, and in Q1, we did exactly that. In addition to delivering organic revenue growth, our adjusted gross margin of 43.5% was the strongest in our history. This year-over-year gross margin expansion of 480 basis points demonstrates the impact of our Powering Honest Growth initiative. By streamlining the focus to our right to win categories, we have ignited a virtuous cycle that allows our teams to successfully execute against our 3 strategic pillars of brand maximization, margin enhancement and operating discipline. In Q1, our brand maximization strategy of growing revenue scale and consumer strength of the Honest brand was evident. We delivered 8.3% consumption growth significantly ahead of our comparative category average growth of 2.6% and a notable acceleration from the 3.4% we delivered in Q4 2025. Best of all, our momentum continued to be volume-led with unit consumption up 20%. As I shared last quarter, the Honest brand benefits from 2 powerful dynamics. The first and most foundational is the growing consumer interest in cleanly formulated and effective products for people with sensitive skin. The second dynamic is the unique competitive advantage of the Honest brand, which drives our commitment to upholding the highest standards in everything we do. This gives us the ability to build deep consumer trust and loyalty across a diverse range of households. This spans families with babies and toddlers to those with big kids and teenagers and even households with no kids at all. In the United States, 89% of U.S. households do not have any children under the age of 6, while 75% of U.S. households have no children at all. This is why we are purposeful in designing a growth strategy that provides a broad range of products developed with a wide range of ages in mind. As a reminder, according to Numerator, over half of Honest's current buyers are for no kid households. Across all household types, the love for our cleanly formulated and sustainably designed personal care products continues to grow. At Honest, every product must meet our industry-leading Honest standard, which is a set of guiding principles that includes a list of over 3,500 ingredients we do not use and that shapes every step of product innovation and development to ensure our high expectations for safety, efficacy and design. This appeal is evident in our growth. In Q1, our total household penetration reached a new all-time high of 8.1%, up 50 basis points from year-end. We're proud to have welcomed 1.6 million new households over the past year. As we look at the opportunity in household penetration, we still have significant runway ahead. For example, in Baby Personal care, key branded competitors hold household penetration anywhere from 2x to 6x greater than ours. In all purpose wipes, larger brands have as much as 5x to 7x the household penetration of Honest. This considerable market opportunity presents a clear line of sight to our next phase of growth with a focus on transitioning existing category buyers to Honest and welcoming entirely new households into these categories. Now allow me to share more on each of these portfolios, beginning with wipes. In Q1, our total wipes portfolio delivered consumption growth of nearly 25%. With a wide and growing array of formats, Honest wipes are expanding throughout the store and across household types with products ranging from adult flushable wipes and hand sanitizing wipes to toddler flushable wipes and all-purpose baby wipes. The consumption of our all-purpose baby wipes grew 14% this quarter, reflecting just how much our community loves having a stylish pop of design on their changing table, countertop or in their bag for those everyday cleanup moments. This quarter was the national rollout of our updated more shopper-friendly packaging for our all-purpose wipes. With this new bolder, more shoppable package design, it is much easier for people to discover these wipes on store shelves. We introduced our largest packaging format to-date, a mega pack that allows parents to maximize value and stay fully stocked on our wonderful sensitive skin safe wipes. Our Honest flushable wipes are a clear standout in our portfolio, delivering Q1 consumption growth of more than 200% off of a still emerging base. These plush moist and plumbing safe flushable wipes have now grown at more than 10x the category rate for 3 consecutive quarters. As a result, we are now the #4 flushable wipe brand in the category, up from the #5 spot in Q4 2025. This momentum illustrates how our growing Honest community loves the unique combination of fashion, function and flushability we bring to the category, and we're just getting started. A few weeks ago, we adopted a very stylish and thoroughly modern new approach to our marketing of flushable wipes. We kicked things off with a high-profile social media campaign in March, partnering with mega influencers specifically chosen to resonate across our target households. Whether you love an intimate conversation with Tia Mowry, a besty moment with Kat Stickler or a freestyle wrap by Hannah Berner, we had something for you. The response from followers was immediate and the algorithm did its thing. In fact, 1 post amassed 1.5 million views across Instagram and TikTok in just its first 12 hours. Building on that incredible digital engagement, we launched a national campaign in April across a broad media landscape of video, social, out-of-home, festivals and more. The ads, posts and videos put the spotlight on the moments when even the most stylish and glamorous women get honest about why they love our flushable wipes. We didn't stop there. This quarter, we also refreshed our collection of hand sanitizing wipes. In Q1, we relaunched our Lavender and Grapefruit scent in updated counterworthy packaging and rolled out our pocket packs in those 2 fresh scents. For the quarter, we saw a consumption increase of more than 60% on our hand sanitizing wipes, maintaining our position as the #2 brand in the category. Now shifting to Personal Care. Our Personal Care collection delivered consumption growth of 16% in Q1. Our shampoo, body wash, bubble bath and lotion have long been a trusted choice in the 11% of U.S. households with children under the age of 6. In fact, with consumption growing 7x faster than the category, Honest has officially become the #2 brand across total baby personal care, jumping from the #4 position last year. Now to build on that momentum, we are expanding our reach. We are pleased to have introduced our new Pixar Toy Story collection, bringing the Honest standard to the 89% of U.S. households with big kids and kids at heart. Initially, we launched the collection, both in-store and online at Walmart. As of a few weeks ago, I'm excited to announce that we added the collection to Amazon, which will meaningfully expand our reach just in time for the Toy Story 5 movie release next month. Speaking of going to Infinity and Beyond, our brand literally reached new heights recently. During the live stream of the NASA Artemis II mission in April, astronaut Christina Koch radio Houston to ask Mission Control for help in tracking down the Honest lotion the crew had packed on board. It was incredible. It was an organic moment that highlights just how essential our products are to our community even in orbit. Not only was this an incredible affirmation that Honest products are for everyone, but because my own mother was a NASA hidden figure, this was a full circle moment in more ways than one. Finally, let me share an update on our diaper portfolio, where we have seen progress on our performance. Our consumption declines in diapers were nearly cut in half, moderating to negative 9.6% in Q1 from 18.3% in Q4 2025 as we lapped the distribution losses of gender-specific prints at a key retailer late in the quarter. However, our outlook for the broader diaper category remains cautious. We are navigating a highly competitive and promotional environment that we expect will continue to pressure the category. While diapers remain an important option for families looking for the Honest standard of clean, we will prioritize our growth in households with babies and families with little kids through our higher growth, higher-margin wipes and personal care platforms. Despite these localized category pressures, the broad strength of our portfolio is shining through. Our positive Q1 results show that we are financially stronger and on the right path with great possibilities ahead. With that, I will now turn the call over to Curtiss to provide more detail on our Q1 financial results and walk through our reaffirmed full-year 2026 outlook. Curtiss Bruce: Thank you, Carla, and good afternoon, everyone. As Carla mentioned, our first quarter results are a clear indication that the structural improvements we made to our business last year through Powering Honest Growth initiative are driving our growth and profitability today. We are pleased with our start to the year. Before diving into the financial results, I want to provide a brief update on this transformation. We are seeing the immediate accelerated benefits of a highly favorable margin mix, driven by our sharpened focus on our right to win categories alongside the positive impact of our rightsized SG&A. As we look to the balance of the year, we remain firmly on track to realize our expected supply chain efficiencies in the second half of 2026. As a reminder, we expect Powering Honest Growth to deliver between $10 million to $15 million in annualized savings, serving as a powerful catalyst to further fortify our bottom line health and generate the fuel needed to reinvest in our growth. Now turning to our first quarter performance. Revenue was $78.1 million compared to $97.3 million in the prior year period, primarily reflecting the impact of our strategic Powering Honest Growth category and channel exits. On an organic basis, revenue grew 3.9% to $78.1 million. This growth is particularly notable as it was achieved over a difficult prior year comparison, which was bolstered by retailer inventory buildup ahead of the 2025 tariffs. Our performance this quarter reflects strong momentum behind our higher growth, higher-margin wipes and personal care platforms, partially offset by moderating diaper sales declines. These diaper results were driven by the initial lapping of previously disclosed headwinds related to a key retailers transition to gender-neutral prints. Q1 reported gross margin came in at 42.6%, a 390 basis point improvement compared to the prior year period. On an adjusted basis, our gross margin of 43.5% was historically strong, reflecting favorable freight costs as well as mix from our higher growth, higher-margin wipes and personal care platforms, which was accelerated by Powering Honest Growth. These items were partially offset by tariffs. Total operating expenses decreased $1.2 million year-over-year, including a modest restructuring charge related to Powering Honest Growth. Excluding this transitional cost, our adjusted operating expenses declined by $1.8 million. This reduction was driven by our structural SG&A improvements, which more than offset our plan to drive double-digit increases in marketing investments directed specifically toward our higher growth, higher-margin wipes and personal care platforms. Coupling these structural cost savings with our meaningful adjusted gross margin expansion creates a powerful financial engine, underscoring our capacity to strategically reinvest in our brand while rightsizing our SG&A at the same time. Looking at our bottom line, we reported a net loss of less than $0.1 million for the quarter. Q1 adjusted EBITDA was $4 million, representing an adjusted EBITDA margin of 5.1%, down from $6.9 million and a 7.1% margin in the prior year period, largely due to lower reported revenue. Regarding our balance sheet and cash flow, we continue to be in an exceptionally strong position. We ended the quarter with $90.4 million in cash and cash equivalents and 0 debt, while Q1 free cash flow was $3.8 million, a substantial improvement compared to the negative $3 million in the prior year period. This year-over-year increase was primarily driven by continued working capital improvements stemming from Powering Honest Growth and our rigorous focus on operating discipline. During the quarter, we utilized $3 million of our newly authorized $25 million share repurchase program with an additional $8.3 million deployed subsequent to quarter end. In total, these repurchases were executed at an average price of $3.26 per share. These actions reflect our confidence in the structural improvements we have made to our business, the significant financial flexibility generated by our asset-light operating model and our commitment to balancing aggressive reinvestment in our growth initiatives with returning meaningful value to our shareholders. Moving to our outlook. While we are encouraged by our start to 2026, we are also mindful that it is still early in the year, and we are navigating an environment where several macroeconomic uncertainties remain. That said, the actions we've taken to optimize our portfolio have created a much stronger foundation for profitable growth. We have effectively shifted our resources toward the categories where Honest has the clearest competitive advantage, and our 2026 framework reflects both the early returns of that discipline and our prudent approach to the balance of the year. With that context, we are reaffirming our full-year 2026 outlook. We continue to expect the following: reported revenue declines of 18% to 16% due to our strategic exits, organic revenue growth of 4% to 6%, in line with our long-term algorithm, adjusted gross margins in the low 40s and adjusted EBITDA of $20 million to $23 million. As I wrap up, I want to emphasize how pleased we are with our start to the year. We believe our first quarter results clearly demonstrate that sharpening our focus on our right to win categories has built a resilient financial foundation. We are executing with strict operational discipline and maintaining a clear line of sight towards sustainable, profitable growth. With that, I will turn it back to Carla for final remarks. Carla Vernon: Thank you, Curtiss. As we shared last quarter, Powering Honest Growth was about unlocking the full potential of our business model by serving as a force multiplier to our strategic pillars. We believe that our Q1 results confirm that the heavy lifting we did in 2025 is paying off. I'd like to thank our team of Honest Butterfly for their commitment and diligence in building our shared vision for Honest. Now more than ever, Honest is well positioned to deliver strong value creation for investors, expand our Honest community and build the enduring strength and meaning of the Honest brand. With that, I will now turn it over to the operator to open the line for questions. Operator: [Operator Instructions]. Your first question comes from the line of Aaron Grey with AGP. Aaron Grey: First question for me, I just want to talk a little bit about the reiterated guidance. I can certainly understand the commentary in terms of wanting to have to take a prudent approach for the remainder of the year. Just given if you take the run rate for 1Q, that kind of takes you to the high end of your guide now. Curious if there's any shipment timing that hadn't impacted the Q or any type of seasonality we should be thinking about ahead just given some of the other top line initiatives we talked about right now -- earlier on the call that should obviously lead to some nice sales trajectory. Curtiss Bruce: Aaron, this is Curtiss. We are certainly pleased with the revenue growth in Q1. It represents a very good start to the year and in line with our expectation and I say we're equally pleased with the consumption of 8% growth as well, and that was on our higher growth, higher-margin portfolios in Wipes and Personal Care. As you think about the full-year, we're just reiterating our guidance, right? We are still expecting to be able to deliver on the 4% to 6% organic growth. We don't have any concerns coming out of the quarter that there was any dislocation in revenue performance and the consumption performance. Aaron Grey: Second question for me is in terms of marketing spend, some uptick there sequentially to about $14 million. Maybe talk about some of the strategy that you have. You talked about it a little bit, Carla, in your prepared remarks. I'd love to hear in terms of some of the initiatives you have to help support the growth for some of the brand launches and expansion there. Carla Vernon: Sure. Why don't I get started? Aaron, we really believe that marketing is a force multiplier here at Honest, and it has always been an important piece of the fabric of building this powerful brand. We think we've got a strategic advantage because ever since our beginning, we've been very brand forward, very consumer forward. We know that this investment we're making in marketing is going to be a very powerful driver of this improved awareness that's key to our growth strategy. As you know, we have -- the success we've demonstrated on household penetration gains have been very balanced across our products and our consumer types, and that's because we've been very intentional as we allowed ourselves to be more focused coming out of Powering Honest Growth. That degree of focus is allowing us to point our marketing dollars and our marketing strategies strongly towards our key categories. In this quarter, what you've already seen is we kicked off a fantastic marketing campaign against our flushable wipes business. You remember in my comments, we are now the fourth largest brand in flushable wipes, and we delivered more than 200% consumption growth in the quarter. We just about 4 weeks ago, started kicking off a very groundbreaking campaign. You can see some images from that campaign in our investor slide presentation, our social media feed as always. This campaign really takes a different approach than other flushable brands in the category. We are living up to our name of being honest, right? We've got these really glamorous, beautiful women talking about the role that a flushable wipes plays in their life and why they love our particularly soft and plush and cleanly formulated wipes. We've got that campaign off to a very strong start. It includes a social media lens where we've got mega influencers across different demographics. Also, what we have going now is, as I mentioned, our Toy Story 2 launch behind our new portfolio of kid personal care kicked off as Pixar began the early initial rounds of driving buzz against that movie. That movie launches in June. We're really just getting into the window where our own awareness driving of that portfolio is heating up as well as Disney's. We've got some other great stuff planned for later in the year that I look forward to coming back and talking to you about. Curtiss Bruce: Yes. Aaron, let me just reiterate and maybe add on to Carla's comments. We definitely believe that brand building is a strategic advantage for us here. We're going to continue to invest in marketing as we look to strengthen the business and create a sustainable growth platform. This is why it was so important for us to execute Powering Honest Growth. The gross margin acceleration, the gross margin expansion is really the fuel that we need in order to continue to invest in marketing to have a long-term sustainable business. Operator: Our next question comes from the line of Anna Glaessgen with B. Riley Securities. Anna Glaessgen: In the past, I think the classical brand discovery was talked about through diapers and then expanding through the broader categories that you guys offer. Now while we've seen diapers declining, we're also seeing continued nice gains in household penetration. Can you speak to how consumer discovery of the brand has shifted and how your go-to-market has shifted in response? Carla Vernon: Wonderful. I'll give that a try. You are right, Anna. We are at our all-time highest household penetration, which is such an affirmation that we have picked categories where consumers love what we have and where our portfolios are very expandable across demographics and across types. A few things drive that. I've talked a lot about the fact that the largest percent of households in America are not, in fact, the littlest baby households, but they are both those bigger kid households and the households like my own, my daughter ought to go off to college where maybe there was a kid in the household and there isn't anymore as well as households where maybe there were never any children in the household. What we found is that the benefit of Honest, which is that clean formulation, sensitive skin safe, that is relevant, not just for babies, right? That is relevant. We know that a degree of adults describing themselves as having sensitive skin is as high as 50% to 70% based on certain research. Honest products that we make have been relevant to a broader set of households for a while. We already sell more than half of our -- or excuse me, more than half of our consumers are already in these households. What we're doing now is really putting the strategy and product innovation road map together with that consumer base and making sure we talk to them. This Flushables wipe campaign that I just talked to you about is a great example. We are talking to adults about why they will love Honest products. That is really a new form of expanded investment, and we're seeing it work because, of course, those businesses are -- the growth of those businesses is outpacing the pressures we're seeing in the diaper category. We feel really good about what that shift in mix and shift in focus has done for our business model. Anna Glaessgen: Then one follow-up on marketing. Nice to see the investment in Wipe and the activation there, as you noted in the first quarter. Should we take that level of spend and assume that continues? Or was it elevated given the launch cadence that hit that quarter? Curtiss Bruce: Yes. I'll take that one. This is Curtiss. As we think about marketing, we -- you're correct, we did have an increased level of investment in Q1. That was behind the activity that Carla previously mentioned. Like I said in the earlier remarks or the earlier question from Aaron, we are going to continue to invest in marketing. We're not going to sort of guide expressly to that line item, but the investment in marketing is going to be fueled by Powering Honest Growth, and then our -- both the revenue guidance and the EBITDA guidance reflect that increased investment. Operator: Our next question comes from the line of Andrea Teixeira with JPMorgan. Andrea Teixeira: Amazing story about your mom. Carla, I was just hoping Curtiss to talk about like the competitive environment we hear in general. I guess you're above and beyond that in terms of like your premium positioning. But on the diaper segment, there has definitely been a more competitive stance from a lot of the players. If you can comment on that. Conversely, I know you've been getting a lot of new products in and distribution, and you clearly accelerated the delivery this quarter. I was just hoping if you can comment about like what are the learnings and what is the -- what are you seeing towards the back end of the year, as Aaron was saying in his question, right? I mean, you probably would have a potential to raise the guidance. I understand that, obviously, it's early in the year, but how we should be thinking of what's happening -- what has happened in the quarter and what it informs you through the rest of the year? Carla Vernon: Great to hear from you, Andrea. Let me begin with the diaper portion first, and then I'll move on to the new product and distribution learning and our approach to that. Yes, we agree. The diaper category is under an enormous amount of pressure. That pressure is multifaceted, as we know, with macroeconomic pressures facing consumers, along with just increased competitive landscape that is more heated up than we've seen it in previous years. For us, where we feel encouraged is that as we modeled our diaper business, we knew it was important to get past these distribution losses. Now that we are really lapping those distribution losses that we've been talking to you about, and we saw our own declines cut in half then that told us that as we've been looking at the category, things are playing out according to what we've built into the model and according to what we expected. With that said, we know that those baby households are important, and so we think we show up differently than most of the other brands in the baby aisle in the baby category because we have the power of a single brand that applies broadly across even when just in the baby set with great meaning because people trust our products to really do what they say. As we are seeing, there are places where people feel that is very important and worth it to them, right? That is because I think that's clean trust we've always had. We love to think it has to do with also our beautiful design. It just they're beautiful products to use as we know, as well as making sure that they deliver on their sensitive skin friendly benefits. We've got the power of a brand that can press multiple different ways in the aisle. That's why we're still seeing our growth is offsetting those declines that we're managing in diapers. When I think about new products and distribution, I guess I'll pick up on that same storyline, which is the Honest brand was always built broadly even from its beginning. What we have learned is that as we bring the brand into things like kid personal care, adult flushable wipes, hand sanitizing wipes, makeup remover wipes, trial and travel, we are finding the brand is a fit no matter where we take it to new spaces in the store, we take it to new rooms in anybody's household, we take it to new consumers. That does come with the need to invest in each of those categories. We have to show up and talk to that consumer group in that particular category against that job to be done. That's why you've seen that the team has built a financial model that allows us to go after these higher-margin categories while reinvesting. Curtiss Bruce: Then let me just add because we're talking about innovation, we're certainly pleased with the start to Q1, particularly around the innovation. Our 2026 plan and our 2026 guidance on organic revenue was really balanced. It was innovation, velocity and distribution, and so this was not a singular one driver plan. We are still very confident in our ability to deliver with the success that we had with innovation and the distribution that went into the market in Q1. Andrea Teixeira: If I can squeeze one about e-commerce and how you are potentially outperforming. I think it was always the case, but I just wanted to check in, in terms of a channel performance against Biggs? Carla Vernon: I think you're talking about broad national e-commerce. Is that right, Andrea? Andrea Teixeira: Yes. Carla Vernon: Yes, we are continuing to be very pleased. First of all, we're seeing that across the board, whether it's your traditional brick-and-mortar retailers as they continue to build out their own focus in e-commerce in AI-driven purchases and shopping behavior or where you're looking at the sort of original pure-play e-commerce brands. Our brands, they really fit those models. We know that everyday essentials and consumables do very well in e-commerce. We're seeing a lot of strength for HTC in e-commerce in general. Honest was -- we love to talk about this, right? We were born digital. We were one of the original DTC brands. We were built by the digital generation, and we were built for the digital generation. Our products really come to life very well in an e-commerce channel, and we're seeing that the algorithm plays out very strongly. with that being certainly one of the fastest places we deliver growth. Operator: [Operator Instructions]. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Dana Telsey: Two questions. One, as you think of the tracked channel consumption, which is up, I think, 8.3%, a real acceleration from the fourth quarter. As you think about going forward, how do you see the levels of demand? Is it new product drivers? Is it category drivers? How would you -- how are you planning go forward? Then on the margin side, with the change in energy prices, how is it impacting your pricing, your customer? Any shifts that you've been seeing? How has it adjusted by channel? Carla Vernon: Dana, let's start with that consumption acceleration. As you noted, when we exited the previous quarter, Q4, we reported consumption growth of 3%. In this quarter, we reported consumption growth of 8%. That growth is very encouraging to see given all of the complexities we've been talking about in the macroeconomic environment. The way I think about the drivers and how that would play out for the rest of the year, this lapping of the distribution declines in diapers is certainly one of the components of why it is sort of more wind at our back on a consumption basis with regard to that piece of our portfolio. We should still see that in the year, but as we've talked about, the diaper category has a lot of pressures. That's why we want to make sure our guidance has got that consideration for the unknowns in the diaper category. We also -- well, let me step back and say, Curtiss talked about our growth based on 3 very balanced drivers, right? We've got innovation as a driver. That includes innovation we launched last year, like flushable wipes entering brick-and-mortar for the first time last fiscal year. That stuff takes a while to catch on and drive awareness. The fruit continues to pay out and grow. Now we've got the awareness driving campaign to act as continued wind in the sales for that type of business. Remember, I also mentioned last quarter, we did a considerable amount of our innovation launches for the year in the first quarter intentionally so that we have the ability to drive that all year. New items are a piece of our growth for the year. Then you've got the velocity and the continued availability increases. Those make out really the 3 ways we look at our growth: innovation, the velocity, velocity that consumers -- when they try our products, they love it. We have great repeat rates, and we are driving a lot of marketing to drive awareness. Then the distribution growth. There are a lot of drivers for us on distribution growth. Sometimes our brand is already in a retailer, but we might only be in the baby set. When we enter and step our way into the flushable lifestyle, that drives a lot of distribution for us even in a retailer we're already in. Think of the kid personal care business the same. We were already in Walmart. We were already in Amazon, but that was an entirely new sort of branch to our tree, if you will, that we are now able to get the benefits of as we launch innovation and expand even in retailers we're already in. Curtiss Bruce: Then I will take the inflation and fuel question here. We continue to monitor and evaluate the impact that the volatility in our macroeconomic environment could have on our business. This is where our asset-light model, our inventory position and the cost mechanisms we have with our suppliers enable us to manage risk in the short term. As we think about 2026, we are confident in our ability to still deliver against our expectations. Operator: Our next question comes from the line of Owen Rickert with Northland Capital Markets. Owen Rickert: Just quickly for modeling purposes, last quarter, you mentioned guiding to organic growth improving sequentially throughout the year. Is that still the right way to think about guidance right now? Curtiss Bruce: Yes. Owen, it's a good question. We are pleased with our start, both on net revenue and on consumption. That was the sequential improvement that we talked about, and so that's in line with our expectations. We are still very confident in our ability to deliver the annual guidance, but we're not offering any updates on the cadence. Owen Rickert: Then secondly for me, what early reads are you seeing from some of those newer product launches like the Sensitive Rich cream, Send Wipes and Hydro Rich cream just in terms of potential velocity and repeat? Carla Vernon: A lot of those items launched in Q1, and so often in my experience, Owen, it is still early to have a true velocity run rate on new items like that. What becomes important is making sure that the shelf sets are all settled in so that we really have a clean read on that data and then driving that awareness. What I would really anchor us on is that in almost any category where you look at Honest, our household penetration is so low that each of these new products really gives us an opportunity to reach into a new household and introduce the brand. For example, you brought up some of our baby items, Sensa Rich Cream, and that is in our Personal Care portfolio. Our Personal Care portfolio is still only at 2% household penetration, whereas what we see in brands that have been around the category longer, we see those with anywhere from 5 to 7x as much penetration as we have. As we continue to make our way in these categories, drive familiarity with the awareness that the Honest brand is there, we feel very, very confident that there is so much runway from our loyal consumers as we continue to drive that growth. Operator: I'm showing no further questions. With that, I'll hand the call back over to CEO, Carla Vernon, for closing remarks. Carla Vernon: Well, thank you, everybody, for joining us this quarter as we continue to go to Infinity and beyond. We look forward to talking to you next quarter. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Arcutis Biotherapeutics, Inc. First Quarter 2026 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, Brian Schoelkopf, Head of Investor Relations. Please go ahead. Brian Schoelkopf: Thank you, Marvin. Good afternoon, everyone, and thank you for joining us today to review our first quarter 2026 financial results and business update. Slides for today's call are available on the Investors section of the Arcutis website. Joining me on the call today are Frank Watanabe, President and CEO of Arcutis; Todd Edwards, Chief Commercial Officer; Patrick Burnett, Chief Medical Officer; and Lasse Vairavan, Chief Financial Officer. I'd like to remind everyone that we will be making forward-looking statements during this call. These statements are subject to certain risks and uncertainties, and our actual results may differ. We encourage you to review all the company's filings with the Securities and Exchange Commission, including descriptions of our business and risk factors. With that, let me hand it over to Frank to begin today's call. Todd Watanabe: Thanks, Brian, and good afternoon, everyone. As always, we appreciate you guys making the time to join us. I want to start today's call with an overview of the latest developments at Arcutis and the progress we're making against our grow, expand, build strategy. I'll then turn things over to Todd for a commercial update, then Patrick for an R&D update; and finally, Latha for a review of the quarter's financial results as well as how we're thinking about investing in 2026 to drive ZORYVE inflection. So I'm starting on Slide 5. Hopefully, by now, you're all familiar with the grow, expand, build framework that we have adopted to define our strategy to sustain near- and long-term growth for both ZORYVE and the company overall. In a nutshell, our plan is to continue to grow our core ZORYVE business in our currently approved indications to expand ZORYVE into additional indications and to build our innovative pipeline beyond ZORYVE. So starting with the grow pillar for driving momentum in our core approved indications, we're very excited to have submitted a supplemental NDA for ZORYVE cream, 0.05% in atopic dermatitis patients aged 3 to 24 months in April. This is a segment of patients who are significantly impacted by AD and who are in dire need of safe and effective treatment options beyond the very small number of currently approved therapies. Patrick will comment on the opportunity more, but we see this as a very significant new opportunity for ZORYVE, and there's a lot of excitement amongst dermatology clinicians about our data and the possible approval. We also completed enrollment in a MUSE trial for ZORYVE foam, 0.3% in children with scalp and body psoriasis ages 2 to 11 years of age, and that should serve as the basis for submission for -- to extend the label to this age group, aligning it with the 0.3 cream. On the commercial front, we've successfully completed -- we've essentially completed, excuse me, the expansion of our dermatology sales force to enable deeper reach into the dermatology landscape. And I'm happy to report that our expanded derm sales force is in the field as of this week, but of course, we probably won't begin to see an impact on sales for a few months. We also began the build-out of our dedicated PCP and pediatric sales team, starting with the recent hiring of our Head of Primary Care franchise. This team will embark on a targeted effort to engage with those primary care and pediatric clinicians who are already using a fair bit of topical therapies in their practice. We also continue to make important progress against our expand pillar as we work to bring the unique benefits of ZORYVE to people impacted by chronic inflammatory skin conditions beyond our currently approved indications who are also in need of targeted innovative treatment solutions with a focus on diseases where we've already seen compelling potential of ZORYVE based on case reports and case series. And specifically, we're nearing full enrollment of our Phase II proof-of-concept trial in vitiligo, and we continue to enroll patients in our Phase II POC trial in hidradenitis suppurativa or HS. We're also evaluating additional Phase II proof-of-concept trials in indications beyond vitiligo and HS, and we'll obviously update you guys on our further decisions. And finally, we reached an important milestone in our pipeline building activities with the initiation of a Phase Ia, Phase Ib trial for ARQ-234. The investments we're making and the efforts we're taking to advance our initiatives across these 3 pillars are laying groundwork for further ZORYVE sales inflection and operating leverage expansion in 2027 and far beyond as well as positioning us to sustain growth for the long term and most importantly, expanding our impact on individuals living with chronic inflammatory dermatosis. Despite now having a successful commercial franchise in ZORYVE, we continue to be at our core, a biotechnology company championing meaningful innovation within medical dermatology. These investments in innovation and growth reflect that intent. And with that, I'll hand the call over to Todd to give you a Q1 commercial update. Todd Edwards: Great. Thank you, Frank, and good afternoon, everyone. Turning to Slide 7. We continue to see strong sales performance in the first quarter with net product revenues of $105.4 million, up 65% versus the first quarter of 2025. This healthy quarterly performance was achieved despite the customary first quarter seasonality impacting branded therapies driven by patient deductible resets, elevated co-pay utilization, annual insurance transitions and pull forward of refills into Q4. This typical pattern was further amplified this year by the impact of severe weather events we had across the country during the quarter. On an aggregate basis and in line with expectations, this resulted in a more significant sequential decline in product revenues from quarter 4 to quarter 1 compared to 2025, where seasonality was mitigated due to the initial launch of ZORYVE in atopic dermatitis. Importantly, we are through the impact of this typical seasonality and anticipate a return to robust quarter-on-quarter demand growth going forward. Our gross to net remained stable in the 50s. And as communicated on our last call, we anticipate it will remain in the same range for the remainder of 2026. Our first quarter gross to net rate improved compared to quarter 1 2025 due to our evolving payer contracting that benefited product revenues for the period. Looking ahead to the second quarter, we expect quarter-over-quarter net sales growth driven primarily by increasing patient demand as well as continued gross to net improvements as we progress from our current rate to the low 50s as the year progresses. Turning to Slide 8. After a typical December to January pullback in demand, weekly prescriptions on a rolling 4-week average based on IQVIA EXPONent data have returned to a healthy growth trend and reached approximately 21,000 prescriptions per week across all indications and formulations for ZORYVE. As is clear from this chart, ZORYVE continues to generate sustained Rx growth. For the remainder of 2026, we anticipate sustained demand growth will be the primary driver of ZORYVE's revenue expansion. The most important driver of this sustainable momentum will remain the conversion of topical corticosteroids to advanced targeted topical therapies as health care providers and patients' perceptions of the risk of chronic use of topical steroids evolves. In a few minutes, Patrick will comment on developments we are seeing on that front. Investments we have made to expand our dermatology sales force will also contribute to demand growth in the second half of the year, and our efforts in primary care and pediatric settings will start to have an impact later in 2026 and 2027. Next, I'll provide some additional detail on demand across topical therapeutics and dermatology in the first quarter. I'm on Slide 9. As demonstrated in the chart on Slide 9, prescription volumes were down across the board for topicals in the first quarter of 2026 compared to the fourth quarter of 2025. Of note, the impact was not only seen with branded products, but also with topical corticosteroids, antifungals, vitamin D analogs and topical calcleurin inhibitors. Products in these categories are primarily generic, making them less sensitive to the typical seasonality experienced by branded products in the first quarter. And yet this year, they still saw marked sequential declines quarter-on-quarter. We believe that this dynamic speaks to the fact that the severe weather events in the first quarter impacted dermatology prescription volume in general, a headwind that compounded typical seasonality and affected the entire topical segment. Of note, the prescription decline for ZORYVE in the quarter at 6% was meaningfully lower than the other branded non-steroidal topicals, which collectively were down 15% for the quarter. This relative outperformance is further evidence of the growing preference for ZORYVE by dermatology health care providers and patients. ZORYVE's relative strength in the period also drove further share expansion with ZORYVE's share of total branded non-steroidal topical prescriptions increasing to 48% in the first quarter, a 3 percentage point increase from the end of 2025. Moving to Slide 10. We are excited about the key investments we are making in 2026 to drive ZORYVE's continued momentum and set the foundation for its growth inflection in 2027 and beyond. We have completed our previously announced dermatology sales force expansion. As Frank noted earlier on the call, we're pleased to report that these new sales force members are out in the field as of this week. As is typical, these sales representatives require a couple of months to gain familiarity with their call points. So we anticipate seeing the impact on demand from these added boots on the ground beginning in the third quarter. We are also underway in the build of our primary care and pediatric team. We are thrilled to announce today that we have hired the head of this new franchise, Katie Swoss. Katie brings incredible breadth and depth of experience with dermatology therapeutic commercialization, having held various strategic and operational leadership positions, and she has already begun building out the rest of her team. As we described previously, we are adopting a high targeted approach with this sales team focused on high-volume, early adopter PCPs and pediatricians concentrated in major metropolitan areas, positioning this investment to be accretive from the outset. From there, we will evaluate additions to the sales team as we further refine our strategy and gain in-depth understanding of the space. We look forward to completing the initial build-out process next quarter with the launch into the field in Q3, initial impact to demand beginning in the fourth quarter. Rounding out focused commercial investments, our Free to Be Me direct-to-consumer patient awareness campaign featuring Tori Spelling, her daughter, Stella McDermott and professional golfer, Max Hona has driven strong meaningful patient engagement. Their shared collective experiences are helping to drive awareness for ZORYVE across all indications and are resonating with a broad range of patient demographics. We look forward to the continued progress of this important direct-to-consumer effort to ensure we are capturing and reflecting the patient voice and patient experiences as they live and manage their chronic inflammatory skin conditions and the impact ZORYVE has on their lives. With that, I'll now turn the call over to Patrick. Patrick Burnett: Thank you, Todd. Good afternoon, everyone. In the first quarter, we continue to make significant progress in our efforts to support young children and infants suffering from plaque psoriasis and atopic dermatitis. Starting first with atopic dermatitis, children under the age of 2 are the most vulnerable patients in a population that desperately needs alternative therapeutic options to the handful of currently available treatments. As a dermatologist, I can tell you firsthand how challenging it is to sufficiently address these diseases in this age group given the very limited set of approved therapies and how eager the parents and caregivers are for effective, safe and well-tolerated treatments to bring comfort to their kids. Safe, well-tolerated treatments are especially important in this age group when the immune system and the skin barrier are still developing. We take their plea very seriously, and we believe the clinical profile and formulation of ZORYVE are well suited to the needs of this young patient population. On our March call, we highlighted the positive top line data from the INTEGUMENT infant Phase II trial of ZORYVE cream 0.05% in infants aged 3 to less than 24 months with mild to moderate atopic dermatitis. Expanding on what we shared in March, we were honored to have our abstract selected for a prestigious late-breaker session and presented by Dr. Lawrence Eichenfield at the American Academy of Dermatology Annual Meeting at the end of March, select portions of which we have here on Slide 12. Over 1/3 of study participants who completed 4 weeks of treatment achieved a validated investigator global assessment for atopic dermatitis that's a VIGA-AD success. that's defined as a score of 0, which is clear, or 1, which is almost clear with at least a 2-grade improvement. Close to half of infants achieved a VIGA-AD score of clear or almost clear, that's a 0 or 1 at week 4 and 24% already at week 2. Now for those infants with at least mild scalp involvement at baseline, more than 2/3 achieved VIGA scalp success at week 4. And as previously highlighted, 58.3% of infants achieved at least a 75% reduction in their eczema area and severity index that's an EASI-75 at week 4 and 3/4 of infants already at week 2. Now to the right, we see a representative patient. This is a 23-month old boy who had previously been treated with topical corticosteroids with an IGA of 3 or moderate severity at baseline, and he's showing significant improvement at week 4 with an IGA of 1 or almost clear. I think these photos really represent the meaningful impact that our 0.05% cream delivered to patients in this study and why we're so excited to already have these data submitted to the FDA. Collectively, the findings from the INTEGUMENT infant study add important clinical evidence on the promise of investigational ZORYVE cream 0.05% in infants 3 to 24 months with rapid and robust efficacy across multiple clinical endpoints, coupled with excellent tolerability and a clean safety profile. Now moving on to Slide 13. I want to highlight one particularly notable result that we shared from INTEGUMENT infant at the AAD, namely the rapid impact that ZORYVE had on itch for these patients as reported by their caregiver. Itch is one of the most disruptive symptoms of atopic dermatitis in patients of all ages and the rapidity with which a therapy can alleviate itch is an important aspect of a drug's therapeutic profile. We've known since early clinical development that ZORYVE has a rapid impact on itch. The chart on the left-hand side of Slide 13 shows itch improvement over time in our registrational INTEGUMENT-1 and 2 trials in atopic dermatitis as measured by WI-NRS or worst itch numeric rating scale. As you can see, we saw itch reduction as early as 24 hours after first application, and that was the first time point measured in these trials. However, through our clinical trial experience and feedback from clinicians in the field, we appreciated that the speed with which ZORYVE impacts itch is exceptional. And with that in mind, in it taking an infant, we chose to measure impact on itch using the dynamic pruritus score, or DPS, with measurements as early as 10 minutes after application. The results from that analysis are demonstrated in the chart on the right-hand side of this slide. Nearly 50% of patients experienced a 25% improvement in itch as measured by their caregivers within just 10 minutes of application of ZORYVE and 2/3 of patients experienced relief within 4 hours. These results not only reinforce our conviction that ZORYVE will be an important therapeutic option for infant patients, but this demonstrated speed of onset has also prompted us to further study the impact of ZORYVE on itch. To that end, we recently initiated a study INTEGUMENT-Ich, to assess descriptive classification of pruritus over time with ZORYVE 0.15% cream in patients with atopic dermatitis. This 40-patient trial will begin enrolling shortly. We believe that the further validation of ZORYVE's rapid impact on itch that this trial is intended to demonstrate, particularly within the first 24 hours after initiating therapy is an important step in better understanding and articulating ZORYVE's profile in atopic dermatitis. INTEGUMENT itch is an example of our strategy to generate additional clinical data for our current indications to further bolster the data set behind ZORYVE. -- an important component of our growth strategy pillar. I look forward to sharing subsequent updates on other clinical activities we're pursuing along the same vein. Next, I'll provide an update on our label expansion efforts to support pediatric patient populations. As Frank mentioned in the opening, we submitted a supplemental NDA to the FDA in April for ZORYVE cream 0.05% to expand the indication to infants 3 to 24 months. We're thrilled to have taken this critical step to potentially bring a new safe, well-tolerated and effective therapeutic option to this patient population. It's notable that we were able to submit our application in just 3 months after having read out the top line results from our INTEGUMENT infant trial. This reflects the speed with which our team at Arcutis is moving on behalf of patients and our response to the high level of urgency shared by those HCPs who care for these youngest AD patients. Turning next to our pediatric expansion efforts for plaque psoriasis. We recently completed enrollment of a MUSE trial or maximum MUSE trial for ZORYVE foam 0.3% for children ages 2 to 11 years old with scalp and body psoriasis. The trial is intended to serve as the basis of an sNDA submission to extend the indication to this age group and to align the psoriasis indication of the 0.3% cream and foam. If approved, ZORYVE foam could offer a truly unique therapeutic option for caregivers helping their young children manage this disease that has historically been difficult to treat when presenting in hair-bearing areas. In addition, as previously announced, our supplemental NDA for ZORYVE cream 0.3% for psoriasis patients down to the age of 2 years is under review by the FDA and the PDUFA action date of June 29 is quickly approaching. I'll note that the rationale for extending our label to the infant population for atopic dermatitis does not apply to plaque psoriasis or seborrheic dermatitis. Onset of diseases in these patient populations is common in atopic dermatitis, while it's not in the other 2 diseases. Our current label in seborrheic dermatitis positions us to effectively serve the addressable patient population and potentially securing a label expansion to the pediatric age range in plaque psoriasis will similarly equip us to serve the addressable patient population. As demonstrated in the table on Slide 14, these latest developments in expanding our indications to additional pediatric and infant populations build on a consistent focus we've maintained over the years to broaden the availability of ZORYVE. We're driven by the need of these younger children for effective, safe and well-tolerated therapeutic alternatives to topical corticosteroids. We also anticipate that when health care providers see how effectively ZORYVE alleviates inflammatory skin disease in their most fragile and vulnerable patients, they'll be more inclined and appreciate the potential benefit from ZORYVE for their adult and adolescent patients with the same diseases. Now turning to Slide 15 and the pipeline. This is the build pillar of our strategy. We've now initiated the Phase I trial of ARQ-234, our novel biologic targeting CD200R in healthy volunteers and adults with moderate to severe atopic dermatitis. There's a clear and distinct need for a systemic therapy for patients with atopic dermatitis who have relapsed on or who are refractory to IL-4, IL-13 drugs. Many in the drug industry and many clinicians had until recently hoped that agents targeting OX40 would meet that need. However, after a series of disappointing clinical data sets and growing safety concerns for these programs targeting OX40 already leading to program discontinuations, that hope has dissipated, leaving a white space for novel new treatment pathways. It's our belief that the CD200 axis targeted by ARQ-234 could bring an important new tool for providers and an important new option for patients. The CD200 axis plays a central role in both innate and adaptive immunity with CD200 signaling reducing immune activation for T cells, type 2 innate lymphoid or ILC2 cells and myeloid cells and decreasing secretion of pro-inflammatory cytokines. Given the impact of this access, there's a solid basis for optimism about the role of CD200R agonist programs may play in treating inflammatory diseases. The Phase I trial for ARQ-234 is comprised of a single ascending dose or SAD component in healthy volunteers, which is currently ongoing and a multiple ascending dose or MAD component followed by a proof-of-concept cohort, both in patients with moderate to severe atopic dermatitis. While we will not share the results from the trial until completed, we will keep you apprised of our progress through these different components. Now moving on to Slide 16. As you can see, we've already delivered on several meaningful clinical milestones in 2026 and look forward to continuing clinical progress throughout the year. Of note, we continue to enroll our Phase II proof-of-concept trials in vitiligo and hidradenitis suppurativa or HS. We're nearing full enrollment for our vitiligo trial and remain on track to provide a readout of trial results and an update on our clinical development plan in Q4 of this year. And a similar readout for our HS program in Q1 of 2027 also remains on track. And Todd alluded earlier to the continued shift from topical steroids to advanced targeted topical therapies like ZORYVE. As we've mentioned on prior calls, we're seeing a steadily growing consensus within the dermatology specialty around the clinical needs for that shift, and we saw further evidence of this since the start of the year. On Slide 17, I highlight just a few of the recent discussions on this topic. I would call your attention in particular to one of the conclusions of the recently published expert consensus statement on advanced nonsteroidal topical therapies for atopic dermatitis, which came out in March in the Journal of Drugs in Dermatology. As you can see, some of the most distinguished experts in the field agree that advanced nonsteroidal topicals should be preferred over topical corticosteroids for long-term management of atopic dermatitis due to their cleaner safety profiles. This is typical of what we continue to hear from the leaders in dermatology, and this growing consensus will propel the conversion to the newer agents, of which ZORYVE is the leading treatment. With that, I'll turn the call over to Latha to further detail our Q1 financial results. Latha Vairavan: Thank you, Patrick. I'm on Slide 19. We generated net product revenues in the quarter of $105.4 million, which is up 65% from Q1 of 2025. This year-over-year increase was driven primarily by increased patient demand. We also had lower gross to net in the first quarter of 2026 versus a year earlier, contributing to higher net product revenues. As Todd mentioned earlier, this improvement in gross to net was primarily driven by the evolution of our payer contracting. And while our gross to net rate is lower to begin the year, we still anticipate our gross to net to be in the 50s throughout 2026, ending in the low 50s. Cost of sales in the first quarter were $9.8 million compared to $8.8 million in the first quarter of 2025, primarily due to increasing ZORYVE sales volume. For the first quarter of 2026, our R&D expenses were $30.6 million versus $17.5 million for the corresponding period in 2025. This year-over-year increase was primarily due to the $10 million milestone obligation to Ducentis shareholders triggered by the dosing of the first subject in the ARQ-234 Phase I trial, which occurred in the quarter. SG&A expenses were $74.1 million for the first quarter of 2026 compared to $64 million in the same period last year, up 16% as we continue to invest in our commercialization efforts for ZORYVE. We anticipate a modest increase to the SG&A expense in the back half of the year, driven by headcount-related costs for the dermatology sales force expansion and the build-out of our primary care and pediatric sales team. we are maintaining our revenue guidance in the range of $480 million to $495 million for the full year 2026. Moving to Slide 20. You can see that we had cash and marketable securities of $224.3 million on our balance sheet as of March 31, 2026. Importantly, we maintained positive cash flow in the quarter with $2.2 million of net cash provided by operating activities. We will continue to be disciplined in our investments in the business to maintain positive cash flow throughout the rest of the year. We have total debt of $101.5 million and have the right to withdraw another $50 million in whole or in part at our discretion through the middle of '26. I am now on Slide 21. With the continued broad adoption of ZORYVE and sustainable sales momentum that the franchise has demonstrated, we have reached the rare milestone amongst biotechnology companies of achieving positive cash flow at Arcutis. We first achieved sustainable positive cash flow in the fourth quarter of last year and have communicated that through diligent expense management, we anticipate maintaining positive cash flows on a quarterly basis throughout 2026. This -- the core ZORYVE business is strong and the shift from topical steroids to branded nonsteroidal topicals will continue to offer immense growth opportunity for many years to come. Concurrently, we are reinvesting capital generated from our ZORYVE franchise back into our business in order to inflect growth in 2027 and beyond. ZORYVE's growth is driven by both of these factors. You've heard about several of these initiatives today, including our sales force expansions in both derm and primary care, DTC efforts, clinical investments to support current and potential additional indications for ZORYVE and progress on our innovative pipeline. There are additional initiatives for which we are making disciplined investments that we look forward to detailing throughout the year. These investments lay the foundation for both near- and long-term growth for Arcutis. They will help to further catalyze the continued growth of ZORYVE and inflect its trajectory. ZORYVE is a profitable franchise. And if we were not pursuing these impactful accretive investments, we would commence operating leverage expansion in 2026. As we look ahead to 2027, we expect a moderation in the need for increased investment in our current business compared to this year. Coupled with the anticipated continued sales growth of ZORYVE, we expect that we will see meaningful increase in our operating leverage and cash flow generation in 2027 and beyond. With that, I will now turn the call back to Frank for closing remarks. Todd Watanabe: Thanks, Latha, and thanks again to all of you for joining us today and for your continued interest in Arcutis. I'm immensely grateful to our team and very proud of their hard work, their dedication to building shareholder value and their commitment to the patients we are serving. And with that, I'll open up the call to Q&A. Operator: [Operator Instructions] Our first question comes from the line of Andrew Tsai of Jefferies. Lin Tsai: So it sounds like gross to net performed better than compared to last year, Q1 of last year. Can you guys maybe qualitatively describe what drove that better percentage? Was it something within your control? And what kind of positive impact could that have for the rest of the year? I know you kind of guided gross to net for the rest of the year. Is it fair to assume blended gross to net for this year could be better than the blended gross to net for 2025? Todd Watanabe: Sure. Yes. Todd, do you want to take that one? Todd Edwards: Yes. I think I'll take that call, Andrew. Thank you for the question. So yes, as mentioned, we did have price improvement in the first quarter of this year relative to Q1 2025. This year-on-year improvement was primarily driven by improvements in formulary status with more preferred versus nonpreferred position with some of our commercial plans. What this means is that for a patient, for a preferred status, it's a lower co-pay versus nonpreferred position. So with the preferred status and lower co-pay for the patients, that leads to lower co-pay expenses and lower co-pay buy-down for Arcutis give us the pricing upside. Now while our rate is lower than the prior year, we continue to anticipate that we'll be stable in the 50s without a doubt throughout the year. And as mentioned, we'll be working down from the higher 50s at the beginning of the year, transitioning to the lower 50s at the end of the year as patients continue to buy down the deductibles and we have lower co-pay expenses. Now as we look forward, I think it's a bit too early to anticipate how all these factors will carry forward to future years. But I remain very confident that we'll continue to have a very strong gross to net, and we'll maintain our gross to net within the 50s going forward. Thank you for the question. Operator: Our next question comes from the line of Tyler Van Buren of TD Cowen. Tyler Van Buren: Just to help quantify the quarter-over-quarter impact in the Q1 seasonality, as we compare to Q4, can you help us understand how much of that was the gross to net impact versus volume impacts from weather or Q4 pull forward? And the second part or follow-up is, I understand that you're saying that Q2 sales will be above the first quarter, but do you believe it's likely that Q2 sales could significantly exceed the sales that were posted in Q4? Todd Watanabe: Tyler, yes, Todd, do you want to take that one, too? Todd Edwards: Yes, absolutely. Thank you, Tyler. So in reference to the quarter-on-quarter impact of seasonality and the differential between gross to net and demand, as we've highlighted, there was an upside on gross to net due to the which that has changed from nonpreferred to preferred with the -- as mentioned, the demand saying relative to the 6% on that. And if you think about it, with the seasonality, which is typical because of the pull forward of the refills into Q4, we got employers that are often change in insurance from employees that's effective January 1 of the year. That transitions impacts relative to ZORYVE and then, of course, the higher deductible reset that impacts it. And then as noted, this was compounded relative to the weather impact. And I will just mention that this whole weather impact and demand impact was not just limited to the topical products. When you look at the systemics, they were also impacted as well. For example, Otezla was down 11%, Rinvoq 3% Dupixent 2%. This is on volume due to this seasonality with this and being amplified by the impact of the weather. Relative to Q2 sales and how we think about them going forward, I will mention that Q2 quarter-to-date through April 24, ZORYVE has 13% growth versus Q1 within the same time period. So we're off to a very strong start within Q2 here, and I have high confidence that we'll continue to build on this demand trend and have robust growth quarter-over-quarter as we go forward. Operator: Our next question comes from the line of Seamus Fernandez of Guggenheim Securities. Colleen Garvey: This is Colleen on for Seamus. When thinking about this year's sales guidance, what are the assumptions driving the lower end of the guide? By our math and just based on the current prescription trajectory, we're starting to struggle to land within the upper end of the guide and consensus looks to already be above. So just trying to understand the pushes and pulls to maintain the current guide. Todd Watanabe: Colleen, Look, I would say that we just updated the guidance in February. so not that long ago, we don't intend to update our guidance at least for the moment every quarter. So we'll continue to evaluate the trend as the year progresses. And if we feel that it's appropriate to update the guidance, we will. But we felt that at this point, early in the year, particularly with a slightly anomalous Q1, we felt that it was prudent just to hold fast. Latha, Todd, I don't know if there's anything else you want to add to that. Todd Edwards: Nothing else, Frank. Latha Vairavan: Calling out, I would say that the -- we issued the guide after the end of the year. And as Frank said, we don't see the need so early in Q1 to take it up. So as the year progresses, then as the guide rate changes, then you'll be able to align more to where the demand trajectory is headed. But for now, I think you can lean into the upper end and stay there. Operator: Our next question comes from the line of Judah Frommer of Morgan Stanley. Judah Frommer: We appreciate kind of the updated trends on total scripts and the share being taken there. Anything you're noticing in NRx new scripts and any trends that are indicative of where TRx could move going forward? Todd Watanabe: You're talking absolute volume share? Judah Frommer: Yes. Todd Watanabe: I would say... Share of new scripts, how that's trending, if anything has changed, has that formulary position maybe impacted what new scripts are doing? Okay. Sure. Todd, do you want to take that one? Todd Edwards: Yes, I'll take that one. When we look at the Q1 for ZORYVE and you look at the new-to-brand Rx for the branded nonsteroidal topicals, you look at that basket for Q1, ZORYVE drove 48% of the new-to-brand Rxs for the branded non-steroidal topicals. And we're very encouraged by this. I mean, I'll just reference this as comparison. If you look at like Opzelura, it was 28%. I think what's more is that you look at for ZORYVE and the NBRx decline quarter-over-quarter, we were basically flat. I think -- which is another strong signal. The other is when you look at our refills, Look at our total volume prescription, of that, our refills are about 45%, which is once again very encouraging for us, not only on the NBRx, but also on the refills that are contributing to our TRx and our overall growth. If I look within Q2 and I look at approximately the last 3 to 4 weeks, we've had very impressive NRx growth with ZORYVE, which once again is a great leading indicator of what's to come as far as TRx growth as we roll forward into the quarter. Operator: Our next question comes from the line of Uy Ear of Mizhuo. Uy Ear: I have 2, if I may. The first question is, could you maybe just help us understand or quantify the opportunity from the infant atopic dermatitis conditions. I think, Frank, you mentioned it was a significant opportunity. And how -- and maybe just help us understand how you'll capture that opportunity? Is it primarily through the derm sales force that you currently have or from building out the primary care pediatric sales force? That's the first question. Todd Watanabe: Go ahead. Did you have another one Uy Ear: Yes, I do. The second question is maybe, Lata, the SG&A was lower than what I think we or the consensus expected something like by $4 million. Now that you have the full sales force expansion, do you expect an uptick in the second quarter? Because I thought, if I heard correctly, I don't know what the starting point is, but you indicated that you were expecting a modest SG&A uptake in the back half of the year. So maybe just help us understand the cadence of spending for the year. Todd Watanabe: Okay. Thanks. So Patrick, maybe why don't we start, if you wouldn't mind sharing maybe a dermatologist perspective on the 3- to 24-month opportunity and the unmet need. And then, Todd, maybe you can address how we're going to get at that commercially. And then Latha, if you could address his question around OpEx. Patrick Burnett: Sounds good, Frank. Yes. So I think this 3 to 24 months group, and I'll let someone else kind of comment on the kind of absolute size of that group. But I think they are uniquely reflecting a patient population that has -- we're talking about essentially crisaborol approved there and then maybe 5 or 6 topical corticosteroids. So I think this really is a group that as we've been out kind of talking to pediatric dermatologists, and these patients are not just managed by pediatric dermatologists. The they're managed by a lot of dermatologists, dermatology, PAs and NPs as well, that this is one where people really do struggle to be able to get these patients under control. Obviously, it's not a group that you want to jump to a systemic right away. They tend to have a higher body surface area. Their disease tends to evolve kind of quickly over time into a pretty high percent of involved skin. And kind of as we alluded to in the call, there's a really high sensitivity to exposure to corticosteroids right out of the gate. I mean these are very, very young patients and the developmental milestones are at the top of mind for caregivers. So really kind of finding something that fits into that mindset, I think the ZORYVE profile fits beautifully into that. And I think we kind of alluded to the fact that this is a way to really win the hearts and minds of prescribers because if you could solve this problem for them, I think it really helps with the overall lift for the brand and what it means for the field. So I think that's the derm perspective. And as far as the overall size of the opportunity, I think I'll turn it over to you, Todd, to talk about that. Todd Edwards: Yes. Thank you, Patrick. And I'll just reemphasize, as Patrick mentioned, this patient population is tremendously underserved. If you think about it, it's really just EcrIA, which burns in the one application is available and then topical steroids, which, of course, brings great concerns to a caregiver, you say relative to steroid exposure. How we're going to drive this opportunity as we go forward once we get the approval will be across both the dermatology sales force as well as the PCP and pediatric sales force. Dermatology sales force because we do have pediatric dermatologists as well as other dermatologists to see this population and that we're conveying there's a real value proposition for this population. And then, of course, with our primary care and pediatric team, they'll be calling on pediatricians to make certain they create that awareness for the patient. And then in -- in addition to that, saying, we'll be doing a lot of direct-to-consumer campaign. And when I say consumer, it's a caregiver. We'll be making certain that we're reaching out and we're driving brand awareness of ZORYVE for this population to that caregiver to make certain that we know that it's available. And then in reference to the approximate side, it's about $2 million to $2.5 million as far as the patients, the opportunity that sits here within this age group in atopic dermatitis. Todd Watanabe: And Latha, can you address Uwe's question about the OpEx? Latha Vairavan: Yes. I would say SG&A for Q1 was slightly below consensus, but not we don't see a dramatic decline. So nothing to concern yourself there. The field force should have started in Q2. You'll see a portion of that hitting Q2 actual. So some normalization of that. The expansion for the primary care field force that will happen in the second half is what the comment modest increase references. And some of the initiatives that Todd talked about, you'll see some of that expense also play out for the course of the year. So that's our feedback on SG&A being higher year-over-year. Operator: Our next question comes from the line of Serge Belanger of Needham. Serge Belanger: The first one, just regarding coverage for ZORYVE. Do you expect to make any headways on what is remaining for Medicaid and Medicare coverage? Or is that more of a 2027 event? Just curious maybe if you can pull it forward to 2026. And then with the sales force expansion, you're going to be going to lower deciles prescribers. Just curious how they differ from the higher decile. Obviously, volumes are lower, but do they tend to prescribe less topical products than the higher decile ones? Todd Watanabe: Yes. Todd, sorry to worry you out, but could -- you want to take those 2? Todd Edwards: Yes. No, I'm happy to. Great question. So thank you. First one in reference to the coverage question and making headway relative to Medicaid and Medicare. We will continue to make headway in Medicaid. We can do that within 2026 as we continue to contract with these individual states relative to the fee-for-service Medicaid. We're currently in negotiations and conversations with some of those states where we don't have ZORYVE on formulary. Relative to Medicare, it's a longer process. We have to contract with each independent Part D plan. And typically, they do those formulary updates at the first of the year. So it is -- I'm saying likely going to be January 1, 2027, but there is opportunity with the Part D plans to be able to pull that forward into 2026. And so as previously communicated, ZORYVE has access in approximately 1/3 of the Part D plans. And it's our ambition to continue to accelerate that as we go forward, and we'll make every effort to pull that forward into 2026. And then the other is in reference to the sales force expansion, yes, you are correct. The ambition here is to be able to have a higher frequency, a higher level of engagement with the med decile providers by not diluting that frequency on the higher decile providers. And what mainly differentiates between high decile and medium decile is the opportunity to prescribe, meaning that they have a higher -- the higher deciles have a higher patient base, higher patient load. They typically do tend to be more rapid adopters of branded products. But with this median decile providers, there's ample opportunity for us here to continue to expand ZORYVE and believe that, that frequency will lead to higher adoption of ZORYVE. Operator: Our next question comes from the line of Richard Law of Goldman Sachs. Unknown Analyst: This is Tan on for Rich. The first one on the primary and pediatric care setting. Curious if you could speak more to what you're doing differently than CALA in those settings. What areas were they not doing well that you think you can improve on? And then I have a follow-up. Todd Edwards: Yes. No, it's a great question. Thank you. I'm sorry, Frank. I just jumped in. Thank you. So what we're doing differently is we are -- I mean, what -- I wouldn't reference it as what we're doing differently as it is what we're going to do to make certain that we set this primary care team up for success and that we can drive utilization of ZORYVE within these specialties is that, as mentioned, as we build this team at launch, we're going to be highly focused. We're looking and we've been able to build out the target list to make sure that we're going to be engaging the highest opportunistic primary care and pediatricians. And what I mean by highest opportunistic is this will be the PCPMPs that have the highest patient loads within the 3 indications in which ZORYVE is approved, not only that, but that these providers have demonstrated their willingness to adopt branded products. And these will sit within the major metropolitan areas. Also, we'll make certain that within each of these representative territories that we'll have a defined number of targets where we can make certain that, that representative can have the right frequency on each target to be able to drive trial and adoption of ZORYVE. Once again, setting this up for success. And then as we deliver success, we'll continue to scale from that point going forward. Unknown Analyst: Okay. Got it. And the second one on the foam in vitiligo and HS. What efficacy benchmarks would you say would be sufficient to give you confidence in continuing development in those 2 indications? Todd Watanabe: Sure. Todd, you got to pass. Patrick, do you want to take that one? Patrick Burnett: Thanks. Yes. So as we're looking at vitiligo and HS, keeping in mind that these are smaller open-label trials -- what we're really trying to understand is what does the ZORYVE profile look like relative to current standard of care treatments. And so for vitiligo, we're really kind of looking at the responsiveness timing relative to Opzelura. We know that one of the big challenges for patients with vitiligo is how quickly that they're seeing a response in the skin because that can really drive compliance. So once you get the patient onto the treatment, if they're not seeing the response that they want to, sometimes they'll fall off of their treatment. And I think that's where the mechanism of ZORYVE with PDE4 kind of working both on the inflammatory component, but also we've seen some evidence, as we outlined earlier, some impact potentially on the actual kind of melanocyte protection and pigment production is our hypothesis. So for why it is that we might see an earlier response rate. So we're kind of looking at what that profile is. Now when we look at HS or hidradenitis suppurativa, one of the things that we really want to be able to see is where are we moving these patients in the earlier stage of disease and how would that treatment, given that there isn't a really effective topical that's out there being used right now for patients with HS, where does that fit within the treatment paradigm that has emerged, where many of those patients are pretty quickly being moved to systemics even if they might have disease that might be able to be managed by an effective topical. So there, I think we see a little bit more blue sky for that. And what we're going to try and outline as we get into Q4 for vitiligo is a pretty clear understanding of both what we are seeing from the response profile, but also where we see the commercial opportunity and how we would see that profile fitting into the landscape. Todd Watanabe: Yes. And maybe I could just add one additional thought to Patrick's comments. And I think specifically in the HS case, and we saw this again with the APOLLO data today, the systemic therapies are not particularly effective in this disease. So even patients on systemic therapy are often going to need adjunctive treatment. And ZORYVE is really unique in the topical space that it can be safely used in combination with systemic therapies. And the disease is often occurring in intertriginous areas, the growing arm pits where doctors are much more reluctant about using topical steroids as well. So I think both early-stage disease, but also adjunctive to systemic therapy as we're seeing in psoriasis and atopic dermatitis. I think ZORYVE has a uniquely compelling profile for that use case as well. Operator: I'm showing no further questions at this time. I'll now turn it back to Frank for closing remarks. Todd Watanabe: Okay. Well, I will just thank everyone again for making time. I know it's a busy time of the year for you guys. So I appreciate you calling in and look forward to talking to you all in another quarter. Thanks. Bye-bye. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.