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Operator: Good day, and thank you for standing by. Welcome to the GE HealthCare First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. Now it's my pleasure to hand the conference over to Carolynne Borders. Please proceed. Carolynne Borders: Thanks, operator. Good morning, and welcome to GE HealthCare's First Quarter 2026 Earnings Call. I'm joined by our President and CEO, Peter Arduini; and Vice President and CFO, Jay Saccaro. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today's press release and in the presentation slides available on our website. During this call, we'll make forward-looking statements about our performance. These statements are based on how we see things today. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I'll turn the call over to Peter. Peter Arduini: Thanks, Carolynne. Good morning, and thank you for joining us. Let me start with our performance in the first quarter of 2026. We were pleased with the top line growth that came in at the high end of our expectations driven by our pharmaceutical diagnostics, advanced visualization solutions and imaging businesses. We also had strong services growth in the quarter. This all reflects disciplined commercial execution and accelerated customer adoption of new products designed to help clinicians enhance diagnostic accuracy and guide more precision treatment decisions across disease states. As we think about the capital equipment backdrop, we're seeing healthy customer demand globally with resilient procedure growth. Aligned to this, we saw solid performance in orders, book-to-bill and backlog. We delivered double-digit reported growth in EMEA and Rest of World, mid-single-digit growth in U.S. and China sales were in line with our expectations. However, we were disappointed by profit performance in the first quarter, which was impacted by a recall associated with a PDx supplier that has since been resolved. Later in the quarter, we began to see more significant increases in material costs, which we expect will continue for the remainder of the year. We remain confident in our ability to procure supply to meet customer demand. But given the inflationary environment, we're taking a prudent view and reducing our profit and free cash flow guidance for 2026. Slide 4 shows the inflation impacts to our profit guidance and the offsetting measures we've identified to mitigate. For background, the magnitude of specific input costs changed significantly as we move through the first quarter, primarily related to two dynamics, an approximate $100 million increase in the price of memory chips, which are critical components utilized in many of our products as well as an increase in oil and freight costs of approximately $100 million. Other inflation impacts are expected to total approximately $50 million with metals, such as tungsten as an example. Prior to any mitigation, the gross impact of these costs is approximately $250 million or $0.43 per share. We expect to offset more than half of the inflation impact in 2026 with price and cost actions. Taking a prudent view for the year, we are reducing our full year adjusted EPS guidance by $0.15 associated with the remaining inflation impact. Including this impact, we will still deliver mid- to high single-digit adjusted EPS growth. Now I'd like to highlight strategic accomplishments that we're advancing our growth strategy. In the first quarter in Precision Care, we advanced our pipeline of innovation with key milestones in CT and MR, our two largest revenue-generating modalities. Regulatory clearances in both the U.S. and Japan market inflection point for Photonova Spectra, our differentiated Photon Counting CT platform. Customer feedback about the image quality has been extremely positive, including the ultra-high resolution and soft tissue clarity in all modes of scanning. We're actively working with customers on site readiness, and building a strong pipeline for future sales. In MR, we received multiple FDA clearances for next-generation technologies, including a new 3T and reduced Helium platform and state-of-the-art AI-powered workflow solution. Aligned to typical imaging order conversion time lines, we expect revenue contribution from our key imaging NPIs to begin in the first half of 2027. In PDx, we saw growth across contrast media and radiopharmaceuticals, along with growth in our molecular imaging equipment. This is driven by an aging population, increased chronic diseases and demand for precision care globally. We're pleased to see Flyrcado continuing to ramp with a nearly 80% increase in doses since late January. We delivered over 390 doses for the week ended April 17. We're onboarding new customers, including high-volume sites, and we've seen an acceleration in the average number of doses that customers are ordering each week. We remain focused on delivering high-quality customer experience, while there will always be some week-to-week variability, we're encouraged by our trajectory. And this reinforces our confidence in our medium-term target of $500 million or more in annual revenue by 2028. growth is also accelerating, supported by the expanding use of disease-modifying Alzheimer's therapies that are driving increased demand for amyloid beta imaging. Looking to the future, one of the most significant research areas we've been focused on is developing our novel gadolinium free MRI contrast agents. If successful, this manganese-based agent would provide a differentiated alternative to Getelinium by addressing retention concerns and reducing reliance on rare developments. We see this as a significant opportunity to expand our role in the current $1.2 billion contrast MR market by overcoming key challenges for both patients and clinicians. We recently reached a meaningful clinical milestone with the first patient dosed in our Phase II and Phase III study. This innovation is under FDA Fast Track designation granted to drugs that address serious conditions and unmet needs and can accelerate regulatory review. If successful, both the combination trial and Fast Track designation would speed up the time to market. This milestone underscores both the urgency and the promise of our approach and reinforces our conviction that our innovation can significantly advance the MRI contrast plans game. In the area of growth acceleration, we delivered growth across PDx, ABS and imaging business with strong commercial execution. Our high-margin services business, the large driver of our recurring revenue also did well in the quarter. We also completed the acquisition of Intelerad in the first quarter. This advances our strategy to deliver a fully connected cloud-first enterprise imaging ecosystem that spans hospitals and outpatient settings. We're excited about the opportunity to grow our AI, cloud and software capabilities, leveraging our Intelerad platform. As we focus on continued business optimization, price and cost programs are a top priority as well as executing on our new wave of innovation that will not only drive revenue but also margin growth. Today, we announced that we're combining imaging and ABS to create a new segment, advanced imaging solutions led by Phil Rocklin. This change now moves us from 4 distinct segments to 3: AIS, PDx, and PCS, which will allow us to more effectively capitalize on our new wave of innovation, sharpen our disease state focus and accelerate growth. As health care becomes more precise, the need for advanced imaging to confidently diagnose and deliver therapy is increasingly important. There's also a growing demand for connected clinical workflows that drive real-time decisions and outcomes. Structural Heart and cardiology is a clear example. It's one of the fastest-growing areas in health care with a shift to less invasive image-guided therapies. At every stage of the patient journey, procedures depend on advanced imaging, spanning CT, ultrasound and real-time guidance in the cath lab. Having vertical ownership from investment decisions to integrated supply chain in the segment will better enable us to deliver differentiated technologies while streamlining our business and reducing costs, and we're excited about this next step on our growth path. And Phil has the right focus and expertise to drive this business forward. We also announced a new global markets region led by Katrina Trump that we believe will strengthen how commercial teams build and scale expertise across markets and bring the full portfolio to customers globally to maximize growth in enterprise accounts. Now I'll turn the call over to Jay to discuss financial results. Jay? James Saccaro: Thanks, Pete. Let's start with a high-level look at our financial performance for the first quarter on Slide 6. We delivered revenue of $5.1 billion, representing 2.9% organic growth year-over-year, coming in at the high end of our expectations. Healthy global demand drove double-digit reported revenue growth in EMEA and the Rest of World and mid-single-digit growth in the U.S. China revenue declined year-over-year, which was in line with our expectations and improved sequentially. On a reported basis, we had strong performance in product and service revenues at 7.3% and 7.5% growth, respectively. Our service business continues to be a key differentiator with growth driven by a healthy capture rate. Orders grew 1.1% following 10.3% growth in the year ago period. We delivered a solid book-to-bill at 1.07x, and we exited the quarter with a record backlog of $21.8 billion, up $1.2 billion year-over-year. We were disappointed with the adjusted EBIT margin of 13.5% and adjusted EPS of $0.99. Of note, adjusted EPS included approximately $0.16 of tariff impact. Lastly, our free cash flow was $112 million in the quarter. Looking more closely at margin performance on Slide 7. Adjusted EBIT margin was 13.5%, down approximately 150 basis points year-over-year. Recall that we expected to see the largest tariff impact for 2026 in the first quarter, given the timing of the 2025 policy changes. Year-over-year margin performance was also impacted by declines in PCS and the PDx supplier issue. Commercial execution driving increased volume, strategic pricing and contract settlements were tailwinds to margin in the quarter. Moving to segment performance, starting with Imaging on Slide 8. Organic revenue grew 3.8% year-over-year, with robust growth in the U.S. and EMEA, particularly in CT and X-ray. We're seeing strong customer demand for our CT product line, particularly with our Revolution vibe that is focused on the growing cardiac exam segment. EBIT performance benefited primarily from volume, but declined year-over-year due to tariff expenses. Excluding tariffs, margins would have been accretive year-over-year. Overall, we're well positioned to capture market demand with the introduction of differentiated new products, including Photonova Spectra. Turning to Advanced Visualization Solutions, on Slide 9, we delivered organic revenue growth of 4.4% year-over-year, with continued strong performance in the U.S. and EMEA, driven by new product adoption across the portfolio. EBIT margin increased by 120 basis points year-over-year, driven by volume and contract settlements, partially offset by tariffs. As we look ahead, we expect continued demand driven by current and future new products across cardiovascular surgery and ultrasound. Moving to Patient Care Solutions on Slide 10. Organic revenue declined 8.1% year-over-year, primarily attributed to select large monitoring installations more concentrated in the second half of the year. Total segment orders grew in the quarter, and we're expecting U.S. clearance for our new premium anesthesia product in the third quarter of this year. Segment EBIT margin declined 500 basis points year-over-year, primarily reflecting the decline in volume as well as tariff impacts. We're taking specific actions to improve PCS performance, focus on improving backlog conversion, increasing price and optimizing segment cost structure. Moving to Pharmaceutical Diagnostics on Slide 11. We delivered another strong quarter of organic revenue growth at 9.7%, driven by global strength in contrast media, continued price execution, and robust growth in our radiopharmaceutical portfolio. EBIT margin declined year-over-year primarily due to the discrete supplier issue, planned investments in our radiopharmaceutical pipeline and the Nihon Medi-Physics acquisition. Radiopharmaceutical adoption, including Flyrcado, is progressing well as evidenced by the dose acceleration from late January. Turning to our cash performance on Slide 12. We delivered free cash flow of $112 million, up $13 million year-over-year, supported by working capital improvements. We continue to execute on our capital allocation strategy, including the completion of the Intelerad acquisition, which we expect to strengthen our imaging portfolio and drive total company recurring revenue. In the first quarter, Intelerad's business performance was in line with the expectations we previously shared. We've repaid $500 million of debt in the first quarter. We also returned capital to shareholders through our dividend and the repurchase of approximately $100 million of our shares. Now turning to our outlook on Slide 13. We're maintaining our top line guidance of 3% to 4% organic sales growth, in line with the healthy customer demand globally and a good start to the year. We continue to factor in a cautious outlook on China and expect limited impact to revenue from the conflict in the Middle East. To note, the Middle East represents approximately 3% of total company revenue. Regarding foreign exchange impacts, while rates have been volatile, we currently anticipate an approximate 100 basis point benefit to revenues this year. Related to adjusted EBIT, as noted earlier, we expect approximately $250 million of gross inflation impact for the full year. We're taking price and cost actions that are expected to offset more than half of the impact, which will partially benefit this year with larger benefits in 2027. Given these dynamics, we are prudently reducing our profit outlook for 2026. We now expect adjusted EBIT margin to be in the range of 15.4% to 15.7%, reflecting expansion of 10 to 40 basis points year-over-year. We continue to expect tariff impact in 2026 to be lower than '25. Note that we do not expect a material benefit following the tariff policy changes announced earlier this year. We're also reducing our adjusted EPS guidance to a range of $4.80 to $5 per share, which represents approximately 5% to 9% growth year-over-year. In the wake of the current inflationary environment, we believe this is the right thing to do. With the change in profit outlook, we now expect free cash flow of approximately $1.6 billion in 2026. Intelerad acquisition is expected to have a minimal impact to adjusted EBIT margin and adjusted EPS in 2026. For the second quarter, we expect year-over-year organic revenue growth to be in the range of 3% to 4% and adjusted EPS performance to decline in the low single digits year-over-year. Note that we will provide a recasted financials for the new AIS segment with our second quarter 2026 reporting. With that, I'll turn the call back over to Pete. Pete? Peter Arduini: Thanks, Jay. Turning to Slide 14. This chart demonstrates the clear progress we're making to deliver on our new wave of innovation. The majority of our latest NPIs have moved from regulatory clearance to early commercial orders, which is an important step towards enabling more meaningful revenue beginning in 2027. You may recall, all of these innovations are differentiated because of a unique design or AI capabilities and have higher margins than our predicate products. Several of these time lines are earlier than expected, and we feel good about the team's high CD ratio and how we're tracking to deliver on our pipeline. In summary, we continue to view 2026 as a pivotal year with the strongest innovation cycle we've had in the past decade that we believe will accelerate revenue and margin growth. At the same time, we're working to manage through a dynamic macro environment with operational rigor. The fundamentals of the business remain strong. We're making meaningful progress advancing our precision care strategy and unlocking value for customers, patients and shareholders. With that, we'll open up the call for Q&A. Carolynne Borders: Thank you, Peter. I'd like to ask participants to please limit yourself to one question and one followup. Operator, can you please open the line? Operator: [Operator Instructions] Our first question is from the line of Vijay Kumar with Evercore ISI. Vijay Kumar: I guess my first one is on maybe when you look at the organic cadence. Back half does imply a step up. And when I look at your order growth and book-to-bill, it looks like your capital book-to-bill was well north of 1.1. Just talk about this back half revenue acceleration, just given you had some noise around PCS, would your orders are coming in well above what gets back half to be close to that mid-single range given we're starting the year at 3%? Peter Arduini: Vijay, thanks for the question. You're right that book-to-bill came in at 1.07 all in, and so if you strip things out, I think the equipment obviously doing better. Look, as I said in my prepared remarks, the overall capital equipment market is healthy. That's super critical, and we're doing well. We're winning at a higher rate. The U.S. market, particularly has strong procedures growth. And I've mentioned on the call that EMEA and the Rest of World is actually doing quite well. It was actually up double digits, which is very good to see. So mid-single U.S. and Rest of World at double digit as well as China kind of aligning to where we are. I think that, coupled with the products that we have that I just went through on the last page, the structure piece, which actually, in some ways, will help us be even more focused. It gives us much more technical and clinical focus specifically on these new products, like how do you differentiate our photon counting versus the other guys. So we feel quite good about that. And we're well positioned with this to continue to accelerate both orders and sales here as we go through the year. Jay, I don't know if you want to add anything else to do that? James Saccaro: Sure. Vijay, remember 1% orders growth in the first quarter against the 10% comp, really, really good start to the year, an illustrative of a healthy capital environment. The backlog sits at a record level. So we think from a plan standpoint, the year has shaped up on the top line consistent with what we originally expected. The other thing I would add is the key NPIs, some of the ones that we've seen in our ABS business, like Vivid Pioneer are performing very well. And we're also seeing some benefit in our area of imaging, too. So really good start on those. Those will support acceleration in the second half. And then the other thing is we are expecting some improvement in PCS in the second half attributable to some monitoring deals that are earmarked for delivery in the second half along with the new product. So really, that's the story as we look at the second half of the year. Vijay Kumar: Understood. And maybe, Jay, my second one on the inflation assumptions around EPS. Talk about the $250 million number that you quoted. What does it assume? Is it assuming current inflation trends? Does it have some cushion if things worsen? And how should we think about the cadence of that inflation impact rate? Obviously, you noted second quarter EPS would be down. Does it assume an outsized inflation impact and then it gets better in the back half? James Saccaro: Yes. So Vijay, just maybe taking a second on the overall guidance. No change to sales guidance, which we feel good about, as I mentioned earlier. The issue for us really relates to some dramatic changes to certain input costs that we saw during the first quarter of the year. And what it really comes down to is memory chips and then the geopolitical events impacting things like oil, freight and certain other commodity costs. What we have assumed for the rest of the year is that these commodity costs remain at elevated levels, the elevated levels they're at today, and we haven't included some level of cushion against that. And so we've included that as the working assumption in this guidance. We have offset measures in place. We talked about implementing price changes, but that's really primarily on new orders. We've talked about evaluating modes of transportation to impact freight exposure, and we are taking some measured cost actions. But the things like price will have a more prominent impact on the second half of this year and into next year than they do in the second quarter because a lot of our -- the sales that are represented in the second quarter as an example, are in the backlog today. I think we've taken a prudent approach here. We obviously are disappointed that we had to lower guidance. We don't like that at all, but it's the right thing to do under the circumstances. And I think the actions that we're putting in place will benefit more in the second half of the year, but then into next year as well. Operator: Our next question comes from the line of Joan Wuensch with Citi. Joanne Wuensch: Can you hear me okay? Peter Arduini: We can, Joan. Joanne Wuensch: Wonderful. I'm just trying to sort of pull apart the first quarter a little bit more, particularly in the Miss and PCS. And I'm just curious if you can detail that a little bit better? And how do you think about this on a go-forward basis? James Saccaro: Sure. So -- so listen, as we think about the first quarter relative to our expectations, the impact was really about a supplier quality issue we encountered in our PDx business. It was roughly $0.05 of impact. It came about late in the first quarter. It led to a write-off of some product, but also a sales shortfall or not for this issue, we would have achieved the quarter. So obviously, not pleased with the performance in the first quarter, but it was really isolated to this PDx supplier issue. PCS decline, but that was generally speaking, in line with our expectations. Pete, maybe you talk about PCS performance. Peter Arduini: Yes. I think, Joan, to your question, and I think Jay delineated. We had built in some cushion relative to what we expected PCS to do, and it was relatively to that area. And at that point, we weren't happy with how the results were. But just to reinforce the points we made on the call is, the two areas where a lot of the larger monitoring deals, which fundamentally that revenue carries a vast majority of the margin are more second half loaded. And so that puts more pressure on the first half from the margins on that. The second area is the new anesthesia product. It's really our first new premium anesthesia product in many, many years. I think it's going to be a very good product. Some customers are obviously waiting to kind of see that come out. We feel pretty good that the clearances and stuff will be on track for Q3. And as I mentioned, a little bit later in that period. So those are both orders and sales drivers. The backlog piece on the monitoring are deals that we have with well-established customers and they'll get executed. Having said that, look, I'm not pleased with the decline in this magnitude, and we're heavily focused on mitigation actions. Jay mentioned some of them for the business, but backlog conversion, pricing in this business, in particular, and we're looking at the overall structure. With PCS being more of a stand-alone segment really in the future, we have the opportunity to do more of a strategic assessment of the portfolio in all the parts as pieces. But ultimately, we'll address the underperformance. Operator: Our next question is from Travis Steed with Bank of America Securities. Travis Steed: First, I'd like to start out on Takato progress, almost double the run rate in April versus January. But so far from the $500 million target. So just curious how that trended over the last kind of 3 months and kind of where you see that business going forward? Peter Arduini: Yes, Travis, thanks for the question. Look, step by step here, I would say. It was a great quarter for the radiopharmaceutical team in general, but particularly for the molecule to your point, we're pleased with the acceleration. The ramp has gone pretty much in line with what we have thought. I think if you think about some of our previous discussions, the weekly volumes have continued to increase throughout the quarter. Really, as we thought, I think, reflecting the customer demand that's out there and just the way we see new customers versus existing customers adding on. We're also hearing more positive commentary from users, which is a really important part. This becomes kind of a network of users talking to other users. And so that buzz is out there. As we stated, the week ending April 17, we had 390 doses. We have about 31 now active CMOs. You may recall in the first quarter, we talked about the performance of those needed to improve. All of those are performing well, which sets us up for continued growth. And we're also expanding the customer base. I think that's -- the base has grown probably close to the same amount as the molecule growth during that same time period. So we're on track. Price is obviously holding as well. Clinically, the integration of the workflows is progressing. We talked about that in the past. I think the workflow is relative to cardiology and stuff are on track. So again, all in all, I feel quite good about where it's at. We've got still a lot of work in front of us. But as we mentioned, this gives us confidence here of what we've talked about, about $0.5 billion sales molecule by 2028. Travis Steed: Great. And maybe a follow-up question on China. You mentioned a cautious outlook on China kind of baked into the guidance. Curious what you're seeing there? If you're seeing any green shoots or things changing on the margin? And what all is kind of baked in from a market standpoint and from a competition standpoint? Peter Arduini: Yes. Look, China performance was in line with our expectations for Q1 and it improved sequentially, which is important because, obviously, in the previous quarters, it's been more challenged. We were intentional in setting a conscious outlook for '26 and still expect the China sales to be down year-over-year. But it's also important that we are seeing some level of green shoots here in the marketplace. I think, look, we aren't satisfied where the China performance is at this point in time. But as I mentioned, under Will's leadership and honestly, the market, we're starting to see some more promising commentary. And I'd say things like improving market predictability is super important. A few of our operational changes that the team has put in place have enabled us to be able to be more clear and accountable strengthening our commercial organization. We've done some things to optimize that with our distributor network, and we're seeing the benefit of that. Being more clinical, particularly in certain geographic areas has helped us out win at a higher rate and just be more nimble. So I think those are important aspects as well as we're getting better traction with our JV, which -- that we have a Sinopharm on DBPs in certain tenders. So Phil and I literally just came back, I think it's a week today from China where we met with customers and leaders and our team and had an opportunity to spend some time into the marketplace and talking. And I think relative to the acceptance of our products, the excitement about the pipeline coming and the changes that we're making. Again, it's still going to be a more challenged year, but I think we're starting to get more stabilization in the China market. Operator: And our next question is from Robbie Marcus with JPM. Robert Marcus: Great. Two for me. Maybe the first one, just to circle back on guidance, Jay. We've seen some negative revisions over the past few years. A lot of it has been from unintended global events. But how are you thinking about the amount of cushion you've put in here, especially given you've been reduced -- offsetting a lot of these costs the past few years. How much is legitimate offsets versus perhaps under investment? And how much cushion is there? James Saccaro: Sure. So Robbie, with this reduction, we've tried to provide adequate cushion in the guidance that we have and also adequate offsets in terms of pricing cost measures. I think importantly for us, you see about $0.23 of offsets that we're reflecting in our guidance. Now importantly, much of that is in Q3 and Q4 versus Q2, which is why you see a decline in earnings in Q2 before you start to see some acceleration in the back half of the year. But that's really related to when the mitigation actions were able to kick in. Now as it relates to underinvestment in the business, one thing we've been intensely focused on is ensuring that we have adequate R&D spending in place and also adequate commercial investments in place to support all of the great progress that we're making on the pipeline. So we've done all of that. But as far as discretionary spending areas outside of that, we're intensely focused on mitigating those and managing those areas. So I think the answer is, I believe we have adequate contingency and I believe that we're continuing to invest in the right way in the business. Peter Arduini: Yes. I think, Robbie, as we've said, look, our growth were set up well for the rest of the year. Look, we've taken this hard decision with some of these hyperinflation items, but now it's up from here. We're not counting on hope on these plans. We've got strong operational plans to make sure that we can do the reset and be able to actually move from here upward. Robert Marcus: Great. Maybe a quick follow-up. There are coming generics in the diagnostics business -- pharmaceutical diagnostics, sorry. It seems more like a 2027 issue than a '26 issue. How are you positioning and thinking about generic impact into the end of the year and into 2027? Are there any measures you could do to help mute any competitive impact and anything else we should be thinking about there? Peter Arduini: Robbie, look, we haven't seen any impact from any of the entrants at this point in time. Obviously, we take all competitors very seriously. And the reality of it is the market today is a generic market. There's branded generic products that are out there, but there's already 6, 7 different players within the marketplace. Customers look for a full SKU lineup. The more you mix SKUs, the more the probability of mistakes, resiliency in the supply chain, that product breadth and convenience, different sizes that integrate into injectors, things of that nature. So those are all of the different pieces that are out there. Obviously, to your point, we have contracting options about how we integrate products to fully offer the wide spectrum that an IDN needs and all of those things that we're constantly looking at. But just to be clear, at this point in time, we're not really seeing any impact from any new entrants into the marketplace. Robert Marcus: Peter, maybe if I could just ask a little clarification. I believe these are AB -- they're able to be switched at the pharmacy level versus branded generics. So does that change the strategy at all? Peter Arduini: No. I mean there's some different contracting positioning, but it also can mean that anybody within the group, any of the folks that are making products if they're challenged on delivery or that, that those products can be reasonably substituted. And so we deal with that today, right? If we were short or one of our competitors today, we're short, one of us could step in. And I think that dynamic we're dealing with today. So that would be a similar type of competitive issue or challenge that the team is used to dealing with. Operator: Our next question comes from David Roman with Goldman Sachs. David Roman: Maybe I'll start just on Photon Counting CT. Could you just elaborate a little bit further on the commercial strategy here? And maybe help us think through market segmentation especially in the context of your primary competitor here, I believe, having kind of a 2-tiered product and pricing structure? Peter Arduini: Yes, Dave, thanks for the question. I would first start out just to say with we're actually doing quite well in the CT market around the world without even having our Photon Counting system on the marketplace. And the question is why is that? Well, there is a growing need for CT of different types throughout the world. This product that we introduced just about a year ago is dedicated to cardiology and it's just taken off tremendously. It's actually one of the biggest drivers for what's taking place in Europe and international marketplaces. So we have allocated more dedicated resources and focus into the field into CT. Some of the changes we announced are about having more specialized reps, people that can go in and talk head-to-head clinical, technical and ultimately, productivity differences to customers. I think that's super important as opposed to having more of a generic discussion. We also are big believers that artificial intelligence breakthroughs are also going to change traditional CT. So we have a list of different things that are going to be coming out that are going to increase resolution and capabilities in our traditional CT range and will be significantly more cost-effective for someone who wants more resolution and maybe going to Photon Counting. So there's an interesting mix that's out there. All that being said, we're super excited about our Photon Counting approach. I think when customers look at our resolution, they look at our contrast capabilities in what's called spectral imaging or being able to see tissue differentiation, they're seeing a system that doesn't have trade-offs compared to maybe what's available in the market. You have this high-resolution all-in capability upfront that you don't have to make these trade-offs. So we're going to come in at the ultra-high end. There's a lot of customers who've been waiting for us for some time. Typically, this will start with the conversion of our installed base. It will then move to broader tenders on competitive targets. We just had the approval, as you know, at the end of March, beginning of April. We've got a solid funnel of opportunities over $100 million of that. And the way to think about this is that between you getting approval, it's many times 4 to 6 months that customers have to do the assessment, they have to look at. That then builds a bigger order funnel. And then it's 5 to 8 months after that, pending on the customer have the room ready or are they building out that the sales transfers take place. But I think we feel quite good about where we are with approvals, where we are builds and the timing to sales conversion. But the most important thing is we think we chose well on our technology approach. David Roman: That's very helpful perspective. And then maybe, Jay, just a follow-up here on some of the input cost dynamics. Could you maybe help us understand a little bit more detail just on the phasing and impact of some of these considerations do you cause? I guess I would have expected you to have some amount of raw material on hand right now given your inventory turns that would enable you to buffer kind of the impact in the immediate term and then potentially see the impact build throughout the year, but maybe help us break down a little bit the timing of some of the cost headwinds, what gets realized now? And then what's kind of just deferred given the natural dynamics in your business from the timing of acquisition raw material through final finished goods and sale? James Saccaro: Yes. Good comment, David. And really, as we think about the impact of these incremental inflationary costs, there was limited impact in the first quarter, if any, because of what we call FIFO rolling out in future quarters the impact of higher-priced raw materials. And so we saw very little impact in the first quarter. The second quarter is really the first quarter where we see a real impact from inflation. And some of it, the logistics attaches to our product at the very end in many cases. And so we see some of those more immediate impacts. And then with our faster flow items faster turn businesses, we're starting to see an impact in the second quarter. The largest impact will be in the third quarter in fourth quarter. But the good news for us is much of the offsets that we have in place start to benefit the second half of the year. So the $0.23, we're not really able to impact the second quarter in terms of those areas very much at all. But really, that benefits the second half of the year. So that's really the overview. Operator: Our next question comes from Larry Biegelsen with Wells Fargo. Larry Biegelsen: Jay, I wanted to start with Intelerad, and how that's impacting the guidance in 2026, particularly margins and interest expense? And I imagine the interest expense goes up starting in the second quarter. And I thought this was a relatively high-margin business. And do you expect the deal to be accretive to both sales -- organic sales growth and EPS next year? And I have one follow-up. James Saccaro: Sure. So first, just as a reminder, Intelerad really was about extending our cloud capabilities and outpatient networks and the efficiency of care teams and helping us deliver precision care for patients globally. So really excited about that transaction. And we were also very pleased to report closing it in the first quarter. So that came in, in line with our expectations, perhaps a little bit better. But overall, good start. And the momentum is continuing in a good way. We previously said double-digit sales growth is what we expect, and we expect to accelerate that a little bit over time. And we also talked about margin accretion. We talked about an EBITDA margin north of 30%. And so all of that is holding true. Of course, you have things like integration costs and so on. But in the first year, we're expecting this to be slightly dilutive, but we've kind of sort of covered that in the forecast as we add EBIT but then include the incremental interest expense. So what I would say is it's fairly neutral from a bottom line standpoint in the first year. As we move to 2027, we'll see a little bit of positive contribution on the bottom line, but then also as an accelerant to sales growth. So we're pleased with this one. I think the strategic logic of it as we closed it and now are studying it even further is more intact and the financial profile is continuing as we expected, which is just great to see. Larry Biegelsen: Jay, one follow-up maybe on the cadence. I think you've addressed sales, but on margins, in EPS in '26. Your comments on the call imply margins and EPS should be up pretty significantly in the second half of the year. And do you now expect gross margin to be down year-over-year because of inflation? James Saccaro: We do expect margins to improve in the second half of the year. A lot of that benefits from some acceleration in sales in the second half of the year, the new product contribution in the second half of the year. And then those self-help initiatives I described earlier, which benefit the second half of the year. So we will see a margin step up second half versus first half. Now I would say that we typically see that in normal years, but we will definitely see it this year. And then secondly, from a gross margin standpoint, I would say it's going to be relatively neutral year-over-year. A lot of the activities that we're putting in place will offset the inflation. And so relatively neutral year-over-year from a gross margin standpoint. Operator: Our next question comes from Matt Taylor with Jeffries. Matthew Taylor: I wanted to double-click on some of the commentary you made on the PDx, which had a good quarter. So good to see the progress of Flyrcado. I guess, could you help us understand what the gating factors are there to drive more production because it does seem like there's demand in the market? And I also wanted to ask about the MRI contrast agent. You mentioned some progress on that program. Could you talk about when that could actually launch? What's the time line to get through Phase II, Phase III? James Saccaro: Sure. Maybe I'll start on Flyrcado. We were really pleased with the progress on Flyrcado. The run rate -- the annual run rate went from roughly $25 million or so to $46 million in April, and we're continuing to work to accelerate that. Now as we've said historically, it's an equation that involves supply and our ability of customers to modify workflow to incorporate and sort of deliver doses at higher levels. We're incorporating new customers, but we also want them to climb ramp up from low levels to higher levels of dose utilization. And so it really comes down to continuing to manage the CMO network. We're intensely focused on very high levels of delivery rate, over 95% is our target. We'll continue to migrate and add some new CMOs, but also ensure the right delivery rate is in place. And then add new customers and ensure that they're comfortable ramping their own utilization of the product. But we were very pleased with the progress in the quarter. I think all of the positive feedback we're getting in terms of the benefits of this particular product are coming true. So it's a good start. Pete, do you want to talk about the other products? Peter Arduini: Yes. I'll just comment on Flyrcado as well. I think as we've talked about previously, customer reimbursement constructs, customers are getting that worked out both privately and through the health system structure, which is important. The workflows are, I think, our algorithm operationally, how we go to a customer and help them set up, that's definitely getting to be a more well-oiled machine. And then as Jay said, too, with the CMOs, they're how to make the product has improved. So those are all critical items. And so as we bring on more customers, the ability to scale from I'm doing 2 to 3 patients a day, so I'm doing 10 or 12, increases as we go out the year. And so we're optimistic about that. We still are going slow to go fast because again, we think this has a long-term potential being a $1 billion molecule. And so again, excited about how the team has been leading this and where we're doing going. So your second question you asked was about the new MRI imaging agent that we have in clinical studies. This is super exciting. I think if you follow the MRI imaging in general, you would say the future of imaging heavily hangs towards MRI. It's radiation-free, very friendly for children, older adults and the technology with things like air recon DL are moving from where it used to be 45, 50 minute exams down to 10 to 15. So the modality is going to continue to grow. Oil limitations has been the contrast agents available. Forever, it's been catalydium. Catalydium has been a great workhorse, but it has challenges. It has retention challenges in the body. It really can't be used with pediatrics. It comes from sources only one part of the world to rare earth element. And so it's been limiting about what one can do. And there's been other attempts that have been challenged over the years to come out with different agents, but we really think we've got a winner here. Obviously, we need to be able to make it through our studies successfully. We had a successful Phase I, which is where a lot of these products in the past have failed relative to tox studies and overall adverse events, but we've done quite well through Phase I. This is now in a Phase II, Phase III combined study, which is around dose optimization to image quality. And you might have seen some work that actually took place earlier at the Mayo Clinic that we feel very good about. This is a manganese-based product. There have been other folks that have worked on manganese in the past. I think the difference is all about your formulation which we have a very proprietary focused approach here that enables the molecule to be able to provide high-quality imaging comparable to GAD but be able to remove from the body in an effective way. That's really the key here. And obviously, if we're successful of achieving that bringing a proprietary first-to-market molecule into this market where there hasn't been anything in decades, we think is a really big opportunity. Not only to grow and obviously have a high-performing, highly profitable product but it really fundamentally changes how we think about how MRI imaging for vascular imaging can be done on all types of population. So this is super exciting. The fast track and the dueling speed up this a product like this that didn't have those capabilities might be out in the 2030 range with fast tracking and the combined studies, if successful, this could be a 2029 type molecule introduction to the marketplace. Operator: Our next question is from Ryan Zimmerman with BTIG. Ryan Zimmerman: Pete, with the changes in the organizational structure with imaging and AVS, you talked about the rationale for it to some degree. But I'm wondering how you think about the benefits of it? If there is increased business capture, does the growth profile of that business collectively change or move higher from what may have been maybe a mid-single digit to maybe the high end of the mid-single-digit range. I'm just wondering if you could kind of articulate how you think about the downstream implications of those changes from an order standpoint that we may see in kind of this new segment? Peter Arduini: Yes, Ryan, really good question. Look, as we thought about AIS at the highest level, it's all about what can we do to drive a higher growth profile organization. Yes, there will be some cost benefits that will help margin, but the #1 priority was that. The predicate model was realistically the model that Phil was running prior to this, which you may recall, ABS was taking ultrasound and image-guided solutions to put them together. And we saw an opportunity by putting them together on the way we articulate the technology story to customers to be winning at a higher level, candidly, by doing it that way. But on the back end, on the R&D side, finding new ways faster to come up with differentiated products. And fundamentally, AIS is a bigger version of that. So we would expect at the street level, starting rather quickly to be able to see us being able to bring solutions and articulate differentiated value faster with this model. But I think on the upstream side, meaning on the R&D side, when you think about a cardiac pathway or an oncology pathway, all the products needed to work together now fit into that AIS construct. And so as far as allocation of R&D dollars, faster moving to get something done, two less meetings to me to make a decision, all of that gets much more streamlined. And so that's -- we would expect we'll see some benefits in this year, but obviously, more benefits come in the following years as you start thinking about how you're building products and framing that to customers. Ryan Zimmerman: Yes. Understood. And then for Jay, cash -- free cash flow has ticked up a little bit versus last year. In the face of these inflationary pressures, you guys bought back shares, about $100 million or so. You have dividends. It's been a very balanced, I would say, capital deployment strategy thus far. Does your prioritization of capital deployment change in the face of some of these inflationary pressures, meaning more to share repurchases, less M&A? Just take us through kind of your thought process, I guess, Jay, as you think about what you do with that cash, again, in the face of some of these changing input costs and so forth? James Saccaro: Great. Thanks for the question. really good progress on cash flow in the quarter. I think we did a particularly nice job with respect to working capital balances. And this business generates a lot of cash, and so we have the opportunity to deploy it. We will first continue to invest in the business organically. To Robbie's question earlier around R&D levels and so on, we'll continue to ensure appropriate investment so that we can drive this business forward. We'll also do disciplined M&A. I think from our standpoint, the quarter was a great example of that, closing the Intelerad deal. That's a very good ROIC deal over time. It's strategically and economically accretive to the company. So that's exactly the kind of M&A we will continue to do. And then we will look to see when the shares sell off and we look at them relative to the intrinsic value, we will evaluate buyback. We felt very good about the buy that we did last quarter, and we did so because we feel very strongly about the long-term prospects of the business. As we think about some of the mechanisms we're putting in place now like pricing, which will benefit next year, like the new product momentum that will benefit next year, we feel very good about the share buyback program, and we'll look to continue to do that as a supplement to M&A. Operator: We'll now take our last question from Anthony Petrone of Mizuho. Anthony Petrone: Maybe one for Jay and then one for Peter and Jay. Just, Jay, on the tariff impact, you're calling out $90 million to $100 million quarterly at the margin, in the presentation material quarterly, it seems like that level is holding. So what do you actually have baked in there from a tariff impact for 2026? And if you do get a reimbursement decision later this year, do you get roughly $100 million back at the margin? And I'll have one quick follow-up on AIS. James Saccaro: Sure. So basically, we said tariff impact in 2026 will be less than 2025. So that's less than $250 million or so is what we expect to see. And based on the mitigation activities that we've put in place, the first quarter will be the biggest impact of the year, and that will trail down through the rest of the year. We have not seen windfall as a result of the IEPA Supreme Court ruling as those tariffs were replaced. And we've assumed those tariffs remain in effect for the rest of the year though there is a tariff impact for the rest of the year. So we've assumed that in the guidance that we've put forward. So that might be an opportunity. As far as refunds, we will be submitting as many companies will for refunds related to the tariffs that we paid last year. We're hopeful that we'll be successful in terms of recovering that. We haven't determined how we will report that or account for that in terms of adjusted EPS or anything like that. That's not included in the forecast that we put forth today. Anthony Petrone: And just on AIS, and I don't know if this is across the portfolio or in AI specifically. But when you think about AI-enabled platforms, you have Intelerad in there, it's coming in as a Software-as-a-Service model, but we count 7 AI-enabled assets across the portfolio at this point, various different programs. So will it all show up as Software-as-a-Service? What are the milestones we should look for, for AI-enabled capabilities? What does the economic model look like over time? Peter Arduini: Anthony, yes, great question. Look, I think a big part of our growth algorithm is really this combination of new wave of innovation. It's about better commercial execution, both on equipment as well as service. And you saw some of that throughout the call here in the first quarter. I think we're going to be able to highlight that and accelerate our growth here as we go through the year. Relative to AI, it comes in 2 flavors today. One is it's the AI inside. It's why things like Vivid Pioneer are growing at a very high rate right now because of 4, 5 algorithms that make this product better than its competition. So we get a higher price for it. We get multiple hundred points -- basis points improvement in margin, which is a combination of its cost, but it's really about its value. So that's really the first piece. All of those products that I had on the page in the deck all have embedded AI. Some of them have a couple of algorithms. Some of them had 4 or 5. And so that's piece one. The other part you hit on, which is, again, we're doing more and more, which is actually having SaaS-based capabilities for specific features. So part of our vision is to be able to sell the hardware, have it more standardized of what that feature set is and then have a wide menu of other SaaS cloud-enabled applications that customers can customize by that individual scanner or by their fleet. And so CT is kind of our first modality as well as ultrasound that leads in that. I think you're going to see more and more of that continue to grow. And we're in a good spot now. Back to Intelerad, why is that important? Because not only in outpatient, but an inpatient, the more that we integrate those tools, that will be the reading interface, not only for the diagnosis, but also, in many cases, deploying the AI tools. And that's all well thought through of how we continue to leverage that. So again, thanks for the question. Operator: Thank you. And this concludes our question-and-answer session. Please proceed with any closing remarks. Peter Arduini: Thanks for your interest in GE HealthCare. And again, we look forward to connecting and chatting with many, if not all of you here in some upcoming conferences. Thanks again. Operator: And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Good morning. My name is Madison, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Holdings Ltd. First Quarter 2026 Earnings Conference Call and Webcast. After the prepared remarks, we will open the call for your questions. Instructions will be given at that time. I will now turn the call over to Keith Alfred McCue. Please go ahead. Keith Alfred McCue: Thank you, Madison. Good morning, and welcome to RenaissanceRe Holdings Ltd.'s First Quarter Earnings Conference Call. Joining me today to discuss our results are Kevin Joseph O'Donnell, President and Chief Executive Officer; Robert Qutub, Executive Vice President and Chief Financial Officer; and David Edward Marra, Executive Vice President and Group Chief Underwriting Officer. To begin, some housekeeping matters. Discussion today will include forward-looking statements including new and updated expectations for our business and results of operations. It is important to note that actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes can be found in our SEC filings and our earnings release. During today's call, we will also present non-GAAP financial measures. Reconciliations to GAAP metrics and other information concerning non-GAAP measures may be found in our earnings release and financial supplement, which are available on our website at renre.com. And now, I would like to turn the call over to Kevin. Kevin? Kevin Joseph O'Donnell: Thanks, Keith. Good morning, everyone. We are proud of the quarter's results, which reflect the strength of the RenaissanceRe Holdings Ltd. business model and the value of our three drivers of profit. Once again this quarter, underwriting, fee and investment income all contributed meaningfully to strong operating income. This is gratifying as the balanced contribution is central to the resilience we have been building and advances our strategy of reducing earnings dependency on any single market condition or source of volatility. Before discussing the quarter in more detail, let me start with the broader backdrop. Geopolitical risk is elevated. Markets continue to adjust to a higher-for-longer rate environment and the macro environment remains increasingly fragmented, highly volatile and less predictable. Last year I said that our business is anti-correlated to this kind of environment and our results demonstrate that this remains true today. As the world becomes more uncertain and risk averse, the value of the protection we provide increases. Our business is to underwrite the volatility others seek to avoid. We manage it to reduce our customers' risk in exchange for strong returns to our shareholders. Ultimately, our strategy is to absorb volatility, manage it efficiently in the ordinary course, and produce results over time, recognizing occasional losses will occur. For the first quarter of 2026, we reported operating income of $591 million, a 22% annualized operating return on equity and operating earnings per share of $13.75. Tangible book value per share increased by 1.5% to $233.49. This reflects two influences: retained mark-to-market losses of $357 million and share repurchases of $353 million at a premium to book value. I will address the mark-to-market losses and share repurchases in a few minutes, but we view these as temporary drags on book value per share and believe they help create the conditions for continuing strong overall performance. Turning to our three drivers of profit, we will start with underwriting. We reported strong underwriting income of $589 million driven by excellent current accident year performance and favorable prior year development. We benefited from approximately $160 million of favorable reserve development with a proportionally larger contribution from Other Property. This reflects our proactive portfolio positioning and superior underwriting over the last several years. I want to highlight one accomplishment from the January 1 renewals that we alluded to last quarter. While rates were down low-teen percentages, our team did an excellent job positioning into a more competitive environment. As a result, top line in Property Cat this quarter stayed relatively flat excluding reinstatement premiums. Rates remain adequate and we took an above-market share of new business which demonstrates the strength of our franchise. As I wrote in our most recent shareholder letter, when rates are adequate, underwriters should be taking more risk—and we are. Meanwhile, our Casualty and Specialty adjusted combined ratio was 99.4%. This was consistent with our guidance of high 90s and supports our view that the portfolio performed as expected. David will provide more detail on our exposure to the war in the Middle East. In summary, we have limited exposure through lines narrowly designed to cover these risks, including War on Land and Marine War. I would not characterize our share in either of these markets as being outsized. Moving now to fee income, which performed equally well this quarter. We reported total fee income of approximately $94 million. Performance fees were the main driver of the upside, reflecting strong current year underwriting results and favorable prior year development. Capital Partners continues to be an important source of persistent and diversified earnings. It allows us to leverage our industry-leading underwriting franchise to generate capital-light fees. This complements the income we earn on our balance sheet, creating additional value from our underwriting business. That is another important source of resilience and remains a clear differentiator for RenaissanceRe Holdings Ltd., especially in markets where clients value scale, reliability and flexibility. Moving to retained net investment income, it was [inaudible] for the quarter. We have executed well in difficult investment markets; as a result, net investment income remains robust. This reflects the scale of our invested assets, the quality of the portfolio, and a rate environment that remains favorable. Fixed maturity, short term and private credit rates remained steady to higher during the quarter, which supported net investment income. Recent market moves allow us to extend duration and lock in at higher yields, which should continue to support earnings power over time. We reduced our gold position during the quarter by about half. We originally put that hedge in place to protect the portfolio against inflation and geopolitical risk, and it served that purpose well. As markets evolved, we chose to reduce the position, lock in gains and lower potential future volatility in the portfolio. Importantly, the position remained profitable both in the quarter and since inception. Let me spend a moment on the mark-to-market losses. The same market movements that pressure current period valuations also improve reinvestment yields and support future earnings power. So while book value takes a modest mark today, prospective earnings improve tomorrow. We view that trade-off as economically constructive. In addition, these losses are largely unrealized, so this is more of an issue of timing reflecting the quarter’s shift in the yield curve. The investment portfolio remains high quality and its underlying earnings capacity remains strong. Consequently, we remain comfortable with the overall credit quality of the underwriting securities. That is also true of our private credit portfolio. About 5% of our investment portfolio is in private credit. Our exceptional capital strength and high liquidity are the foundation for this measured allocation to private credit, which enhances our book yield due to the associated illiquidity premium. Robert will provide more color on our credit book in his comments. Shifting now to capital management where our approach remains unchanged. We have a consistent track record of strong earnings performance, excess capital and ample liquidity. That positions us to continue returning substantial capital to shareholders. And this quarter, we repurchased $353 million of our shares. We did so in a disciplined manner, allocating capital where we see favorable risk-adjusted returns. This includes allocating to our own shares when they trade at levels we consider compelling relative to intrinsic value and future earnings power. Since 2024, we have repurchased over 20% of our outstanding shares. This total is almost 11 million shares, or $2.7 billion, up until April 24. We did this at very attractive valuations, very close to current book value, which should boost returns to shareholders with minimal dilution. At the same time, we remain well capitalized to support our underwriting portfolio, our partners and future growth opportunities. Ultimately, capital management should support long-term growth in tangible book value per share and long-term value creation for shareholders. That remains the standard we apply. Looking ahead, the message is continuity, not change. The underwriting environment remains competitive, but rates remain adequate. Ultimately, our objective is to maximize long-term growth in tangible book value per share and operating earnings by preserving margin, constructing the right portfolio and allocating capital with discipline. That has been our approach through the cycle, and it remains our approach today. When we think about the balance of 2026, our outlook remains constructive. The underwriting portfolio is performing well and our earnings model continues to benefit from multiple diversified sources of income. With that, I will turn it over to Robert to discuss the financials in more detail and then to David to provide additional color on underwriting and renewals. Robert Qutub: Thanks, Kevin, and good morning to everyone. We delivered a strong start to 2026 in a quarter with both geopolitical and economic volatility. Our diversified earnings model continued to produce superior returns for shareholders. We generated operating earnings per share of $13.75 and an annualized operating return on equity of 22%. Annualized return on equity was 10.5%, which included $357 million of retained mark-to-market losses. Importantly, each of our drivers of profit contributed meaningfully in the quarter, providing a diversified and resilient earnings profile. There are a few numbers that will help demonstrate this. First, 15 points, which is the contribution from fee income and retained net investment income to our overall return on average common equity in the quarter. This provides a solid foundation of earnings each quarter that we then build upon with income from our underwriting business. Second, $589 million, which is the underwriting income we generated this quarter. This reflects disciplined risk selection and cycle management. And third, $353 million, which is the capital we returned to shareholders through share repurchases during the quarter. We continue to view our shares as attractive at current valuations and share repurchases remain an important part of our capital management strategy. Taking a step back, this performance is a continuation of the strong results we have been delivering over the last three years. In the last four quarters alone, we have delivered $2.5 billion of operating income with an operating return on average common equity of 24%. With such a strong base of earnings, we are better able to absorb volatility from a large event in any one quarter while continuing to grow shareholder value over time. Now, I would like to turn to a more detailed view of our three drivers of profit, starting with underwriting. Let me begin with the key point. Even as rates decline in some parts of the reinsurance market, our underwriting book remains highly profitable. In the first quarter, we delivered an adjusted combined ratio of 72%, reflecting disciplined underwriting and portfolio construction. We reported favorable development across both segments with most of it coming from Other Property where we fully retained it in our bottom line results. Property Catastrophe reported a current accident year loss ratio of 10.2% and an adjusted combined ratio of 19.2%. This reflected 11 percentage points of favorable development across a range of accident years. In Other Property, we had another excellent quarter, with a current accident year loss ratio of 55.5% and an adjusted combined ratio of 56.1%. This included 29 percentage points of favorable development, primarily from our non-cat attritional book. Casualty and Specialty remained in line with our expectations, with an adjusted combined ratio of 99.4%. Shifting to overall gross premiums written, which were $3.4 billion, down 16% from the comparable quarter, or 9% without reinstatement premiums. It is important to remember that our results last year included the California wildfires, which increased loss activity and drove most of the $340 million of reinstatement premiums in Q1 2025. After accounting for reinstatement premiums, Property Catastrophe gross written premiums were nearly flat. Other Property was down 7% and Casualty and Specialty was down 13%. David will discuss this in more detail, but these movements reflect deliberate portfolio shaping towards the most attractive classes of business. Property Catastrophe is generally our highest margin business. We have successfully found opportunities to deploy capital to grow selectively and help offset the impact of downward rate pressure. In Casualty and Specialty, we have continued to trim back exposure in general. We have also reduced on certain specialty classes like cyber, where rates have been under more pressure. Professional liability premiums were up in the quarter; however, this is not reflective of growth in the portfolio. It was driven by lower premium adjustments last year related to negative premium adjustments and a reclassification from professional liability to general casualty. Looking ahead to the second quarter, we expect Other Property net premiums earned of around $350 million and an attritional loss ratio in the mid-50s, and Casualty and Specialty net premiums earned of approximately $1.3 billion and an adjusted combined ratio in the high 90s. Turning now to fee income, we generated $94 million of fees, with management fees of $48 million and performance fees of $46 million. Performance fees were higher than our expectations due to a combination of strong underwriting results, favorable development and a one-time recognition of deferred performance fees related to a return of capital by DaVinci. Looking ahead to the second quarter, we expect management fees to be around $50 million and performance fees will vary by quarter, but should come in around $120 million for the year absent any large loss events or favorable development. Turning now to investments, retained net investment income was [inaudible]. This was down about 3% from the fourth quarter due to lower average interest rates in the first two months of the quarter. We recorded $350 million of retained mark-to-market losses in the quarter. About half of these are related to our fixed maturity portfolio and the other half related to equity losses, consistent with the volatility experienced in the broader market. While increased Treasury yields have a short-term negative impact, they also improve reinvestment yields which support our longer-term earnings power. During the quarter, we took advantage of financial market volatility to adjust the composition of our portfolio. First, we reduced our retained investment portfolio's exposure to gold from 5% to 2%. In doing so, we realized gains from a hedge that has performed well for us and has been profitable both in the quarter and since inception. Second, we increased our exposure to high-quality investment-grade corporate credit, where spreads and all-in yields offered attractive risk-adjusted returns, and at the same time reduced our exposure to shorter-term Treasuries. And third, through these allocation changes, we extended duration on the retained portfolio to 3.4 years from 3.0 years and increased the yield on the portfolio. In the second quarter, we expect retained net investment income to trend slightly up. Finally, I want to briefly address the private credit investments. Private credit assets are diversified across managers, sub-strategies, sectors, geographies and vintage years. We invest through institutional closed-end structures run by high-quality managers. We emphasize senior secured lending and other areas where structure, collateral and manager selectivity provide downside protection. Further, we have limited exposure to currently strained areas such as software or through BDCs. We believe current volatility provides opportunities to selectively increase our exposure to private credit. In summary, our investment portfolio performed well and we took advantage of market volatility to incrementally improve the investment portfolio. We believe these changes will improve expected net income on a growing invested asset base. Moving now to a few comments on tax and expenses. Our overall effective tax rate for our GAAP net income was 6%. We had a few one-off items which benefited the tax rate and we expect it will return to low double digits next quarter. As a reminder, although non-controlling interest results are included in pre-tax income, we are not taxed on the earnings that belong to our Capital Partners investors which reduces our GAAP effective tax rate. This quarter, we also benefited from the Bermuda substance-based tax credits. As you will recall, last year, we were able to realize 50% of the value; in 2026, we are able to recognize 75%. About two-thirds of the value is reflected in underwriting and had a 90 basis point impact on the combined ratio with the remainder in corporate expenses. Inclusive of the credits, our operating expense ratio for the quarter was 4.1%, up from 3.7% in the comparable quarter, or flat when you factor in the impact of reinstatement premiums in 2025. There were a few one-time reductions in the quarter, which pushed this ratio down, but looking ahead, we continue to expect our operating expense ratio to grow to 5% to 5.5% over the year as we continue to invest in the business. Let me close now with capital management, where our earnings strength and consistency continue to generate substantial capital. During the quarter, we repurchased 1.2 million shares for $353 million at an average price of $289 per share. And through April 24, we repurchased an additional $105 million of our shares for a year-to-date total of $458 million. We expect to continue our disciplined approach to capital management in 2026, first by seeking to deploy capital into desirable underwriting opportunities and second, by returning excess capital to our shareholders at attractive prices. In summary, I am pleased with our performance in the quarter. Each of our three drivers of profit continue to deliver strong results and demonstrate the benefits of our diversified earnings model. And with that, I will now turn the call over to David. David Edward Marra: Thanks, Robert, and good morning, everyone. In the first quarter, we delivered strong financial results across each of our drivers of profit and differentiated RenaissanceRe Holdings Ltd. in the market through superior underwriting execution. I could not be more pleased with the underwriters' performance. The team retained profitable business, grew selectively and maintained underwriting discipline with a focus on preserving margin. Rate adequacy across the portfolio remains attractive and should continue to support strong shareholder returns. At each renewal, our underwriting team has two objectives. First, deliver our market-leading value proposition to clients and brokers. That supports a durable pipeline of renewable business, first-call status and favorable signings that are resilient to competition. Second, construct the optimal underwriting portfolio across business segments to support each of our three drivers of profit and generate capital-efficient, attractive returns both in the current year and over time. Our underwriting team's excellent execution of both objectives continues to differentiate RenaissanceRe Holdings Ltd. We combine underwriting expertise, portfolio management and capital flexibility to identify the best opportunities. And we are able to convert those opportunities into signed business because of the value we bring to our clients. We support them consistently over the years, offer large lines, and lead market quotes, often when others will not. We transact with them holistically across products, geographies and balance sheets, and when they have claims, we differentiate with speed of payment and claims insights. This is why we are successful in securing the lines we target even when programs are oversubscribed. It is also why we have been able to capture more than our market share of new demand and continue to shape the portfolio toward more attractive risks. Our first quarter results demonstrate the continued efficacy of these actions. Our portfolio drove underwriting income of over $580 million supported by a strong current accident year loss ratio of 53 and favorable prior year development across both segments. Let me cover our segments in more detail starting with Property. As we discussed last quarter, the January 1 book saw Property Cat reinsurance rates down on average in the low teens for our portfolio. U.S. accounts were down closer to 10% and international and global accounts closer to 15%. At today's rates, and with favorable terms and conditions, Property Cat is still highly accretive with strong rate adequacy. We successfully deployed capital into this attractive market. We retained the majority of our portfolio and deployed $1 billion of new limit. This was a strong team effort and it demonstrates our ability to access high-quality opportunities in a competitive, but still very profitable market. As a result, gross written premiums in Property Catastrophe—our highest margin business—were roughly flat, only down 3% from Q1 2025 excluding reinstatement premiums. Specifically, we deployed additional limit by focusing on two main areas. First, we grew on accounts and layers with the most attractive margins, such as select California deals impacted by the wildfires and certain nationwide accounts. Second, we grew with several large U.S. clients where we captured new demand on business which remains highly rate adequate. Global accounts and international business experienced more rate pressure than the U.S. portfolio. These accounts remain attractive due to the diversified portfolios we maintain with them and the pipeline of renewable business they represent. We also saw opportunities in the retro market to purchase additional protection at attractive terms. Ceded rates were down high teens across our portfolio. We are a significant buyer of retrocessional protection and are a first call for purchasing opportunities, similar to our position in the inwards book. In addition, we upsized our Mona Lisa cat bond at significantly more attractive terms and conditions. Looking ahead, we are making good progress on the U.S. midyear renewals. We have already bound about half of our U.S. midyear portfolio; roughly half of that has been on private terms. The Florida market continues to benefit from strong pricing, reduced social inflation due to tort reform, and robust terms and conditions. As a result of this improved environment, policies at Citizens are at a record low. The shift from public to private markets benefits the entire distribution chain, including increasing demand for reinsurance. We grew in Florida through the Validus acquisition and organically in 2025. I feel confident in the current positioning of our portfolio and our ability to access profitable business on existing programs and new demand in Q2. In Other Property, we continue to shape the book to reduce peak exposure while preserving attractive margins. The business is performing well with strong current and prior year loss ratios, reflecting the quality of our underwriting decisions and our disciplined management of the book. Terms and conditions remain strong, but pricing is under more pressure. We are trimming exposure in the most pressured areas, and improving expected net profitability through ceded reinsurance. Turning to Casualty and Specialty, market conditions are a continuation of those experienced at January 1. We see ongoing rate increases in general liability, which are necessary in order to keep pace with loss trend, and we see increased competition in specialty and credit lines in response to recent profitability. We have been optimizing the Casualty and Specialty book through risk selection, portfolio mix and greater use of ceded reinsurance. Our team has done a fantastic job of underwriting our clients' business across the various classes they purchase. This is especially important for the Casualty and Specialty business, as it allows us to pick the best deals within each class and construct a more diversified portfolio. In general liability, we have reduced on deals which are most exposed to social inflation. Our exposure to this class is down 40% over the last two years, but premiums are down significantly less because of rate increases. In addition, we have been proactively shifting the portfolio mix to weight the best returning business, with specialty and credit now making up more than half of the portfolio. We have consistently used ceded reinsurance in the segment to manage risk and optimize returns, and at January 1, we found new attractive opportunities to increase these protections on long-tail lines of general and professional liability and specialty classes such as marine and energy. Today, we cede 20% of Casualty and Specialty premiums compared to 13% a year ago. As in Property, we see the entire market from an inwards and outwards perspective and are uniquely positioned to construct an optimal net portfolio. These actions are important examples of how we shape the portfolio. They allow us to stay on the right panels, preserve valuable options and enhance the overall quality of the book. Improved margins will take time to emerge, but at the same time, we continue to benefit from the investment income generated by float on casualty reserves. So even in a period when underwriting margins in Casualty remain tight, the business continues to support book value growth and shareholder returns. Before I close, I want to address the war in the Middle East. Based on what we know today, we do not believe the war will have a significant impact on our book for several reasons. First, we have low underwriting exposure to the region. Second, war is excluded from standard property policies. Finally, our potential exposure would come primarily from our specialty portfolios—specifically War on Land and Marine War—and we purchased retrocessional protection on these portfolios. War on Land is a line where property damage from war is explicitly covered, modeled and priced for. Some of the damaged hotels and refineries in the region have purchased this cover, but take-up rates and coverage limits are relatively small compared to property policies. Marine War coverage is included in most marine policies but can be canceled and repriced on 72 hours’ notice. We have detailed information on locations and vessels that have been hit, and we will continue to monitor developments closely as the war evolves. Stepping back, we continue to manage our underwriting portfolio to generate attractive returns even in a competitive market. We are growing where economics are attractive and reducing where they are not. That discipline supports all three of our drivers of profit. Property is contributing mostly through underwriting income and fee income, while Casualty and Specialty is contributing mostly through fee income and investment income. All of these factors support strong shareholder returns and sustainable earnings power. And with that, I will turn it back to Kevin. Kevin Joseph O'Donnell: Thanks, David. In closing, this was a strong quarter and another good example of the earnings power and resilience of our business. Each driver of profit performed well. Underwriting was especially strong, including excellent current accident year performance and significant favorable development. Fee income exceeded expectations. Net investment income remained robust, with stronger reinvestment economics supporting future earnings power. And we repurchased shares in a disciplined way while maintaining a strong capital and liquidity position. Taken together, this quarter demonstrates what RenaissanceRe Holdings Ltd. was built to do: generate attractive returns across environments by combining underwriting expertise, third-party capital management, and investment capability. Three diversified drivers of profit rather than any single one allow us to deliver more consistent earnings through the cycle than we could have produced even three years ago. The market remains competitive, but opportunities remain attractive. Most importantly, we remain focused on the same objectives that guide our decisions every quarter: growing earnings, compounding book value over time and creating long-term value for our shareholders. We will now open the call for questions. Operator: Thank you. And we will take our first question from Elyse Beth Greenspan with Wells Fargo. Elyse Beth Greenspan: Hi, thanks. Good morning. My first question is on the midyear renewals. I was hoping—I guess it is a couple parts. You said you bound around half of the U.S. book already. So I was hoping to get a sense of the pricing you saw on what has been bound, expectations on the remainder that will be bound between now and the midyears. And then are you observing any changes in demand across that renewal? David Edward Marra: Hey, Elyse, this is David. The Q2 that we have seen so far is pretty much a continuation of what we saw in Q1. In Q1, rates were down mid-teens as a portfolio, but that was split between closer to 10% for U.S. Cat and closer to 15% for international and global. We have seen that mostly continue. Into Q2, we are still seeing a lot of opportunities for private terms. If you recall last year in Q2, there was a lot of Florida business that we were able to access on private terms. What we are able to do with these early renewals is lock up our capacity early at terms better than the market, and the clients are able to fill out the placement from there. We are encouraged by how the team has been able to engage in that. New demand is actually higher than we thought at January 1. If you go back a little bit, we were saying $20 billion of new demand in 2024, $15 billion in 2025, and we thought $10 billion was our estimate for 2026. That is looking closer to $15 billion now, but we will not know until all the Q2s are done. We are seeing really good opportunities across the normal Q2s and the Florida book. That growth in demand, I would also add, is from a lot of core personal lines clients which are buying new reinsurance because they have growth in CIB and are keeping up their programs with inflation. So it is a really good combination for us to deploy capital into that. Elyse Beth Greenspan: Thanks. And then my second question, can you give us a sense of how much losses you booked for Iran in the quarter? And I am assuming that all stays within the Specialty and Casualty segment within the combined ratio there. And then would you expect to book additional losses in Q2? Kevin Joseph O'Donnell: Let me start there. As David mentioned, we are generally somewhat underexposed to the lines that are most exposed to the Iran war. We have good transparency on the ships that were hit and the other on-land targeted properties as well. Those are all reserved within our portfolio. Additionally, we are being cautious and thinking about the uncertainty from the ongoing war and being cautious about releasing IBNR within the Casualty and Specialty segment. The losses are within Specialty; they are within Marine, Marine Energy. It is fully reflected. If more happens in the second quarter, we will reflect that in the second quarter, but we feel good about where we are. It is really just a couple of points into the Casualty and Specialty segment, but it does not foreshadow what could be happening going forward. Elyse Beth Greenspan: Thank you. Operator: Thank you. And we will take our next question from Joshua David Shanker with Bank of America. Joshua David Shanker: Yes. Thank you for taking my question. In Robert's prepared remarks, he spoke about the operating expense ratio moving to somewhere around 5.5%. You said on the last conference call that you were talking 5 to 5.5%. You did 4.1% this quarter. I have a few questions. Number one, that is a lot of money—150 basis points in annual expenses. What are you investing in? And two, do you not get the offsetting tax benefit from the payroll tax adjustment? Is that not pushing that down at the same time you are guiding investors to think it is going to rise? Robert Qutub: Josh, thanks for the question. I did address it in the prepared comments, but let me expand. The 4.1% that you saw in the first quarter was down because of some one-time items that came through, typically nonrecurring in the first quarter. The core is probably closer to the mid-4s—maybe around 4.6%. Yes, we are investing in the business. Here is how I see it: 4.5% to 5% is a relatively low expense ratio relative to the industry. We feel good about that. That gives us the opportunity to invest in people and our platform to be able to operate at scale, and we will continue to operate at scale. Specifically, we are building out a new front office system for REMS that we have talked about before. These are significant investments and we expect to continue over time to grow. So, we need that operating expense base to be there. Yes, for expenses that we incur in Bermuda, we will get that tax credit, relative to the people and what we invest in non-people. We did reflect that whatever we are investing will come in as a small offset. And as I said, we expect to grow into this over the course of the year. It is gradual. Joshua David Shanker: So 5.5% is not your targeted 2026 expense ratio. You expect it to creep towards 5.5% through year-end? Robert Qutub: Five to five and a half. We have control over that in terms of how we spend it, but it will grow. Joshua David Shanker: And are these one-time expenses, or is this an investment in capabilities that will moderate in 2027, or do you think that is going to be the new normal? Robert Qutub: People are part of our run rate. When we build out a system in REMS, that is nonrecurring over time. Joshua David Shanker: Okay. Thank you very much. Operator: Thank you. And we will take our next question from Michael David Zaremski with BMO. Michael David Zaremski: Hey, great, thanks. Going back to the commentary about the Specialty segment, the net-to-gross kind of changing, it sounds like that is a permanent change, but there was no guidance change on the combined ratio in that segment. How should we think about it? Are you laying off more tail risk? I know that segment, especially on the marine side, had some cats in recent years, even though I do not know if cats are embedded within that high-90s guidance for that segment too. Thanks. David Edward Marra: Hey, Mike, this is David. I can address what we are doing from an underwriting perspective. In the Casualty and Specialty segment, we have used ceded reinsurance for many years. If you go back about ten years, we ceded about 28% to 30% of the book. So this is in the normal course of how we use ceded reinsurance to shape the portfolio. We see the whole market inwards and outwards, so we are able to make those trades and construct the portfolio with all that in mind. The types of ceded reinsurance that we have grown into have been more quota share on the long-tail book, and on the Marine and Energy book, we have bought more excess-of-loss with broader coverage. Those perform distinctly different roles. The quota share provides risk income in the short term, but it also provides protection if losses deteriorate. And on the energy side, it would provide some protection for events such as the Iran war to the extent that those might grow. It is an effective way to position the portfolio and that is what we are accomplishing now. We expect to continue to see opportunities throughout the year as capacity comes into the market and the year develops. Michael David Zaremski: Got it. That is helpful. Switching to the portfolio, Robert, you talked about some fairly material changes. At a high level, I just want to confirm—taking profits in gold puts additional assets into the fixed income bucket, which probably extended duration. So should we add an additional bump to the fixed income run rate from that reallocation? Or are there other moving parts we should think about? Robert Qutub: Thanks for the question. There was a lot going on in the portfolio, but when you break it down, it comes in three distinct buckets. One is the gold we reduced. As Kevin pointed out in his prepared comments, we knew that was going to be a good hedge. The value accreted to us faster, so we reduced the exposure. We still have a small piece of gold in our portfolio, which we think is a prudent allocation within our investment guidelines. Second, we focused on the structure of the portfolio holding in a higher-rate-for-longer environment. My comment about reducing short-term Treasuries that had a high yield and moving that out to investment-grade credit in a significant way allowed us to extend and lock it in; hence the duration increased. Therefore, we have higher credit quality and an impact to our new money yield that went from 4.8% to 5.1%. We view that as a good structure and a long-term position. Third, we wanted to clarify the importance of private credit to our investment portfolio. We feel good about it, and I think that is what I was trying to share. So if you break it down, it is really those three areas with an outcome of a little bit longer duration and overall a higher yield that you will start to see trending next quarter. Michael David Zaremski: And quickly, if you move further into private credit opportunistically, roughly what type of yields are you seeing? Robert Qutub: We do not share specific yields. We are capturing the liquidity premium that we get above investment-grade positions, which can range from 200 to 300 basis points. It is also hard to look at it as one number because we have direct lending, distressed and secondary, and they have different return profiles over time. They are all performing within our expectations, in some cases exceeding. Operator: And our next question comes from Andrew E. Andersen with Jefferies. Andrew E. Andersen: Hey, good morning. On the new demand at June, is that skewing towards more traditional layers versus aggregate covers? And of the aggregate business, what is the appetite to write that? David Edward Marra: The new demand—we prioritize the quality of the pricing, the quality of the overall risk and the quality of the buyer. We have seen demand come from sustained buyers, nationwide personal lines companies, which are a big core client base for us. There are some aggregate programs in there. Our view on aggregate is that there are good aggregates and bad aggregates. The aggregates placed in the market now and the ones that we write as part of our portfolio are well structured. They are attaching at the capital level, not the earnings level. They are also well priced, and the level of attritional losses is well understood by the market at this point. They make an attractive piece of the overall tower. Our approach to that new demand is to go to market on the middle and bottom end regardless of whether there is an aggregate program. We can secure our line there and then use efficient capital sources on the top end as well and provide that one-stop shop across the board, achieving attractive returns that meet the program for RenaissanceRe Holdings Ltd. shareholders. Andrew E. Andersen: Thanks. And on Other Property, can you talk about how durable the mid-50s attritional loss ratio is as competition increases on that line? David Edward Marra: The Other Property book has had really good performance. It has had several years of sustained rate increases and improvements in terms and conditions. Rate is coming under pressure, but terms and conditions are still holding, and we have seen favorable claims trends. With the current pressure on rates, we have shifted some of the capacity, taken some risk off the table, and found it better priced in the Cat book—mainly some Florida risk. We have confidence in continued sustained returns on the Other Property book, and we have options to manage through some of the softening. Robert Qutub: As I said in my prepared comments, mid-50s is where we feel comfortable given the mix of the portfolio. It will have some ups and downs based on large events that come through. Right now, mid-50s—about 55% plus or minus—is how I think about it. Andrew E. Andersen: Thank you. Operator: And our next question comes from Meyer Shields with KBW. Meyer Shields: Thanks so much. When we think about this year's pricing for Florida at midyear, is there any reduction in the provision for initial skepticism over how well the reforms were going to work? In other words, besides risk-adjusted pricing, is there another discount working its way into pricing, or is that not relevant? Kevin Joseph O'Donnell: We often talk in terms of risk-adjusted pricing. If we look back at our credit for the reforms when they were originally put into place, we have seen more tangible benefit from the reforms, which is coming into pricing. I would say that the overall economics within Florida are reducing on a comparable level to what we saw at January 1, and the portfolio is extremely well rated. We have good flexibility to leverage into the market. We are finding new opportunities to grow in Florida. To give you a sense of how much we like it—relative to David's comment between Other Property and Property Cat—right now Property Cat is returning, particularly in the Tri-County area, stronger returns than some of the Other Property, and we have made some shifts there. We like the portfolio. We have begun to give more recognition for the reforms, which I think is warranted, and we continue to think the market is highly accretive. Meyer Shields: And then a question for Robert. You gave guidance for fees in the second quarter, but the press release also noted some funds returned to some of your partners. Does that have an impact in future quarters’ management fees? Robert Qutub: To make sure I get the question correctly—you are talking about the capital return we had this year for the joint ventures, the $730 million. That is really a distribution. Does it affect this year's performance? No. We will keep in each of the vehicles the capital we need to deploy versus our current expectations. They had a good year in 2025; you can see the NCI was $900 million plus that we earned, and returning some of that back to the investors in those funds is a good thing. That was the bulk of it, the $700 million, and we are positioned well as we underwrite in 2026. Kevin Joseph O'Donnell: One thing I would add: the vehicles are about the same size this year as last year. This is really just returning earnings, and it is our normal process. We do it every year. Meyer Shields: Okay. Thanks so much. That helps. Operator: And our next question comes from Analyst with JPMorgan. Analyst: Hi, thank you. Most of my questions have been answered already. Sorry about that. I will drop off. Kevin Joseph O'Donnell: Sure. Operator: Thank you. And we will move next to Ryan Tunis with Cantor. Ryan Tunis: Thanks. Just one from me for Kevin. Kevin, I was hoping that you could remind us of the history of Ren in terms of appetite for writing for the domestic companies. I feel like at one point there were a good number, and then there were almost none. Given where the health of the market is today, how do you compare that relative history in terms of your willingness, not just to write in terms of size, but breadth of cedents? Kevin Joseph O'Donnell: I have been here almost thirty years and I have seen us participate in lots of different ways in the Florida market. We remain highly influential in the Florida market even today, although it is a much smaller percent of our overall premium. In the early 2000s and late 90s, about 30% of our premium came from Florida broadly, and we participated in a highly structured way over the years. Starting five to seven years ago, we decided to take more of our Florida risk coming through nationwide programs. We always had good participations on some of the larger programs and larger writers in Florida, and then selected more aggressively as we went through the stack of domestic companies. Right now, our participation remains split between some of the larger Florida companies, probably a little bit more breadth into the mid-tier companies, and a lot of exposure still coming from the nationwide. So it is a smaller percent of the portfolio, still large enough to drive the tail in our tail capital for the property cat portfolio for Southeast hurricane. It is a constantly evolving strategy in Florida, but it is one we know extremely well and we have all the levers to think about where best to take it: Other Property, nationwide, large domestics, small domestics. Operator: Thank you. And our next question comes from Tracy Benguigui with Wolfe Research. Tracy Benguigui: Thank you. Most of my questions were asked. I will just ask one. I was going through your proxy and your 2025 ROE target of 10.27% in the STI plan. It stood out given how far above you have been operating. It raises questions about potentially being in the long haul of pricing decreases, given it will take a lot for your ROE to fall to that level. But you convinced me that you could land at 15 just from NII and fees. Could you help us understand how you want investors to interpret this ROE target? Kevin Joseph O'Donnell: It is not a target. It is something used formulaically to produce a change in the slope of the curve in our compensation program. We try to be careful not to put it out there as a target. It is simply a formulaic input to a formula for long-term compensation. There is no perfect way for compensation to work for the types of risk we are taking, where casualty risks are stretched seven years and volatility from Property Cat does not always reflect the performance or quality of the underwriting. It is simply a good way for us to think about how to compensate employees over the long term. My compensation varies with the performance of the company, but more importantly, I am deeply invested in the company with a large holding and I am aligned with shareholders. One way to think about it is closer to cost of capital than a target for ROE, but it is not exactly that. It is a mechanism to change the slope of a compensation scheme. Tracy Benguigui: Got it. Thank you. Operator: Thank you. Our next question comes from Matthew Heimermann with Citi. Matthew Heimermann: Hey, good morning. Two quick questions. First, thinking about having fewer opportunities than you do quantum of capital, and recognizing you have repurchased all the shares you issued with Validus, I am curious whether inorganic corporate development is on the table as you think about the outlook. And if so, given what you have grown into, what would be additive? Kevin Joseph O'Donnell: We are well positioned to think about inorganic growth, having fully integrated our last acquisition, Validus. Nothing has changed. If we see something that advances our strategy and is financially actionable, we would take a look and be able to execute. We feel like we are a complete company with each of the components we need to continue to be successful. If something becomes available, I think we would be on the list for people to call, but we are focused on executing the strategy that we have and we see inorganic growth as an accelerant, not a change. Matthew Heimermann: Following up on the complete platform comment, is it unreasonable to think about business development that might historically have taken place in traditional M&A terms occurring more in dedicated third-party capital solutions? Kevin Joseph O'Donnell: We are always looking at adding different capital to our franchise if it serves our customers. I do not think of that necessarily as inorganic growth. If we start a vehicle or bring a new structure online, that is fundamental to our strategy, not something I would think of as inorganic even if it is a strategy that we do not otherwise attack today. Matthew Heimermann: That is fair. For clarification, I was thinking about it more in terms of maybe there is a book of business at a subscale participant and buying an entity does not make sense, but solving for both parties with additional off-balance sheet capital could make the difference. Kevin Joseph O'Donnell: We can do that. Often that type of structure is a renewal rights structure if it is a takeout from an existing book, and that is something we are comfortable doing. Those are all things that we look at. On some of the more production-focused stuff, the multiples still remain quite high though. Matthew Heimermann: One clarifier—regarding the $15 billion of potential incremental demand at midyear, can you remind us relative to what, just to put it in underlying exposure growth terms? David Edward Marra: The $15 billion we referenced—moving from $10 billion to $15 billion—is for U.S. Cat limit. That is limit primarily exposed to U.S. Cat buyers and U.S. Cat exposure. We had $20 billion a couple of years ago, $15 billion last year, and it is between $10 billion to $15 billion this year. Kevin Joseph O'Donnell: If you use a similar rate online for that relative to the rest, that is a good way to think about the incremental exposure growth. Operator: Thank you. Our next question comes from Alex Scott with Barclays. Alex Scott: Hi. First one I had is on some of the comments you are making around the reduced exposure—over 40% exposure reduction to the most social-inflation-impacted parts of casualty. Could you extrapolate on what you are seeing there? What is preventing enough rate coming through so that it becomes attractive at some point? How far away are we from that? And are any initiatives in states other than Florida working? Would love to hear the thoughts behind the reduction and whether at some point that could become a growth area again. David Edward Marra: Over the last 24 months, the market has recognized that social inflation, and inflation in general in claims, has accelerated. That is when rates started going up. Ten to twelve percent is our estimated range for loss trend, but that will vary by class and subclass. Insurers are getting rate—sometimes above that, sometimes around that. The key is trend is cumulative and that rate has to keep going or we will see slippage in loss ratios in the casualty space. We are happy with where the business is headed; insurers are doing the right things. Rate is the easiest way to measure that. Other important areas are investments in claims handling. The plaintiffs’ bar has been highly successful. Insurers are now investing in the right data and technology, coordinating through the towers better, and making this a C-suite issue. It will take a long time for the investments to come through the numbers because of how these claims develop. We are watching that closely. The third lever for us is optimizing our own portfolio—deciding in an inflationary environment which deals we want to be on and which we do not. We have been reducing on deals most exposed to social inflation—lower layers, structures covering parts of the business most at risk, or where an insurer is not making the right adjustments in claims handling. Going forward, the business is on the right track. We have a substantial and leadership position and are well positioned to grow if we see margins turning around. But given the length of time for margins to emerge, we are going to be cautious for now. Alex Scott: Got it. That makes sense. Then the growth opportunity with some of the large cedents and some nationwide contracts—could you give a little more color on the opportunity? Why are you finding that more rate adequate? And should we think about mix shift—convective storm versus hurricane risk? David Edward Marra: Stepping back, we deployed $1 billion of limit in Q1 into the market. That is the easiest metric. There have been some rate decreases, so rates are roughly flat for us, rather than showing the decreases in the market. Rate adequacy overall in U.S. Cat is still highly adequate, coming off the highs of the best markets we have seen in a generation. We are comfortable with returns in U.S. Cat. Not every Cat deal is created equal—by layer or client. Our goal is to underwrite each deal and client, ensure we have confidence in our independent view of risk, and then act. We see a wide dispersion between the best and worst deals. The team has done a great job not only recognizing where the best deals are, but also using client relationships to lock up lines on those deals early. That is a differentiator and supports deploying capital into a high-margin business that will continue to impact returns going forward. Operator: And our next question comes from David Kenneth Motemaden with Evercore. David Kenneth Motemaden: Hey, thanks for squeezing me in. Just a quick one on Casualty and Specialty, on the accident year loss ratio. If I back out the Iran losses, it looks like the loss ratio deteriorated by 120 basis points year on year, and that is above where it has been running recently. Could you elaborate on what was driving that underlying movement? Robert Qutub: If you go back and compare to last year’s first quarter, comparisons are noisy because of the wildfires and we did take some specialty losses there which would have elevated the current accident year loss ratio. As Kevin said, we printed a current accident year in the high 90s for the segment, but that included a couple of points related to the Iran war going on right now. That is a better starting point before you get events that would drive it up. Kevin Joseph O'Donnell: We are not seeing an uptick in our loss ratio other than adding a couple of points for Iran. Not sure about the reconciliation you are doing, but that is not part of our dialogue in managing the book right now. David Kenneth Motemaden: Got it. Thank you. And maybe just quickly—an update on how you think PMLs will shape up as we go through the midyear renewals? I think you had talked about flat for Southeast wind. Is that still the case, or a little higher now given more opportunities and more demand? Kevin Joseph O'Donnell: As David mentioned, we are deploying a bit more capacity into the market. That will push up our exposure for Southeast hurricane a bit. If I were giving 10,000-foot guidance, I would say relatively flat, biased to a little more exposure, but it is not going to change the overall profile of the risk we are taking as an organization. David Kenneth Motemaden: Great. Thank you. Operator: Thank you. This concludes our question and answer session. I will now turn the meeting back to Kevin Joseph O'Donnell for any closing remarks. Kevin Joseph O'Donnell: Thank you for joining the call. We are proud of the results we achieved this quarter, feel like the book is in great position, and we look forward to talking to you next quarter. Thank you. Operator: This concludes the RenaissanceRe Holdings Ltd. First Quarter 2026 Earnings Call and Webcast. Disconnect your line at this time, and have a wonderful day.
Operator: Welcome to the Regeneron Pharmaceuticals First Quarter 2026 Earnings Conference Call. My name is Kevin, and I'll be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Ryan Crowe, Senior Vice President, Investor Relations. You may begin. Ryan Crowe: Thank you, Kevin. Good morning, good afternoon and good evening to everyone listening around the world. Thank you for your interest in Regeneron and welcome to our first quarter 2026 earnings conference call. An archived and transcript of this call will be available on the Regeneron Investor Relations website shortly after our call concludes. Joining me on today's call are Dr. Leonard Schleifer, Board Co-Chair, Co-Founder, President and Chief Executive Officer; Dr. George Yancopoulos, Board Co-Chair, Co-Founder, President and Chief Scientific Officer; Marion McCourt, Executive Vice President of Commercial; and Chris Fenimore, Executive Vice President and Chief Financial Officer. After our prepared remarks, the remaining time will be available for Q&A. I would like to remind you that remarks made on today's call may include forward-looking statements about Regeneron. Such statements may include, but are not limited to, those related to Regeneron and its products and business, financial forecast and guidance, development programs and related anticipated milestones, collaborations, finances, regulatory matters, payer coverage and reimbursement changes to drug pricing regulations and requirements and our drug pricing strategy, intellectual property, pending litigation and other proceedings and competition. Each forward-looking statement is subject to risks and uncertainties that could cause actual results and events to differ materially from those projected in that statement. A more complete description of these and other material risks can be found in Regeneron's filings with the United States Securities and Exchange Commission, including its Form 10-Q for the quarter ended March 31, 2026, which was filed with the SEC this morning. Regeneron does not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, please note that GAAP and non-GAAP financial measures will be discussed on today's call. Information regarding our use of non-GAAP financial measures and a reconciliation of those measures to GAAP is available on our quarterly results press release and corporate presentation, both of which can be found on the Regeneron Investor Relations website. Once our call concludes, the IR team will be available to answer any further questions. With that, let me turn the call over to our President and Chief Executive Officer, Dr. Leonard Schleifer. Len? Leonard Schleifer: Thanks, Ryan. Thanks to everyone for joining today's call. We were pleased with Regeneron's performance to start 2026, highlighted by strong commercial execution across our key growth products, continued pipeline progress, a disciplined approach to capital allocation and our agreement with the U.S. government to lower drug prices for American patients while preserving innovation. Starting with the financials. We delivered double-digit growth across both revenues and earnings. Total revenues increased 19% compared to the first quarter of 2025 and non-GAAP earnings per share increased 15% demonstrating our ability to deliver strong operating performance while continuing to invest in our science and long-term growth opportunities. Global DUPIXENT net sales increased 31% on a constant currency basis to $4.9 billion in the quarter. Growth was broad-based and driven by continued strong demand across multiple approved indications and geographies, reinforcing DUPIXENT's position as the foundation of our immunology franchise. We also continue to advance our efforts with next-generation therapeutic approaches to strengthen our leadership position in inflammation and immunology. EYLEA HD U.S. net product sales increased 52% year-over-year to $468 million. We continue to see encouraging physician adoption of EYLEA HD, reflecting confidence in its clinical profile and dosing flexibility. We resubmitted an application seeking FDA approval for filing -- for filling of the EYLEA HD prefilled syringe at Catalent Indiana, where the FDA has recently conducted a site reinspection. In addition, the FDA did not act by the April 2026 PDUFA date for the company's regulatory application for a second contract manufacturer for the PFS. Therefore, this application remains pending. Regeneron and both third-party filling manufacturers are working closely with the FDA to resolve all outstanding issues and we anticipate a regulatory decision on one or both applications during this quarter. In oncology, global Libtayo product sales grew 54% to $438 million, driven by continued uptake in advanced cutaneous squamous cell carcinoma and advanced non-small cell lung cancer as well as early contributions from the adjuvant CSCC indication, which received FDA approval in the fourth quarter of 2025. Turning briefly to our pipeline before George provides more details in his remarks, we've continued to make meaningful progress across multiple therapeutic areas so far in 2026. Last week, we received FDA approval of Otarmeni for genetic hearing loss, marking an important milestone for patients with this ultra-rare condition, and we have committed to offering this product for free. While this may seem like an unconventional decision, we believe it's the right one for Regeneron, and it reflects the ethos that we live by, pushing the boundaries of science to benefit humanity. Moving to other advances in our pipeline. We presented positive Phase III data for cemdisiran, our investigational siRNA that targets C5 in generalized myasthenia gravis, which demonstrated a differentiated efficacy, safety and convenience profile relative to approved myasthenia gravis therapies. We submitted a new application utilizing a priority review voucher and anticipate an FDA decision in the fourth quarter. In metabolic disease, we enhance or announced positive Phase III data in China for olatorepatide, our in-licensed GLP/GIP receptor agonist with full data expected to be presented by Hansoh later this year. DUPIXENT achieved multiple regulatory milestones, expanding the eligible patient population to younger age groups and to new diseases. In addition, the FDA accepted our biologics license application for garetosmab and granted priority review with the decision in August, representing another important step forward for our rare disease portfolio. Briefly on capital allocation. We continue to take an approach that balances internal investment which we believe offers the greatest long-term return for shareholders with direct return of capital through share repurchases and dividends as well as business development. In support of that approach our Board authorized a new $3 billion share repurchase program, reflecting confidence in our business and financial position. We also recently entered into strategic collaborations with Telix and TriNetX. Finally, last week, we entered into a Most Favored Nation pricing agreement with the United States government, achieving our shared goals of ensuring timely and affordable access to groundbreaking medical advancements for [ Medicare ] patients, maintaining the United States leadership in biotechnology, innovation and manufacturing and addressing the imbalance in the distribution of cost for medical innovation, which we have long argued has placed a disproportionate burden on American patients. In closing, we've made so far in -- the progress we've made so far in 2026 reflects the strength of our science and execution and sets a solid foundation for an exciting remainder of the year. With that, I'll turn the call over to George to discuss our R&D progress in more detail. George Yancopoulos: Thanks, Len. I'll start with our differentiated approach to treating complement-mediated diseases, which was highlighted last week at our latest Regeneron roundtable investor event. Our core strategy is to deploy customized approaches using an siRNA, an antibody or a combination approach, depending on the level and durability of complement inhibition required for each disease. For example, it appears that in generalized myasthenia gravis or GMG, the partial blockade with the C5 siRNA alone delivers optimal efficacy, safety and convenience. While in PNH, complete blockade requiring a combination of the siRNA with our C5 antibody is required to optimize efficacy. For myasthenia gravis, we presented results from the Phase III NIMBLE trial at the American Academy of Neurology Conference, which were also simultaneously published in The Lancet. Cemdisiran, our investigational C5 siRNA as monotherapy -- as monotherapy, met the primary and all key secondary endpoints with subcutaneous delivery every 12 weeks delivering a 2.3 point placebo-adjusted improvement in the MG-ADL endpoint at week 24. In registrational clinical trials for the leading approved C5 inhibitors, which are administered as large volume intravenous infusions dosed every 2 weeks or every 8 weeks, placebo adjusted improvements in the same MG-ADL endpoints have ranged from 1.6 to 1.9 points at similar time points. For cemdisiran, clinically meaningful efficacy was demonstrated by week 2. Moreover, these improvements deepened over time and were sustained through week 24 with no indication of waning efficacy between doses. The totality of the data, including mostly mild to moderate adverse events support a compelling profile for cemdisiran as a stand-alone quarterly therapy for this disease. These data have been submitted to the FDA, and we expect a regulatory decision in the fourth quarter of this year. In PNH, our Phase III lead-in results reinforce the requirement for the combination of cemdisiran plus pozelimab, our C5 antibody, to deliver complete and sustained disease control, lead-in results suggest that our combination will provide best-in-class control based on LDH measures, and that patients who are uncontrolled on ravulizumab can largely be controlled when switched to our combination. Enrollment in the registrational enabling cohort of the Phase III study is now complete and results are expected late in the fourth quarter of this year. Additionally, in PNH and as part of our ongoing complement strategy, we recently initiated a first-in-human study evaluating siRNA that targets complement factor B. This approach is initially intended for the 20% to 30% of patients who, despite optimal C5 therapy remain anemic due to extravascular hemolysis but also has the potential to expand to a broader PNH population. If successful, siRNA targeting of CFB could overcome the limitations associated with current CFB inhibitors, which require daily dosing and carry the risk of catastrophic hemolysis if doses are missed. In ophthalmology, our C5 approach in Geographic Atrophy is on track to deliver interim data from the exploratory cohort of our Phase III study in the fourth quarter of this year, which will help inform our pivotal strategy. As a reminder, we are evaluating cemdisiran with or without pozelimab administered systemically with the goal of slowing the growth rate of GA lesions while avoiding ocular safety issues that have been observed with certain approved intravitreal therapies. However, to ensure that we have optionality depending on what we learned clinically, we have also recently begun clinical development of an intravitreal formulation of pozelimab, and we'll also follow up with a co-formulation of pozelimab with aflibercept since some of the patients also developed wet AMD while being treated for their GA. Now turning to immunology and inflammation and starting with DUPIXENT. In the United States, DUPIXENT was recently approved as the first and only medicine for allergic fungal rhinosinusitis, or AFRS in adults and children 6 years and older. AFRS is a specific type of chronic rhinosinusitis with nasal polyps that more often require surgery and is associated with higher rates of postoperative recurrence. DUPIXENT was also approved in the United States and Europe as the first targeted medicine for children 2 to 11 years of age with chronic spontaneous urticaria, expanding the eligible patient population beyond adolescents and adults. This approval reinforces the expanding role of DUPIXENT across diseases driven in large part by type 2 inflammation and across a broad range of ages. Regarding our efforts to develop next-generation approaches to DUPIXENT pathway, we have previously disclosed that we have developed innovative VelocImmune derived fully human, long-acting antibodies and bispecifics that target the IL-4 receptor itself as does DUPI as well as the IL-13 and IL-4 cytokines that act through this receptor. We are on track to initiate a first-in-human trial for our IL-13 antibody by the middle of this year, both in healthy volunteers and in patients with atopic dermatitis, with plans to execute an expedited path to regulatory approvals. Beyond DUPIXENT life cycle opportunities, we continue to advance our next wave of immunology and inflammation programs. Our goal is to keep exploring genetically validated targets that have the potential to become future pipeline and product opportunities. We're initiating a first-in-human study of an antibody to a target identified by the Regeneron Genetic Center as being genetically linked to several diseases such as lupus, Sjogren and primary biliary cholangitis. We're also continuing to evaluate the best path forward across respiratory and sinonasal diseases for Itepekimab, our interleukin-33 antibody. In chronic rhinosinusitis with nasal polyp, our Phase III studies are ongoing with the results expected in 2027. Regarding COPD, we, Sanofi and global regulators continue to discuss a potential third Phase III study, though no decision has been made on whether to move forward. Turning to oncology. On fianlimab, our LAG-3 antibody in combination with Libtayo. Our Phase III study in metastatic melanoma remains on track with results expected later in the second quarter of this year. The primary analysis of progression-free survival will now consider all patients enrolled in the study with a minimum follow-up of 6 months. In adjuvant melanoma, the study continues following the first interim analysis, with the second interim analysis and if necessary, a final analysis, both expected in the second half of this year. We also continue to advance pivotal studies for Lynozyfic in multiple myeloma and premalignant conditions and expect to have results by early 2027 from our study in multiple myeloma patients that have received at least one prior line of therapy as well as MRD negativity results in 2028 from our study in first-line myeloma patients who are ineligible for stem cell transplant. Our first-line study for odronextamab in first-line follicular lymphoma is fully enrolled. This is the only study exploring a bispecific as monotherapy versus the current standard of care, which is RCHOP, across this bispecific arena. Moving to anti-coagulation. We initiated additional factor XI registrational studies in stroke prevention in patients with atrial fibrillation who are not candidates for direct oral anticoagulants as well as cancer-associated venous thromboembolism. Additional studies in peripheral arterial disease, peripherally inserted central catheter-associated thrombosis, secondary stroke prevention as well as [indiscernible] in DOAC eligible patients are all expected to commence this year. Initial registrational studies from studies in venous thromboembolism prevention following new replacement surgery are expected in the first quarter of 2027. Turning to obesity. In March, Hansoh reported positive Phase II results for olatorepatide, or in-licensed GLP/GIP agonist in Chinese patients with obesity, which compared favorably cross-trial to a previous Chinese study of tirzepatide for obesity. In this is randomized double-blind placebo-controlled trials of 604 adults across 33 sites, olatorepatide met its co-primary endpoints and delivered up to 19% mean body weight loss at week 48. We are also encouraged by the safety results, in particular, the gastrointestinal tolerability profile. Hansoh is planning on presenting these promising results at a medical meeting later this year. Building on this momentum, our olatorepatide Phase II study in obesity is enrolling rapidly and later this year, we expect to initiate 2 global Phase III programs, one in patients with obesity and in other patients with obesity, type 2 diabetes. In parallel, our work on the olatorepatide Praluent combination continues with our first clinical study of weekly Praluent initiating shortly. In rare diseases, Len already mentioned the FDA approval of Otarmeni formerly known as DB-OTO. This was an incredibly meaningful moment for the company as is not only our first gene therapy approval but one of the most striking successes with gene therapy in history, restoring for this first time a sensory function in humans. As published in the New England Journal of Medicine, nearly half the children who are born profoundly deaf were able to regain hearing at normal levels within one year of treatment. The mother of one of these children recently told the President of the United States, a heartwarming story, of how her son is now able to hear her say that she loved him. We decided to make Otarmeni free in the United States because we believe it was the right thing to do for these families. We hope this highlights and reminds the world that it is the biopharma industry, which is frequently viewed so negatively that is often responsible for delivering such medical miracles to humanity. Regeneron is a different type of company that attracts the best and the brightest to join our fight against disease because we have a heart and a soul as well as a mission and a willingness to play the long game. Another rare disease that we have been studying for many years is Fibrodysplasia Ossificans Progressiva, or FOP, a devastating condition in which muscle and soft tissues are progressively invaded and replaced by abnormal bone formation. The FDA has accepted for priority review the BLA for garetosmab or [ active-NAD ] blocking antibody with a PDUFA date in August of 2026. If approved, garetosmab will become the first and only available treatment shown to prevent abnormal bone formation in FOP patients. In genetic medicines, our first-in-human trials testing siRNAs targeting Superoxide Dismutase or SOD1 in amyotrophic lateral sclerosis, alpha-synuclein for Parkinson's disease and [ MAPT ] Tau for Alzheimer's disease, enrolling patients and our initial NASH siRNA program readings targeting [indiscernible] PNPLA3 and HSD17B13 are expected by the end of this year. Concluding with recent early-stage research updates, the Regeneron Genetics Center recently announced a collaboration with TriNetX to access de-identified electronic health record data from a global network representing 300 million patients, creating an opportunity to connect large-scale genomic and proteomic cohorts to real-world clinical data in ways that can accelerate drug discovery, translation, development as well as providing new ways of addressing digital health issues. Regeneron also announced a strategic collaboration with Telix to codevelop and commercialize next-generation radiopharmaceutical therapies combining Regeneron's antibody discovery and oncology capabilities with Telix' radiopharmaceutical development and manufacturing expertise. In summary, we remain focused on advancing our late-stage, mid-stage and early-stage programs as well as innovative research, which we firmly believe has the potential to continue to change the practice of medicine. With that, let me turn it over to Marion. Marion McCourt: Thanks, George. Our first quarter results represent a strong start to 2026. Our market-leading brands, EYLEA HD, DUPIXENT and Libtayo, delivered ongoing growth based on their clinical profile and our ability to execute effectively in competitive markets. We begin 2026 well positioned to advance our portfolio and are excited by upcoming opportunities to change the lives of even more patients. Starting with EYLEA HD and EYLEA, which delivered combined U.S. net sales of $942 million in the first quarter. EYLEA HD net sales were $468 million, representing 52% year-over-year growth. During the quarter, physician demand for EYLEA HD increased sequentially by 10% despite typical first quarter seasonality. Additionally, in the first quarter, wholesaler inventory levels were reduced to the normal range. EYLEA HD now has the broadest label and greatest dosing flexibility of any anti-VEGF medicine following recent label enhancements to include retinal vein occlusion and additional dosing options that range from every 4 weeks through every 20 weeks. We are encouraged by physician adoption following these label enhancements. Importantly, we also look forward to the upcoming FDA decision for the EYLEA HD prefilled syringe, which if approved, would bring what we believe is a best-in-class device to retina specialists and help drive continued uptake for EYLEA HD. In the first quarter, EYLEA's U.S. net sales were $473 million, representing a 36% year-over-year decline. This reflects ongoing conversion to EYLEA HD, competitive pressures and patient affordability issues Additionally, during the first quarter, there was only a modest reduction in EYLEA inventory and continued inventory absorption is expected to negatively impact net product sales in the second quarter by approximately $20 million. Looking ahead to the second quarter, we expect to achieve sequential unit demand growth for EYLEA HD that is consistent with the 10% sequential demand growth in the first quarter. Conversely, for EYLEA, we anticipate the demand will decline in the mid- to high teens in the second quarter ahead of the potential launch of additional biosimilars in the second half of the year, coupled with the factors that I highlighted earlier. Together, EYLEA HD and EYLEA lead the innovative branded anti-VEGF category with more than 100 million injections by EYLEA HD and EYLEA administered worldwide since launch. Additionally, in the U.S., EYLEA HD now contributes half of net sales for our retina franchise. Turning to DUPIXENT, which continues to transform the lives of more than 1.4 million patients worldwide with type 2 inflammatory diseases that are currently on treatment. In the first quarter, DUPIXENT net sales were $4.9 billion, representing 31% year-over-year growth on a constant currency basis. U.S. net sales grew 35% year-over-year to $5.6 billion sic [ $3.6 billion]. We continue to see growth across all line indications, including recent launches, making DUPIXENT the #1 biologic medicine prescribed by dermatologists, pulmonologists, allergists and ENTs, across the blockbuster indications of atopic dermatitis, asthma nasal polyps and [indiscernible], DUPIXENT continues to drive strong growth based on its differentiated clinical efficacy, safety profile and physicians strong preference for this brand. Uptake is also strong across more recent launches, including chronic obstructive pulmonary disease, chronic spontaneous urticaria, polyps [indiscernible] and allergic fungal rhinosinusitis. These launches across a growing range of age groups provide a runway for even more patients to benefit from DUPIXENT. With annualized global net sales of nearly $20 billion and significant room for further market penetration across indications, DUPIXENT is well positioned for sustained growth over the near and long term. Turning to Libtayo, which delivered $438 million in global net sales in the first quarter. In the U.S., net sales were $286 million as Libtayo continues its strong trajectory as the leading immunotherapy for advanced non-melanoma skin cancers. The recent launch of Libtayo in adjuvant CSCC is also an emerging growth driver with encouraging uptake and positive feedback on this paradigm-changing treatment. Libtayo is the only NCCN Category 1 preferred immunotherapy open for eligible adjuvant CSC patients. In non-small cell lung cancer, Libtayo is established as the second most prescribed first-line immunotherapy treatment in the U.S., and we expect continued growth through 2026 as we gain incremental share in lung cancer and drive uptake in adjuvant CSCC. On to linvoseltamab, which is in its second full quarter on the market, early launch momentum has been driven by positive physician experience, a differentiated clinical profile, lower hospitalization requirements and convenient dosing schedule. We expect continual continued gradual uptake as we work to advance our clinical program in earlier lines of therapy. I also wanted to spend a moment highlighting our expanding rare disease portfolio. Evkeeza is now in its fifth year on market in the U.S. and delivered net sales of $46 million for the quarter, representing 48% growth year-over-year. Evkeeza is well established as a leading treatment for homozygous familial hypercholesterolemia with more than half of all diagnosed U.S. patients currently on Evkeeza or in the process of starting of Evkeeza. As highlighted by Len, we are also launching Otarmeni, which is the first and only gene therapy for children born with genetic hearing loss. In addition, we look forward to the anticipated FDA decision on garetosmab in August. Garetosmab is our potential treatment for FOP and has been shown to prevent 99% of abnormal bone formation, influencing our strong first quarter results demonstrate growth potential across our portfolio. We continue to advance our in-line brands while also preparing for multiple potential indications and new product launches including for cemdisiran for generalized myasthenia gravis, where there is significant commercial opportunity in this large and growing market. We remain well positioned to deliver meaningful benefit to patients worldwide across a growing number of diseases. And with that, I'll turn the call over to Chris. Christopher Fenimore: Thank you, Marion. My comments today on Regeneron's financial results and outlook will be on a non-GAAP basis unless otherwise noted. Regeneron performed well in the first quarter, highlighted by double-digit growth on both the top and bottom line. First quarter 2026 total revenues grew 19% from the prior year to $3.6 billion, driven by higher Sanofi collaboration revenue as well as strong growth in net sales of EYLEA HD in the U.S. and Libtayo globally. First quarter diluted net income per share grew 15% to $9.47 on net income of $1 billion. Beginning with the Sanofi collaboration, first quarter total Sanofi collaboration revenues were $1.6 billion, of which $1.5 billion related to our share of collaboration profits. Regeneron's share of profits grew 42% versus the prior year driven by DUPIXENT sales growth and improving collaboration margins. We now expect the Sanofi development balance to be fully repaid by the end of the second quarter. As a result, we expect Sanofi collaboration revenue to step up to reflect our full share of collaboration profits starting in the third quarter. Moving to Bayer. First quarter net sales of EYLEA and EYLEA 8 mg outside the U.S. were $729 million, inclusive of $333 million of EYLEA 8 mg sales. Total Bayer collaboration revenue was $287 million of which $240 million related to our share of net profits outside the U.S. Other revenue grew 109% in the first quarter to $171 million. This included $101 million related to our share of profits from ARCALYST and royalty income from Ilaris. Now to our operating expenses. R&D expense was $1.4 billion in the first quarter reflecting continued investments to support Regeneron's innovative pipeline, including pivotal programs across late-stage opportunities in hematology/oncology, complement-mediated diseases at anticoagulation. First quarter SG&A was $560 million, reflecting investments to support the launch of Libtayo and adjuvant CSCC and to drive continued growth of our EYLEA HD. First quarter matching contribution to good days and independent nonprofit patient assistance foundation were de minimis. We remain committed to matching up to $200 million in 2026 to support patient access and affordability. Non-GAAP gross margin on net product sales was 86% in the first quarter. Our GAAP gross margin was 76%, which was negatively impacted by costs incurred due to a temporary interruption in bulk manufacturing at our Limerick Ireland site. We have now resumed initial production in the facility and expect to resume full production by the end of the second quarter. As a result, we anticipate our GAAP gross margin will continue to be negatively impacted in the second quarter as production returns to normal levels. This interruption has not impacted and is not expected to impact the availability of any products. Regeneron generated $848 million of free cash flow in the first quarter of 2026 and ended the quarter with cash and marketable securities less debt of $15.8 billion. We repurchased $800 million of our shares in the first quarter and announced this morning that the Board of Directors has authorized a new $3 billion share repurchase program. With this new authorization, we have approximately $3.4 billion available for share repurchases as of today, and we remain opportunistic buyers of our shares. We have made some minor changes to our 2026 financial guidance including updating our GAAP gross margin guidance to be in the range of 77% to 78%. This reflects actual and expected costs incurred as a result of the aforementioned temporary manufacturing interruption. A full summary of our guidance can be found in our earnings press release published earlier this morning. In conclusion, Regeneron is off to a strong start in 2026 with financial results that position us well to continue investing in our pipeline delivering breakthroughs for patients and driving long-term value for shareholders. With that, I'll pass the call back to Ryan. Ryan Crowe: Thank you, Chris. This concludes our prepared remarks. We will now open the call for Q&A. To ensure we are able to address as many questions as possible, we will answer one question from each caller before moving to the next. Kevin, can we go to the first question, please? Operator: [Operator Instructions] Our first question comes from Tyler Van Buren with TD Cowen. Tyler Van Buren: So DUPIXENT continues to be a monster delivering strong performance this quarter after quarter after quarter. And it now looks like it will well exceed $30 billion of global sales. So given that we get a lot of questions from investors, not just on life cycle expansion but the Sanofi collaboration, so can you discuss your willingness to work on life cycle expansion efforts within the Sanofi collaboration or come to an agreement on commercializing these assets together in order to take advantage of the DUPIXENT rebate wall and the status of that as opposed to moving life cycle expansion candidates for yourself and potentially further building out the commercial infrastructure? Leonard Schleifer: Tyler, it's Len. Thanks for that very pointed question. Maybe to give me an opportunity to publicly thank Paul Hudson for all the work he did on DUPIXENT since 2019. Thank you, Paul. We wish you good luck in your next chapter. Also as of today, Sanofi's new CEO, Belen Garijo is officially, I think, the CEO today. So we want to welcome Belen and wish her luck, and we look forward to working with her and the rest of her team. Tyler, you're right, DUPIXENT is a remarkable product. As Marion detailed and George outlined, it's helping so many different people with some -- millions of people with different diseases and is a financial juggernaut for the company. We are always open-minded to transactions certainly leveraging what we've built in terms of both development capabilities as well as commercial capabilities has merit to it. We can do these things ourselves. We've had interest for many different places to sort of take on some of the next opportunities with us. But we're open-minded, and I look forward to talking with Belen and her team in the coming weeks and months, et cetera. Operator: Our next question comes from Terence Flynn with Morgan Stanley. Chun Yu: Great. This is Chris on for Terence. We have a question about fianlimab in metastatic melanoma. Is the PFS differentiation enough to capture majority share? Or do you think you need OS as well? George Yancopoulos: Well, it obviously depends on the results. it depends on exactly what the PFS results are. But the study is also designed so that -- if we have a substantial OS benefit, we will see that as well. And so the hope, of course, is that the study will show both the PFS and an OS benefit. But the results remain to be seen. Operator: Our next question comes from Chris Raymond with Raymond James. . Unknown Analyst: This is Sam Lee on for Chris Raymond. Just one on the EYLEA prefilled syringe. So any commentary on why FDA missed the April PDUFA and was that a request for more information or a backlog issue? And then you noted there was a reinspection at Catalent, Indiana, and you've resubmitted. Can we read in between the lines and assume that means the site inspection was positive? And what's kind of your overall guidance on timing for either of these applications? Leonard Schleifer: Yes. So thanks for the question. I think we've told you what we know. We don't -- if the inspection turns out to be positive, then I think they will approve the drug. So we await and both applications are pending. And the only thing I can say is that based on our conversations and how hard everybody is working at this and the FDA, I think, desire to get these sites up to the standards they want as well as get the products out there that are waiting that we anticipate action on one or both of these during this quarter. Operator: Our next question comes from Cory Kasimov with Evercore ISI. Cory Kasimov: I wanted to ask about Lynozyfic and kind of the outlook in the multiple myeloma space. When we talk with docs, there's obviously excitement about the potential of BCMA bispecifics, the main pushback on [indiscernible] spread adoption is the infection risk they carry, especially in earlier-stage patients. So curious what you make of the debate and how you're trying to mitigate this in your trials going forward? George Yancopoulos: So the debate of their use compared to what? Cory Kasimov: Existing standards of care like [indiscernible], et cetera? George Yancopoulos: So obviously, all of these approaches carry significant infectious risks. As we've shown in our study, the disease itself carries substantial infectious risk. And if you actually look at our detailed data and publications on the matter, it actually turns out that the longer you treat these patients, the more you control your disease, the more functional their bone marrow becomes actually infectious risk goes down over time, which is actually quite stunned. So I think that the profile, if you really look at it, of the bispecifics in general and our bispecific in particular, are very, very promising not only in terms of their impressive efficacy. But in terms of their overall side effect and tolerability profile, including, of course, the infectious risk. So we think that this is going to become the dominant class for the treatment of this disease as well as its precursors. And we believe that if you look at the data that our agent is certainly competitive, if not indeed best-in-class across all parameters here. Operator: Our next question comes from Tazeen Ahmad with Bank of America. Tazeen Ahmad: As you think about next-gen DUPI, how are you thinking about the importance of having a late-stage program clearly defined before the U.S. IP for DUPIXENT goes away whenever that might be? Just given the increasing number of potential long-acting injectables and other oral agents that might come online. Leonard Schleifer: Yes. Look, we don't know how long the patent life will be for DUPI because we have lots and lots of intellectual property out there, lots of different types of patents, used patents, formulation patents, in addition, obviously, to the composition patent. In terms of how we think about this, to us, we want to leverage our knowledge and immunology. We don't necessarily think about having to exactly replace or work on. We have nearly 50 things in the pipeline and we're looking forward to bringing as many important ones forward as we can. But we do have a number of these that George, I think, talked about the extended interval DUPIXENT going after long-acting IL-13, IL-4, other diseases that we haven't even covered with DUPI such as allergic diseases, in general food allergies and so forth. So I think there's a lot of opportunity and one shouldn't just focus on a simple replacement or what have you and one shouldn't assume when the patent for DUPI will actually expire. Ryan Crowe: Our next question comes from Carter Gould with Cantor. Carter Gould: Maybe change it up a bit. For George, as you spoke about the co-injection of C5 with aflibercept, should we think about that as more of a convenience play sort of with the co-administration or potentially more of, I guess, a label expansion as you think about potentially preventing wet AMD, I guess, forming for lack of a better term? George Yancopoulos: I think those are both interesting possibilities. It could be used to actually prevent the development of the wet AMD and/or to treat the patients who develop it. And very importantly, as you probably know, there's a lot of evidence and suggestions about the causes of the occlusive retinal vasculitis that is seen with the other agents that are, for example, totally different kinds of molecules [indiscernible] and so forth. And these -- some of the characteristics of those molecules are associated with this occlusive retinal vasculatis. We hope and we believe based on our experience with biologics, with EYLEA and with this particular antibody that we may not only have these convenience benefits. But perhaps most importantly, we may also avoid the very tragic, very horrific side effects that are seen with the existing agents, which would allow them to be much more broadly used. Moreover, we would think, once again, as our experience indicates the history with EYLEA that we can have much longer-acting versions. And moreover, depending on how the data looks with the systemic as well as the local, one could imagine even combined to allow for a very long-acting injections [indiscernible]. So there's a lot of possibilities that could address better safety profile as well as convenience as well as potential even efficacy. Operator: Our next question comes from Evan Seigerman with BMO Capital Markets. Evan Seigerman: I'd love for you to walk me through the commercial considerations for developing your combo GLP-1/GIP plus Praluent. And how can you accelerate the development to remain competitive in this rapidly evolving market? George Yancopoulos: Well, the way we look at it, and I think Len came up with this terminology, imagine if you invented a GLP that was as good as the currently best-in-class agent, let's say, tirzepatide, and acted very much the same, but also lowered your bad cholesterol by more than 50% and was shown to decrease your risk of cardiovascular outcomes like heart attacks and death, that GLP would become the preferred GLP on the planet, especially if you priced it at a very similar price. Why would anybody take any other GLP. We are very by the data that we see coming from our collaborators in China, where the cross trial comparisons show that as we predicted based on our due diligence of the molecule, that it behaves if anything as well as tirzepatide. And of course, our folks in the lab have been busy working developing coformulated forms of this GLP together with our [indiscernible], which we believe we can be delivering by a very similar convenient autoinjector approach using the same approach as the are delivered as well. And we believe that we can price it very competitively to the GLPs. And we would think that, honestly, any physician prescribing it or any patient thinking about it would say that why would they ever take a GLP, especially since we know of the profound co-morbidities associated with cardiovascular risk and hyperlipidemia in the same population. Why would they ever take a GLP if they had an option of taking a GLP that also lowered their lipids and also decrease the risk of bad cardiovascular outcomes. To us, honestly, it sort of seems like a no-brainer. Obviously, there will be competition, but we believe we have potentially a best-in-class and a best-in-class PCSK9 and the convenience for many people of these auto injectors is now becoming so pervasive that we think a large segment of the population, we'll offer them. Now this is, of course, not even presuming that the side effect profile that we see in China more broadly pertains in our upcoming global studies. So we think this is a very, very exciting and a very, very large opportunity. Leonard Schleifer: George, could you just correct the misunderstanding about weight loss, not lowering lipids? George Yancopoulos: Yes. So -- it's -- thank you, Len. It's a great point. As many people obviously know, weight loss and the GLPs can provide cardiovascular outcome benefits. But they do this by creating benefits across a wide variety of different risk factors, and they only lower your bad cholesterol by a few points in contrast to the 50% to 60% lowering that we see with the PCSK9 blockers. So this will be a real add-on in terms of the cardiovascular benefit and the lipid benefit compared to just GLP loans, which, by themselves, though they benefit outcomes, they do very little in terms of your lipid profile. So many patients are obviously left with still high risk based on their lipid profile if they're either obese or especially obese with type 2 diabetes where dyslipidemia there is a very serious and common comorbidity concern. Leonard Schleifer: Finally, the use of cost of lowering drugs is now finally catching up, I think, to the science, where the recommendations are to start earlier and longer. So I think that you've indicated population to lower cholesterol and lose weight is going to be even broader. So as George said, this is a really significant opportunity. George Yancopoulos: Well, and very importantly, from the public health perspective, though recommendations are all about how focus on your lipids, much earlier, widespread use of lipid-lowering medications. They are dramatically underutilized in the world. Unfortunately, this caused us incredible morbidity and death, heart disease is still the leading cause of death in the United States, in part because of the underutilization of these incredible weapons we have, we think in a Trojan horse sort of way, this will provide incredible public health benefit by having [indiscernible] people who are really so worried about their weight loss also get the lipid benefit, which will have this dramatic benefit, which is unfortunately underutilized and underappreciated. Operator: Our next question comes from Alexandria Hammond with Wolfe. Alexandria Hammond: Can you share a little bit more on your clinical strategy to exhibit that development of your next-gen I&I assets, particularly [ Supi-dupi ]? How do you expect to be able to kind of leverage the changes within FDA to further speed this development up? And has there been an ongoing dialogue with the regulators? George Yancopoulos: Well, we've obviously -- we're world leaders in this field. We created the field. We did the first studies in atopic dermatitis in the field. And we are well positioned, we believe, to expedite and accelerate the programs as rapidly as possible, and we feel very good about our position and our plans here. Operator: Next question comes from Salveen Richter with Goldman Sachs. Salveen Richter: Just regards to the life cycle strategy for DUPIXENT, which is broad and multipronged, where do you feel you have the most line of sight? And how are you optimizing the IL-4 agent or [ Supi-dupi ]? Leonard Schleifer: Yes. I think what George said is that we have a lot of experience here. We don't need to give out all of our details to help any competition that might be out there. But the team knows what they're doing. [ Supi-dupi ] is one that Sanofi and Regeneron have mutual agreement can add to the collaboration. We have the knowledge, the capabilities and the desire to do this as efficiently as possible. Operator: Next question comes from Christopher Schott with JPMorgan. Taylor Hanley: This is Taylor Hanley on for Chris Schott. We were just wondering on Libtayo. Can you provide any color on the drivers of performance this quarter? Was there anything onetime in there? How much of this was driven by the new indication, CSCC? And is this a good baseline to think about growing off of going forward? Marion McCourt: So sure, very happy to take the question. And I think the Libtayo performance certainly is strong. I would characterize the strength based on certainly the advances that we've seen in our our skin indications. Now with adjuvant CSCC, very exciting to help this group of patients with Libtayo. There's been a lot of enthusiasm. And certainly, the clinical profile of Libtayo in this indication is highly distinguishing. We also see performance in our lung cancer indication, U.S. and international performance are strong. I would characterize the quarter though by comparison to a year-over-year comparison in a quarter that had some movement in inventory. We can certainly go back and share more of the details with you on that. But it's a very strong quarter, but there is some comparison [indiscernible] this quarter. Operator: Next question comes from David Risinger with Leerink Partners. David Risinger: Len and George, my question is for you. So Regeneron spends aggressively on R&D, but the investment community lacks confidence that the company's candidates will move the needle commercially in particular versus established competitors. So could you please highlight the pipeline candidates in late-stage development that we'll have cards turning over in the near term or relative near term, i.e., in the next, I don't know, 18 months or so that you have the greatest confidence in that can generate multibillion-dollar peak sales that investors will be able to see more clearly in the next 18 months or so. Leonard Schleifer: That's perhaps the most penetrating -- in the 160-odd conference calls have done, penetrating in detailed question. But unfortunately, David, probably take several hours to answer. We have a robust pipeline. We do have, obviously, highlighting the C5 franchise, where we'll have more data and an approval action. We will have 11, I think, Phase III trials ongoing in anticoagulation program. which is a massive opportunity. We have our Lynozyfic and our ogenextomab, our bispecifics in myeloma, in lymphoma are ongoing. I think George just talked about our [ ola plus and ola plus ally ] as the near term. And obviously, even in this quarter, we have fianlimab plus Libtayo with metastatic melanoma. So we -- maybe that I'll leave that for openers, but we -- and we have more and more things. But we've got some exciting data coming out that we haven't even talked about, and I didn't just mention. So lots going on when you have 48 exciting things in development. George Yancopoulos: Can I just say, I mean I want to comment that past performance should be the strongest indicator of future performance. There's only one company in recent history that of its own labs produced two $10 billion plus blockbusters. And let me remind you that I think you and probably a lot of other investors never saw those coming or ignored what we were saying about them. So I think that Investor confidence, I think, should in large part be reflecting historical performance and the recognition that where blockbusters come from sometimes for the investor community can't be directly anticipated And the best way of producing very important big drugs is by having very exciting molecules across all stages of development that have enormous opportunity. And if you just look at our oncology programs, whether it's the [indiscernible], whether you look at Lynozyfic, whether you also look at odronextamab in follicular lymphoma. These are all potential blockbusters. The C5 franchise is a pipeline in a franchise, multiple blockbuster opportunities there are factor XI customized approaches are looking more and more exciting, especially based on competitive data using, we think, inferior and less convenient approaches. And we just covered the obesity opportunity, which arguably to become the preferred obesity approach that not only addresses obesity, but more aggressively addresses cardiovascular morbidity. So I know it's hard to think of a more exciting pipeline in the entire industry. Ryan Crowe: We have time for 2 more questions, Kevin. Operator: Our next question comes from Geoff Meacham with Citi. Geoffrey Meacham: On fianlimab and lung, I just wanted to see if you guys can give us a bit more context for not moving to Phase III, maybe what was observed in the data? And from a tolerability perspective, is there any read-through to melanoma or broader solid tumor in terms of strategy? George Yancopoulos: Yes. I think that we've been talking about this for a long time. I mean we never indicated that we were excited about this opportunity. Our data from earlier-stage studies was always pointing us to the melanoma opportunity. Once we see that data, it will certainly guide our thinking forward and in terms of going into additional cancer settings as well. But as we've been saying for a while, we never had any reason to really believe that this was going to be a game changer in the lung cancer space. Leonard Schleifer: And Geoff, there's no negative read-through from any new side effects or anything unanticipated. Ryan Crowe: Last question, please, Kevin. Operator: Our last question comes from Brian Abrahams with RBC Capital Markets. Brian Abrahams: We were intrigued with the inclusion of milder patients in your long-acting IL-13 study versus contemporary AD trials. So I was wondering if you could talk about the potential untapped opportunity for systemic biologics here and the degree to which you can broaden the market even beyond where DUPI is used now? Marion McCourt: Just certainly in patients with mild disease, there's a lot of unmet need. So this is a potential area for greater understanding in advance for treatment. I think we'll have to wait and take a look at clinical profile and opportunities and determine from there, but it is a large population. And when the patient or the parent of the child with mild disease, it really isn't mild, it's aggravating, it's difficult. And certainly, there's a lot of unmet need and potential. Leonard Schleifer: And I have to say there was certainly in the early days of bias by investigators and the agency against using a powerful biologic. It could be immunosuppressive. Remember, we did find it to be immunosuppressive. In fact, in the moderate to severe cases of atopic dermatitis, we actually saw less infections in patients who had skin lesion healing. It is not immunosuppressive on the side of the immune axis, which deals with the kind of infections that people are used to with biologics or might be with some of the orals that suppress both arms of the immune system, as George has talked many times, the type 2 immunity is not something we rely on to keep us healthy from infections, might play some role in parasitic infections. But you've got so many people having been treated now and now thinking about going earlier makes some sense. Ryan Crowe: All right. That's all the time we have for today. Thanks to everyone who dialed in for your interest in Regeneron. We apologize to those folks remaining in the Q&A queue, who did not have a chance to hear from today. As always, the Investor Relations team at Regeneron is available to answer any remaining questions you may have. Thank you once again, and have a great day. Operator: Thank you. Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.
Operator: Good morning, and welcome to the General Dynamics First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nicole Shelton, Vice President of Investor Relations. Please go ahead. Nicole Shelton: Thank you, operator, and good morning, everyone. Welcome to the General Dynamics First Quarter 2026 Conference Call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K, 10-Q and 8-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website, investorrelations.gd.com. On the call today are Danny Deep, President; and Kim Kuryea, Chief Financial Officer. I will now turn the call over to Danny. Danny Deep: Thank you, Nicole. Good morning, everyone, and thanks for being with us. The first thing I'll note is that our Chairman and CEO, Phebe Novakovic, had a family illness that required her absence. So I'll be conducting today's call along with Kim. At the very outset of these remarks, let me share with you our view that this was a very powerful quarter in all respects. Earlier today, we reported earnings of $4.10 per diluted share on revenue of $13.5 billion, operating earnings of $1.420 billion and net earnings of $1.125 billion. These results compare quite favorably to the year ago quarter, which in and of itself, was a very good quarter. For example, revenue was up 10.3% and importantly, operating earnings are up 12% and net earnings are up 13.2%. As a result, earnings per diluted share are up $0.44, 12% on more than a year ago quarter. The operating margin for the entire company was 10.5%, a 10 basis point improvement over a year ago quarter, which coupled with the revenue growth, led to very strong earnings growth. While Aerospace and Marine led the way on revenue increases, each of the other 2 segments enjoyed revenue increases as well. A similar pattern is true with respect to operating earnings. Each of the segments demonstrated better performance led by Marine Systems with a 26.4% increase from improved operating performance across all of our shipyards coupled with the revenue increase. We beat consensus by $0.43 in the quarter on more revenue and better operating margins than expected by the sell side. In short, this performance exceeded our own expectations. We also had a terrific quarter from a cash flow perspective together with strong order intake, which led to a larger backlog, which Kim will discuss in greater detail in a moment. From our perspective, we have opened the year on a very positive note. At this point, let me ask Kim Kuryea, our CFO, to provide details on our superb cash flow, order activity and solid backlog before I come back with segment observations. Kimberly Kuryea: Thank you, Danny, and good morning. Let me start by addressing our outstanding cash performance during the first quarter. The first quarter was a very strong start to the year with operating cash flow of $2.2 billion. We got out of the gate with our business units overwhelmingly exceeding their planned cash flow and driving operating working capital down. Compared to the first quarter of 2025, capital expenditures were up over 40% to $203 million. While capital expenditures were around 1.5% of sales in the quarter, we continue to expect capital expenditure between 3.5% and 4% of sales for the full year. You should expect the profile of our investment to grow each quarter as we continue to invest, especially in our shipyards to accelerate production and meet demand. After considering capital expenditures, our free cash flow for the quarter was just shy of $2 billion, yielding a cash conversion rate in the quarter of 174%. We continue to expect a free cash flow conversion rate of 100% of net income for the year, but the strong cash acceleration into the first quarter results in a profile that will look a little different than what I provided in January. We now expect the first quarter to represent the largest quarter of free cash flow with positive cash flow in each of the remaining quarters, supporting our continued efforts to drive cash to the left. Also in the quarter, we paid dividends of approximately $400 million and repurchased about $200 million of our common stock to cover dilution. After adding it all up, we ended the quarter with a cash balance of $3.7 billion and a net debt position of $4.4 billion, down $1.3 billion from last quarter. Moving now to orders and backlog. Our order activity and backlog continued to be a strong story and a highlight for us in the first quarter. We received over $26 billion of orders achieving an overall book-to-bill ratio of 2:1 even as revenue grew by over 10% from the year ago quarter. The robust demand across our portfolio resulted in total backlog of $131 billion, an impressive 48% increase over last year and 11% higher than just a quarter ago. Total estimated contract value, which includes options and IDIQ contracts, ended the quarter at another record level of $188 billion, a 33% increase from last year. Now some final areas -- some final items in my area to address. We have $500 million of notes coming due in both June and August 2026 for a total of $1 billion. Our plan assumes that the $1 billion will be refinanced, but this is something that we will continue to evaluate throughout the year. Turning to interest. Our net interest expense in the quarter was $69 million compared to $89 million in the respective 2025 period. The decrease is due almost entirely to the interest we paid for commercial paper borrowings in the first quarter of 2025. Wrapping up with income taxes. Our effective tax rate in the first quarter of 2026 was 17.8%, generally consistent with our full year guidance of 17.5%. Danny, that concludes my remarks. I'll turn it back over to you. Danny Deep: Thanks, Kim. Now I'll review the financial performance for each of the groups. First, Aerospace. Aerospace did very well in the quarter. It had revenue of $3.3 billion and operating earnings of $493 million with a 15% operating margin. Revenue was $253 million more than last year's first quarter, an 8.4% increase. To give you a little perspective here, the increase was driven by 2 more aircraft deliveries and higher services revenue at both Gulfstream and Jet Aviation. The 38 deliveries in the quarter are exactly as planned. Operating earnings of $493 million are up $61 million driven in part by the increased revenue, but most importantly, by a 70 basis point improvement in operating margin. The comparison with last year's first quarter is particularly instructive from my point of view, the number of deliveries is similar, but up by 2 in the quarter, neither quarter was significantly burdened by tariff costs and neither has any unusual items of significance. As a result, the improvement quarter-over-quarter comes from a lot of measurable improvements across the entire business. From an operational perspective, we are off to a strong start to the year and as I mentioned, with 38 deliveries in the quarter, that happens to be the highest number of deliveries for any first quarter in Gulfstream history. We see durable productivity improvements on the G700 and 800 in both manufacturing and completions. Performance on the G800 has been a particular standout. This quarter, they delivered with very good gross margins. In fact, it was better than the G650s that it replaced which delivered in the first quarter of 2025, quite remarkable given how recently G800s have entered into service. In fact, we will deliver only our 25th G800 this coming quarter, so very positive, given how early we are in that program. Turning to market demand. We had a 1.2 book-to-bill in the quarter with 17 more airplane orders than the year ago quarter. We were on our way to a spectacular quarter, but numerous transactions slowed at the end of the quarter as a result of the conflict in the Middle East. The book-to-bill over the trailing 12 months is 1.3x. So we see very active interest across all models in the U.S., but some cautious concern for some customers in the Middle East. We are also off to a solid start in the first month of this quarter. In summary, the aerospace team had a special quarter operational. So let's move on to the defense businesses. First, Combat Systems. Combat Systems had revenue of $2.28 billion up almost 5% over the year ago quarter. Earnings of $310 million are up 6.5%. Margins at 13.6% are up 20 basis points against the year ago quarter. The increased revenue performance was at Ordnance and Tactical Systems and European Land Systems. We also experienced good order performance at 0.9:1 book-to-bill given the third and fourth quarters of 2025 book-to-bill of 2x and 4.3x, respectively. In fact, on a trailing 12-month basis, the book-to-bill has been 2.1x. Demand for Combat Systems products is strong, driven primarily by U.S. allies. Wheeled and tracked vehicles are up, reflecting the increased threat environment. In addition, ordinance and tactical systems continue to lead this group's growth with particularly strong growth in munitions. What is encouraging for Combat is during this period of recapitalization and transition to next-generation platforms for our U.S. land force customers is the breadth of this portfolio with both international vehicles as well as our munitions group that continue to provide a nice growth outlook with very solid margins. Turning to Marine Systems. Once again, our shipbuilding units are demonstrating strong revenue growth. Revenue has continued to increase to reflect increased demand and importantly, increased throughput across all of our shipyards. This quarter's growth of 21% was driven primarily by the Columbia and Virginia class programs, followed by the oiler at NASCO. Repair volume has also increased at both our East and West Coast repair yard. Of significance, earnings improved 26.4% on improved productivity in each of our shipyards. As you know, to support this growth, we have made significant investments in each of our shipyards, particularly at Electric Boat, and we will continue to invest as we go forward to support the additional demand we see. Turning to operating performance. Momentum is building at each of our shipyards at Electric Boat on the Columbia program, we have seen a 29% increase in the number of hours earned as compared to first quarter 2025. And while we still have areas in the supply chain where we need an increased cadence, we have seen a marked improvement versus first quarter a year ago. For sequence critical material, we have seen a 52% increase in the number of items received as compared to this time period last year. At [indiscernible] Iron Works, the DDG51 program continues to improve in both efficiency and schedule. And at NASCO, we'll deliver the final expeditionary sea-based ship this summer with capacity to support additional TAOs or other auxiliary -- or commercial programs. And finally, technologies. This group also experienced growth in revenue and earnings, albeit not at the pace of the other segments. Revenue of $3.6 billion was an increase of 4.2% over the first quarter of 2025. Both businesses contributed to the growth of Mission Systems led the way with an 11.7% increase. Operating earnings of $339 million were up 3.4% over the year-ago quarter. Operating margins decreased 10 basis points from 9.6% to 9.5%. The group's order activity was also encouraging with a book-to-bill of 1.3x for the quarter and 1.2x for the trailing 12 months. This segment continues to compete very well in its markets with win and capture rates between 80% and 90%. For GDIT, we're seeing strong demand for our AI and cyber capabilities. Q1 orders exceeded our internal plans across the portfolio with particular strength in defense. And despite elongated procurement cycles and fewer customer adjudications, GDIT ended the quarter with a 5% increase in the backlog as compared to year-end 2025, which is encouraging given their near record revenue this quarter. Mission Systems had a strong quarter from an operational standpoint with a 50 basis point expansion in margins as compared to a year ago, driven by a favorable product mix and their broader transition away from legacy programs to highly differentiated systems. So to wrap things up, while we historically have not updated our guidance after the first quarter, given our strong start, we thought it would be prudent to revise our EPS guidance to reflect our performance thus far and its implication for the full year. As a reminder, in January, we told you to assume an EPS range of $16.10 to $16.20. Our updated guidance for 2026 would be an EPS range of $16.45 to $16.55. Looking at the year from a quarterly perspective, the first and fourth quarters would represent the high points, favoring the fourth quarter given its typical increased volume with the second and third quarters trailing a bit on expected mix. As is our long-standing practice, we will refresh our internal forecast in detail during the second quarter and elaborate more on the specifics by segment on the July call. Nicole, back to you. Nicole Shelton: Thank you, Danny. [Operator Instructions]. Operator: [Operator Instructions] We'll take our first question from Robert Stallard at Vertical Research. Robert Stallard: Danny, I was wondering if you could comment on the supply chain situation. You seem to have touched on it a little bit in marine, but I was wondering how you're getting on across the broader group, whether there are any tight points that you're trying to address? Danny Deep: Yes. I would say, broadly speaking, as it relates to the supply chain for the whole Marine Group, we have seen an increased cadence on time, deliveries are up. I think we're not seeing the same number of quality issues that we saw in the previous year. I think we still see some areas in the supply chain where we need to get the cadence up, and those problems tend to be where we have complex components or complex systems where there are just single sources of supply. But broadly speaking, we are seeing improvements. Robert Stallard: Okay. And then a quick follow-up. It looks like the Ajax program is back in testing again in the U.K. Maybe for Kim, I was wondering if there had been any accounting or financial implications of the stoppage there the restart? Kimberly Kuryea: No, they have not. Everything is business as usual from an Ajax perspective. Operator: We'll move next to Kristine Liwag at Morgan Stanley. Kristine Liwag: When we look at the fiscal '27 budget request from the White House, there's a fairly large step-up in shipbuilding dollars, you guys have talked about the tightness in labor historically and the supply chain issues in marine. But I was wondering, as you look at the significant step-up in opportunities, are there things that General Dynamics could do to capture more of this growth sooner. It seems like there's more of an urgency to rebuild our Navy. Douglas Harned: Yes. Like, as you can imagine, the lead times for producing these ships pretty extensive. And I think what we see in the budget is good support for the programs that are already in work and certainly, it helps the volume. But we don't anticipate that any of these awards are going to change dramatically the number of ships that we have to produce in the immediate term. Kristine Liwag: And then also when we look at that fourth projection by number of shifts, you've got your traditional programs, but then there's also some of these smaller surface vehicles and smaller unmanned undersea vehicles. I was wondering can you talk about the opportunities for that and is there a way for you to capture more of that smaller end market, especially if we're looking at higher volumes. Danny Deep: Yes. So we have been investing in the unmanned undersea platforms for a number of years with our Mission Systems group through Bluefin. So we're, I think, poised well to participate in the growth in that market. As far as smaller ships on the surface combatant side, we don't really see that. We're going to focus on what we do at NASCO, with oilers and sealift and sub-tenders and at Bath Iron Works with DDG51s and the next destroyer that's out there. But we don't anticipate moving into the smaller ship surface wise. Operator: Next, we'll go to Peter Arment at Baird. Peter Arment: Danny, maybe if you could give some comments on just any impacts you've seen out of the Middle East, whether it's affecting Gulfstream or whether you've had any other impacts more favorably, I guess, on the munitions side of things. So maybe just some overall color of any early -- any feedback from Middle East operations. Danny Deep: Sure. So let me just maybe focus on aerospace initially. As I think we said in our comments, we were having a spectacular quarter from an order standpoint across the board here in the United States as well as the Middle East and then as the conflict started to take form. We saw some slowing in order intake in the Middle East. So certainly impacted on the order side, albeit still pretty robust. From a supply side, as you can imagine, some of what we get from that part of the world is impacted, and it's really a labor force issue. So all of the airplanes that we delivered in the first quarter of 2026, we actually had those airplanes in inventory ready for completion prior to the conflict. So I mean, we're watching that, but certainly, world events could impact supply there. From a demand side, on the defense side, I mean, it's a little early. We're certainly in plenty of discussions with a number of customers where we've had long-standing relationships, but we haven't necessarily matured those opportunities to the point where I can comment that we see increased demand. But I think a lot will depend on how long this goes and what sort of demand we see in terms of refilling their inventories. Peter Arment: I appreciate that. And just a quick follow-up. Just you mentioned Columbia construction is progressing. Can you just give us the latest of like [ where you ] are on kind of the first haul and where things are progressing otherwise? Danny Deep: Sure. Really positive momentum on Colombia. All the major modules we received by the end of last year, and so we're in the process of integrating and assembling those in one of our larger yards and expect to have a real key milestone achieved by the end of this year and on a path to deliver that first boat in -- by the end of 2028. So excellent progress in the last 6 or 9 months on the Columbia program and on the path to deliver. Operator: Our next question comes from Seth Seifman at JPMorgan. Seth Seifman: I wanted to ask about Aerospace. And I know you said you weren't refreshing guidance within the segments. But the first quarter came in nicely ahead of the expectation for the year on margin rate. The reasons for that, that you mentioned seem to be fairly enduring. Are there particular things we should be watching for that would be pushing margin down going forward? Or has Gulfstream, in particular, maybe aerospace more broadly, you kind of gotten over the hump with regard to some of these supply chain challenges and margin headwinds that you faced. Danny Deep: Yes. Look, I think, as you know, we had a pretty strong quarter at Aerospace and Gulfstream specifically. I think you'll see some mix movement in the second and third quarter, but certainly as planned, and then you'll see a really strong fourth quarter. From a delivery standpoint, we should expect that second quarter will be very similar to first quarter and then the third and fourth will be our highest, and that's per plan. So I think all of those things give us some optimism about where we are in aerospace in terms of margins and to use your word, certainly durable. Seth Seifman: Okay. Okay. Excellent. And then maybe in combat, if you could talk a little bit about the facility in [ Mesquite ]. I know I think the release talked about some goodness in artillery and you mentioned OTS in your comments. If we've been reading the trade press over the past couple of months, there's been some customer concerns expressed about Mesquite and the ramp-up there. How should we be thinking about the the risks and the opportunities around that facility. Danny Deep: Yes. So I think as you've seen the customer put out a recent release on that. We've reached agreement with the Army customer on the path forward for that facility. We are very well aligned. We expect that we will be in production next year and producing artillery rounds for them and for the foreseeable future. So we have a very, very good path forward with the customer. And as I said, we're well aligned. So just think about that happening and coming online next year. Operator: Next, we'll move to Ken Herbert at RBC. Kenneth Herbert: I just wanted to follow up on the aerospace comments. It sounds like, Danny, when you think about some of the production coming out of Israel on some of your programs, how has that been impacted and is that a potential risk as we think about sort of the next few quarters? Danny Deep: Yes. So as I mentioned, all of the airplanes that we delivered in Q1, we had received a fair bit ago, and we're -- we completed them over the quarter and delivered. So we weren't impacted this quarter. I think we could see a small impact the longer this goes on. They're still producing those airplanes ready for us to complete, but we could see some minor impact. And as you know, that's on the G280. Kenneth Herbert: Great. And then maybe, Kim, really nice cash generation in the quarter. Can you give any comments maybe around any onetime advances or other items that could have been supported some of the upside in the quarter and how we think about specifically then the progression here into the second and third quarter as cash steps down relative to the strong first quarter. Kimberly Kuryea: Sure. First, let me start out with -- and I think I mentioned in my remarks that it was really outperformance on our own expectations across the business units. If we think of our 10 business units, I think they all exceeded expectations. And so that was really great performance. When I think about customer advances specifically, they sort of come with the business. So it wasn't anything of terrible significance from that standpoint. And certainly, anything that we got from an advanced standpoint was planned. So I would say this was more outperformance against our expectations for the quarter, which does mean moving some of the cash from second quarter into the first quarter. So as I mentioned, cash will be positive, but down in the quarters to follow, but very strong for the year. And we're certainly looking at the cash conversion rate for the year in terms of is it possible that we could exceed 100%, and we'll see where we go there, too. Operator: We'll move next to Ron Epstein at Bank of America. Ronald Epstein: So Danny, a quick question for you. We've seen, I guess, the DOW putting pressure on some contractors to make investments for, how do I say, the promise of future volume. Have you seen that? Have you guys had to make some investments upfront? And how are you handling that, particularly in the munitions and the defense consumable area? Danny Deep: Yes. So in particular, for munitions, we have been investing. We've been investing in artillery capability, solid rocket motors, energetics and some of the down components to support the missile primes. So we have been doing that and are continuing to do that, and we're fully committed to making sure that we're part of the solution as it relates to the munitions issue. And as you know well, we've been investing for a long time on the marine side, and we anticipate that continuing for a number of years. So I don't know that I would necessarily say that we saw pressure from the administration. I think we've been investing because we see that the demand is there and the need is there and the threat environment is dictating that, and that has been happening for a while with us. Ronald Epstein: Got you. Got you. And then maybe just shifting to marine. There's been discussion about this from class battleship. When would you expect some more details on that, a possible down select or -- as outsiders looking in, when do you think we could learn more about it? Danny Deep: Yes. Look, I think we're in the very early stages of that. We're working with the partner on doing some of the detailed design now. I know that the administration wants to move as quickly as possible on it. And -- but it's just a little early now for us to be able to define exact time lines, but we're part of that process today, but it's in the early stages. Operator: We'll take our next question from David Strauss at Wells Fargo. David Strauss: I wanted to ask about Mission Systems. I think, Dan, I heard you said it was up around 12% in the quarter. I think the business has been flat to down for quite a while. Now you had some programs rolling off. What was driving the -- what's driving the growth there? And maybe touch on the growth outlook from here and what that might mean for margins overall for technologies. Danny Deep: Yes. Look, I think Mission Systems has done an excellent job of transitioning from what we term legacy programs into very highly differentiated systems that are in demand. And if you look at where they have invested and focus a lot of their attention over the last several years. And as they look forward, it's in areas that are very much aligned with the administration's priorities. So I think strategic deterrent unmanned systems, proliferated space and contested space, encryption, modernization, next-generation command and control and precision munitions. So I think all of those things given the alignment with some of the administration's priorities and where Mission Systems has focused their attention, it bodes well for them in the future. And I'm not sure that margins were at 12.6% that you mentioned, but we'll come back to you, I think they're even a little higher than that. So -- and we're continuing to be bullish about where we think they can be. David Strauss: I was -- I think you said the growth at Mission Systems [indiscernible] above 12%, yes, that's right. Danny Deep: Yes. Yes. The growth -- sorry, the growth was at 12%. That's right. And -- yes, and we feel good about the growth in that part of the portfolio going forward based on all the things I just mentioned. David Strauss: Okay. Great. And Kim. In terms of the CapEx step-up this year, your updated thoughts on your ability to kind of recover that through working capital over the near term? Kimberly Kuryea: Yes. I mean it's certainly -- as we continue to invest throughout the year, it certainly has an impact on our cash flow, and that's what we're evaluating as it impacts the quarter, but we're certainly driving to get our working capital off the balance sheet to offset the increase in CapEx. Operator: We'll take our next question from Myles Walton at Wolfe Research. Myles Walton: Danny, you mentioned 1Q representing the highest output for [indiscernible] at Aerospace. And so where does capacity currently fit for large cabin production at this point on an annual basis. I noticed in the fourth quarter of last year, you had a pretty material step-up in CapEx. And so I imagine you're expanding capacity. So maybe if you can just update us on the trajectory to get to whatever capacity you're targeting? Danny Deep: Yes. So from a demand and backlog standpoint, certainly, we have enough of that to increase production on the long range and the ultra long-range family of airplanes. I think the issue here really is the supply chain and their ability to ramp up as quickly. And so in terms of overall capacity, we're putting it in place because the demand is there and it's just a matter of when the supply chain can ramp up to support that. Myles Walton: Okay. And in your tariff outlook, is it still contemplating $40 million or north thereof after the Supreme Court and 232 and all the other changes that have taken place? Danny Deep: Yes. I think when you referenced the $41 million, you're talking about what we reported in the fourth quarter of 2025. And so as we mentioned in the remarks, when you make a comparison of first quarter 2025 to first quarter of 2026, neither of those 2 quarters had any tariffs to speak of. And then we only assumed a very modest amounts or included a very modest amount of recovery in the first quarter. So really nothing material. And then going forward as it relates to these [indiscernible] tariffs, we haven't assumed anything different. Operator: Next, we'll move to Sheila Kahyaoglu at Jefferies. Sheila Kahyaoglu: Danny, really strong start across the businesses. Is it fair to say that the 2% EPS raise is primarily related to aerospace and the 15% margins versus the 14% guide. And maybe how much of that came from 800 accretion versus maybe services, onetime items with fuel? Danny Deep: Yes. I think the increase in guidance is for what we see today. I mean, I think as we mentioned in the remarks, we'll have more fidelity in the second quarter to share the contribution to that increase came from more than aerospace, also from marine and a little bit from technology. So the the expectation for aerospace is that we will continue to execute the way we're executing and we'll see what that means for the second quarter. Sheila Kahyaoglu: Okay. And then sticking to Aerospace, just a follow-up. Two business jet OEMs have called out supply chain issues, Honeywell more publicly. Maybe if you could just talk about you're still growing deliveries 25% year-over-year in aerospace. Should we expect any cadence changes to deliveries for the rest of the year for these jets? Danny Deep: For us specifically, I think you should expect second quarter to look a lot from a cadence and delivery standpoint, a lot like what you just saw in the first quarter. And then third and fourth quarter will be higher and the fourth quarter will be our strongest both from a mix and a margin standpoint. So from a supply chain perspective, as I mentioned, they're keeping up for us. Operator: Next, we'll move to John Godyn at Citi. John Godyn: First, Marine Systems alignment with the $1.5 trillion budget, extremely clear. Can you elaborate a bit more on combat systems and technologies just in light of the priorities proposed in the $1.5 trillion. Danny Deep: Yes. As you mentioned, I think it's very clear where the Marine programs sit in the base budget, and we're encouraged by that. As far as combat goes, there's good support for where we are in the munition space. And as far as combat vehicles goes, they're really in a period of transition, the Army and even the Marine Corp to some extent. And so there's a fair bit of development activity going on. And so during this period, and speak specifically to next-generation main battle tank with [ M13 ] or we'll see some lower volumes on the current version of the tank. And as it relates to [ Stryker ] program, for example, those rates are down, although that vehicle and that platform continues to be versatile and used in a number of different applications, those rates won't replace what we had seen historically, but certainly supported from an RDT&E standpoint for the programs that we're pursuing and that includes M13 and advanced reconnaissance vehicle for the Marine Corps. From a technology standpoint, the areas we see good alignment in the budget. And as you can imagine, in their space, there are a lot more line items to look at. But in the areas, whether it's cyber and space and some of the areas I mentioned earlier for Mission Systems, we see good support in the budget for programs that we are heavily involved in. John Godyn: Great. And just changing gears on capital returns and appetite for buyback. Obviously, that was sort of an interesting topic last quarter for a lot of the companies. But as we sit here today, you guys are executing well. The stock is still kind of down on the year. we'll see how this all plays out. But maybe you could just kind of remind us what the appetite and the view on buybacks may be if you continue to execute well this year and the stock is -- lags the market. Danny Deep: Yes. So as you know, share repurchases are highly sensitive subject in this current environment. And so I think in this atmosphere, it behooves us to continue to be cautious, and that's -- that's exactly what we've been. And as Kim mentioned, we only acquired shares to address dilution. And that's really dilution from our compensation programs, and we think that's just fair to all that are concerned. In terms of dividends, we have -- and we remain committed to paying our dividend. We've increased it for 29 straight years and really think it's part of our investment identity and part of our value proposition. So that's sort of how we see it. But we'll continue to be cautious and as we move forward. Operator: Next, we'll go to Doug Harned at Bernstein. Douglas Harned: Your -- in marine, you had a large increase in revenues, which you attributed mainly to Virginia Class and Columbia class. But can you separate what items led to that growth, such as sort of mix pricing, throughput improvement, additional labor funding or some specific milestones. How should we think about where that growth is coming from? Danny Deep: Yes. Look, I think you should think about it as a story of throughput. And I think both in terms of labor output, and so more earned hours as well as material. So both of those things. But I think what drives it? I mean, obviously, there's always a mix change quarter-to-quarter. But what has been driving that growth is throughput and that throughput is both labor and material. Douglas Harned: So when you look at the throughput now, how do you see this as sort of getting on the way to the goal of, say, 2 deliveries per year for Virginia class, that target that's been so difficult to progress against over time. Danny Deep: Sorry, can you repeat that? How are we doing towards the delivery of 2 per year? Is that the question? Douglas Harned: Yes, it is. Progressing towards that, yes. Danny Deep: Yes. So we are progressing towards that. I won't get into the specific rates that we're currently producing at. But suffice to say that it's up significantly over last year already. And the path to 2 Virginias and 1 Columbia per year. I can't predict the exact timing, but we are on the way there. And certainly, that is the target. But I don't think it's prudent to get into specific rates over this call. Nicole Shelton: So Audra, I think we have time for one more question. Operator: And that question will come from Scott Mikus at Melius Research. Scott Mikus: Jim, very nice results. Just a couple of quick questions on Colombia [indiscernible] 2, Virginia Block VI contract. Just wondering when you're expecting that to be awarded and then also going back to Rob's question earlier on the supply chain in, is there any change that you or the Navy could dual source the steam turbine on the Columbia program to improve supply chain resilience? Danny Deep: Yes. So as it relates to Block VI and [indiscernible] 2, we have had and have been in ongoing and detailed discussions with the Navy on that, and we'll update you in more detail when we have something to report, but that continues to proceed, and we're in detailed discussions, and we've only assumed that it will come in due course. As it relates to -- sorry, remind me your second question? Scott Mikus: Is there a possibility that you or the Navy could seek to dual source the steam turbine on the Columbia [indiscernible] just to improve supply chain resilience. Danny Deep: Yes. Look, I think there's been some activity with the Navy over the last several years on adding some capacity to be able to build turbine generators. And so they've been the focus of that activity, and I think that is -- as I mentioned, some of the challenges with single-source suppliers, you can conclude which some of those are, that's an area that is very critical to the overall success of the of the submarine enterprise. So the Navy has been working on that for a little while now. Nicole Shelton: Well, thank you, everyone, for joining our call today. Please refer to the General Dynamics website for the first quarter earnings release and highlights presentation. If you have additional questions, I can be reached at (703) 876-3152. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to the Markel Group First Quarter 2026 Conference Call. [Operator Instructions] During the call today, we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They are based on current assumptions and opinions concerning a variety of known and unknown risks. Actual results may differ materially from those contained in or suggested by such forward-looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward-looking statements is included in the press release for our first quarter 2026 results as well as our most recent annual report on Form 10-K and quarterly report on Form 10-Q, including under the caption Safe Harbor and Cautionary Statements and Risk Factors. We may also discuss certain non-GAAP financial measures during the call today. You may find the most directly comparable GAAP measures and a reconciliation to GAAP for these measures in the press release for our first quarter 2026 results or in our most recent Form 10-Q. The press release for our first quarter 2026 results as well as our Form 10-K and Form 10-Q can be found on our website at www.mklgroup.com in the Investor Relations section. Please note, this event is being recorded. I would now like to turn the conference over to Tom Gayner, Chief Executive Officer. Please go ahead. Thomas Gayner: Thank you so much. Good morning, Day, and good morning to all. This is indeed Tom Gayner, and I'm joined this morning by my teammates, Brian Costanzo, our Chief Financial Officer; and Simon Wilson, the CEO of our Insurance Operations and Executive Vice President of the Markel Group. Andrew Crowley, the President of Markel Ventures and Executive Vice President of the Markel Group is also with us and available for questions. Thank you all for joining us today. Our headline is that we continue to do more of what's working and less of what's not. I'm deeply grateful to my colleagues who continue to adapt and improve our operations throughout Markel Group. We all look forward to sharing our progress with you this morning. We're also delighted to take your thoughtful questions and for your ongoing interest in Markel. First, I'll make a few opening comments. Then Brian will run through the financial results. Following Brian's comments, we'll turn the bulk of the call over to Simon, who will address our ongoing actions in our insurance operations and our progress to date. Insurance is our largest business and the one where the most change continues to be underway. As such, it's appropriate to focus and allocate the most time there. Following Simon's comments, we will open the floor for questions. Continuing to do more of what works and constantly learning and iterating is not a new idea at Markel. It's been a hallmark of the company for nearly 100 years. As we state in our cultural statement that we call the Markel style, we look for a better way to do things. That means being creative, adapting to changes in technology up to and including those being brought about by the development of AI and every other form of change and progress underway. Internally, we control what we can control. We've taken extensive steps to focus on serving our customers, improve efficiency, develop new products and services, expand our geographical reach by opening and developing new markets and continuously improving and refining our operations in every nook and cranny throughout the company. I'm beyond grateful to my teammates for their unrelenting actions to continuously learn and improve. Our financial results show that our actions are working. Brian will give you details and explain some of the nuances from one-off events and business mix changes from last year. But net-net, we're confident that we are making progress and that it is showing up in our results. Externally, outside our 4 walls, we continue to see cyclical pressures and softness in some end markets. For example, property-related insurance coverages and certain industrial end markets like transportation equipment and residential construction continue to show normal signs of cyclicality. Longer term, those markets provide ample opportunity for good returns on our capital and continued growth, but they do not do so in a straight upward line. Curves are involved, both up and down, and that is normal. In aggregate, our businesses continue to produce healthy amounts of adjusted operating income, cash and long-term growth. Your company contains diverse, resilient, high-quality businesses designed to produce all-weather returns and cash flows. That is the design of the Markel Group. With these cash flows, we enjoy a 360-degree set of reinvestment opportunities to put that cash to work. We continue to deploy that cash with patience and discipline. Each incremental dollar goes to the highest and best use available. Sometimes that means funding incremental growth in one of our existing businesses. Sometimes that means adding to our investment portfolio of publicly traded securities. Sometimes that means acquiring new businesses and sometimes that means repurchasing our own shares. Sometimes that also means building up our liquidity and optionality for future opportunities, something we've been emphasizing of late. We maintain a strong balance sheet. We believe balance sheet strength will provide timely and unique advantages to grow and long-term stability to our operations. As we observe the broader investment landscape and participate in conversations, we are observing more data points about global conflict, supply chain disruptions, low consumer sentiment and softening job markets. Despite those factors, the animal spirits in the financial market seems largely unfasedased. As such, the number of external opportunities that appear attractive to us remain limited. Fortunately, as we've demonstrated over the last several years, we can and are continuing to repurchase our own shares. In 2023, we repurchased $445 million of our own stock. In 2024, we made $573 million in repurchases. In 2025, we did $430 million in share repurchases as well as redeeming $600 million of preferred stock. We've done that largely with cash from operations and not by levering the balance sheet. So far in 2026, we've repurchased $134 million of our own shares, and we remain highly attentive to opportunities to continue to do so. At this point, we've reduced our share count by roughly 10% from the peak of nearly 14 million. It's taken slightly more than 5 years for that 10% reduction to occur. At current prices, I would expect it to take us less than 5 years to purchase the next 10% of the share count. The math suggests that repurchasing our own shares makes sense as our #1 on the list of capital allocation choices right now. We remain disciplined and methodical as we do so. That should help us to persist through thick and thin. And we think that, that consistent behavior will serve our owners well. We also continue to have a balance sheet, which keeps us in good shape to pursue opportunities when it makes sense to do so. We enjoy a strong degree of optionality. We maintain the flexibility and ability to play offense in a wide variety of environments, not just the one we see today. And while we are reporting our quarterly results to you today, we manage this business with a longer time frame. Looking out over the next 5 years, I think it's reasonable to expect that our insurance operations will grow and earn healthy returns on equity. I expect the same from our industrial consumer and financial operations. I expect our public equity portfolio to compound at healthy rates and for our fixed income operations to provide appropriate interest income while protecting and preserving our capital. All of our businesses will face natural ups and downs, but I am confident in the direction of travel. Those increasing amounts of earnings and cash flows should end up being divided by fewer share. We think that you, as our fellow owners will be well rewarded with those results. In our equity operations, we continue to invest with discipline and patience in keeping with our long-standing 4-part investment discipline. We invest in profitable businesses with good returns on capital and not too much debt, run by people with equal measures of talent and integrity, with reinvestment opportunities and capital discipline at fair prices. There are no changes to that process. In fixed income markets, interest rates increased during the quarter. The good news is that we remain matched in currency and duration to our insurance liabilities and largely hold our fixed income securities to maturity. The other good news is that amidst rising concerns about credit quality, our portfolio remains as high quality and pristine as we know how to make it. There were no credit losses in our fixed income portfolio in the quarter, and I do not expect any going forward. Our public equity portfolio declined 5.2% in the first quarter compared to a 4.4% decline in the S&P 500 with broader market volatility. Our approach is designed to withstand equity market volatility. We believe our public equities portfolio will continue to produce strong returns for our shareholders over the long term. In many ways, we've gone through a healthy amount of change in recent years at Markel. At our core, though, we remain unchanged in the enduring things that matter. We remain dedicated to relentlessly compounding your capital. Our specialization and diversification, which we talked about in our very first annual report as a public company in 1986, remains just as relevant today as it was then. And as time has shown, it works. I believe that will continue to be the case. Our values build value. With that, I'll turn it over to Brian. Brian Costanzo: Thank you, Tom, and good morning, everyone. Before reviewing our first quarter results, I want to briefly remind listeners of the reporting and disclosure enhancements we implemented beginning in the third quarter of 2025. These changes were designed to improve transparency and better align our reporting with how we manage the business. We now present operating revenues and adjusted operating income as key performance metrics, both of which exclude unrealized investment gains and losses as well as amortization expenses. We also now report our results across 4 operating segments: Markel Insurance, Industrial, Financial and Consumer and Other, while providing a divisional view of our insurance businesses, organic growth for our industrial, financial and consumer businesses and annually providing capital metrics for all segments. With that, let's turn to the results. Starting off with Markel Group's consolidated results for the first quarter of 2026. Operating revenues, which exclude net investment gains, were $3.6 billion or flat when compared to Q1 2025. Operating income, which includes unrealized gains and losses, was a loss of $273 million compared to income of $283 million in Q1 2025. Net investment losses were $728 million compared to net investment losses of $149 million in the first quarter of 2025. Adjusted operating income, which excludes net investment gains and amortization expenses, totaled $498 million, a 4% increase versus the first quarter of 2025, driven primarily by improved underwriting performance in Markel Insurance offset by the nonrecurrence of a gain from our investment in Velocity in the financial statement in the first quarter of 2025 and to a lesser extent, lower margins in the Industrial segment. Operating cash flow for the quarter was $16 million versus $376 million in Q1 2025. Operating cash flows for the quarter were net of payments totaling $108 million made to reinsure our exposures on our Hagerty business as part of the transition of that business to full fronting and also reflect lower premium collections resulting from the runoff of our global reinsurance business, along with higher payments for income taxes. Comprehensive loss to shareholders was $340 million versus comprehensive income of $348 million in Q1 2025, driven largely by unrealized movements in our investment portfolio. Moving to Markel Insurance. Adjusted operating income for Markel Insurance in the first quarter 2026 was $369 million compared to $282 million in the first quarter of 2025. Markel Insurance underwriting gross written premiums were $2.2 billion, a decrease of 21% for the quarter versus the first quarter 2025. This was driven by the expected impact from our exit of Global Re and the transition of our Hagerty program to a fronting model, which together totaled $797 million in underwriting premiums in the first quarter of last year compared to just $23 million this year. As I mentioned on last quarter's call, the exit of our $1 billion gross written premium global reinsurance business and the transition effective January 1, 2026, of our partnership with Hagerty to a pure fronting model will decrease underwriting gross written premiums for the full year 2026 by approximately $2 billion. A significant portion of the global reinsurance premiums were written in the first quarter of last year. We expect these changes over the long term to benefit our combined ratio, adjusted operating income and our returns on equity. Adjusted underwriting gross written premiums, which excludes the impact of the exit of Global Re and the Hagerty transition, grew by 10% in the first quarter versus Q1 2025. This increase was driven by our International division within our professional liability and marine and energy products and our Programs and Solutions division, driven by growth in personal lines and programs, partially offset by a decrease in premium volume in our Wholesale and Specialty division due to declines in property driven by a softening rate environment and in general liability due to our continued underwriting actions and remixing of the casualty portfolio. Earned premium decreased 2% to just under $2 billion in the first quarter of 2026. The combined ratio for Markel Insurance was 93% compared to 96% in Q1 2025. The improvement in the combined ratio was driven by improvements in our current accident year loss ratio. First, we had lower catastrophe losses this year with $35 million or 2 points of losses from the Middle East conflict this year versus $66 million or 3 points of losses from the California wildfires in the first quarter of 2025. Second, we had a 4-point improvement in our attritional loss ratio, driven by no losses on our CPI product line this year, a lower loss ratio within our International division and our U.S. property and general liability lines and the exit last year of our risk-managed D&O book within our Wholesale and Specialty division. The Global Re division reported a combined ratio in the first quarter of 114% as we continue to build margins and solidify reserves. The results from the runoff of our Global Reinsurance division unfavorably impacted the insurance segment's combined ratio by 2 points. Prior year releases were 5 points in the current quarter versus 7 points in the first quarter of last year, down slightly due to lower takedowns this quarter within our international professional liability lines. At a divisional level within Markel Insurance, starting with International, gross written premium of $861 million was up 28% versus Q1 2025. We grew across the International division, driven by strong growth in professional liability cyber. The combined ratio of 90% compares to 89% in the first quarter of 2025, with the first quarter of this year, including 6 points of losses from the Middle East conflict and the first quarter of last year, including 6 points of losses from the California wildfires. Within our Wholesale and Specialty division, gross written premium of $673 million declined 9% versus Q1 2025, driven by a softer property and marine premium rate environment and decreases in binding contractors and casualty. The combined ratio improved to 93% in Q1 '26 versus 100% in Q1 2025, with the largest impact coming from lower loss ratios due to our underwriting actions and the exit of the risk-managed D&O book last year. Within our Programs and Solutions division, gross written premium was $656 million in Q1 2026 versus $806 million in Q1 2025. The 19% reduction was driven by the previously announced shift of our Hagerty program to a full fronting arrangement, which reduced gross written premium by $220 million. Excluding this impact, the Programs and Solutions division gross written premium was up 12%, driven by personal lines property programs and growth in our Bermuda platform. Our Programs and Solutions combined ratio improved to 91% compared to 97% in Q1 2025 due to improved loss ratios, primarily due to 3 points of impact from the California wildfires in the first quarter of last year and more favorable development on prior year loss reserves. Moving now to the consolidated investment portfolio. Net investment income for Q1 2025 totaled $256 million, up 8% from Q1 of last year. This reflects higher interest income on fixed maturity securities and higher dividend income on equity securities due to higher yields and higher average holdings in 2026 compared to 2025. These increases were partially offset by lower interest income on cash and cash equivalents, driven by lower average cash and cash equivalent holdings and lower short-term interest rates in 2026 compared to 2025. Fixed income portfolio yield during the quarter was 3.7% and reinvestment yields averaged 4.1%. Within the public equity portfolio, losses totaled $728 million versus $149 million last year. We made net purchases of $28 million during the quarter. The portfolio ended the quarter with a market value of $12.3 billion and pretax unrealized gains of $8.2 billion. Moving to the Industrial segment. Industrial segment revenues for the quarter were $883 million, a 6% increase versus Q1 2025, including 4% organic growth driven by increases in sales in precast concrete products, partially offset by lower revenues from sales of car hauling equipment due to softening demand within the auto industry. Adjusted operating income was $49 million, down 16% versus Q1 2025, driven by a lower segment operating margin due to changes in the mix of business. Turning to our financial segment. Financial segment revenues were $162 million for the quarter, representing a 9% decrease versus Q1 2025, driven primarily by a $31 million contribution in Q1 of last year from a gain related to our minority investment in Velocity offset by an increase in revenue from both higher investment management and program services fees. Organic revenue growth for the segment was 10%. Adjusted operating income totaled $36 million versus $80 million in Q1 2025, reflecting the $31 million onetime contribution from Velocity last year and a $14 million impairment of an equity method investment in an asset management firm in the first quarter of this year. Further, we're aware of the recent story regarding State National's fronting operations and potential credit exposure to a capacity provider. While we acknowledge a current shortfall in collateral against our total exposure, management is actively pursuing all available recourse options under our contracts to obtain additional collateral. We do not believe this situation will have a material impact on Markel Group's earnings or capital position. Moving to our Consumer and Other segment. Revenues for the Consumer and Other segment were $281 million for the quarter, a decrease of 3% versus Q1 2025, driven primarily by slower demand for new housing, partially offset by the contribution of our acquisition of EPI. Organic revenue growth for the segment was down 6%. Adjusted operating income was $40 million compared to $32 million in Q1 2025, with the increase driven primarily by the acquisition of EPI. Finally, regarding capital allocation, during the quarter, we repurchased $134 million of common shares, reducing total shares outstanding to 12.5 million. With that, I will turn the call over to Simon. Simon Wilson: Thank you, Brian, and good morning, everyone. It's pleasing to share another solid quarter for Markel Insurance. As Bryan outlined, the overall combined ratio for Q1 '26 was 92.8%, a more than 3-point improvement versus the comparable period and in line with the steady progress we reported in the previous 2 quarters. Our reported 93% combined ratio included a 2-point drag from our now exited Global Re business. While the combined ratio showed material improvement over last year, GWP growth at first glance looks to have declined significantly. The 2 main drivers of this reduction were the strategic decisions to exit reinsurance and a change to our Hagerty program, where we now provide services for a fee versus taking underwriting risk. Excluding these 2 items, year-over-year GWP growth was 10% in the first quarter. Our primary financial goals at Markel Insurance remain sustaining underwriting profitability and maximizing our return on equity. The decision to cease writing new business in Global Re is a clear example of this commitment. The old adage that top line is vanity, bottom line is sanity is and will remain a core mantra in this business. Our focus on the bottom line will be challenged in the softer insurance cycle. In more challenging markets, our underwriting teams are giving clear direction, always stay focused on profitability and growing businesses where we have a sustained competitive advantage. That said, I'd like to think of Henry Ford's famous remark that we should always remember that the airplane takes off against the wind, not with it. We are present in more than 100 product areas and operating in 16 countries. In no market do we have a share greater than 2%. And in most territories, our share is less than 1%. When people ask me, where does the opportunity lie? -- my response is that we have potential everywhere. We need to remain disciplined about which opportunities we take. We are looking forward to the challenge and remain confident we will find areas of profitable growth. Recent improvements in our financial results are important and provide clear evidence of progress. However, the transformational changes we've made to the organization over the past year will drive our future success. After 1 year into the CEO role, allow me the opportunity to outline how the business is positioned across our 5 core pillars: strategy, structure, oversight, operations and culture. On strategy. Our goal is simple. We aim to be the preeminent specialty insurer on the planet. We win in the market by focusing on 4 key areas: number one, customer focus. We obsess over the customer. Everything we do must provide something that the standard market does not. Number two, market-leading expertise. We build local expert teams across the globe who deliver deep capability in every product that we sell. Number three, speed. We make decisions and serve customers at speed, all enabled by leading technology and local empowerment. And number four, consistently doing the right thing. We honor long-standing commitments, act with integrity and fairness while providing dependable claim service. On structure, Competing successfully in many different areas of the specialty insurance industry across many geographies requires us to operate a business of businesses. In this model, specific leaders have clear responsibility for and control over their P&L. Today, we have 14 distinct business units across Markel Insurance, each with a single leader and a discrete P&L. These business units are grouped under our 3 ongoing divisions to ensure proximity to executive leadership. Clarity of business ownership and simplicity of decision-making sits at the heart of the new structure. Each P&L leader is responsible for selecting their teams, producing their strategy, agreeing to their business plan, designing their product set and overseeing their expenses. Their total compensation is aligned to the long-term profitability. A second key structural change was shifting most resources from the corporate center to the business units themselves, aligning capabilities with business needs and giving leaders greater control over the resources that they use. On oversight, our new structure empowers P&L leaders to build market-leading businesses with clear accountability. By shifting ownership into the organization, executive management can focus on setting expectations and monitoring performance at both the financial and strategic levels. Our financial reporting and management information now fully align with this structure, giving us much clearer visibility into performance and enabling us to quickly identify and address issues where they arise. On operations, technology and AI. People often ask me, what are we doing with technology? What does our tech stack look like? And more recently, how are we approaching AI? I want to make 2 things clear. First, I have a great deal of personal interest in this subject. I truly believe that the winners in our industry will be the companies that develop exceptional operational capability and maintain a culture of continuous improvement. Every leader at Markel Insurance is expected to aim for excellence in operations and technology. Second, within our business of business structure, there's no single answer to what we are doing around technology and AI. Our products span highly diverse markets from excess casualty to workers' comp to global war and terrorism across multiple geographies. A single technology solution for this breadth of business doesn't exist. So what are we doing in operations and technology and AI? A lot. More specifically, each of our 14 business units have developed a strategic plan outlining how they will invest to become best-in-class in their respective markets. These plans are tailored to distinct customer groups and include core system modernization, enhanced data and analytical capability and AI deployment. We are committed to investing in operational excellence and technological excellence. Within Markel Insurance, the current state of our technology is mixed. For example, our London market data and analytics capabilities are outstanding. Our growth in U.S. personal lines has been driven by exceptional operational leadership. At the same time, we need to bring our U.S. wholesale and specialty operations up to the required standard. Our operational investment is occurring at a time where we stand to benefit from rapid advances in AI. Historically, the specialty nature of our businesses made it hard to find a market-leading technology tailored to our needs. Scale was insufficient, forcing us to build bespoke systems or to heavily customize off-the-shelf solutions. Both these types of systems are costly to maintain and typically struggle to keep pace with broader technological advancement. AI changes that. We can now develop cutting-edge solutions for our specialized businesses far more quickly and at a significantly lower cost. AI is helping us serve our brokers faster and policyholders more effectively. AI is helping us create new value, provide more quotes more quickly, which supports premium growth. We also see AI augmenting underwriting judgment and claims adjudication with the potential to improve loss ratios in selected classes of business. We do not believe AI threatens the core economic value we provide, including risk transfer onto a balance sheet with a customer focus. Instead, it expands our ability to serve our customers and helps us assume more profitable risk. For example, we deployed Harvey AI into our London Market warranties and indemnities business last year and extended it to our U.S. financial institutions and environmental lines in the first quarter of this year. We also partnered with Cytura to build a data ingestion system for our U.S. Wholesale and Specialty business that will significantly accelerate our underwriting analysis and speed to quote. In parallel, we are building a new operating model from the ground up to revolutionize our competitiveness in the hard-to-place U.S. small and midsized U.S. wholesale market. Operational excellence is something that I expect from our leaders. We're fully embracing AI across the organization. Our business of businesses model is an asset, allowing individual units and their leaders to deploy AI quickly and locally without having to wait in a centralized prioritization queue. We are on the road to transforming our operational capability. On culture, the culture that permeates Markel Insurance is one which encourages leaders and their teams to build businesses that will endure over a long period of time. We expect our business leaders to act like owners. We talk about how to win, not doing work. We have a respect for authority, but a distain for bureaucracy. The clarity of our structure and its alignment with the new P&Ls provide a strong degree of transparency and accountability. There is a building sense of excitement for what we can achieve. In short, the Markel style when 40 years ago is alive and well. In conclusion, for the past year, I've emphasized what we're doing to bring clarity to Markel's insurance strategy while simplifying the structure underpinning it. These changes aim to empower great leaders to go out and build great businesses. Markel Insurance is now positioned to do just that and to return to the very top of the global specialty insurance marketplace. Achieving this goal will take time, but we are on the right path. And with that, I'll pass you back to Tom. Thomas Gayner: Thank you very much, Simon. And with that, Eiley, we will now open the floor for investor questions. Operator: [Operator Instructions] The first question comes from Mark Hughes with Truist. Mark Hughes: A very strong growth in the international insurance business. I think you've talked about professional lines, marine and energy. How sustainable is that? I know you've put some new initiatives in place to drive the top line. How do you think about the longevity of that market opportunity? Thomas Gayner: Let's have the man who was running that international insurance business speak to that. Simon Wilson: Yes. Actually, a lot of things happened just after my tenure as well. So credit to Andrew McMellan over there in London and the rest of the world. It's an important question, Mark. There is a number of specific initiatives and growth areas that we've put in place around about the second -- at the start of the second half of last year. So we bought an MGA called MECO in the first half of last year. That started putting premium on the book from 1st of July forward. We opened up in Italy, which was a new measure. We took part in some structured portfolio solutions, which are like London market facilities, which were new to us during the course of last year. And so a number of things there are new initiatives that have taken off, which is probably new things that will not have as bigger growth increases during the remainder of this year. There are also a lot of things where we invested in people, in technology, in teams, in new products, which are now coming to critical mass, I suppose. So this time last year, they were still getting going, and now we're seeing some real momentum building behind those. So there is some natural growth underneath there. I think, to be honest, 28%, which we struck this year will be at very much a high point. But I'm pretty confident that we'll see for the duration of the year, you should expect decent growth from international probably in low to mid-teens of the -- sort of from a GWP perspective. But yes, 28% was a terrific start to the year. And we genuinely believe, and this is the most important point, that, that is profitable growth with our international operations because they're finding new places to go and compete with new and high-quality teams that we're bringing into the business. Mark Hughes: And a related point, the favorable development in international was very strong. Was there -- I won't say one-timers related to that, but was there anything unusual? Or is that you're just seeing good underwriting performance emerge in that line? Brian Costanzo: Yes, Mark, this is Brian. I would say this quarter was a pretty quiet quarter on the reserving front. Really no kind of chunky increases, chunky decreases, pretty much our normal kind of just releases of kind of our margin and what we do on a regular quarter-over-quarter basis coming through in the period. Certainly, the one kind of thing year-over-year is we did have some bigger releases a year ago in that international professional book. That book is still holding up very well. It just is not quite as big of a release this year as it was a year ago. Mark Hughes: Yes. And then on the other side of the coin, GL, a lot of talk about the kind of re-underwriting declines in GL premium in the U.S. Can you give us an update on that? How much of that is market? How much is maybe inflation, loss inflation? -- how much progress have you made on those initiatives? And when might that return back to positive growth? Simon Wilson: Yes. Thanks, Mark. It's Simon. I think from a U.S. GL, we did a lot -- this is the area of the book of business where we've probably done the most work to re-underwrite. And the 2 major things where we've re-underwritten. The first is to lower our average limits quite significantly, probably north of 20%. So if you think you were writing $15 million lines and now $10 million lines, $10 million lines quite often now are $7.5 million or $5 million. So we've spread the portfolio more broadly, and we've lowered the limits per risk that we're taking quite materially, especially in the excess areas of that particular book of business. What that does is protects us a little bit more from what we call a frequency of severity problem. And what I mean by that is what we're seeing in the U.S. is that when we see cases going to court or being settled, those numbers are often a lot bigger now than they were maybe 8, 9, 10 years ago. People call that social inflation. Well, the way that we and several of our peers have dealt with that is by reducing limits. So if one of our insureds were to have a claim against them, our net loss and gross loss will be lower than it would have been, say, 7, 8, 9 years ago. Now that takes time to bring that down, but I think we're in a much better shape in terms of our limit profile over the whole book of the business. Now because we're not writing as much limit, that will have a slightly depressing effect on the amount of premium that you take in. So -- but I'll take that trade any day because I think it helps profitability. The second thing we've done in that book of business, which is material, is reduce the proportion of construction-related business that we're writing from around about, I think it was 40% to 45% of that book of business down to around 20% and maybe slightly below 20% now. We saw a lot of impact on our book. And when we took some of the reserve strengthening a few years ago, it was really that construction part of the book of business that were causing us issues. And we've moved pretty hard and fast to reduce that proportion within our book overall. Again, that hurts us on the top line but benefits us on the bottom line. And that's absolutely the mantra that we're running. Now that we've gotten into a position where we feel much better about the shape of the book and the way in which it reacts in the circumstances we see ahead of us, we can now start to look for opportunities. There are still opportunities within the U.S. casualty market for us to look into and the way in which we choose to go and underwrite that risk and market to it. I would signal one note of caution on that, though, in that clearly, the trend -- the claims trend in U.S. casualty business continues to run in probably, we think, the low double digits at the moment. And where we did see very good rate increases probably for the past year or so, we've started to see those rate increases come under a bit of pressure in the last, I would say, 2 to 3 months. And perhaps one of the reasons for that is as the property market has become more competitive, some of those underwriters are now looking for alternative ways to deploy capital and they're moving into the casualty market. I will say this, and I can't tell you how much I mean it, we will not follow a casualty market down, and we will not lose discipline in that area. It's so critical to us that we keep that casualty portfolio in a position which we've gone into it now and start to go into just be in areas where we feel confident that we can make an underwriting profit over a long period of time. But casualty, there's been a huge lift credit to the people that have been involved in that. It hasn't been easy at the front line in the market because we've had to say no to a lot of brokers that we used to say yes to. And you can imagine how that might go down from time to time. But the heavy lifting, I think, in many respects has been done and I feel very, very good about where the portfolio is at the moment. Mark Hughes: And then one more, if I might. You talked about the collateral issue and your potential exposure. Any numbers you can share related to that situation? Brian Costanzo: Yes. I mean, as we sit here today, Mark, we acknowledge we've got a shortfall in the collateral. A lot of work is going into that. Weeks ago, we engaged an outside actuarial firm to kind of take a look at this for us at another level, get another opinion in the door. We're not going to share a number today or anything forward, but we certainly believe that, that is not material to our operations and capital position. Operator: And your next question comes from the line of Andrew Klingerman with TD Cowen. Andrew Kligerman: My first question is around book value per share. It sequentially in the quarter came down to $1,553 from $1,566. And it was in part due to a loss on the equity portfolio of about $58. So I'm wondering now with the S&P 500 Q-to-date up, I think, more than 9%, where would that book value be now, assuming that equity gain? Could you help out with that in the equity portfolio? Thomas Gayner: Yes, Andrew, it's Tom. It will be higher. We wouldn't do mid-period calculations on that, but your math would be correct and the number would be higher. That first quarter equity market volatility is something we've had decades of experience with. That's just normal mark-to-market stuff. Those changes were unrealized gains and losses, not anything realized. Andrew Kligerman: Okay. But I would think materially higher. But anyway, 2 quick housekeeping ones. One, the $14 million impairment on an asset manager, could you clarify what that was? And then on the industrials, 6% revenue growth, but 16% operating income decline due to business mix change. What was that business mix change? So 2 kind of just clarification items. Thomas Gayner: Yes. I'll ask my partner, Andrew, to chime in as well. On the industrial market, again, almost like the equity markets, that's just normal volatility. It's a relatively soft overall GDP kind of environment out there, the K-shaped economy that people talk about. Well, we've got both pieces of the Ks going on out there, and I think the economist description of that is real. I'll ask Andrew to chime in from that point. Andrew Kligerman: Yes, Andrew, on the financial question first, from time to time, we test business units for impairment around here. That's part of normal GAAP accounting procedures. Sometimes there's triggering events that cause us to do that on a shorter-term basis. In a small business unit within there, we felt like the carrying cost was not appropriate. We tested it for impairment, and we concluded that an impairment was the case. However, if you step back and you think about the cash earnings potential of that segment, there is no change. That performance was already baked into results you've seen in recent quarters. So I think you need to separate out the noncash charge versus the cash potential of that business going forward. As it relates to your transportation question, you're right. We mentioned mix in the quarter and the transportation being a drag there. One, I think Tom hit it on it today and just now again. Two, if you recall, 4 or 5 quarters ago, Brian actually laid out a nice narrative around these are cyclical businesses, but they produce great returns on capital over time. Just to add a little data for you, look, dry van shipments, which is one measure of industry volume, have declined from all-time highs a few years ago to multi-decade lows today. There's a whole host of factors contributing to that oversupply during post-COVID years, weakened freight rates, higher financing costs and now elevated fuel costs, at least temporarily. The good news is this equipment must be replaced over time. And as the economy grows long term, so does the demand for this equipment. Our businesses operating in that segment are market leaders. They operate with no debt. They're led by industry veterans, and they maintain a long time horizon for each investment that they make. And we continue to believe we're still well capitalized -- well positioned to capitalize on growth in the future. Thomas Gayner: And I'll close Andrew, just one second, Andrew, probably, I appreciate the detail. Let me add one bit of color to your comments about the amplitude of the cycle this time around. So in the immediate aftermath of the onset of COVID, there was a super cycle of demand for these businesses were wonderful and produce sort of above long-term trend line results. We're now in a period where that equipment is out there. It's part of the inventory. It's getting used up. So we're through a soft part, but the size and scale of the amplitude of that wave has been bigger this time around than normally has been the case. Last thing I'll say about it is if we had the opportunity to buy those businesses again at the price we paid for it, we would do it in a New York minute because they produce wonderful returns on capital measured over meaningful periods of time, and we have every expectation that will continue to be the case, and we would love to find more of them as we can. Brian Costanzo: Maybe real quick on the impairment, Andrew. It's a little bit different than the normal impairment. So Here, we're talking about a single equity investment that goes through an impairment calculation. That's a little bit different in the accounting world, not to go too deep into that in terms of the evaluation and what's done on an individual security that we hold versus a business impairment. And they run through different parts of the financial. So the impairment on an equity investment, you see that go straight to adjusted operating income and our kind of reoccurring earnings, whereas if you had an impairment on a business unit, it would go into the amortization kind of below the line section. So we're talking about the former here, not the latter in terms of the evaluation we did. Andrew Kligerman: That was very helpful. And just 2 last hopefully, real quick ones. Simon, I love your comment about vanity and sanity. And as we look at the rates from a backdrop in the release, you talked about notable rate increases in personal lines and general liability and notable decreases in property, cyber and energy. Any quick numbers you could share with us? And then I have -- I'm sorry for so many, one more quick one. Simon Wilson: I'm turning to Brian's notes on this, you might be able to give you a bit more detail on that. Brian Costanzo: Yes. So if you look at kind of where we are, I mean, property, as you would expect kind of what we're seeing there from a rate decrease across our portfolio, I'd say, high single digits across the gambit from a decrease standpoint. That varies dramatically depending on the size of accounts. So larger accounts, we're seeing a lot more of that. That's where we're doing probably more judicious underwriting, smaller SME accounts, not as large. So it kind of -- it does vary based on the spectrum. Maybe the other place I'll go, casualty, Simon talked about that and just kind of what we're seeing, our view on trend in the low double digits. Rates are still in the double digits, but they are weakening a little bit from where we would have been in the low teens a year ago, now into the lower double digits range. On the personal lines side, I mean, a lot of products in there, but most of that book is in our personal lines property space, not nearly under the same amount of pressure there as the general property market. We write that on an E&S basis. It's very customized in terms of the coverage and what's out there. Those rates are more flattish compared to the broader property market. Andrew Kligerman: Got it. And I guess, lastly, stock looks like it's trading off about 7% this morning. It looked like some pretty stellar property -- I'm sorry, property casualty results, a little mixed elsewhere. What do you gentlemen think it takes to kind of get the stock moving up north from here? Thomas Gayner: Performance. And I think we've demonstrated a few quarters of doing that. And if the market disagrees with the performance that's happening, we'll continue to repurchase shares. And we are price sensitive in our repurchasing. So when things are -- when the stock price is going down, we buy more. Operator: Your next question comes from the line of Andrew Anderson with Jefferies. Andrew Andersen: On the collateral discussion, if I look at some statutory data related to this reinsurance relationship at year-end, it looked like the collateral relative to the recoverable was near 100%. So I guess my question is, has there been some loss development on this relationship? Or is the collateral shortfall that you're thinking about in a low single-digit million range? Brian Costanzo: Yes. Sure, Andrew, it's Brian. So we evaluate loss ratios on all of our programs every quarter. So you're right, if you go to our annual statement, we would have had a loss ratio where the collateral was sufficient. We did increase that loss ratio a little bit here in the first quarter as we react to incurred claims trend. So that is what creates the shortfall that we're looking at today. Like I said, we're getting an independent actuarial review with a third party, bringing in some other data, bringing in more robust data to really refine that estimate a little bit better than what we've got today. So that's kind of our next step in the process, along with the State National team that's done this for a long, long time, continuing to pursue all their avenues under the contract to get additional collateral and offset against where we sit today. Andrew Andersen: Okay. And Simon, I think I heard you mention underlying claim severity running low double digits. How should we think about your implied reserve margin today? And how much conservatism remains embedded in those carried reserves? Simon Wilson: Yes. So when I made those comments, it was a general comment about the industry. So claims trend. If anyone knows what the claims trend is in casualty, if they could tell the industry, that would be fantastic. So I think that is genuinely a -- that is obviously what we get paid to do to try and have a view on that. But coming back to that, how do we feel about the reserves? We have been extremely conservative in our reserving of that GL portfolio because we saw this start to happen 3 and 4 years ago. And I think looking back on that, I would say, Markel were one of the first canaries in the coal mine to really see these trends developing. And therefore, when we've looked at those reserves, over the last, I would say, 18 to 24 months, we haven't had to touch the GL reserves a great deal specifically to strengthen those ones up. So I feel with the re-underwriting that we've been doing recently and the way in which that the portfolio as a whole has performed against those GL reserves that we've got, look, from what we can see, I feel quite good about that. What we will be watching for, though, is this pricing dynamic, which I mentioned in comments earlier. If people start to get ultracompetitive in U.S. casualty, that is where things go badly wrong in this industry. And I am concerned, and I'll say this on the call, about a number of kind of new entrant MGAs in the space backed by sidecars and private capital effectively, which in some areas being very competitive in areas that we know have caused significant losses in the past. And that is where people might get hurt, certainly financially, I think, over the next few years, we're going to be staying out of those games, and we're going to keep focusing on the areas where we know we can perform and bring some tremendous value. But from a reserve perspective, from my perspective, everything we've done on that -- doing that conservatively early has put us in a nice position to start producing the results that we've done in the last few quarters. And to Tom's point around performance, that's exactly what we're focused on for the next few quarters as well. But Brian, you might have some extra detail on that. Brian Costanzo: Yes, I couldn't agree more with what you say, Simon. Maybe one thing I would add on the casualty space specifically, we've talked about this a little bit before, is we do have a reinsurance protection that we started pseudo, call it, 2019 and forward. It's a risk attaching treaty. So it's not perfect to that. But that is a stop-loss treaty in terms of how it functions. So that also gives us a backstop if we were to have to strengthen reserves. And we've done some nominal strengthening of the gross since we have took our charge in 2023, not very much of that falls down to the net. But overall, as Simon says, we've been able to -- we took a big crack at it over a couple of quarters in '23 and then a big swing at the end of '23. We have not had to do so much with that since that time, which is what we had intended to do when we did all the deep dives, brought in third-party firms, took a really long and hard look at the construction trend, what is that construction defect kind of tail risk factor and longer tail than maybe the industry had projected there. And that's a lot of -- that drove a lot of the re-underwriting actions we were talking earlier about is kind of what we saw coming out of some of those reserving observations and being out in front of that and really adjusting the portfolio to the areas where we feel we can compete and do well from a profitability standpoint. Operator: Your next question comes from the line of Mark Hughes with Truist. Mark Hughes: I think you've touched on this, but kind of some sense of what you think the noninsurance business profitability might be in coming quarters. Tom, you pointed out how you're just looking at some cyclical pressures in certain end markets and these businesses have certainly created a lot of value. But when we think about kind of profitability through the balance of the year, it sounds like insurance, good. And then how should we think about those noninsurance businesses? Thomas Gayner: I think the first quarter gave you a pretty good picture of just the conditions in the economy, and we have 20-some businesses out there array through industrial and consumer. We've got some that are doing very well. We've got some that are setting all-time records, and we have some that are on the softer side of the curve. So I don't really have an aggregate point of view other than that they have always done a pretty good job of coming through. And I'm looking at Andrew, if you want to add a comment to that. Mark Hughes: Yes. I agree with what Tom said. I think if you simplify the 3 divisions together, one, adding industrial to consumer and other, you start to see just more flattish. And then within Financial, we called out in our comments both a $31 million gain related to the sale of Velocity last year as well as the $14 million impairment of an equity method investment within. If you take those 2 numbers and you simply appreciate the unique nature and in one case, noncash nature, financial is also flat. So overall, I think when Tom colors the first quarter, we are not a company that adjusts earnings, but I would encourage you to look at it through that lens and marry that with Tom's comments around it's a reasonable representation of the state of affairs. Thomas Gayner: Yes. And let me conclude just by drawing back to the 80,000-foot level, if you look at Markel Group as a whole. So first quarter is done. As we went into this year, here's the sort of back of the envelope math we were looking at. With the business plans that existed within our insurance operations, that's in round rough numbers, call it, $700-some million of underwriting profits. that we think was a reasonable number. And I think we're on track to hit something like that. If you add the industrial, commercial, financial businesses, that set of businesses last year made about $850 million, rough, rough, rough. We fully acknowledge that we thought it would be down from that wonderful result last year, but not by major amount. So just in round numbers, so we can do math in our head, call it, $750 million, something like that. You take the investment income, the recurring interest and dividend income, that's pretty solid. That rounds to $1 billion, and we're on track on that. If you take the equity portfolio and just normalized returns, let's say we're at 8% total return normal expectation that we've got 2% of that through dividends. So 6% of that would be the normal unrealized gain that would take place. That's another $700 million or $800 million. So you add all those numbers together and you get to a number of over $3 billion. There's a couple of hundred million dollars of interest expense and you have tax expense, some of which is deferred by virtue of the fact that we have the unrealized depreciation taking place in the equity portfolio. You add all those kinds of numbers up even on an after-tax basis, you get to double-digit returns on the capital we have, and we're continuing to divide them by fewer shares. And just to give you some numbers on that, it was interesting because I know the 3 of you who have asked questions, and Mark, I appreciate the fact you've asked a broader question. We oftentimes get compared against insurance company peers and not so much to some of the industrial company peers and the holding companies that I would include. But let's keep it within the yellow lines of insurance. I was looking this morning. So with our share count at about 12.5 million shares, as I said in my comments, that's down about 10% from the peak of 14 million shares, and it's taken us about 5 years to do that. Going through the list of looking at things, Allstate these days is down about 260 million shares. And basically, you go back 5 years, they bought in 10% of their shares in 5 years as well. Going in alphabetical order, American Financial Group has about 82 million shares outstanding. If you add 10%, that would be 90 million shares. We have to go all the way back to 2011 to get to where they've taken out 10% of their share count. Go to Arch Capital, a wonderful company, 359 million shares outstanding currently. Again, you go back about 5 years, and they have bought in 10% of their shares as well. W.R. Berkley, a wonderful company we have a lot of respect for, about 380 million shares. You got to go all the way back to 2014 to see them having 10% more shares than they do right now. Berkshire Hathaway, which obviously we admire and think a great deal of. You got to go back to 2019. So 6 years, it took them to buy 10% of their stock in. Chubb at 391 million shares, again, about 5 years since they were at a 10% increase to that. So same kind of time frame we've done that. Fairfax currently at 22. Similarly, it would be a 5-year count to go back to get that 10% in. Hanover Insurance Company, 35 million shares. I say you got to go back 7 years for them to have bought in 10%. Kinsale, 23 million shares. They've just recently started buying in some stock, but the stock count has been going up. And if I were them, I would do the same thing, their valuation. You look at us, again, it's taken us 5 years to do it. I think it will take us less than 5 years for the next. Progressive, 586 million shares. You got to go back to 2010 for them to have had 10% more shares outstanding than they do right now. RLI, wonderful company, 91.8 million shares outstanding. You go back over the 17 years of data I'm looking at, they've never bought back a meaningful amount of stock. And again, ROI has been very well valued. So I think that's a correct capital allocation decision on their part. Travelers, 216 million shares. And again, it would be about just a little over 4 years for them to have bought in 10% of their share. So I think we actually stacked up pretty well. And again, someone was asking me about the stock price and I said performance. Well, again, actions speak louder than words. So you're seeing us execute. And even through some of the challenges that we've had over the last couple of years, which we've spoken frankly and honestly about all the way along, we still had enough money buying 10% of the shares and not add to balance sheet leverage to do it. That's been out of cash flows. I think it's a very strong statement. And given the conditions of the business right now, the people we have running it, I'm optimistic about how the next several years play out. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tom Gayner for any closing remarks. Thomas Gayner: Thank you very much. We appreciate your participation. We look forward to catching up with you. We've got the reunion coming up on May 20 here in Richmond. We would love to see you there. It's a wonderful way to instead of hearing from 3 or 4 of us to hear from hundreds, if not thousands. So we would love to see you here in Richmond on May 20 for our annual meeting, which we call the reunion. Thank you. :p id="-1" name="Operator" /> This conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the First Quarter 2026 Phillips 66 Earnings Conference Call. My name is Rob, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Sean Maher, Vice President, Investor Relations and Chief Economist. Sean, you may begin. Sean Maher: Hello, everyone. Good morning, and thank you for joining Phillips 66 First Quarter 2026 Earnings Conference Call. Participants on today's call will include Mark Lashier, Chairman and CEO; Kevin Mitchell, CFO; and Don Baldridge, Midstream and Chemicals, Rich Harbison, Refining; and Brian Mandell, Marketing and Commercial. Today's presentation can found on the Investor Relations section of the Phillips 66 website, along with supplemental financial and operating information. Slide 2 contains our safe harbor statement. We will be making forward-looking statements during today's call. Actual results may differ materially from today's comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. With that, I'll turn the call over to Mark. Mark Lashier: Thank you, Sean. Geopolitical events in the Middle East drove unprecedented commodity price volatility during the quarter. To put this in context, March was the first month that price moves in major crude oil, refined product and European natural gas benchmarks all exceeded the 95th percentile. In the face of this volatility, we remain focused on operational excellence. Our team is executing safely and reliably. The majority of our assets are in the U.S. We have pipeline connectivity to some of the lowest cost and most reliable hydrocarbon corridors in the world. This positions us to reliably supply energy to support global demand. Due to the closure of the Strait of Hormuz, a significant amount of global refining and petrochemical capacity is down. We, however, continue to operate at high utilization supplying products to our customers. Additionally, we have global placement optionality through our commercial organization. This quarter has seen a significant and favorable shift in market fundamentals. First, the importance of U.S. sourced hydrocarbons has increased due to a need for diversification and access to reliable supply. Second, unplanned downtime in global refining assets has reduced inventories and will support margins. Finally, reduced petrochemical production globally due to downtime and higher naphtha prices has reduced inventories and will also support margins. As a reminder, 80% of CP Chem's capacity is on the U.S. Gulf Coast with competitive ethane feedstock. Recent global events show the importance of reliable domestic energy supply. Our Western Gateway Pipeline project will address long-term refined products needs, improve supply flexibility and increased reliability for the West Coast markets. We're excited about the future due to our strong asset footprint culture of operating excellence and attractive fundamental outlook across all of our businesses. Anchored by the strength of our balance sheet, we're confident in our ability to navigate market volatility and capture opportunities. Brian will now share more on Slide 4 about how our commercial organization is one of our competitive advantages. Brian Mandell: Thanks, Mark. We have a strong commercial organization with 6 offices across the globe. Our business enhances our asset footprint by optimizing feedstocks, delivering products into the marketplace and capturing value. We capitalize on geographic dislocations and turn volatility into opportunity. . With our expertise in global market dynamics, we're ahead of the game, we have an asset-backed trading model and can leverage our physical footprint to take advantage of opportunities. We trade over 6 million barrels of liquid hydrocarbons every day. This creates optionality and economic value. Markets are fluid right now and volatility is likely to persist into next year. Recent disruptions have created multiple opportunities. For example, we move Bakken crude oil to our Beaumont terminal on the U.S. Gulf Coast and then leveraging the Jones Act waiver to our Bayway Refinery. We displaced international crudes with domestic grades into our refining system and sold the international barrels into tight overseas markets. We placed gasoline from our U.S. Gulf Coast commercial blending facilities into the West Coast using the Jones Act waiver. We leveraged our global footprint to deliver LPGs and naphtha produced at our Sweeny hub to global petrochemical customers around the world. Commercial performance is included in the results of our operating segments. Enhancing their margins and improving market capture. Moving to Slide 5. The recent shock to the global energy system has been universal. Refining capacity has been damaged, logistics have shifted arbitrage routes have changed. We are watching these and other signposts closely to capture additional value. The differentials between global indices and physical markets have spiked and forward markets are heavily backward dated. This dynamic reflects tight global crude oil balances. The outlook for product markets looks even tighter, and we expect refining margins to be constructive through the remainder of the year. Our market analysis, commercial capabilities and global footprint enable us to optimize the flow of molecules around our system. Our team maximizes the margin uplift across our value chains. Here are 2 examples of how we are optimizing our system. First, we've added 2 dozen originators around the globe. They speak the language. They know the culture, and they know how to source deals that unlock more value and optionality providing long-term access to key global markets. Second, we've tripled our vessels on time charter in the past 2 years, securing roughly half of our waterborne crude slate. The global tanker fleet has become tight with limited spot availabilities and a large share of sanctioned vessels. This has caused freight rates to increase to historic levels by locking in our freight rates early, we reduced the cost of crude to our refineries. We optimize around our refineries, pipelines and terminals to ensure that we're leveraging every molecule and driving additional value from our fundamental knowledge of the global markets. Backed by world-class assets, we find opportunity and volatility to deliver greater shareholder value. Now I'll turn the call over to Kevin. Kevin Mitchell: Thank you, Brian. On Slide 6, first quarter reported earnings were $207 million or $0.51 per share. Adjusted earnings were $200 million or $0.49 per share. As a result of a sharp increase in commodity prices during the first quarter, the company's financial results were impacted by mark-to-market losses of $839 million related to short derivative positions used as economic hedges to manage price risk on certain physical positions. We had a use of operating cash flow of $2.3 billion. Operating cash flow, excluding working capital, was approximately $700 million. Capital spending for the quarter was $582 million. We returned $778 million to shareholders including $269 million of share repurchases and $509 million of dividend payments. We increased the quarterly dividend 7% on an annualized basis. I will now cover the segment results on Slide 7. Total company adjusted earnings were $200 million. Midstream results decreased mainly due to lower volumes, largely due to impacts from winter storm burn, lower margins associated with customer recontracting and accelerated depreciation associated with a Permian Basin gas plant. In Chemicals, results increased mainly due to higher polyethylene margins. Across refining, marketing and specialties and renewable fuels, results decreased mainly due to mark-to-market impacts. In Corporate and Other, the pretax loss increased primarily due to the inclusion of costs associated with the decommissioning and redevelopment of the idled Los Angeles refinery site. Slide 8 shows cash flow for the quarter. We started the quarter with a $1.1 billion cash balance. Cash from operations, excluding working capital, was approximately $700 million. There was a $3 billion use of working capital, mainly reflecting an inventory build and an increase in cash collateral on derivative positions, partly offset by the net benefit in our payables and receivables positions associated with rising commodity prices. We funded $582 million of capital spending and returned $778 million to shareholders through share repurchases and dividends. Our commitment to return greater than 50% of net operating cash flow to shareholders remains unchanged. The company increased debt in the first quarter. Given the sharp increase in commodity prices, we issued a term loan and increased borrowings on short-term facilities to manage the margin collateral requirements. We ended the quarter with $5.2 billion in cash. We are well positioned to manage further commodity price volatility through significant liquidity and including a high cash balance and cash generated from operations. Slide 9 shows the projected path from the current debt level to year-end 2026 and 2027 debt. We remain fully committed to a total debt balance of $17 billion by year-end 2027. Consensus cash from operations for 2026 and 2027 is approximately $8 billion. In the remainder of 2026, we expect operating cash flow, working capital benefits and the reduction of cash balances as markets stabilize to enable us to reduce debt to approximately $19 billion. In 2027, we expect operating cash flow to enable us to reduce debt by a further $2 billion to $17 billion. This is consistent with the capital allocation framework we have previously laid out. with approximately $2 billion each to dividends, share repurchases, capital spend and debt paydown. Looking ahead to the second quarter on Slide 10. In Chemicals, we expect the global O&P utilization rate to be in the low 80s, driven by the uncertainty of operating levels at CPChem's joint ventures in the Middle East. In Refining, we expect the worldwide crude utilization rate to be in the low to mid-90s. Turnaround expense is expected to be between $120 million and $150 million. We anticipate corporate and other costs to be between $430 million and $450 million. Moving to Slide 11. Mark will now provide some final thoughts. We will then open the line for questions. Mark Lashier: Great things happen when preparation meets opportunity. The current environment is attractive across all our businesses. We've prepared by focusing relentlessly on what we control: cost, culture, competitiveness and capital with discipline, all in the service of safe, reliable operations that deliver strong shareholder returns. Our teams are performing, and we're pressing in and capturing those opportunities. fully prepared fully committed to execute and win when we win, you win. Operator: [Operator Instructions] Steve Richardson from Evercore ISI. Stephen Richardson: I was wondering if you could start on the mark-to-market adjustments and wondering if you could give us some color on some of these impacts by segment, if you could. And I know you addressed this in the 8-K, but if you could get into a little bit of how the volatility that you witnessed was outside the bands of expectations? And can you also just be sure to hit on how you think about that draw of liquidity, what it means going forward? And would it -- any impacts it may have on your shareholder return commitments? Kevin Mitchell: Yes, Steve, this is Kevin. Let me walk through some of that detail. So as we laid out in the first quarter, we saw an $839 million mark-to-market loss from an income statement that impacted refining M&S and renewables and the specific amounts by segment were detailed in the press release. . This is broadly consistent with what we put out in the 8-K. We said approximately $900 million. At that point, that was our best estimate at that point in time. And so I think it's important to make it clear that these are mark-to-market impacts on paper hedges that we have in place to offset physical purchases those purchases are mark-to-market at the end of each month, but the physical inventory is not. And so there's a net impact through the income statement. I do think it's important to emphasize that we do this to protect economic value. There is -- this is a risk mitigation tool. We've been doing this for some time. It's a standard practice. And in the normal course, the impacts of these mark-to-market transactions are just not that significant, not that material. But as Mark mentioned in his comments, we saw unprecedented volatility across the commodity markets in which we participate that course this, we'll see as a sort of outsized impact. as you look ahead in terms of what you can expect on a go-forward basis, it's very much a function of where the commodity prices move from end of March, I think through, say, the end of the year. And if we were to use the forward curve as of end of day yesterday, we'd recover by the end of the year, about $500 million of that $893 million. And it's a commodity-by-commodity calculation on a quarter-by-quarter basis. So based on the forward curve, if that were to play out as reality, that's what you see come back in that context. From a cash standpoint, we have -- at the end of the quarter, we had a total of $3.2 billion out on margin associated with all of this activity. That differs from the income statement effect because there are other barrels being marked where we actually do a corresponding impact to reflect the physical gain. And so you have more paper activity than is subject to the income statement related mark-to-market. That cash impact will come back -- 2 ways it comes back. One, directly in falling prices, you'll see the reverse effect. But in normal course, because this is a continual process as volatility subsides, we effectively consume this cash through a normal purchasing activity. So just to put some context around that, $3.2 billion out on margin at the end of March, at the end of yesterday, it was $2.1 billion, even though the absolute price levels are pretty similar to where they were at the end of the first quarter. And so we'll see that come down as we work our way through the year. And then as we get into -- what does this mean in terms of capital allocation, debt reduction, share buybacks, big picture. And I covered it in the earlier comments and the slide that we put in the presentation on debt targets, we think we will be able to utilize between working capital benefits and the remainder of the year, operating cash flow and as the market stabilize, we don't need to carry that much cash, which is what we showed at the end of the quarter and still do. But we can draw down that cash, get debt down to about $19 billion at the end of this year and then down to our target $17 billion next year, all while still returning 50% of our operating cash flow back through dividends and buybacks and quite frankly, we used Street estimates for cash generation in that calculation, but I feel pretty optimistic that there's upside there as well and we'll hold true to that. So 50% back to shareholders and the other excess will just accelerate debt reduction. Stephen Richardson: That's great. Thanks for the fulsome answer, Kevin. I was wondering if I could just hit as well, we've got you on CPChem. The consultants have full chain margins up, I believe, $0.33 at last check for the second quarter. I was wondering if you could talk about what you're seeing in your business and your view on capturing this with obviously a very high utilization rate on the U.S. Gulf Coast into the second quarter and the balance of the year? Mark Lashier: Yes, absolutely, Steve. This is Mark. CPChem is well positioned to go out and capture those margins. There can be some contractual step-ups that occur, but they're certainly out there aggressively pushing that -- you've seen the supply and demand situation tightened up dramatically with the limitations coming out of the Middle East. And additionally, you've seen limitations for producers in Asia that, frankly, some countries in Asia are selectively moving hydrocarbons away from petrochemical production and into energy use to protect that. And so that further tightens things up. And the cost curve has dramatically shifted as the price of oil has gone up versus low-cost ethane in North America, you see that price floor going up, driving the margin increases. And then there's this factor that prior to Venezuela prior to the activities in Iran. China was accessing deeply discounted crude and so they were converting that into a deeply discounted naphtha and then pouring that polyethylene to the world market. We think that somewhere in the $0.05 to $0.06 per pound advantage versus what the cost curve should have been. Now that's been eliminated with the things that have been going on. And so it's very constructive for CPChem. They can operate from the U.S. Gulf Coast at high rates and over 80% of their capacity is in the U.S. access to advantaged ethane feedstocks that have been -- that feedstock cost has been stable versus what's been going on in the rest of the world. So they're very well positioned to go out and capture those margins. Operator: Neil Mehta from Goldman Sachs. Neil Mehta: Yes. Mark and team, the standout number from this quarter was really the worldwide market capture, which ticked up to 138%. And maybe you can bring this to life a little bit. What -- can you give us a couple of examples of dynamics that specifically drove that strength? And then when we think about sort of a mid-cycle market capture rate, you've talked about mid-90s type of utilization. I think there are a lot of investors on the call who were thinking that 2Q could be lower than that mid-90s number, though, just because of the backwardation in the curve. And just your perspective of that is actually achievable as we set up for Q2. Kevin Mitchell: Yes, Neil, it's a great question. Brian was -- he was pretty humble in his opening remarks, but we always talk about optionality and creating optionality and what he and his commercial team demonstrated in Q1 is leveraging that optionality. If you think about moving Bakken crude to New Jersey without using a train and leveraging the shipping logistics that they've at least in advance. So we've got an advantage over shipping using the Jones Act waivers, all those things lined up to where Brian and his team could take full advantage of that and to drive that. And that's what drove that pretty remarkable capture number, and we're really proud of what they've been doing. They weren't sitting around watching the world in a crisis. They were -- they were moving things to take advantage of the optionality that we've created and we're prepared for. So Brian, you can go ahead and talk a little bit more about what your folks have been up to. Brian Mandell: And as Mark said, with the huge amount of volatility in the market with market dislocations and just the integration of our businesses, there was a lot of value to be had in the market. Just maybe some examples, we profited from a long RIN position, including RINs, we generated at a RIDEA renewable facility. And we were also able to roll some lower cost RINs for prior year into this year. We had really strong results in our European and Asian trading businesses. As I mentioned earlier, and as Mark mentioned, the time charters that we put on over the last couple of years really helped in the elevated freight market. And reduced our accrued costs into our refineries. And then finally, you saw some of the product differentials like on octane and Jet were higher than the indicator. So that helped as well. So to give you some context maybe going forward, if we use our refining indicator, it includes a lot of the impacts already. It's embedded in the indicator. Historically, an average for the year would be -- in Q1, we captured -- benefited from all the commercial opportunities I just mentioned. Normally, in Q2, beginning of summer driver season, we would think about mid-50s so just thinking about some of the tailwinds and headwinds, tailwinds, things like butane blending. We think there'll be more butane blending to the RVP waivers. Strong Jetter octane dips can help us there and additional commercial value. And I think we'll continue to see some of the same value we saw in Q1. But then there's some headwinds, as you said, backwardation and inventory impacts and even turnarounds if we had some in Q2 would impact capture. So I'd start with the mid-90s and think about what you think the market will look like in Q2 and then work our way from there. Neil Mehta: Is it fair to say mid-90s is a good starting point, though, based on plus [indiscernible] Brian Mandell: Mid-90s would be a good starting point. . Neil Mehta: Okay. All right. And then Kevin, can you hit Slide 9 again, maybe in a little bit more detail because this is on the pushback since the 8-K came out that I know you and we have gotten on the PSX stores is leverage pretty elevated. And I think part of that is you're just holding excess cash. And so if you could spend a little more time just unpacking this slide because I think it is important. Kevin Mitchell: Yes. And that is a really important point that we've effectively, from a debt and cash standpoint, we sort of gross up the balance sheet by borrowing more than we need from a normal day-to-day standpoint but being positioned in the event that we see more extreme volatility and have a need on, for example, margin calls in the event that significant price increases. It does feel like since the end of the first quarter, that dynamic has settled down a little bit. I mean the markets still continue to fluctuate. But we've been in this -- if you look at crude in the sort of $90 to $110-ish band over that period. And so our expectation is as market conditions stabilize, we'll be able to draw that cash down. And clearly, that will have an offset on debt. Likewise, on working capital. We had a big working capital use in the first quarter. We expect that to more than come back over the course of the remainder of the year through the combination of normal sort of annual trends. First quarter is usually a working capital use for us. It was exacerbated by the margin calls this year. but we expect that we recover that and end up our projection is a slight working capital benefit for the year -- for the full year. That's our assumption. And then operating cash flow. We expect to have healthy operating cash flow, and that will go to debt reduction. And as you roll into next year, we continue to have that sort of $8 billion of of operating cash flow, then a couple of billion of that can go to debt reduction pretty comfortably. All that gets us to our projected $17 billion target. And I will emphasize that if we see a continuation of strong margin conditions in refining and chemicals, that will further enhance the cash generation will enable us to pay down the debt quicker and also enable us to return more cash to shareholders. Operator: Manav Gupta from UBS Financial. Manav Gupta: I have more of a theoretical question. What I'm trying to get to the bottom of this, based on your preliminary comments, it feels your refining system, which is in the U.S. mostly is relatively insulated from these crude supply disruptions and other things that are happening in the world where certain refining assets may be very good, but can't run. You are relatively insulated from these things. And what I'm trying to understand is -- does that mean somebody like a Philips or even any U.S. refiner in this environment is structurally better off than their global counterparts. And if that is the case, in your opinion, is this the time to be bullish U.S. refining? Or is it this time to be bear issue as refining, if you could help us answer that. Brian Mandell: Hi, Manav. It's Brian. You're absolutely right. This is the time to be bullish, U.S. refining. If we look at what's happened in the marketplace, it started in Asia, moved to Europe, but U.S. has been relatively insulated on supply. Refinery runs are strong, consumer demand is healthy. Crude production is relatively stable. And this kind of highlights how we're immune to the crisis, although not to the higher prices. But largely, our crude -- for instance, at Phillips 66, we only purchased about 1% of our crude from the Middle East. Our crude is generally from Canada from the U.S. and from Latin America. And of course, from Canada and the U.S., it's all pipeline connected. So we are in a very, very good position. Mark Lashier: And I would add to Brian's comments and you think about the activities that they undertook in the first quarter, they do interface with the rest of the world, so they're able to move around and leverage domestic supply and push normal imports out into what the global markets are demanding. And then in addition to that great position in North American refining CPChem is rock solid in North America petrochemicals and the high-density polyethylene value chain. So all of our product lines, all of our businesses really have tailwinds in this environment. And we think that those tailwinds will persist for a considerable amount of time. Manav Gupta: We completely agree. Quickly pivoting to -- sometimes people don't forget that you actually own a significant amount of renewable diesel capacity in the U.S., you never actually entered into a JV to split your capacity. Renewable diesel margins were negative. Everybody was losing money, but we are in a very different environment. Given the size of your footprint, would it be fair to say year-over-year, you could see a material free cash flow inflection in your renewable diesel business, given where we are right now. Brian Mandell: Well, absolutely. Even if you just think about the Ringman of the current blended RIN is more than twice what it was in 2025. So just a credit value alone. And we are running very, very well right now, in fact, above nameplate capacity. So you should see a substantial difference than prior year. Operator: Doug Leggate from Wolfe Research. Douglas George Blyth Leggate: Brian, I wonder if I could direct this to you. So we've got extraordinary margins, you pointed out multiple times, that it's steeply backward dated and I get the bullish near-term outlook question and duration and what breaks it. And we're seeing a lot of airlines cutting capacity or balancing demand through demand disruption, you could argue versus physical supply constraints. What's your response to that in terms of margins are great, but what's your view on duration? And then I've got a follow-up for Kevin, please. Brian Mandell: Thanks, Doug. Our view is throughout this is going to last throughout the rest of this year and into early next year. If you think about what's going on, it's less about demand destruction and more about demand constriction, trying to manage the need for products. And we kind of think of it as a race to the top. We're watching very tight food markets and crude prices keep moving up $106 today on TI, 118 on Brent. And as crude prices move up, products are going to have to move up even further to open up the refinery margin to keep refiners producing the products that the world needs. Clearly, the world is tight. And as you mentioned, it's jet fuel is the tightest. So it's the refinery margins are going to have to keep opening. And we saw that even for instance, in our European refinery recently, where we saw the gasoline crack were somewhat weak compared to the distillate crack, which seemed to be slowing down European refineries. And then all of a sudden, the gasoline, in fact, made a large move to the upside, opening up margins so that European refiners could produce the products that they need. So I think we'll continue to see that through this year and through the early part of next year, even if the straits are opened in the next month or 2 months. Douglas George Blyth Leggate: 2 Brian, would you treat this as -- would you [indiscernible] this or treat it as a windfall? Brian Mandell: What was the question? . Douglas George Blyth Leggate: Would you annuitize this? Or would you treat that as a windfall? Brian Mandell: In other words, are the margin is going to persist. Yes, I think we see them persisting for longer than the straights being closed. Annuitize it. I don't know that we're at the point where we would annuitize anything, but we see it more than just a few months phenomenon. Douglas George Blyth Leggate: So this is my follow-up question, which is for Kevin. Kevin, your share price is 5% off is high. And I think Mark just said we wouldn't annuitize this. This is the opportunity to permanently shift this windfall to your equity value comes from debt reduction versus buying back your shares? Why is that not the right answer if this is indeed a windfall. Kevin Mitchell: Yes, Doug. So you are correct that debt reduction is -- creates equity value as well. And debt reduction is a priority the $17 billion target that we laid out there is a target. If we have significant excess cash generation, we will reduce debt below that level. I'm not going to go so far as to say we will stop buying back shares so it can all go to debt reduction. I think having -- maintaining a degree of balance through the cycle on capital allocation. We've been pretty clear on the 50% return of which at current levels, about half of that is the dividend and the other half is buybacks. But as the absolute level of cash generation increases by definition, if you take 50% back to shareholders, that's an increasing amount also going to the balance sheet. And so we view it as a balance across the board. As of right now, while we may only be a few percent off of our high, we still think there is good value in our share price. And so we feel comfortable with that plan and capital allocation. Operator: Joe Laetsch from Morgan Stanley. Joseph Laetsch: So I wanted to start on the macro, just given where product prices are today. Can you talk about the demand trends that you're seeing within your system in the U.S.? Are you seeing any signs of demand destruction on gasoline and diesel, but the inventory levels in the U.S. have drawn to at or below the 5-year range on products, things are starting to look pretty tight. . Brian Mandell: Joe, this is Brian. We haven't seen much demand destruction, probably 1% or down for products, both gasoline and diesel. And then in terms of our system, we've actually done really well. We added over 500 franchise stores last year in marketing. So we're actually seeing a lot of value from the good work the sales team has done in marketing. But we haven't seen demand disruption in the U.S. Joseph Laetsch: That's helpful. And then I wanted to just ask on the refining side. So utilization rates of 95% in the quarter were solid, even with some maintenance and some third-party pipeline impacts as well. Can you just talk to some of the drivers of the performance during the quarter and then as part of that operating costs, they continue to trend in the right direction. And I recognize there is variability quarter-to-quarter with throughput and natural gas costs. But could you just touch on what inning you think you're in, in terms of cost reduction efforts and the path to the $550 per barrel? Richard Harbison: Yes, Joe, this is Rich. Thanks for the question. Yes, first quarter, I'll start with the cost per barrel and then maybe look back at some of the regional performance opportunities that we see last quarter. The cost per barrel 1Q was $6.21. That's actually $0.80 per barrel improvement year-over-year. So good movement there. I'm very happy with what the team has accomplished on that front. Quarter-over-quarter, as you indicated, it was slightly higher. And that's primarily due to fewer barrels processed in the quarter. And that was a combination of planned maintenance activity as well as there's just fewer days in the quarter and the first quarter of the year, and that does have a material effect. Total process inputs were down about 2% quarter-over-quarter. Seasonally, higher natural gas price was also a big player in this prices gone all the way. I think, averaged about $4.87 per MMBtu at the Henry Hub. We normalize that back to the $3 annual natural gas price, which is the basis we've used for the $5.50 target, the number moves into the low 5.80s on a dollar per barrel OpEx basis. So that says we're well within striking range here of this $5.50 per barrel target in 2027. The organization is really working hard. They've actually got over 200 initiatives that we're actively pursuing right now which are forecasted to drive $0.15 to $0.20 per barrel out of the base operating costs. And these are structural changes in our cost profile and continuing a trend that we've started here well over 4 years ago now. And maybe an example of 1 or 2 of these One of them is really changing our approach to how we clean FCC boilers. It doesn't sound like something very exotic but that actually will, once accomplished, will drive down our annual cost by well over $3 million. And another example is really acid consumption in our sulfuric acid alkylation units and we're working on tightening up the process controls and the temperature controls on those -- that strategy is projected to save another $2 million per year. So it's racking these wins up 1 by 1 by 1 across the system, and the team has been doing a fantastic of doing that. So the balance of the closure, I see us continuing to increase our availability and utilization of the assets, the continued maturity of our reliability programs as well as something I've mentioned before, which is increasing our total process inputs by filling up the downstream units, behind the crude units, using all that discipline that we put in for the crude unit side to apply it to the downstream units. So this remains an ongoing execution story, and I'm very happy with the way the organization is progressing it, and we do see additional upside on that. On the market capture, regional performance side of the business, Brian covered a lot of that generally at the macro level. But what we saw on the refining side was cargo prices coming in a little bit lower for us in refining. And some of that's just the anomaly of pricing, you got prior month pricing that's coming in on crude deliveries and really good work by the European office to capture strong results. And especially on the jet side of the business, the Kerosene fuel is those prices disconnected from traditional tied to distillate. On the Gulf Coast, we saw the same -- a similar story, jet production there quarter-on-quarter was very high. That's for us, and it was also very timely with the Jet pricing blowing out coming out of the Gulf Coast area as well. And then in the central corridor, this is where we had a lot of our turnaround activity focused for the quarter. So we did see the market capture actually go down a bit there, and that was related to maintenance activity at Wood River and Borger facilities and some mark-to-market impacts that Kevin had pointed out earlier in the call here. And last but not least, the West Coast was in a pretty good spot. As you mentioned, there was some impact with third-party pipeline operations there that slowed down our Pacific Northwest operations. But short of that, the team did a fantastic job of capturing the marketplace. Operator: Philip Jungwirth from BMO Capital Markets. Phillip Jungwirth: How does -- on midstream, just how does the higher crude prices change, how you're thinking about investment opportunities? If it becomes clear, there's going to be a greater call on shale. We see the public raise CapEx. Just would you be willing to look more at organic growth here -- if so, which parts of the value chain would that consistent GMP pipeline frac or exports? And then just last, just how much sensitivity is there around the $4.5 billion midstream EBITDA target by year-end '27 if we do see higher U.S. volumes? Donald Baldridge: Phil, it's Don. When I think about the crude prices and the activity. What I would say, first and foremost, that the capital discipline, returns, those are very important to us. I mean certainly, as opportunities evolve, whether that's volume growth in the field where we can add gathering and processing capacity to serve our customers and fill our value chain up we'll certainly pursue those opportunities. We've got growth plans in place. You'll see us continue to add capacity as the customer needs evolve. I think that's a sooner the fairway of our midstream growth plans. You'll see that we try to maintain a balanced value chain. What I mean by that is adding -- gathering and processing capacity, making sure we've got the downstream infrastructure, but also being mindful of what capacities are needed in the market. Again, going back to staying focused on capital discipline, staying focused on the returns that we can generate with those organic growth opportunities. In terms of and our $4.5 billion target. We feel very good about that target, the path that we are on. Certainly, the fundamentals are bright. Coupled with our execution and commercial successes, we feel very comfortable with where we are on that trajectory as well as the ability staying that growth beyond 2027. Phillip Jungwirth: Great. And then coming back to Chemicals. Once the Strait opens up, how do you see the progression for getting back to normal operations for CPChem where you are guiding the lower 2Q utilization, but obviously benefiting on the margin front in the Gulf Coast. And if you could also just comment on the broader industry that would also be helpful just in terms of what does that scenario look like, steps to take and time duration to get back to normal. Mark Lashier: I think as far as CPChem is concerned, the assets in the Middle East that are offline are in good shape. The bigger question is then the greater infrastructure in the Middle East and what challenges there may be. I think that there's probably a greater sense of urgency to get crude oil and refined products moving and then petrochemicals may be a next layer. So I think that revival from the Gulf will be a little lag behind the energy recovery and then you're going to see the system need to repopulate the inventory chain, the logistics chain, and that will take some time. So I think you'll see this have some legs on it. Now we've got 2 big projects underway, too. And those projects, the Golden Triangle project in the U.S. and the RPP project in Qatar, are both proceeding as expected. And there's been no disruption in the progress of the LPP project. In spite of what's going on, everybody's been safe. everybody is doing what they need to do to get that project going. And both those projects will come online fully in 2027, you'll see Golden Triangle polymers starting to commission things later this year and they're making great progress. And so I think they will contribute capacity at a time when it will be really sorely needed, I think. And so there'll be good progress from multiple dimensions for CPChem as this crisis resolves itself. Operator: Lloyd Byrne from Jefferies. Unknown Executive: Mark, Kevin, team, thank you for having me on. Can I start by following up on Neil's question on capture. And I know you commented on how well positioned your transportation is, but how does that impact second quarter capture or maybe even third quarter if rates continue to go on like this. Brian Mandell: You should see a benefit -- given that we locked in our shipping rates over the last couple of years and shipping rates are so elevated, you should continue to see a benefit from shipping rates, particularly in our Atlantic Basin region. Unknown Analyst: Okay. And let me ask a follow-up of -- I don't know whether Don is on, but maybe Mark can answer it. You can comment on Western Gateway and obviously, a very good open season. Just what are the hurdles left and kind of the timing for FID. Donald Baldridge: Lloyd, this is Don. I appreciate the question on Western Gateway. We are quite excited about where we are on the Western Gateway project, the progress we've made to date and where we find ourselves at the end of the second open season. How I see the path forward here is to complete the JV arrangements with Kinder Morgan as well as execute the transportation agreements with the third-party shippers, we've got a team that's working hard to get that done. I would say with the successful conclusion of that work over the next couple of months, I'd expect we would be in a position to FID this project mid- to late summer, again for 2029 in service date. And one of the things I plugback on just the progress we've made and what we've learned through the open season, is really twofold. One, I think there is a strong market interest in having a new build pipeline built to Phoenix and be able to deliver reliable, secure transportation fuels to the west. And then two, there's strong support from the state and federal groups, agencies and officials in having this pipeline in service as soon as possible. So that gives me a lot of confidence that Western Gateway is the right project at the right time and we'll deliver the right returns. Operator: Jason Gabelman from Cowen. Jason Gabelman: I know you reiterated the $4.5 billion of EBITDA on midstream 1Q obviously moved sequentially lower particularly in the NGL business quarter-over-quarter. Can you just help us, I guess, bridge quarter-over-quarter decline and remind us how you get to that $4.5 billion and perhaps given Western Gateway and potential for continued activity? Do you see what type of upside do you see from that $4.5 million? Donald Baldridge: Sure, Jason. Appreciate the question. And just in summary at the very onset, absent the impact of volume from winter storm earn, we're right where I expected us to be from a quarter 1 performance. We continue to have great commercial success, not only in the growth, but also in the recontracting, which -- that has some impact in Q1 and maybe unpack that a little bit. When we think about our renewals, we're quite proactive in how we do that. We tend to renew those a year prior to their expiration dates. The ones that came up for this quarter, we had renewed those and what was exciting about that is we had renewed those for 10-year plus terms. For me, that really validates the success of our customer service the success of our relationships with our customers, that execution gives me a lot of confidence in our ability to continue to grow into our $4.5 billion target by 2027. If the fundamentals are bright, the execution by the team is strong. And as we look through with Western Gateway, whether it's some of the follow-on expansion when we talk about additional gas plants, that gives me confidence that we can sustain this growth rate beyond just 2027. Jason Gabelman: Got it. And I neglected to ask about the LPG export ARB opportunity in the current environment. So if you could just talk about how you're thinking about that. . Unknown Executive: Sure. In the near term, most of our windows are spoken for, either with our term customers or by ourselves, from our time charters, where we've had success is really in our delivered time charter market, where the team in Singapore has been able to optimize deliveries, be able to take advantage of the volatility much like what you just heard Brian talk about. I think, overall, what this shows is the importance and the strength of the Gulf Coast LPG export capability. So I think this will continue to be a good tailwind for Gulf Coast exports, and we expect Freeport to be a beneficiary of that outlook. Jason Gabelman: Great. And my follow-up is just on some of the assets you have on the West Coast. One, given Western Gateway, does that make Ferndale any more or less quarter of the business than it previously was? And maybe can you also talk about the opportunity to sell down part of the interest in the renewable diesel plant as your peers have done and as that market has strengthened here. . Mark Lashier: Yes. Absolutely. From a Ferndale perspective, Ferndale is integrating well into the California market, and we see the 2 things complementary there. They're more targeted at Northern California, Western Gateway is a Southern California opportunity. And so we still see strong tailwinds for Ferndale as they enhance their capability with CARB and sustainable aviation fuel and blending and so they're in a strong position and Western Gateway will come in and provide some stability in Southern California. The other question about renewable yes, I think that we'll see what the market does. The asset is running strong. we would always entertain any interest, but it's a great asset, world-class asset runs like a Swiss watch, and we're seeing great value from that asset today. Operator: Theresa Chen from Barclays. Theresa Chen: On the midstream front, with the crude price outlook likely risk to the upside over the medium term and potential re-acceleration of activity in second-tier basins, can you talk about utilization and the ability to expand your path for NGL assets that are now or soon will be connected to Kinder's double age conversion now an NGL surface. . Is there renewed growth, if there is renewed growth in associated gas, either in the Bakken or in the Rockies itself, how much incremental pipe capacity could you have on your Rockies to Sweeny NGL system? Or would that require a significantly more investment? Mark Lashier: Teresa, I appreciate the question. In the Rockies, right now, actually, our DJ production, we're seeing some record volumes. So it's very exciting to see the volume in that area. And certainly, as you alluded, there's opportunities, whether that's in the Powder River Basin or the Bakken for additional development. We certainly have a well-positioned NGL network out of Colorado that flows through our system in multiple different routes and feeds into our Sweeny complex. We've recently restarted our Powder River NGL pipeline to be able to take some early Bakken barrels. If there's growth in that area, we would certainly look at opportunities to be able to expand capacity to be able to fill the downstream pipes that we have out of the Rockies. So that is certainly an area that we're keeping an eye on. Theresa Chen: And in regards to Western Gateway, now that the commercialization process is done what range of total CapEx and expected to build multiple on a 100% basis, can you share at this point regardless of how the economics would be split between the partners? Mark Lashier: We still need to kind of work through some of the final details with our partner in terms of scope and connections with our perspective of shippers. So we're probably premature to have that information out there, but it will be out there shortly. Operator: Matthew Blair from TPH. Matthew Blair: Just one question for me. Could you talk about the Canadian crude market? It looks like WCS Hardisty is one of the most attractive crudes out there. Are the wider dips relative to TI due to any pipeline constraints coming out of Canada? And then the market structure impacts that you talked about earlier for U.S. inland barrels, would those apply to Canadian barrels as well? Or are they not affected by that? Brian Mandell: I say the -- clearly, the WTI WCS differentials have moved wider for very tight levels earlier on this year. They're now next month at almost $18 off. And a couple of reasons. The first reason is that light sweet crudes from the U.S. are being pulled to Asia. And so that's tightening up light sweet crudes and medium sours. And the second reason is that the Venezuelan barrels on the market and also some planned and unplanned outages at refineries have put some pressure on the heavy grades. And so that's kind of widened the WTI, WCS and our kind of view is they're going to stay wide for some period of time. We're in a very strong position with our Mid-Con portfolio and our pipeline position, which is a competitive advantage, given the Canadian crudes to our refineries. And we benefit from those widened differentials, as you mentioned. And currently, just as a reminder, our sensitivity is $140 million of additional earnings for every dollar wider at the dips to come. Operator: And this concludes the question-and-answer session. I will now turn the call back over to Sean Maher for closing comments. Sean Maher: Thank you for your interest in Phillips 66. If you have any questions or feedback after today's call, please retain to Kirk or myself. Thanks, and have a great day. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Acadia Realty Trust 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. To ask a question during the session, you will need to press star 1. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Lynelle Ray, Lease Administration and Due Diligence Analyst. Please go ahead. Lynelle Ray: Good morning, and thank you for joining us for the first quarter 2026 Acadia Realty Trust earnings conference call. My name is Lynelle Ray, and I am a lease administration and due diligence analyst. Before we begin, please be aware that statements made during the call that are not historical may be deemed forward-looking statements within the meaning of the Securities and Exchange Act of 1934 and actual results may differ materially from those indicated by such forward-looking statements due to a variety of risks and uncertainties including those disclosed in the company's most recent Form 10-Ks and other periodic filings of the SEC. Forward-looking statements speak only as of the date of this call, 04/29/2026, and the company undertakes no duty to update them. During this call, management may refer to certain non-GAAP financial measures including funds from operations and net operating income. Please see Acadia's earnings press release posted on its website for reconciliations of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Once the call becomes open for questions, we ask that you limit your first round to two questions per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue, and we will answer as time permits. Now it is my pleasure to turn the call over to Kenneth F. Bernstein, President and Chief Executive Officer, who will begin today's management remarks. Kenneth F. Bernstein: Thank you, Lynelle. Great job. Welcome, everyone. As you can see in our press release, we had another strong quarter in what is shaping up to be a very solid year both with respect to our internal as well as our external growth initiatives. And while geopolitical events have certainly added unwanted uncertainty to the global economy, thankfully, due to the tailwinds for open-air retail in general, and then even more so for street retail, we are seeing continued strong results driven by strong tenant demand, strong tenant performance, and attractive investment opportunities. As the team will discuss in more detail, we delivered 11% year-over-year earnings growth driven by nearly 6% same-store growth. And even with heightened uncertainty in the capital markets, we completed over $2.5 billion of transactional activity, comprised of $600 million of new investments, over $500 million of recapitalizations within our investment management platform, and a new $1.4 billion corporate borrowing facility. Now since I have discussed in detail the key drivers of the tailwinds in open-air retail on our previous calls, I will limit my explanation a bit. But in short, our continued strong performance is being driven most significantly by our street retail portfolio and more specifically by five key factors. First, limited supply, that continues to shrink. Second, and probably more importantly, increasing demand due to the ongoing focus by retailers to having their own physical locations rather than being so heavily reliant on either wholesale or digital channels. Third, strong tenant performance due to a resilient consumer, especially the upper-end shoppers at our street locations. Fourth, lighter relative CapEx in our re-tenanting of street locations. And finally, stronger annual income growth in our street locations, due to both higher contractual growth and then more frequent mark-to-market opportunities. These continued tailwinds are enabling us to deliver solid internal top-line growth and having that growth hit the bottom line both in terms of earnings growth as well as net asset value growth. Alexander J. Levine will discuss our progress last quarter and why we are poised to continue to deliver superior growth for the foreseeable future. And then supplementing this internal growth, and ensuring that we can continue to deliver this steady growth well into the future is our external growth initiatives. Reginald Livingston will discuss our acquisition activity over the last quarter where we continue to deliver on our goals, both with respect to our on-balance sheet acquisitions of street retail and our execution through our investment management platform. But let me give a few observations. As we have seen more investor interest in retail over the past year, competition has increased for most formats of open-air retail. But so has the volume of deals coming to market. So even with increased competition, we expect to be able to meet our acquisition goals. And while we welcome the company, it has been a bit more difficult to simply buy existing yield to make our targeted returns. So as it relates to street retail investment opportunities, while competitive, it is still a less crowded field than in other formats with fewer capable buyers. So we are still seeing enough attractive investments that are accretive day one both to earnings and net asset value. And we are most focused on investments where there are near-term value creation opportunities where we can use our skill set and relationships to unlock that value. We are still finding deals that get us to a 6% plus yield in the near term, but require a few more moving pieces. And since our team has never been hesitant to use its value-add skills and relationships, this shift is welcomed. Same is true for our investment management platform. The ability to achieve opportunistic returns by simply buying stable assets as we successfully did during our Fund V investment period a few years ago is becoming increasingly difficult, thus our recent investments over the past year have been much more value-add focused and we expect that focus to continue. And as it relates to our investment management activity, we can actually team up with the increasing pool of institutional capital and harness that increased interest. So we do not have to just beat them; we can join them as well. And to be clear, with respect to both our REIT and investment management acquisitions, our goal continues to be to make sure our investments are accretive to earnings, and to net asset value day one, and to achieve a penny of FFO for every $200 million of assets acquired. Reggie will walk through how our most recent activity is meeting our goals both in terms of volume and accretion, and then equally importantly, how we are planting seeds for continued superior growth down the road. Then finally, John Gottfried will walk through our balance sheet metrics and how we are positioned to continue to drive both internal and external growth with plenty of dry powder and diverse sources of capital. So to conclude, our street retail investment thesis is working. The internal and external opportunities we see provide clear line of sight into providing solid multi-year top-line growth and then having that growth drop to the bottom line. Then with ample balance sheet capacity, we are in a position to capitalize on the exciting opportunities that we have in front of us. I would like to thank the team for their continued hard work and with that, I will hand the call over to AJ. Alexander J. Levine: Thanks, Ken. Good morning, everyone. So I would like to start out with an update on internal growth with a focus on trends and performance on our high-growth streets. Then I will touch on some of our slower-to-recover markets with significant upside, namely San Francisco and North Michigan Avenue, and I will finish with an update on Henderson Avenue in Dallas. Overall, another strong quarter of leasing across the board—street, suburban—both within the REIT portfolio as well as our investment management platform. Total volume of signed leases in Q1 was an additional $3.5 million at our share. We have grown our pipeline of new leases in advanced negotiation to $11.5 million, which is a net increase of nearly $2.5 million above the previous quarter. As we sign leases, we are quickly reloading the pipeline and then some. As Ken articulated, because of the historically strong supply-demand dynamic, and the resilient high-income consumer that shops our streets, all signs indicate that we will be able to deliver similar results through the remainder of this year and beyond. In addition to an accelerating leasing velocity, we are also seeing a steady rise in market rents on our high-growth streets. We are currently negotiating new leases, fair market renewals, and pry-loose mark-to-markets along several of our streets, including SoHo, Upper Madison Avenue, M Street, Armitage Avenue, and Melrose Place. These are all markets that have experienced several years of double-digit rent growth and if we are successful in signing these new deals, it will result in a weighted average spread of just over 40%. Now remember, street leases have 3% contractual growth. So a 40% spread after five years of 3% growth means that rents have grown closer to 60% over that time period. This is what we mean when we say that not all spreads are created equal. Now incremental to the sector-leading growth that we are seeing on our streets, we are also continuing to build conviction around historically strong markets that are in the earlier stages of recovery, like San Francisco and North Michigan Avenue in Chicago. At our last update, we reported that since the start of 2025, we had signed about 90,000 square feet of new leases across our two assets with LA Fitness Club Studio and T&T Supermarkets. Since our last update and following the end of the first quarter, we have added another 25,000 square feet by signing Sprouts Farmers Market, who will be joining Trader Joe's and Club Studio at 555 9th Street. And like T&T and Club Studio, this will be their first store in San Francisco. What has become clear is that tenants are strengthening their conviction around the recovery of San Francisco, and with another 70,000 square feet of space remaining to lease, in addition to some accretive pry-loose opportunities, we are gaining increased confidence that we can continue to unlock the meaningful remaining embedded value within our two San Francisco centers. Now right behind San Francisco is North Michigan Avenue, which continues to see steady improvement and has certainly moved beyond the green shoots phase of recovery. We still have a ways to go, but foot traffic has returned to pre-2019 levels, and since the start of this year, there has been a noticeable increase in tenant demand. Over the last year, we have seen new store openings and new lease signings from top brands like Mango, Aritzia, Uniqlo, and American Eagle, and most recently, the 60,000-square-foot Candy Hall of Fame at 830 North Michigan Avenue. Even so, rents are still 50% below where they were at prior peak. North Michigan Avenue is an iconic, irreplaceable street, and we are confident that the recovery will continue to accelerate, and when it does, we will be well positioned to capture that upside. And finally, I will end with an update on Henderson Avenue in Dallas. As a reminder, the vision on Henderson is to create a vibrant, walkable street curated with a mix of today's most sought-after retailers, and supplemented with dynamic and recognizable F&B—mixing the best of what has worked on streets like Armitage Avenue in Chicago, Bleecker Street in New York, Melrose Place in LA, and M Street in DC. In short, Dallas' first and only true street retail shopping experience. The street is already off to a great start with tenants like Tecovas and Warby Parker producing sales that could already justify rents doubling. And with 80% of our retail on the street now spoken for, our new leases are doing just that. I cannot reveal the names of all of the brands that have committed, but to give you a flavor, the project will consist of a healthy mix of nationally recognized tenants like Rag & Bone, who is relocating from Highland Park Village, along with a collection of younger brands that have had success on some of our other high-growth streets like Gizio, Cami, and Margaux. And we are saving around 10% of our space for brands that are more local and authentic to Texas. Add in some fun high-volume F&B like Prince Street Pizza, Papa Bagels, and Salt N' Stir ice cream, and you have the makings of a well-curated, walkable street. So in summation, the key takeaway is that despite consistently high levels of leasing activity over the past several quarters, we continue to see meaningful runway ahead, both in terms of mark-to-market opportunity and ongoing lease-up of our high-growth streets, as well as tapping into markets that have more recently begun to show the signs of a strong recovery. As always, I would like to thank the team for their hard work, and with that, I will turn things over to Reggie. Reginald Livingston: Thanks, AJ, and good morning, everyone. I will cover two things—our transaction activity for Q1 and through April, and then I will share some perspective on what we are seeing in the market. On the transaction front, we have been incredibly busy year to date. We have closed over $1 billion in acquisitions and recapitalizations, gained footholds on two of the country's premier luxury retail corridors, all while achieving our accretion and growth thresholds and building a pipeline that should maintain a high level of activity for the balance of the year. So let us walk through some details. Starting with the acquisitions not previously announced, at the end of the quarter, within our REIT portfolio, we made our inaugural investment on Worth Avenue in Palm Beach, with the acquisition of 225 Worth for $43 million. This street is one of the most irreplaceable luxury retail corridors in the country, and it has all the ingredients for continued rent growth, including strong-performing tenancy, a high-end customer base, and limited supply. The asset contains Gucci, Jay McArthur, and G4, and possesses a meaningful mark-to-market opportunity that we will harvest in the near future. Our conviction on Worth goes beyond this single asset. We have an active pipeline in that corridor, and our strategy there mirrors what we have executed in other markets: acquire a foundational position, build scale, and activate the benefits of concentration to drive returns over time. Subsequent to quarter end, also in our REIT portfolio, we closed on 4 and 28 Newbury for $109 million. These assets are anchored by Chanel and Cartier, two of the most sought-after luxury tenants in the world. These buildings are between Arlington and Berkeley Streets on Newbury, one of the best concentrations of luxury retail on the East Coast. And most importantly, this asset has a meaningful value-creation opportunity that we expect to harvest soon. The same scale thesis applies here—understand the Newbury Street market, and have relationships to create a path to building a greater presence on the corridor. For both Palm Beach and Boston, it is important to note they adhere to our metrics—being accretive to NAV, hitting our FFO accretion target of a penny per $200 million, with CAGR in excess of 5%. On the investment management side, Q1 was defined by executing on recapitalizations. We formed a joint venture with TPG Real Estate that encompassed the recap of Avenue at West Cobb and six Fund V assets, a $440 million transaction. The scale of this recap is a meaningful validation of our platform, our assets, and our relationships. We also completed the recap of Pinewood Square in Palm Beach County with private funds managed by Cohen & Steers, a $68 million transaction. This is our second recap with Cohen & Steers, a highly regarded investor; their involvement reflects both the quality of the asset and the credibility of our business plan. These transactions in part demonstrate our incubated recap model at work and in total, free up capital that we can accretively redeploy. Turning to what we are seeing in the market, the retail investment landscape remains active even as the macro backdrop has grown more complex. Supply remains constrained, new development is sparse, and institutional capital flows into quality retail continue to grow. And none of the current macro noise has changed those underlying dynamics. What that environment rewards, though, is exactly what we have built. Recall, in the street retail world, the majority of our acquisitions are off-market, and that sourcing advantage does not diminish in periods of volatility. If anything, it improves, as motivated sellers gravitate towards certainty of execution. And this rewards us disproportionately because there are fewer players in the street retail segment, and our pipeline reflects that reality. We have a number of opportunities in advanced stages of negotiation and we will continue to underwrite to the same disciplined thresholds that have defined our recent activity. On the investment management side, while the institutional appetite remains elevated, so are the number of owners looking to monetize. Owners without the capital, patience, or platform to unlock value in their assets are looking for an exit, and that is creating a compelling opportunity for a platform like ours that has all three. Our pipeline on this side is as active as it has been. So to close, as I said, we have been busy—find the right assets, on the right corridors with the right growth profile, while continuing to accretively build the investment management business. We expect this activity to continue as we are on track to deliver transaction volume for the balance of the year consistent with our past activity. Thank the team for their hard work this quarter. And with that, I turn it over to John. John Gottfried: Thanks, Reggie, and good morning. Our first quarter results are clear. Our internal growth is accelerating, and we are achieving our external growth goals on both accretion and volume. And these accomplishments are driving our bottom-line earnings. Our year-over-year earnings are up 11%, and with the acquisitions completed to date, we raised our full-year 2026 earnings guidance. I will start my remarks by laying out the building blocks for the remainder of the year, followed by an update on 2027, and then closing with the balance sheet. For those of you that know our approach towards earnings expectations, we set robust targets for ourselves, and thus it makes it unlikely to raise our guidance, particularly so early in the year. However, given the strength in our operations and the accretive acquisitions we have completed to date, we raised both the high and low of our guidance to $1.22 to $1.26, representing 9% growth at the midpoint over the $1.14 of FFO we reported in 2025. And with the simplified reporting that we rolled out last year, you can clearly see what is driving that growth. Based on our latest model, here is how that $0.10 of projected year-over-year growth breaks down. We expect that our internal NOI growth inclusive of redevelopments should contribute about $0.07 to $0.09 of FFO. External growth is projected to add $0.04 to $0.05, driven by the full-year impact of 2025 deals and those closed year to date in 2026. And a continued expansion and scaling of our investment management program should add another $0.01 to $0.02. And as we have previously discussed, partially offsetting our projected growth is approximately $0.04 that is embedded in our guidance from the anticipated conversion of the CityPoint loan in the second quarter. Again, while dilutive in the near term, it will ultimately be accretive as the asset stabilizes. And the earnings growth that we expect to deliver in 2026 provides us with a road map for what we aim to achieve in 2027 and beyond. Before moving to same-store NOI, I want to give a few updates on our earnings model and anticipated quarterly FFO cadence for the balance of 2026. We anticipate our quarterly run rate will be in the $0.30 to $0.32 range for the balance of the year which, consistent with our past practice, does not factor in additional acquisition accretion notwithstanding the active pipeline our acquisition team is underwriting. Secondly, and as I will discuss shortly, rent commencements from our signed-not-open portfolio are weighted to the back half of the year, positioning us for strong embedded growth heading into 2027. Now I want to give an update on occupancy, internal growth, and same property NOI. At quarter end, our REIT economic occupancy increased to 94%. But as we have said repeatedly, not all occupancy is created equal. Our street and urban portfolio, our most valuable space, sequentially increased 140 basis points and 570 basis points from Q1 of last year. And we still have several hundred basis points of embedded upside with the portfolio 91.7% occupied as of March 31. As outlined in our release, we ended the quarter with $10.5 million, or approximately 5% of RABR, in our signed-not-open pipeline. We grew our pipeline by approximately 18% during the quarter, and that is even after nearly 25% of our pipeline commenced in Q1. And as AJ discussed, our leasing pipeline remains robust, and we anticipate that our SNO should continue to build over the next couple of quarters. I will now spend a moment to highlight a few key items on our $10.5 million pipeline for those updating models. We anticipate that approximately 80% of our SNO, representing $79 million of ABR, will commence during 2026 with the remaining balance targeted for 2027. I want to highlight that over $4 million of this $7 to $9 million is projected to commence in the fourth quarter of this year, primarily from the anticipated openings of T&T Supermarket and LA Fitness's Club Studio at our San Francisco redevelopment projects. And when incorporating the timing of commencement, we expect approximately $2 to $3 million of incremental ABR to be recognized in 2026, with the vast majority of that being in our same-store pool, which leaves us with $7 to $8 million of embedded incremental ABR growth heading into 2027. And lastly, on earnings flow-through, with nearly half of our SNO coming from our REIT redevelopment portfolio, we are capitalizing certain costs—primarily interest and real estate taxes—so not all of that incremental ABR flows to the bottom line. Of the $5.3 million of ABR in our SNO redevelopment pool, we expect to capitalize between $3 to $4 million of cost on a full-year run-rate basis. Moving on to an update on our 2026 same-store expectations, we remain on track to land at the midpoint of our guidance, or 7%. I mean, I will likely regret providing this level of granularity, given it only takes a few hundred thousand dollars to move us 100 basis points in either direction, but based on our current model, we see same-store growth trending 6% to 8% in Q2, 7% to 9% in Q3, and 5% to 7% in Q4, with our street and urban portfolio anticipated to outperform suburban by 400 to 500 basis points. And now moving on to our balance sheet. So far in 2026, and it is still early, we have acquired over $600 million of REIT and investment management deals, and we did so without issuing any equity. And with the available capacity on our revolver, unsettled forward equity, and anticipated proceeds from our structured finance and investment management businesses, we have all the accretive capital we need to fund our acquisition pipeline. As highlighted in our release, we completed the refinancing of our unsecured corporate credit facility, entering into a $1.4 billion agreement. As part of this refinancing, we tightened pricing, extended maturities, and increased our total borrowing capacity by $250 million to support our growth. The new facility was significantly oversubscribed, and we strategically added two new banks to our incredible and long-standing lineup of capital partners. Following the completion of this facility, we have very manageable maturities and swap expirations over the next couple of years, which means our top-line earnings will largely drop to the bottom line. So in summary, we had an incredibly busy and productive start to the year. Our multi-year expectations of strong internal growth are intact, and we have a balance sheet that has ample capacity to support our expansion goals. We will now open the call for questions. Operator: Follow up and rejoin the queue for any further questions. Our first question comes from Craig Mailman with Citi. Craig Mailman: Hey, guys. So, John, that was helpful going through the guidance detail there. Just kind of curious, between AJ and Reggie, I know there is not a lot incrementally for acquisitions. Maybe just to start there, Reggie, I think you said that activity for the balance of the year could be similar to what we have seen recently. In terms of magnitude on gross, so then maybe pro rata share, goalpost what you guys are looking at, what could conceivably close this year, and maybe what the earnings impact of that could be? Reginald Livingston: Sure. I will focus on what I think could close this year. I guess taking a step back, run-rate retail on the REIT portfolio side is kind of about $400 million or so the last year plus. We have done about $200 million of that so far this year. So I think we could pencil in doing basically the same volume that we have done last year from a REIT portfolio side. On the investment management side, where we have averaged about $250 million plus or so the last two and a half, three years per year, I think we can do that as well. That is, by definition, a little lumpier because we are focused more on value-add opportunities, but I think that is how we think about it from a goalpost standpoint for volume. John Gottfried: And then on the earnings side, Craig, I think the one thing that we pointed out is that our target, which is unchanged, is a penny of accretion. And that is both REIT—so on $200 million worth of REIT acquisitions, our target is day-one earnings accretion of a penny per $200 million. And that same math, even though our pro rata share is much less of the equity, when you factor in the fees, $200 million of investment management is also a penny. So in terms of earnings impact, you would just prorate that throughout the year. But those targets are unchanged. Craig Mailman: Okay. That is helpful. And, John, you are breaking up a little bit. I do not know if it is my line or yours, but just a heads up. And then similarly on the leasing side, AJ, you said you guys are working on a fair bit of fair market value adjustments and some other deals. How much of those are already embedded in guidance versus could be incremental upside as we head into 2026 into early 2027? John Gottfried: Craig, are you referring to what is in the pipeline or what could be in the pipeline and converted to show up in rents? Is that the question? Craig Mailman: Yeah. Like, what is actually considered in some of the metrics you guys talked about versus could be additive to that—you guys do not want to put it in there yet because the predictability of it is not great. John Gottfried: Got it. So I think any leasing that we need to happen has already happened to hit the midpoint of our guidance both on same-store and earnings. So whatever AJ—if he gets something signed that is in his pipeline, we get them open and operating—that would be additive to that, which in the street is possible. Alexander J. Levine: Yeah. We are typically fairly conservative with FMV assumptions. And it is typically upside for us. Operator: Our next question comes from Andrew Reale with Bank of America. Andrew Reale: Good morning. Thanks for taking my questions. Maybe if you could talk about your new corridors—Palm Beach and prime Newbury. First, what is the timeline for realizing the mark-to-market opportunities there that Reggie mentioned? And then are there any additional assets in the pipeline in either of those markets today? And how scalable do you think those markets could ultimately be? Reginald Livingston: Sure. I will start with the second one, Andrew. For us to identify a market, it is never just about one deal. We think: how can we amass $100, $200 million plus over time, so that we can enjoy the benefits of that scale that we have talked about—being the first call for sellers, the first call for tenants, etc. So we have an active pipeline that we feel pretty good about. We are always going to stay disciplined in our underwriting, as I have said before, but we think those markets we can scale. Before we even talk about scaling, though, we ask whether those markets have the same rent growth drivers and demand that we have in SoHo, in Georgetown, and our other corridors. And I think these corridors do. There is tight supply, the tenant demand is very high, the sales volume is there—not only to justify the rent run-up from previous years, but to continue rent growth in the future years. So we think both Worth Avenue in Palm Beach and that block of Newbury, and some of Newbury generally, have those. We feel good about the opportunities that make sense there and that we will be able to scale. To your first question, I do not want to get into too many specifics, but big picture, the opportunities for us to harvest mark-to-market opportunities and harvest 6% plus yields are really fact dependent. The framework and the way to think about this is there are a lot of things happening in these markets—from rent growth, from F&B resets. A bunch of retailers are actually reaching out to us even before their leases expire and saying, “Hey, I want to invest in my space, so let us do an early renewal now.” All those things inure to the benefit of us being able to achieve the yields in the near term instead of long term. John Gottfried: And just to add on to that, from a modeling perspective, two thoughts. When we look at—and, again, you should assume that in these instances, the in-place lease would be below market—so when we think of that in the conservative bookkeeping we do, we are conservative as to where we think the market is on day one. And just a rough rule of thumb that we think about is, ideally, we want to get to the 6%s cash that Reggie referred to. Our target is two years, but we will tolerate up to three or four years for the right deal where we have the level of conviction. That is in terms of timeline and what we do initially to establish the gap yield from that below-market impact. Andrew Reale: Okay. That is helpful. Thanks. And then, John, I think it was last quarter, you said pry-loose could potentially be the most impactful variable within the 5% to 9% same-store range, with the real benefit from that maybe accruing in 2027 or 2028. If you were to maximize the pry-loose opportunity in the 7%— John Gottfried: Andrew, so I think that was one—we gave a wide range, and I will start with historical practice, and maybe I need to not be so stubborn. We could change our historical practice, but we have not updated same-store guidance once we have given that, which is why we are not doing it this quarter. But I would say assume we are targeting the 7%, and the pry-loose is very real, very actionable, but it is not going to deviate from the 7% target. Kenneth F. Bernstein: Good luck getting John to count his chickens before they hatch. Andrew Reale: Fair enough. Thank you. Operator: Our next question comes from Floris van Dijkum with Ladenburg Thalmann. Floris van Dijkum: Thanks. Good morning, guys. Question that does not seem to get a lot of attention these days, but your Henderson Avenue development—it is about $200 million. Should investors expect something like a 9% or 10% return on that, and is that what you have indicated the remaining ATM, the forward ATM, is going to be used to fund? Maybe also talk a little bit about the timing of that development, what kind of rents you are getting, and how much of that is pre-leased. John Gottfried: Let me start with the yields and timing, and then I will turn it over to AJ on the leasing specifics. We put out there—and we are on, if not ahead of, target—that we think the development is going to stabilize to an 8%–10% yield, so very consistent with what you shared. Another point, Floris, is that is the 8% to 10% on the dollars we are spending incrementally. What that is not factoring in is that we have a whole other portfolio of assets where what AJ is about to share with you is that the entire portfolio of assets is proving out to be very below market. We are not factoring in the lift from the balance of the portfolio that the development is going to add to that. In terms of timeline, we will be through our part of construction back half of this year, begin delivering space, stabilizing in 2027 and up and running in 2028. AJ will talk about where we are in leasing and status there. In terms of what we laid out as expectations, we are on track, if not ahead. Alexander J. Levine: Yeah. I would say the interest and excitement on Henderson has been far beyond what we even initially imagined. And I think what you have to remember—and we have said it before—is that existing sales on the street are already in excess of the sales we are seeing even in markets like Armitage Avenue, and rents on Henderson are half of what we have currently on Armitage Avenue. So, as I mentioned in my prepared remarks, there is already justification for rents doubling on the street, and some of the more recent leases that we are signing are actually doing just that. Rag & Bone, obviously having a lot of success over at Highland Park Village, is deciding to shift to merchandising that is a little bit more in line with what they prefer from a co-tenancy standpoint. Some of the younger brands like Margaux and Gizio—I am anxious to give you more names. I have shared what I can at this point, but we are off to a great start. Floris van Dijkum: Great. And maybe as a follow-up question, I wanted to touch base on Chicago. I know you talked a little bit about the momentum, and I think TPG has bought into your JV, if I am not mistaken, at 717. What is the appetite to perhaps take advantage of some of the opportunistic investment opportunities that could be achievable in that market? And maybe talk about where is the upside, or is there only— all we hear about typically when we talk to people is Chicago is terrible. What has changed, and why is it not a bad place to be? John Gottfried: Let me start with—of course, the recap with TPG was Fund V, nothing to do with Fund IV. Everything we own at 717 is in Fund IV and still held by Fund IV. Just to clarify there, there has been no transaction. Alexander J. Levine: And I just want to correct one thing. Chicago is not terrible. It has never been a bad place to be. Certainly in our neighborhoods, we have had many years of success there. The issue with North Michigan Avenue has never been an issue of fundamentals. Footfalls are back in excess of 2019 volumes. The sales are seeing very real growth over the last few years. It has really always just been a challenge of difficult spaces—multi-level retail, historically those flagship locations that have been more difficult to backfill—but those spaces are filling in. I mentioned some names—Uniqlo, H&M coming back to the street, American Eagle, Aritzia—large format spaces. As those fill in, we are going to continue to see increases in activity. Then, of course, the challenge of having three underperforming malls on the street has not done us any favors. As those pieces start to get figured out, we are just going to see more and more momentum on the street. Operator: Our next question comes from Todd Michael Thomas with KeyBanc Capital Markets. Todd Michael Thomas: Thanks. Good morning. First, I just wanted to ask if there are any more markets or partners that you are evaluating today. Should we expect some additional inaugural investments in the quarters ahead as we contemplate some additional investment activity? And then, Ken, a bigger-picture question for you or Reggie—you talked about the increased competition for open-air centers. I think you referenced that in context of speaking about Fund V assets, for example, but you indicated that you are still finding opportunities on the street and urban segment, a little less crowded. Why do you think it is less crowded? Why is the competition lower and the acquisition environment seems more favorable, where there are strong IRR and risk-adjusted opportunities, good rent growth—you talked about the escalators. Just curious to get your thoughts there. Kenneth F. Bernstein: Sure. On additional markets, we spend a fair amount of time—AJ and I especially—talking to our retailers about which markets are ones you might want to be in, and which ones are going from “nice to have” to “need to have.” In the case of Palm Beach, it is transitioning from a seasonal market and, for a variety of reasons that we all read about, it is now becoming a must-have market. In those instances where we see fragmented ownership and our retailers are saying, “We would welcome institutional high-quality ownership like Acadia or others,” that is where we spend the majority of our time and attention. In some markets, Dallas was no place to buy, so there we are building and creating that street retail environment. But for Palm Beach, Worth Avenue clearly checks that box. As does Newbury in Boston. There are probably a half-dozen, perhaps a dozen, additional markets that would fit into that spectrum that we are constantly spending time on. And then what we are saying is—and Reg touched on this—is there enough assets for us to acquire over a realistic period of time that we can build adequate scale? Is there a spine? Are there barriers to entry on a given corridor so that it does not just keep on wandering up and down, left and right? And when it does, in the case of Worth Avenue and Newbury, and as I said about a half-dozen others, you should expect over time that we will focus on those. We do not have to add new markets in order for us to achieve our goals of being the premier owner-operator of street retail in the United States, but it would be nice to have a few more. And from our retailers’ perspective, they would welcome that. Now in terms of competition, street retail has the longer learning curve. It is pretty easy to underwrite some formats of open-air retail and that is why you saw capital move first and foremost back to supermarket-anchored. You still need to underwrite thoughtfully and carefully your supermarket, but all of the things we talked about in terms of our tenants, you do not really hear in terms of the satellites—that dry cleaner, that coffee shop, and otherwise. We do not get into that same level of underwriting. So there are just lower barriers to entry. For street retail, you have to understand the market, you have to understand the tenants, you have to understand the local laws, and it has taken us well over a decade to get to the point where we are right now. And for a lot of institutional owners, gearing up is just too difficult. They would rather partner with us. And so we certainly like our positioning in the street retail format. That being said, as Reggie has pointed out, the team has been very active in other formats of open-air retail. Thankfully, volume is coming back. So we will achieve our volume goals notwithstanding it being more competitive. We just have to work a little harder on it, and so far, so good. Todd Michael Thomas: Okay. That is helpful. And then, John, just real quick—appreciate the update on CityPoint as it pertains to the guidance. What is the ABR upside opportunity there today? You are at a little over $21 million of ABR. Where does that stabilize? And what is the current thinking around the stabilization time frame? John Gottfried: In terms of stabilization, Todd, it is one we have always thought of in two distinct phases. The first phase—in the next 18 to 24 months—where we should be able to add 10% to 20% of current ABR. That is our goal, our strategy, and our leasing plan to add that over the next year or two. Secondly, after that—again, the neighborhood is still filling in—proof of concept, we have some leases that we have signed that will be rolling. Second stabilization, we think we add another 30% to 40% off of that once we get to that level of stabilization, after we get through this first one. Alexander J. Levine: For sure. The last 18 months have been pivotal at CityPoint. Between Sephora and Swarovski, most recently Warby Parker, Van Leeuwen—really it is starting to get that Armitage/M Street feel. So, at this point, it is just about finding the right retailers and completing that right mix of merchandising. Yes, there is a lot of runway ahead there as well. John Gottfried: How we look at it to give us conviction is the sales that are being generated. We do not want to give individual tenant sales, but you could take a guess as to who they are. They are doing increasing volumes that are attracting the attention of retailers, and that is what is giving us the conviction that it is a matter of when, not if. Todd Michael Thomas: Okay. That is helpful. Thank you. Operator: Our next question comes from Michael William Mueller with JPMorgan. Michael William Mueller: Yes, hi. First, you mentioned 8% to 10% returns for the Henderson expansion. What are some of the moving parts that pull you to an 8% versus a 10%? Is there that much variability in the rents being discussed? Kenneth F. Bernstein: Yeah, Mike, some would be cost, some would be timing of opening and when we declare we are at stabilization. And if you really looked at the math, when you are doing a full lease-up like this, 200 basis points of variability feels normal. Maybe it is a little wide so that we are being a little conservative, but it is not appropriate to say we are getting to 9% right now. Give us a little latitude. Hopefully the tenant sales performance that we have seen so far and the tenant enthusiasm that we are seeing continue. A lot of it is just logistics—how long does it take to get the various tenants open? A few months’ delay could change those numbers 10–20 basis points one direction or another. Michael William Mueller: Okay. And I guess second question: you now have three buildings on Newbury and the one in Palm Beach, and I know the goal is to scale that. But could you operate those buildings efficiently over the longer term if you could not find additional acquisitions, or do you really need to have five or ten assets in a market to have it work over the long term? Kenneth F. Bernstein: We could absolutely operate them. When I refer to—and when we have referred to—benefits of scale, it is very different than G&A as a percentage of assets in a given corridor. While there are benefits to scale like that, and that is how we traditionally in our industry think about it, what we are seeing is very different. What we are seeing is when we can control enough buildings on a given corridor—as we have on Armitage Avenue, as we have on M Street, as you will see us continue to do on Greene Street in New York and elsewhere—we can then pull other levers that enable us to get higher rents more efficiently with less downtime. So AJ and team are constantly shuffling tenants. We just had a meeting this morning on this where some tenants want to be larger, others are ready to leave, and by having enough choices on a given corridor, and being a trusted landlord for these retailers, the benefits of scale that we are referring to are not cost-related; it is really the ability to drive rents and NOI over time. And that requires more than just a couple of buildings on any corridor. So in order for those benefits of scale to show up, I look forward to Reggie and team adding to both of these corridors over time. Operator: Thank you. That concludes today's question-and-answer session. I would like to turn the call back to Kenneth F. Bernstein for closing remarks. Kenneth F. Bernstein: Great. Thank you, everyone. We look forward to speaking with you next quarter. This concludes today's conference call. Operator: Thank you for participating. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattel, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jen Kettnich, Vice President and Head of Investor Relations for Mattel. Jen, please go ahead. Unknown Executive: Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; and Paul Ruh, Mattel's Chief Financial Officer. This afternoon, we reported Mattel's First Quarter 2026 financial results. We will begin today's call with Ynon and Paul providing commentary on our results, after which, we will provide some time for questions. Please note that during the question-and-answer session, we respectfully ask that you limit to 1 question and 1 follow-up so that we can get to as many analysts and questions as possible today. Today's discussion, earnings release and slide presentation may reference certain non-GAAP financial measures and key performance indicators, which are defined in the slide presentation and earnings release appendices. Please note that gross billings figures referenced on this call will be stated in constant currency unless stated otherwise. Our earnings release, slide presentation and supplemental non-GAAP information can be accessed through the Investors section of our corporate website, corporate.mattel.com. And the information required by Regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicators is included in those documents. The preliminary financial results included in the earnings release and slide presentation represent the most current information available to management. The company's actual results when disclosed in its Form 10-Q may differ as a result of the completion of the company's financial closing procedures, final adjustments completion of the review by the company's independent registered public accounting firm and other developments that may arise between now and the disclosure of the final results. Before we begin, I'd like to remind you that certain statements made during the call may include forward-looking statements related to the future performance of our business, brands, categories and product lines. Any statements we make about the future are, by their nature, uncertain. These statements are based on currently available information and assumptions, and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ from those projected in the forward-looking statements. We describe some of these uncertainties and in the Risk Factors section of our latest Form 10-K annual report, our Form 10-Q quarterly reports, our most recent earnings release and slide presentation and other filings we make with the SEC from time to time as well as in other public statements. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so, except as required by law. Now I'd like to turn the call over to Ynon. Ynon Kreiz: Thanks, Jen. Good afternoon, and thank you for joining Mattel's First Quarter 2026 Earnings Call. We are off to a good start to the year with growth in net sales and positive consumer demand for our products in the first quarter. We continue to make progress on our strategy to grow our IP-driven play and family entertainment business and are seeing top line acceleration in the second quarter to date. Key financial highlights for the quarter as compared to the prior year. Gross billings grew 2% in constant currency with increase in vehicles and challenging categories overall, partly offset by a decrease in dollars and [indiscernible] and preschool. Net sales grew 4% as reported and 1% in constant currency and adjusted earnings per share declined $0.18. Per circana, Mattel was #1 globally in our later categories dolls, vehicles and infant partner and preschool and gained share in vehicles and action figures. We also executed on our capital allocation priorities including closing the acquisition of full ownership of Mattel 163 mobile game studio and repurchasing $200 million of shares in the quarter while maintaining a strong balance sheet. The toy industry grew in the first quarter, and we continue to expect it to grow in 2026 with the benefit of a toetheatrical slate and further expansion of adult consumers. As it relates to current geopolitical events, including the war in the Middle East, there has been minimal impact on our business to date, but we continue to monitor the situation and hope for a swift resolution and peaceful days ahead. Turning back to our portfolio performance in the quarter. Several standout brands grew double digits or higher across own brands, including Hot Wheels, Uno and Monster High partner brands such as toy story and WWE relaunch franchises like Masters of the Universe and innovative new product lines like Mattel Brick shop. We are making strong progress on our digital strategy, including the integration of Mattel 163 as well as the upcoming launch of our first 2 self-published mobile games, acquiring full control of Mattel 163 meaningfully strengthens our digital games business and adds significant development, publishing and digital customer acquisition expertise. As it relates to self-published mobile games, our first game is based on masters of the universe and currently in soft launch ahead of the theatrical movie premiere on June 5. The second game is in advanced development and targeted for release later this year. We plan to share more details soon. We are also expanding our presence on creative platforms. On branded digital game experiences were launched on roadblocks and Fortnite with strong reach and engagement in our Barbie Dreamhouse Tycoon roadblocks game continues to rank in the top 10 among hundreds of branded games on the platform. Our digital game licensing business contributed to overall growth in the quarter and benefited from partnerships, including Pictionary with Netflix and scramble with scope. The upcoming Masters of the Universe movie will be released with wide distribution in thousands of tiers globally. A robust multi-platform marketing campaign spanning digital out-of-home and strategic brand partnerships is underway, led by Amazon MGM and Mattel. A full cross-category product line across stores, adult collectibles, apparel, publishing and more began rolling out this past weekend. We are very excited to bring this classic methology to life on the big screen and reimagine the franchise for original fans and a whole new generation. We are also gearing up for the Matchbox movie in October and have a robust slate of films in development, including Hot Wheels, Poly Pocket, Barney and Rock Soken Roberts, among others. As we've shared, we're making strategic investments totaling approximately $150 million in 2026 and to drive accelerated growth and profitability consistent with our capital allocation priorities. These investments are designed to allow us to capture even more value from our IP faster such as in self-published mobile games, building sets, B2C, first-party data and technology and infrastructure. We believe these investments in aggregate will have high ROI with a net positive contribution to the bottom line in 2027 and beyond. Before I turn it over to Paul, I would like to touch on the recent leadership announcement that Steve Totzke, President and Chief Commercial Officer, will step down from his role effective May 1, and Sanjay Luthra, Managing Director of EMEA and Global D2C will succeed Steve as Chief Commercial Officer, overseeing Mattel's global sales and commercial operations. We thank Steve for his many contributions, and I'm personally grateful for his years of partnership. Sanjay is a 23-year Mattel veteran. In his most recent role, he has steered the emails transformation to achieve record sales and growth and expanded Mattel's leadership across the region in key categories. We look forward to his impact on driving our strategy to grow our IP-driven play and family entertainment business. Over to you, Paul. Paul Ruh: Thanks, Ynon. As you just heard, we're off to a good start to the year. Looking at key financial metrics as compared to the prior year quarter, net sales grew 4% as reported and 1% in constant currency to $862 million ahead of expectations. Adjusted gross margin declined 450 basis points to 45.1%, primarily due to the gross cost impact of tariffs that we previously mentioned as part of our guidance as well as unfavorable foreign exchange and inflation and adjusted earnings per share declined by $0.18 to a loss of $0.20. Turning to gross billings in constant currency. Total gross billings grew 2% with Mattel's global POS up mid-single digits. Vehicles momentum continued with a 13% increase. Hot Wheels and Disney and Pixar cars each grew double digits. Total declined 11% due to Barbie, partially offset by growth in Monster High. American Ger was comparable. Infant dollar and playschool declined 18%, primarily due to Fisher price. Within Fisher price, little people grew double digits. Challenger categories collectively increased 17%, and Games grew led by Uno, including the benefit of the partial quarter contribution of Mattel 163. Action Figures growth was driven by a robust slate of owned and partner properties. Mattel Brief shop also performed exceptionally well as it continues to expand following a successful launch. As it relates to gross billings by region, international was up 8% and with growth in each of EMEA, Latin America and Asia Pacific. North America declined 4%, including the impact of the shift in U.S. retailer ordering parents from direct import to domestic shipping. Based on what we are seeing today, we believe U.S. retailer ordering patents are stabilizing and expect our North America region to grow in Q2. Moving down the P&L. Adjusted gross margin in the first quarter was 45.1%. The decline was due to the impact of 240 basis points from the gross incremental cost of tariffs, 140 basis points from unfavorable foreign exchange and 90 basis points from inflation. Going the other way, tariff mitigation actions and OPG savings, partially offset by several factors contributed a benefit of 30 basis points. Advertising expenses increased $23 million to $93 million, reflecting the timing of Easter this quarter and the inclusion of Mattel163 expenses. Adjusted SG&A expenses increased $19 million to $366 million, primarily due to the strategic investments previously discussed. As mentioned in our earnings press release, beginning in fiscal 2026, we are excluding the impact of amortization of acquired intangible assets from non-GAAP measures to facilitate period-over-period comparisons of underlying business performance and have also recast these non-GAAP financial measures for prior periods. Adjusted operating income was a loss of $70 million as compared to a loss of $8 million in the prior year period. primarily due to higher advertising expenses, lower adjusted gross profit and higher adjusted SG&A. Adjusted EBITDA was a loss of $12 million as compared to a gain of $57 million and adjusted earnings per share was a loss of $0.20 as compared to a loss of $0.02, both primarily due to the same factors that impacted adjusted operating income. Free cash flow generation on a trailing 12-month basis was $335 million as compared to $582 million in the prior year period. The decline was primarily due to the lower net income, excluding the impact of noncash items. We repurchased $200 million of shares in the quarter, bringing the total to $1.4 billion since resuming the share repurchases in 2023, representing a reduction in shares outstanding of approximately 21%. We continue to expect to buy back a total of $400 million of shares this year as part of our $1.5 billion share repurchase authorization, which we expect to complete by the end of 2028. Turning to the balance sheet. Cash at quarter end was $866 million compared to $1.24 billion a year ago. The decrease was primarily due to $640 million of share repurchases over the last 12 months and $75 million of cash used for the acquisition of the remaining 50% interest in Mattel163, net of cash acquired, partially offset by free cash flow generation. Total debt was consistent with prior year. Owned inventory at quarter end was $677 million, a modest increase versus prior year, primarily reflecting tariff-related costs. Our gross leverage ratio was 2.7x and we continue to manage our balance sheet in line with our capital allocation priorities. Retailer inventories declined low digits compared to the prior year and we believe we are well positioned overall for Q2. As part of the optimizing for profitable growth program, we achieved savings of $16 million in the quarter bringing the community total savings for the program to date to $189 million. We continue to target approximately $50 million of efficiencies this year for a program total of $225 million between 2024 and 2026. 2026 guidance is unchanged with the exception of recasting adjusted operating income and adjusted EPS to exclude the impact of amortization of acquired intangible assets. Our net sales guidance is unchanged, and we still expect growth in the range of 3% to 6% in constant currency. At current spot rates, FX would be a tailwind of 1 to 2 percentage points on full year reported net sales. We also continue to expect adjusted gross margin of approximately 50% for the full year. The recast guidance includes expectations for adjusted operating income of $580 million to $630 million, reflecting a $30 million adjustment attributable to non-Mattel-163 amortization of acquired intangible assets from prior acquisitions. For clarity, Mattel163 amortization of acquired intangiable assets was not included in prior 2026 guidance. This results in adjusted EPS guidance in the range of $1.27 and to $1.39. In terms of 2026 gross billings performance by category, we continue to expect vehicles as well as challenger categories combined to grow strongly. Those to be comparable and ITPS to decline. This includes the following growth drivers: continued strong performance in key brands, including Hot Wheels, Mattel Brick shop, Uno and Little People further amplified by masters of the universe, global theatrical release and product line, the Matchbox film product for major theatrical releases, including Disney and Pixar's significant new toy partnerships, including KapopDiemon Hunters and DC, upcoming self-published digital game releases and the consolidation of Mattel163. The guide for 2026 full year adjusted gross margin of approximately 50% includes an expectation of sequential improvement in the second quarter, although we expect it will remain below 50% in Q2 and then also improved in the second half. Looking to 2027, we continue to expect mid- to high single-digit revenue growth in constant currency and strong double-digit growth in adjusted operating income, benefiting from our brand-centric strategy, innovation in toys, major partnerships and the anticipated returns of strategic investment, including digital games. We are monitoring developments related to the current events in the Middle East as well as possible changes related to tariffs, and our guidance includes a range of assumptions and scenarios. Conditions remain fluid and current guidance is subject to market volatility, unexpected disruptions as well as other macroeconomic risks and uncertainties, including further developments in the Middle East and regulatory actions impacting global trade. With that, I will turn it back to Ynon. Ynon Kreiz: Thanks, Paul. In summary, we are off to a good start to 2026. We are seeing momentum in the business and continue to execute our strategy to grow our IP-driven play and family entertainment business. We are seeing top line acceleration in the second quarter to date and expect to achieve our full year 2026 guidance. With that, I'll now hand the call off to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Megan Clapp with Morgan Stanley. Megan Christine Alexander: I wanted to start maybe, Paul, you left off, you said you're monitoring what's going on in the Middle East. Obviously, things are fluid and the guidance assumes a range of assumptions and scenarios. You said, I think, Ynon, you mentioned there's minimal impact to date as well. I guess as we think about the cost side of things, resin and freight have both moved significantly higher, just obviously, as oil has -- and so can you maybe just remind us of your exposure to those 2 cost buckets and maybe walk us through your hedging and contracting and what you're kind of embedding in the guide at this point? I understand there's some inventory timing as well. So maybe the potential headwind is pushed out. But just trying to kind of understand and frame the degree of potential cost pressure we could see? And how are you thinking about managing it? . Paul Ruh: Of course, and thank you for the question. As we said in the prepared remarks, we see minimal impact on our business year-to-date. But of course, we continue to monitor closely. -- we did reiterate our guidance, and that includes a range of assumptions and several scenarios. We are not immune, but it's too early to speculate. And it depends, particularly on how long the disruption last and also how long the oil prices remain elevated. We are experienced. We have a team on the ground that's managing this situation. And we are, at this point, reiterating our full year guidance both in gross margin of approximately 50%, with all these puts and takes. Megan Christine Alexander: Okay. And then maybe just on the top line, the 4% reported growth in the quarter and 1% in constant currency was better than what you had laid out when we talked a couple of months ago, I think you're expecting down low single digits in the first quarter. So maybe you can just talk through the drivers of what came in better than expected? Was there any sort of Easter timing benefit we should be aware of as we think about the second quarter? And yes, that would just be helpful. Ynon Kreiz: Yes, Megan. As we said on the call, we had a strong start of the year. The growth came from several sound out brands that grew double digit, including in our own brands, Hot Wheels, Uno, Monster High masses of the universe. -- ahead of the movie release and Mattel Brick shop, which is becoming a proper hit for Mattel as well as partner brands like Toy Story and WWE. The consumer demand POS was positive, and this is in the context of strong growth in the industry. So what we are seeing is consumers are buying toys -- the toy industry is in a healthy position. And for Mattel, we are continuing to see demand. And as we said, we saw acceleration of shipping quarter-to-date, second quarter to date. So we're well positioned to grow in the second quarter, consumer demand is positive, and we continue to execute our strategy. Operator: Your next question comes from the line of Arpine Kocharyan with UBS Investment. Arpine Kocharyan: To follow up on Megan's margin question, actually, I was hoping you could go through what EPA tariff rollback means for you for the year? And then how much of wiggle room that gives you to basically offset some of the impacts you might see through 2027, as I understand most of your raw materials are locked in for the year. But we are hearing of fuel surcharges for freight. Just if you could kind of give a little bit more on those puts and takes? And then I have a quick follow-up. Paul Ruh: Yes. Thanks, Megan. So our guidance related to tariffs includes a range of assumptions and scenarios. And specifically, what we have included in the guidance is the expectations of the actions that we're taking back in 2025 will fully offset the annualized dollar cost impact of 2026. We said that, and we are, at this point, reiterating that point. But you know that the tariff situation is fluid. We started the process of refunds. We're actively working through the systems. And more broadly, the overall framework is still evolving including potential appeals. So the time and ultimately, the outcomes are not clear. So that's why I say that our guidance includes a range of assumptions and tariff rates for the year. But it's important to say that our guidance does not factor in a refund given the uncertainty at this point in time. Arpine Kocharyan: And then maybe for you, you talk about digital strategy integration of the JV going well ahead of the releases to digital games. Anything else you would like to share kind of on your investment cadence as we progress through the year, anything that has changed in your outlook maybe for 2027 and what kind of returns you could be looking at? Anything else you feel like you should share sort of as you think about 3 months that have passed through to us gave an update. Ynon Kreiz: Thanks, Arpine, Yes. So we did close the acquisition, as we've said on March 2. The integration is tracking according to plan. We have a cross-functional team that is focused on all the relevant activities. And as we've said, acquiring full control of the JV meaningfully advances our digital games business, and it will add significant development publishing and digital customer acquisition expertise to the company. So this is a good development. The deal is done, and we are in full integration mode. When it comes to our strategic investments, as we've shared, these investments are meant to drive accelerated growth and profitability, which is consistent with our first capital allocation priority to invest in organic growth. It's in line with our strategy to grow our IP-driven play and family entertainment business. The investments, as we've said before, are in areas that are designed to allow us to capture even more value from our IP and do that even faster. And the examples we gave were in self-published mobile games, building sets, B2C, first-party data and technology and infrastructure. When it comes to self-published mobile games, this is also progressing very well. As we've said in the prepared remarks, we are ready to launch the first game, which is based on the site of the universe firm. The game is now in soft launch, and all the metrics are where we want to see them. And the second game is in advanced development, also would be a soft launch soon and will be released later this year. We'll be able to share more down the road, but I can say that it's tracking well. all of the testing and metrics that we are monitoring or where we want to see them. And it's exciting to be in a position where we would launch our first published games that can have asymmetric impact on the company. All of that is part of our investment in areas that can accelerate top line growth and profitability. Operator: Your next question comes from the line of Jim Chartier with Monness, Crespi, Hardt & Company. James Chartier: Last quarter, you said infant/Toddler/preschool would be a 2% to 3% headwind to the business this year. That implies like a mid- to high-teens decline in that business. Can you just give us some more color on what's driving that and when you think that business could stabilize? . Ynon Kreiz: Yes, Jim, it's exactly what we said. It will be a 2% to 3% headwind this year, and this is still where we see things tracking. But as we also said that the drag is becoming smaller, especially from baby gear and power wheels. We do expect to see growth in key segments within Fisher-Price, including specifically Little People, which is growing double digit. And this is driven by new partnerships that we have with important players like Nintendo, with Disney across Toy Story and making friends and other brands. And overall, this is a fast-growing high-margin business that is growing within Fisher price, and it's great to see that. We're also getting ready to relaunch Thomas in the second half of the year. There'll be animated content, premium content that we are producing. It will be on all the major leading kid platforms with new product line, new branding and more engagement. And we continue to assess the business, the category as a whole because the category is an important part of the toy industry overall. Fisher Price is the market leader. It's a brand that has been around for more than 90 years, globally recognized and cherished by generations of parents and families and the significant vested value in that brand. And then, of course, we're looking at the numbers and want to make sure that the business is in the best position to grow and achieve its full potential. And we'll come back with more information down the road. Operator: Your next question comes from the line of Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: First, Ynon, maybe away from the digital gaming strategy. I was curious if you could maybe talk a bit more about the strategic initiatives you laid out last quarter and some of the changes the organization and organizational structure that has taken place over the last couple of months, really where are you investing in the business today? And how should investors expect to see some of these initiatives and some of these changes playing out over the balance of the year as you work towards that goal of capturing more value from your IP faster? Ynon Kreiz: Yes. Thanks, Stephen. This goes back to our strategy that to -- that is oriented around being more brand-centric where this is no longer about toys versus non-toys or toys or entertainment. This is about growing our brands holistically. And the strategy, a new operating model that we are deploying right now is designed to accelerate the value that we will capture out of our brands. Toys remains a key pillar part of this strategy. Toys is a foundational part of our business and we believe there is significant upside in the toy industry, and we're seeing it playing out this quarter as well as last year, and we expect that will continue for the full year in 2026. That said, we would like to leverage the success we have in toys and the strength of our brands outside of the toy aisle. And in order to do that, we believe that a holistic management of the business with our plans with the brand -- a brand-centric strategy would allow us to do that in the most optimal way and also be very effective in how we create demand. In the past, the orientation was more about promoting certain toy lines or other lines of the business. We are shifting more towards brand marketing, not specifically just on certain lines or certain products, but more holistic marketing and are looking to leverage the significant resources that we spend in demand creation across the business overall. The other thing that it does, it allows us to manage the business holistically where success in toys, great success in entertainment and success in entertainment will reflect and inflect back on the pop business. So if you think about digital games or mobile games. When we are now developing titles or game titles based on our brands, we do it with a holistic strategy to promote both the games as well as stories, content, location-based entertainment and other executions holistically. And we believe if we do that right as we are now deploying the strategy that we're now deploying, it will accelerate our business significantly and drive also a higher margin and stronger performance overall. Operator: Your next question comes from the line of Eric Handler with ROTH Capital. Eric Handler: Ynon, I wonder if you can talk a little bit about Mattel Brick shop. I mean, reviews have been really strong for the product line. And just wondering how fast can this ramp so that it's a meaningful contributor to the business? And where -- how -- at what point will we start seeing full shelves at retail? And just talk about some of the dynamics going on there, please? Ynon Kreiz: Thanks, Eric. The Building Sets category is 1 of the fastest-growing parts of the toy industry wall. This is obviously driven by LEGO. But it is an and fast-growing category. And within the category, within the building site category, building search for cars specifically is 1 of the fastest-growing segments. When it comes to vehicles, we are by far the global leader. We understand culture better than anyone. And what we did around material Breakshop is bring our expertise in cars together with the incredible capabilities and innovation we have within Mega that is our footprint within the building sits category, and created an incredible product. And what is unique about Mattel brick shop is that these are not just cars that you construct and put together. These are cars that by the time you finish building them, look like cars. And we infused metal parts, rubber wheels, and just great packaging, branding, an incredible manual itself is a book that you would put in your library. The quality is that high. And we're very excited to see the initial reaction. The consumer demand is stronger than we can accommodate. We are chasing demand. It's growing double digits. And we believe there's significant runway ahead of us, not just in '26 or 2027. This can be a runner for years to come and really leveraging the Mattel playbook beyond cars and beyond building search in infusing innovation, brand purpose, cultural relevance, great partnerships and a franchise mindset that extends the play pattern and create multiple touch points across multiple entertainment verticals and other opportunities to engage fans. Eric Handler: Okay. And then as a follow-up question, when you look at the mobile gaming industry, it is the largest segment within the video games business, but has become very mature, really flat lining for the last several years, growing maybe low single digits. Very competitive cost a lot to scale a game. So I'm wondering why is -- why do you view that this is a business that you want Mattel to be in? And sort of how are you going to measure success in the genre. Ynon Kreiz: Yes. The -- you're right in the premise that it is competitive and it's a relatively competitive -- well, competitive place to be with other players that are in it. But a few things changed over the years in terms of the dynamics within the industry. It is now not very costly to develop a game. You don't need to own a studio to develop a game and you don't need to own the game engine. And so for a cost of under $10 million, we see it as single-digit million dollars, you can fund the development of a game. What is more capital intensive, and you said that as well is that it's more capital -- it's more -- you need more capital to drive demand, to acquire users, although what is also unique in our days now is that the user acquisition is all driven by performance marketing, where you know the ROI of your spend you know exactly what to expect when you spend the money and it's almost scientific in terms of how much money you spend and what do you get in return. So while you do spend capital, you only do that to the extent you know that the marketing and the consumer acquisition will yield the return that you expect. What is unique to Mattel and where we stand out is with the strength and appeal of our brands. Our economics are different, different to a radial player because people are proactively looking for opportunities to engage with our brands. People are searching for opportunities to engage with our brands. When we put out a Barbie branded game on roadblocks, it was the #1 branded game for more than a year with 0 marketing. When we put out an UNO experience on Fortnite, on the first day, it became 1 of the top 10 most active or engaged experiences on the entire platform against more than 100,000 different islands and experiences in the platform. So we know that our brands percolate to the top and people are proactively searching for them. Because of that, our economic equation is different in terms of demand creation and user acquisition. And we expect that with good execution and it's not enough to have strong games, you still need to deliver on the execution. So we believe that strong -- with our capabilities and with the partners we work that develop the games for us, we'll be able to drive successful experiences that will deliver have the potential to deliver asymmetric return for Mattel. And we're excited to participate in this large important part of the ecosystem. Operator: Your next question comes from the line of Anthony Bonadio with Wells Fargo. Anthony Bonadio: So just to start on masters of the universe. It seems like some of the forecasting services have is doing pretty well at the box office. Can you just talk a little bit about how we should think about the lift to earnings, if that's the case? And just maybe walk us through what's embedded in guidance around this. Ynon Kreiz: Yes. You're right, things are tracking well. There's a lot of excitement around the trailers and the initial marketing campaign and the actual company is about to kick off. So you will see a lot more activity around masters of the universe. At the same time, we know it's hard to predict box office, this is Hollywood. But what we can say already that Masters of the Universe movie is already a big win for Mattel. They are -- even the buildup towards the movie is driving awareness, strengthening relationship with fans. We have dozens of partners around the world. We're seeing product sales ramping, growing double digits, and it's only going to get stronger and better from here. What's unique about this movie specifically is that it's bringing to life and it reimagines this classic methology it's going to engage classic, the fans, the fans of the generation that used to watch it when there were kids, but also appeal to young kids and be very contemporary and timely and culturally relevant. So it is an important addition to our portfolio. It will drive sales, toy sales, the movie is toyetic. The movie is very toyetic. We just rolled out our product offering this past weekend, a combination of mainline as well as collectors, and it's just great. So we're very positive about it. We said it will be a driver. We expect double-digit growth, and we expect it will give a whole new generation of fans and opportunity to engage with this great franchise. Anthony Bonadio: That's helpful. And then maybe framing Megan's question another way. If commodity and freight prices remain where they are today, does that mean guidance remains intact for '26? Or does that become more of a challenge as the year progresses? Paul Ruh: I'll take that one. As we said before, we're not immune, but at this point, it depends how long the disruption lasts and how long the oil prices remain celebrated. So at this point, the guidance remains intact with those assumptions in mind. . Operator: Your next question comes from the line of Kylie Cohu with Jefferies. Kylie Cohu: I apologize if you've already kind of addressed this. but I just want to dig a little bit into the expected sales cadence for the year. Obviously, Q1 turned out better than you expected. Do you still expect kind of a large step-up in sales growth in Q2? And really just any changes in how retail like inventory posture has changed over the quarter would be helpful. Paul Ruh: Yes, Kyle, I'll take that one. So we had a good first quarter overall from a performance perspective, but we still have 3 quarters to go and Q1 is a small quarter. Now what we see into Q2. We have certainly acceleration in the early times of the quarter in POS, and we then continues to -- we will then continue to see acceleration in gross billings. So actually, POS, let me clarify that. POS, given the seasonality in Easter is not -- is flat. I would say it's flat to slightly down. But we're encouraged by what we're seeing from an acceleration in shipping in Q2 year-to-date, that is the point. And our full year guidance remains unchanged. So a strong start of the year, acceleration in Q2 and then we continue to see the strength in the second half of the year. Kylie Cohu: Great. And then just any update on the strategic review of infant, toddler, and preschool. Ynon Kreiz: Can you repeat the question? I heard strategic review. I didn't hear the first part. Kylie Cohu: Just any update on the strategic review of infant, toddle, and preschool? Ynon Kreiz: So yes. Thanks, Kyle. No update. We continue to assess the business. We talked about the importance of the category in the industry. We talked about the importance of fisher price within the industry and within the category specifically, and we'll come back with more detail about our review of best positioning this business for -- to maximize its potential. Operator: Your next question comes from the line of Gerrick Johnson with Seaport Research Partners. Gerrick Johnson: So on the investment spending, the $150 million, I should actually say the $110 million, let's exclude the $40 million in user acquisition, $110 million. Is that still the target, $110 million for the year? And how much has been incurred so far? Ynon Kreiz: Yes, that is still the target. We are not breaking out the spend by quarter, but we are tracking on plan full execution mode, all the initiatives we mentioned, it's still early in the year, but we're happy with the progress and very confident that these investments in aggregate will have high ROI with net positive contribution to the bottom line in 2027 and beyond. We talked about the different parts of the different areas where we invest -- this is all about our own brands, our own organic business and designed to accelerate and improve the performance of the business overall. . Gerrick Johnson: Okay. And perhaps related, maybe not. CapEx for the quarter looked like it was $65 million the highest first quarter CapEx since 2017. So what's your CapEx guidance for the year? And why was it so high in the first quarter? Paul Ruh: Yes. We don't necessarily guide CapEx specifically, but what we are doing is we are investing in our infrastructure and this is in line with our guidance in terms of cash flow in general. So we are tracking to our expectations. And overall, this is pretty much in line with the 3% to 4% net sales that we have executed on over the last few years. And we are doing the normal upgrades that we increase our productivity, our efficiency and pretty much in line with our expectations. Ynon Kreiz: And Gerrick, just to emphasize what Paul said, still within the framework of 3% to 4% of net sales, which is -- we believe is still very healthy and very much controlled in line with our capital-light orientation and capital allocation priorities. Operator: Your next question comes from the line of Chris Horvers with JPMorgan. Christopher Horvers: I wanted to follow up on the tariff question. As you think about -- not take refunds off the table, in the back half of the year, you'll be shipping product presumably at a lower tariff rate. If that happens, how do you think about how the retailers behave in terms of do you get the gross margin rate back? Or do you think that the retail partners will look for you to bring prices actually lower given how important the category is to driving traffic to the stores? Paul Ruh: Yes, Chris, I wouldn't necessarily speculate on what the future tariff rates will look like. It's early days, but what we are doing is constant conversations with our retail partners. It's early days, and we want to see how the refund process works out. But also keep in mind that we do not set the prices the retailers do. So what we do is we work closely with them on a variety of issues, and this is actually one of them. Christopher Horvers: Got it. And then I wanted to clarify the POS comment. So quarter-to-date, it's flat to slightly down, and that includes an Easter headwind. How do you think about it on a year-to-date basis, and then as you think about the shipping strength that you're seeing right now, you're also lapping some deferred retail orders from last year. You've got masters in the universe. You've got Toy Story coming as you try to disaggregate sort of the improvement in the second quarter, is there a way to give us some insights around how much of it is comparison driven versus some sort of more organic uptick in the business. Paul Ruh: Yes. I don't want to get deep into POS. We do not guide on POS and -- but what I can tell you is that our gross billings are coming in strong for the second quarter. Remember, last year, it started -- we started to see the disruption that was as a result of the uncertainty around tariffs. But it's a combination of both what we are comping from last year, but also our strong portfolio and our strong innovation, and we are adding this year on top of what we had last year. So it's a combination of both. Ynon Kreiz: And Chris, I would add the comment that we said in the prepared remarks that the shipping -- the ordering parents in the U.S. is stabilizing. And this is an important comment. What we've seen in the last 4 quarters, if you remember, the shift in ordering panel was a big headwind for us. We believe U.S. retailers ordering patterns are stabilizing. And in line with that, we also expect our North America region to grow in the second quarter. And so this is something we said in the prepared remarks. I just want to make sure you -- I mean it's captured. . Operator: Your final question for today comes from the line of James Hardiman with Citi. James Hardiman: So I just want to make sure I understand. Obviously, revenues were better than you guys were anticipating in the first quarter. If I think about gross margins and the magnitude of the compression there, at least versus where we were modeling that was worse than expected. Maybe the bridge on Slide 12 is certainly helpful. Maybe walk us through some of those buckets and how those performed relative to your expectations? And then any color you can give us on how those trend as we move through the year. FX looks like it was a headwind, I think you're expecting that to flip to a tailwind. Any thoughts on the timing there? And then obviously, the inflation piece doesn't sound like that has anything to do with the fuel cost in the Middle East stuff. But as we think about 2Q and beyond, any help on what those buckets look like from a gross margin perspective? Paul Ruh: Yes, James, remember, we previously said that we expected in Q1 gross margin to be down. So the decline was due to the expected gross margin incremental cost of tariffs, as you see in the bridge, unfavorable or an exchange and also inflation -- that inflation, by the way, is unrelated to the Middle East because it hasn't hit our P&L. And going the other way, we had tariff mitigation actions, including our optimizing for profitable growth savings, and those were partially offset by several other factors. And all these elements were expected. So keep in mind also, that's an important consideration that Q1 is a small quarter. So small dollar shifts can cause big swings in margin percent. So when it comes to the outlook for the year, with all of that, we are on track to achieve our full year adjusted gross margin guidance of approximately 50%, and this includes an expectation of sequential improvement in the second quarter, and although we expect it to remain below the 50%, specifically in Q2, but then also to improve in the second half to get to an average of the guidance that we talked about of approximately [indiscernible]. So those are the puts and takes on the trajectory that we expect. James Hardiman: Okay. And then a similar question on the OpEx side, the SG&A side. I guess, in particular, the advertising and promotional expense was up, call it, 32%. It sounds like maybe there was some timing that affected that number. But maybe any thoughts about how to think about how that trends over the course of the year. and sort of the incremental investment spend, how to think about the timing of that? What do we see in the first quarter and how we sprinkle that into our models for the remainder of the year? Paul Ruh: Sure. So for SG&A, let me start with that one. SG&A increased $19 million, primarily due to the investments that we talked about to the strategic investments. And of course, we do not guide to these lines for the year. But keep in mind that this includes incremental investments that we talked about since last quarter. There's also a little bit of timing when it comes to the A&P, and that is also associated with the shift in the Easter holiday. But we are tracking to what we said overall since in the beginning of the year, and that is associated, of course, with the pacing of our investments. Ynon Kreiz: Okay. We don't have another question. Thank you. Thank you, everyone. Thank you for joining us today and for all your questions. Just to say in closing, we are closely monitoring macroeconomic developments. Clearly, a lot of things are going on, and we are watching how things pan out. Yet we have a lot to look forward to this year. Our outlook reflects the momentum of our strategy to grow our IP-driven play and family entertainment business and are excited to continue to execute the strategy for the rest of the year. We appreciate the time. Thanks again for joining the call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to the Equity Residential 1Q 2026 Earnings Conference Call and Webcast. Today's conference is being recorded. At this time, I would like to turn the conference over to Marty McKenna. Please go ahead. Marty McKenna: Good morning, and thanks for joining us to discuss Equity Residential's First Quarter 2026 Results. Our featured speakers today are Mark Parrell, our President and CEO; and Michael Manelis, our Chief Operating Officer; Bret McLeod, our CFO; and Bob Garechana, our Chief Investment Officer, are here with us as well for the Q&A. Our earnings release is posted in the Investors section of equityapartments.com. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I will turn the call over to Mark Parrell. Mark Parrell: Thank you, Marty. Good morning, and thank you all for joining us today to discuss our first quarter 2026 results. I will start us off, then Michael Manelis, our Chief Operating Officer, will speak to our first quarter operating performance, and then we'll go ahead and take your questions. Our first quarter operating results met our expectations with strength in San Francisco and New York, driving our same-store revenue performance. These 2 markets share common elements of strong demand from our target higher earning renter demographic for our well-located apartment homes and low levels of new supply. So let me spend a few minutes now talking about why we are excited for the setup for our business in the back half of 2026 and into 2027. As I said on our last call, we expect deliveries in our markets to be down 35% in 2026 versus 2025. And the forecast for expected future deliveries continues to show substantial declines over the next few years, creating a very positive trend line for our business. Also, our higher-earning customer demographic continues to demonstrate solid financial health with rising incomes, and we also see lower delinquency across our portfolio. Then there is a single-family for sale market that continues to be a challenge in terms of both cost and inventory, translating into customers renting for longer and leading to our record low turnover levels and strong renewal rates. With all those positives, the one missing ingredient is an accelerating job market and current signals there remain mixed. That said, we do see some green shoots in the form of postings on the Indeed job site for heck rolls and other similar high-earning jobs, rising substantially across many of our markets since November of 2025. That provides us cautious optimism even in the [ phase recent ] job cut announcements at big tech firms. But with a portfolio that is more than 96% occupied with much lower levels of new apartment supply for the foreseeable future and limited owned housing choices, it will not take a lot of new jobs to drive more widespread, strong operating performance in the future. On the transactions front, we did not acquire or sell any assets in the first quarter. We did update our transaction guidance for the rest of the year to reflect the likely sale of a couple of properties. This is a continuation of our process of improving the portfolio by selling older capital-intensive assets are assets in places where we have heavy concentrations. As we previously disclosed, we repurchased $220 million of our common shares during the first quarter, bringing total repurchase activity to $500 million since August of 2025. And with that, I'll turn the call over to Michael Manelis. Michael Manelis: Thanks, Mark, and thanks, everybody, for joining us today. I'm going to provide a quick update on our operating performance, including some high-level market commentary, and then we'll begin the Q&A session. So overall, we had a good first quarter with our results, reflecting the continuation of our disciplined operation execution with both same-store reported revenue and expenses generally in line with our expectations. On the expense side of the house pressure from Northeast snow removal costs and utilities, were offset by a very low 20 basis point growth in payroll. On the revenue side, we are starting the spring leasing season in a good position with solid demand and strong physical occupancy of 96.3%. During the quarter, we also saw improvements in bad debt and the financial health of our resident base remains very supportive. Household incomes for new move-ins have increased and rent income ratios have fallen to 19%. Sitting here today, net effective prices have increased just over 4% since January 1, which is in line with normal trends and our occupancy and current demand levels are providing continued momentum into the second quarter. On a cash basis, concession use continues to decrease across most of our markets and is down about 21% across the portfolio as compared to the first quarter of last year. As we have said in the past, an improving supply and demand balance leads first to increasing occupancy levels next to reduced concessions, then to absolute rental rate increases, all of which ultimately drives growing blended rates from leasing activity and future same-store revenue growth. We already see San Francisco and New York, where we are posting strong same-store revenue results as far along in this market performance continuum and expect most of our other markets to make progress to varying degrees as the year progresses. In the first quarter, we reported blended rate growth of 1.5%, which mirrored the blended rate growth from the first quarter of last year on this same-store set and demonstrates a 130 basis point sequential improvement from the fourth quarter of 2025. This sequential improvement included a 260 basis point lift in new lease change and a 30 basis point improvement in the achieved renewal rate increases. Retention continues to be a key driver of our performance, our centralized renewal strategy is performing well as evidenced by 61% of our residents renewing with a 4.7% achieved renewal rate increase, which was slightly better than what we expected. Looking across our footprint, performance continues to vary by market, which was expected. The strength in key gateway markets like San Francisco and New York, which both exceeded our already high expectations for the quarter are offsetting a slower-than-expected start in Boston and Seattle. Together, New York and San Francisco constitute about 30% of our NOI and have the best supply and demand outlooks in the country. Our urban exposure in these 2 markets is particularly unique to equity residential and should be a relative strength for us versus our peers this year. San Francisco continues to be the best-performing market in our portfolio. The tremendous growth in AI is making San Francisco, particularly the downtown, the place to be. Despite a few headline grabbing layoff announcements, the market continues to have good job postings and strong office leasing activity. Looking at migration patterns, we are seeing more residents come to us from out-of-state and outside the MSA, which is a good sign for continued pricing power. Concession use in the downtown submarket where we derive 22% of our NOI here is virtually nonexistent. The overall catalyst here is that strong demand is meeting a market that will deliver almost no new competitive supply in 2026. New York also continues to post excellent performance with demand outpacing supply and has almost no new competitive deliveries coming online in 2026. The large financial institutions continue to produce record profits and employment in the market is very stable. This sets us up for another year of strong results. Boston started the year with challenging weather conditions and is also still feeling the impact in Cambridge around life science funding. Our overall outlook for Boston has moderated as a result, but this is a very seasonal market, and it's still early. Overall, we still think that the city will outperform the suburbs based on the location of the 2026 new deliveries. And while D.C. is performing in line with our modest expectations, pricing power is less than normal, although we expect that to improve as the year progresses, given the dramatic decline in new deliveries. With only 4,000 units being delivered this year, a decline of over 65%, the real question here is whether we will see any improvement in consumer confidence in this market. The current levels of uncertainty are clearly holding back the potential for this market. Any positive shift should allow us to recover from what has been a slower start to the year. Heading back to the West Coast, Seattle is not experiencing the AI-driven demand boom that we're seeing in San Francisco and is currently trending below our expectations due to a slower start to the year. Historically, Seattle has followed cyclical trends from San Francisco, both good and bad, by about a year. And while it's still too early to call, given some of the headline risks regarding layoffs, we still see the potential for this market to tighten up. Today, the market is still working to absorb the new deliveries from 2025. Concession use is down 22% in the quarter, but demand is still price sensitive causing this market to lag normal seasonal improvements. On a positive note, we've seen some good traction in the Bellevue, Redmond submarket with recent office leasing activity announcements and having more residents during the quarter come to us from outside the MSA. Right now, rents are trending positive year-over-year and concession use is very limited in the Bellevue, Redmond submarket. In Southern California, Los Angeles is performing in line with our tempered expectations. While the downtown is starting to feel a little better as the city prepares for the events like the World Cup and Olympics, continued uncertainty in the entertainment business is an overhang on the market and we have still not yet seen any catalyst on the job front that will drive growth in the near term. In our newer markets, we continue to see improving conditions in both Atlanta and Dallas with concession use coming down, which again is an early indicator that the overall market is improving. Atlanta is performing the best, and if the current trends continue, this market should deliver slightly positive same-store revenue growth for the year which is better than what we thought 90 days ago. Turning to Denver. We are seeing some strength in occupancy and initial signs that the market may have bottomed out. With a sizable decline in new starts, improving operating conditions and current competitive pressure easing, our newer markets, excluding Austin, Texas, all have the right setup for recovery through the balance of this year. On the innovation front, we're about 6 months into our full deployment of the AI-assisted application process, which includes screening. As I mentioned, delinquency from new resonance is trending down, resulting in improvements in our bad debt net performance. We're also continuing with the successful rollout of our bulk Internet program, and we'll have about 60% of the portfolio live by year-end. We believe that offering a superior connectivity at pricing that is better than our residents can get on their own is supportive of our goal of delivering a value-add customer experience. As we look ahead, our priorities remain unchanged. We are focused on driving disciplined pricing, reinforcing retention and maintaining tight control over expenses. As we head into our primary leasing season, the environment at a high level is stable and in many areas improving. Portfolio-wide occupancy remains at strong levels to our focus naturally shifts from a reliance on occupancy gains to optimizing pricing. In the second quarter, we expect to see a sequential build in new lease change and strong, stable performance in terms of retention and achieved renewal rate increases. Overall, we are well positioned and we'll maintain our operational agility and strategic focus to deliver sustained value with the best operating platform and people in the industry that combine automation, centralization and a passion to deliver a seamless customer experience to our residents. At this time, I will turn the call over to the operator to begin the Q&A session. Operator: [Operator Instructions] We'll go first to Eric Wolfe with Citi. Eric Wolfe: I think last year in May, we started to see a few signs of an earlier peak in pricing. As you look forward 30 to 60 days, are you seeing anything that would suggest something similar to last year? Or does the seasonality at this point look more normal to you? Michael Manelis: Eric, this is Michael. I think relative to last year, I look at this and say, our setup was pretty good at this time last year as well, and we feel good about the positioning that we have. The strength that we see on the retention side of the business right now gives us a lot of confidence that heading through the spring into the peak that we're going to maintain this position that we have. So I think what we have is a setup that is a little bit [ within ] last year, with the weakening that we really started to feel, I would say, more in the late second quarter or third quarter, we are heading into a place of unprecedented times with such low levels of new supply. But I think if we can maintain this velocity and get over the peak leasing season, that back half of the year with the setup of such limited new competitive supply coming online, really does position this portfolio well. Eric Wolfe: Makes sense. And then you mentioned that rent incomes were at 19% now. Can you just remind me what the sort of lowest that has ever gone. And I don't know if you have an opinion about sort of why rent growth has become a bit more disconnected from wage growth than is typical. Michael Manelis: Yes. I mean I think the range is historically have always been somewhere between 17% to 23% across our markets. And I think at any given time, you've seen this portfolio be 19% to 20%. So it feels like we're kind of right in line with the norms. I think what we saw in this quarter is you just saw a place where incomes have grown and you can see kind of the demand coming in that just have some higher income levels against rents that are in line with kind of normal seasonality, but I think that increase in the income is what kind of caused us to tick down a little bit. Operator: We'll go next to Steve Sakwa with Evercore ISI. Steve Sakwa: Michael, I don't know if I missed it, but did you talk about where renewals were going out for May and June? And I guess, what are you achieving on those versus sending out? And just remind us what your blended spread expectations are for the year? Michael Manelis: Yes. So Steve, this is Michael. So right now, I would say the renewal quotes that are out there really for the next kind of 3 months already at this point. And we're sitting somewhere just over 6% kind of with the quotes and kind of have a lot of confidence in our centralized renewal process. Our centralized renewal team handles all the negotiations. It allows us to kind of execute various strategies across markets and submarkets. This is the time of the year where we tighten up negotiations. So we got a pretty high degree of confidence that we're going to maintain and achieve renewal rate increase somewhere right around that 5% range kind of in the months to come. So in terms of the blended rates right now, we're not changing our full year expectations. We had about a 1.5% to 3% kind of growth rate. And embedded in that was implied new lease change roughly flat renewals somewhere around that 4.5% to 4.75% range. And right now, renewals are doing a little bit better than what we thought. New leases a little bit later than what we thought. So we love the setup heading into the peak leasing season. We love the supply picture in the back half of the year. But at this point, it's still probably too early in the year for us to change that full year outlook for the blends. Steve Sakwa: Okay. And then maybe just on capital allocation for either Bret or Mark. There's obviously been a pretty big dislocation in the public markets versus private market. Have you guys thought about leaning even heavier into the disposition program and kind of taking advantage of kind of what the private market is offering? Either to build up the balance sheet or kind of take advantage of buybacks? Mark Parrell: Yes. Thanks, Steve. It's Mark. I'm going to start, and then Bob will kind of give you a feel for the disposition market. So we are open. We've done a fair amount of net disposition activity. You saw last year, $500 million. We took third, fourth and into the first quarter of this year to deploy those proceeds into the buyback. We're open to doing more buybacks. We like the match of selling these lower-growth assets and buying the stock. So we're very open to that. It's just it kind of comes and goes a little bit. So I'll let Bob talk about some of the assets that are embedded in the increased disposition guidance you saw and some of the other stuff we might expose to the market. And we are open to using the balance sheet, meaning using debt to buy stock back. But you just have to remember that's a very different decision because you're affecting the capital structure of the company. And you can only do that a certain number of times before, obviously, you've used that capacity up. So our preferred means is dispositions. But of course, we are aware that at 4.3x were relatively underlevered and have that opportunity as well. So Bob, do you want to... Robert Garechana: Yes. Steve, it's Bob. And as Mark mentioned, we did introduce disposition guidance for the quarter, for the first time, so a $165 million. And these are assets that we're pretty confident that we're going to execute on, and that's why we introduced them into the mix. I think the critical thing that Mark already mentioned about what we're looking to sell are assets that are perhaps not best suited for our portfolio today, right? So these are assets that have value-add components or growth components or concentration risk. So those do take a little longer, typically to execute from a disposition standpoint because the buyer pool may not be as broad as just down the main fairway. That being said, interest is, I think, the world has seen in multifamily in the private sector is very robust. And so we continue to see bidding tents that are very large. We continue to see interest in our asset class, and we continue to see a lot of private capital. So I think you'll continue to see us execute as we go. Operator: We'll go next to Jana Galan with Bank of America. Jana Galan: Congrats on a great start to the year. And Michael, thank you for all the geographic detail. Can you comment on the magnitude of the decline in concession usage by markets? Just trying to figure out where we could start to see the new leases inflect sooner versus later? Michael Manelis: Yes. I mean, really, the concession dollar amounts across most of the markets are down because this is a low volume of transactions in the first quarter as well. As we think about the concession use going forward, my guess is right now, we're going to see continued elevated cash concessions in the newer market along with kind of probably into the DC and maybe even Seattle markets for the second quarter. So for us, when we modeled the concessions out we still kept the concessions pretty heavy through the expansion market for most of the year. As we turn the corner into the second half of the year, given the decline in supply, we expect concessions to materially decline, especially relative to the increases that we saw in the second half of last year. So I think the expectations right now on a full year for concessions, I would still model somewhere about 20% reduction relative to what we used in 2025. In the second quarter, my guess is that the year-over-year reduction is probably going to be a little bit less than that because the cash concessions are probably going to stay about the same as what we just did in the first quarter. But then as we turn the corner into the second half of the year, we do expect them to be down considerably compared to last year. So concentrated again, newer markets, a little bit in D.C. and Seattle. But outside of that, the majority of the markets are going to continue to see reductions. Operator: Our next question comes from the line of John Kim with BMO Capital Markets. John Kim: Looking at your prior years, it looks like the April new leases tend to be fairly representative of what you end up in the second quarter. So I'm wondering if you feel that dynamic is going to occur again this year at minus 1.1%. Or do you think there's a chance of inflect positively? Michael Manelis: John, it's Michael. No, look, I think you're going to continue to see a sequential build. Our net effective pricing is continuing to grow across this portfolio. So my guess is we should expect to see some continuation momentum of improving new lease change. I don't think it's going to be like materially different than what you can see we just posted, but I don't expect us to end the quarter at minus negative 1% for the quarter. My guess is you'll see each month sequentially build and put us closer to kind of flat. John Kim: Okay. And then New York, it's been several quarters where you've been saying it's been one of your stronger performing markets. Recently, there have been some high-end multifamily assets that traded hands to another public REIT. So I'm just wondering, are those assets that you looked at? Is this a market where you would allocate more capital? Or are you still really focused on some of the expansion markets? Mark Parrell: Yes. Thanks for that question, John. I'm going to just start about New York in general. And I'm going to let Bob talk about the deal that stuff that traded in our interest or relative lack of interest. So we're about 14% allocated to New York Metro, mostly Brooklyn, Manhattan and a little bit of the Jersey Coast and one asset in suburban New York. Pretty unique portfolio. It's performing really well. We're benefiting from all the banks doing so well. We're benefiting from financing of the AI boom, all those things and some pretty limited supply in that market. I feel like we're more kind of in a trading mindset in New York, 14% feels about right to us. So you may see us sell, you may see us buy. But by and large, 14% feels like a really good weighting. And our urban portfolio feels like a uniquely positive thing for us compared to our peer group. And then Bob, if you want to comment on what's sold? Robert Garechana: Yes. We -- I would say that we underwrite everything, whether or not we look at something and bid on something is different, and we did not bid or look at these specifically, but we certainly underwrote them. One of the benefits of our Manhattan portfolio that's also kind of a nuanced approach. It's pretty straightforward and pretty simple in that we don't have a lot of 421-a burn off. We don't have an extensive amount of retail exposure. And so they're pretty straightforward. And that's one of the benefits that you see flowing through to the underlying NOI. The assets that ended up trading were a little more complicated than our liking. So they had more retail components. They had more tax abatement burn-off components. And just frankly, weren't of interest. So we didn't bid or look at them. Operator: We'll go next to Haendel St. Juste with Mizuho. Haendel St. Juste: Great to see the continued strength in San Francisco and New York. It seems like the slowdown, as you mentioned, [indiscernible] was in line with expectation, Boston, Seattle, a bit weaker. But I guess I'm curious, kind of beyond the next few months, New York and San Francisco clearly had momentum. What are you expecting for your coastal markets, the other group, I mentioned, the L.A., Seattle, D.C., Boston, how do you expect them to trend over the next year? Which of those markets are you most excited about? It seems as though there's tougher comps in some cases, weaker demand drivers. So curious how you're -- what data you're looking at, which of those markets perhaps you're more encouraged about over the next 12, 18 months? Michael Manelis: Yes, it's Michael. Look, looking -- sitting here today, you have to focus on D.C. with such tremendous drop-off in the supply. I mean, it's 65% less new units coming online. That will equate to some level of pricing power in that market. So we didn't have -- we have pretty modest expectations for the full year. But I think as you fast forward and go out 12 to 18 months, that market with such little new competitive supply. So I think a few starts actually in the market as well, sets up for another strong year next year. We need a little bit of confidence on the demand side of the equation for us to really see that thing take hold. Outside of that, I've said for L.A., we had muted expectations. I don't know that we've seen anything yet to suggest that we'll model differently for the balance of this year. and we'll kind of see where the entertainment industry is kind of closer to the end of the year before we talk about next year on those. The Boston and the Seattle markets right now, I think they're off to a slow start. Boston had a really horrific winner, cold, lot of snow kind of probably impacted a little bit at the start that we're seeing. I like the setup in both of these markets, and I like the recovery potential of Seattle. The history has shown it follows San Francisco, good or bad, by about a year. So my guess is we'll start talking positively about Seattle sometime here this year or into the early part of next year. Haendel St. Juste: That's great color. Appreciate that. On the -- perhaps on the [ Seattle ] or the expansion market, I think you said and forgive me a misquoting that they have the right setup for recovery into next year. We know the supply is falling. But maybe some color on where you're seeing some improving demand, pricing power or concessions are probably coming off the most. So maybe some color on that comment and which markets perhaps are standing up beyond the maybe the Atlantics of the world? Michael Manelis: Yes. So let me just add, I can't speak about the [indiscernible] I can only talk about the few markets that we own and operate in those. So really, Atlanta, Dallas and Austin, right now, we have 3 properties in Austin. We don't expect any material change in performance this year because there's still a lot of overhang of supply and there's still some new supply being delivered this year. Between Atlanta and Dallas, Atlanta really ticked up a lot for us this last quarter and is now kind of set up to potentially eke out some positive revenue growth this year, which is better than what we thought. So we have seen concessions pull back. We do see kind of good occupancy. We do have kind of that momentum right now heading into the peak that is outperforming what we're seeing in Dallas, but Dallas still sitting here today feels pretty good. It's got -- it's doing a little bit better than what we thought, but Atlanta feels like it's got more momentum right now. Operator: We'll go next to Brad Heffern with RBC Capital Markets. Brad Heffern: Yes. So the Bay Area continues to be very strong, and you talked about AI driving that. There's a lot of investor debate about whether this is going to be a multiyear trend or whether AI ultimately pushes employment the other way. Obviously, nobody knows, but I'm just curious to get your take on how sustainable you see the strength in the Bay Area as being? Mark Parrell: Yes, it's Mark. That's obviously a bit of a speculative question, and I know you probably feel that too. To us, it feels like the AI boom and be honest, the affordability boom in San Francisco is likely to continue. I mean rents downtown, where we have a significant portfolio of just recently moved above rent levels just before COVID. So our resident can certainly reflect back on getting a 30% increase in nominal wages since 2019 and have the rent about flat. So there's room to run there. We see all the office leasing activity, everything around AI. It isn't just the actual creators of AI, it's all the systems that sit on top of it. A lot of this employ in the small groups of people building on top of AI systems, various helpful applications of sorts. So I think there's room to run here. I think this technology there'll be ebbs and flows and valuation, things will happen. But I think there's a lot to come here, and I think the resident can afford it because I think their nominal wages have gone up quite considerably in the San Francisco area. So this deal is pretty persistent to us. And again, the ecosystem of great universities and all the venture capital money in the area and all that is also supportive of this continuing to be a kind of innovation center for everything AI and everything else, technology related, which does seem to me to be the future even if there are kind of fits and starts. Brad Heffern: Okay. I appreciate that. I know it's a difficult question. In the prepared remarks, you talked about residents coming to the Bay Area from outside the market. I was wondering if there are any stats or additional color you can give on that dynamic. Michael Manelis: Yes. So I mean, every quarter, we're looking at where our new move-ins coming to us, what percent come from within the MSA. And then obviously, I've said over the last several years, right, for us to really start seeing sustained pricing power momentum, we'd like to see in some of these markets, a bigger draw from outside the MSA, a bigger draw from outside of the state. And we saw that both in San Francisco and in Seattle specific to the Bellevue, Redmond submarket. So they're not huge percentages. It's like 5% more move-ins. But it's the trend lines that we've seen in San Francisco now where we have multiple quarters of seeing kind of that pattern old, which is really giving us that confidence that we're in a position of pricing power for the next several quarters. Operator: Our next question comes from Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: Mark, just following up on -- as you guys think about dispositions. The markets are certainly interesting, if you will. New York rebounded strong after the pandemic, San Francisco has been a dream case on the other side. You've got the contrast between Seattle and the East side, L.A. versus like Orange County and San Diego. So as you guys assess your portfolio and assets to sell, how are you making the decision which markets sort of may have deeper longer challenges, and therefore, it's worth really downsizing versus which are sort of like the New York or San Francisco, which is at the moment in time and you just have to wait for the pendulum to come back? I'm just trying to think, as you're assessing asset sales and buybacks, how you're thinking about the market? Mark Parrell: Yes. Great question. I'm going to take the market focus. And maybe I'll have you Bob speak to asset challenges because some of these decisions, Alex, we like the market or submarket, but we just have an asset that maybe we don't believe in the capital story or the micro location. So again, just generally, our exposure pre-COVID to California was 45%. Now it's around 40%, getting that number down over time, probably mostly with the reduction in Los Angeles is, I would say, more of a strategic goal of ours. Right now, that's not a terribly salable market, so we can weight that out a little bit. So that's a spot where we maybe have a little less conviction is Los Angeles. And that isn't just the regulation, of course, that's pervasive in California. It's just unemployment stuff. And Bob talked about that on the last call and Michael has, too. It's the entertainment industry really feeling like there's been a paradigm shift away from Southern California and just not feeling like those employment drivers are what we thought they were when we made those investments initially. And a little bit of downtown Seattle. That, again, is an area that has some advantages and has been kind of recovering and fits and starts, but we do have a fair bit of exposure there and probably is another strategic reduction. All that, it's a little bit more tactical. And I guess I'll give it to Bob to talk about that. Robert Garechana: Yes. I mean it really is an overall portfolio strategy approach, really taking an integrated approach to that at the asset level. So we integrate our capital with our disposition and acquisition kind of mindset. So we underwrite every single asset. I just actually went through this exercise with the team because if you're not selling, you're buying. And so we integrate that into our capital plans. We look at what the asset. We make an assessment of what we think the asset performance is going to be going forward. We compare that against our cost of capital, and we decide what can we do about that? What levers do we have? So in some instances, that can mean on a specific asset, we're going to invest that value-added renovation capital. We're doing $90 million of that this year, and we'll get a return that will compensate the shareholders. And in other cases, we see that, that's not an option. And so therefore, we look to sell that in the market when the market allows and redeploy that in something that's more accretive. Alexander Goldfarb: Okay. And then the second question is regarding the stock buybacks, you guys before, have done developer equity programs where you fund a third-party deal, you get fees along the way, et cetera. How is that looking as an opportunity to put capital out, especially if you think about derisking to wholly owned development? How is that looking today versus just straight buying back your stock? Mark Parrell: Yes. I want to draw a distinction. It's been pretty uncommon, Alex, for us to do any kind of investment in development where we don't have a clear path to ownership, like all our deals, the 2 new ones we did, they do have partners in them. But I mean, we have the right and expect to own those assets. It's all been pretty infrequent in my career here where we funded like some of our peers do, a program where it's just funding a development, but we don't have an expectation or a legal right to own it somewhere in the process. So I guess I'd say we don't do that sort of [ mezz ] lending or preferred equity or whatever you want to call it, in development very much. When we do it, whatever the structure is, whether it's called debt or equity, it's intended for us to own the property and there's a path to ownership. Alexander Goldfarb: But I mean as far as the path to ownership, how does that look versus buybacks as you judge the math of doing a third-party development deal where you're going to own it versus buying back your stock? Mark Parrell: Yes. I think that's a great question. Let's use the 2 development deals we started this quarter as an example. Obviously, the stocks thankfully run up a little over the last few days, but we are comparing the stock and our acquisition opportunities and development all the time. So why don't you talk, Bob, about those? Robert Garechana: Yes. And so I think what you're highlighting, Alex, is that like in the new choice, I think the stock is obviously a really compelling choice. It's probably oftentimes the most complying choice. The next decision or the next those compelling choice is probably the development side today. Now you got to risk-adjust it, right? Because the risk and the development is different than the risk in the stabilized portfolio implied in the stock price. But like the 2 deals that we did that we announced or started this quarter, those deals generally on a current yield basis are closer, may not be exactly perfect with the implied cap rate of the stock. But then we're also looking at the IRR, right? And so we're looking at the IRR in the aggregate over time and comparing that to our WACC. And in the instance of the Atlanta deals, you're looking at delivering into -- in the one case, an asset that is in a very supply-constrained area that does exist even in Atlanta. And you're looking -- when you look at reasonable rent growth, we can generate a nice spread on an IRR basis without kind of making too crazy assumptions on rent growth or cap rate compression, we don't have any cap rate compression in our math, that is a premium to our WACC. And so I think you're hitting on a point which is that the development side is probably right now the best other alternative outside of stock because your third choice, which is acquisitions are really tough on it relative to what private capital is underwriting. We're seeing private capital underwrite deals still in that 4 75 to 5 25 kind of spot rate and then IRRs that are probably in the 7 handles, if that. Mark Parrell: I just want to add, Alex, because we don't primarily underwrite based on forward rent growth we're looking at spot construction costs against spot rents. And when we looked at the deal that's in Canton, Georgia, which is north of waste from downtown and Alpharetta, which is more of a close-in suburb our perspective was that based on the rents we see in the construction costs, we see the deal made sense on a risk-adjusted basis compared to the stock. It's tough. It's still below the yield the stock was trading at, at the time. So we acknowledge that. But you also got to look for places to have some growth capital and put some money to work that you think can grow over time. And we just felt like the Alpharetta deal really underwrote extremely well on a basis level. We just saw a deal trade in that submarket at a 4.5 cap rate, and we're building now around to 6. So it's a little bit of triangulation, but the primary dependent thing is how to current construction costs compared to current rents. Operator: We'll go next to Julien Blouin with Goldman Sachs. Julien Blouin: I guess as we think about the ramp in blends we saw from 1.5% in the first quarter of '26 to 3% in April. Was that improvement relatively similar in the established and expansion markets? Or was it definitely stronger established because of New York and San Francisco? Michael Manelis: Julien, it's Michael. I think when I look at the quarter, I would tell you on a sequential basis, almost all of the markets showed around like a 200 basis point kind of improvement relative to the fourth quarter. I haven't really done that analysis for the April numbers. But I'm looking at it and just saying most of the markets, have shown that kind of sequential improvement. Obviously, San Francisco and New York are more like 400, 500 basis point sequential improvement on the new lease side. Renewals have been pretty consistent, where almost all of the markets were equal to slightly better outside of like a D.C. and Boston, which were marginally kind of lower on a sequential basis. So I look at that kind of growth to the April number and say it's kind of in line with what you would expect from a normal kind of pricing trend seasonal curve. And like I said earlier on the call, right now, given our positioning, given where the occupancy is, our pricing trend has continued momentum, right? We're going to continue to see that accelerate through the second quarter. That's going to drive continual like materially different than my comments from prepared remarks about line with normal seasonal trends and which ones aren't. Mark Parrell: Yes. Julien, it's a difference between absolute numbers, which are certainly better in the established markets than they are in the newer markets for us. But I think what Michael is signaling to you is just the momentum or trend line in the case of the established markets is becoming [indiscernible]. Momentum track is the same, just the absolute numbers are still different, right? Julien Blouin: Yes. Got it. That makes sense. And then maybe moving over to Seattle. Are there any forward indicators you're looking at in Seattle that would indicate that it could follow San Francisco? I mean, just so far, it seems like that market had a disproportionate amount of tech layoffs and sort of corporate roles without as much of the AI boost from company creation and job creation. The real-time rent data just continues to deteriorate in Seattle. Michael Manelis: Yes. I mean -- this is Michael. I think Julien, one of the positives that I guess I would point to is really the momentum that we see in Bellevue, Redmond. I mean if you look at some of the headlines around the office leasing activity, you see that kind of momentum kind of taking hold. You look at the migration pattern that I kind of mentioned earlier, where more folks are coming back into the market. Now some of that could be from the Microsoft return-to-office kind of policy change early in the first quarter that we saw. But the setup feels right for that market to kind of show some of that momentum. And I think what we're feeling right now is we still have a little it of overhang from the supply that was delivered in 2025 that we're working through in the city. We also saw a reduction of inbound migration from foreign countries. So typically, Seattle is one of those markets that has a higher concentration of move-ins from kind of outside the U.S., so call it 4%, 5% of our move-ins during that quarter, we're running like 50% of that, Mark. So I look at this stuff and say, kind of longer term, I see the setup and I can see this kind of the recovery indicators kind of taking hold. We probably just need a couple more quarters to get through for it to really kind of follow that trend that we're seeing in San Francisco. Operator: We'll go next to John Pawlowski with Green Street. John Pawlowski: Michael, I have a follow-up question on the new lease conversations. You mentioned the expectation for the full year is flat to maybe slightly negative now for the portfolio. Can you give us a sense for the goalposts? What kind of range new lease growth rates will be for the best swath of the portfolio and the weakest? Michael Manelis: Yes. I don't really have that in front of me, John, for the whole portfolio. I guess what I would look at and say the newer markets are going to continue to still have negative new lease change, right? As Mark just alluded to a second and go off of my comments, we are seeing momentum. We are seeing improvement, but the absolute numbers are still negative. And then you get into markets like San Francisco, right, where we're putting up kind of near 10% kind of change. So I think that's going to be a pretty wide spread when we end the year and looking at some of the newer markets as compared to like a San Francisco. John Pawlowski: Okay. And then Bob, second question about just the disposition or that you have sold or you've potentially brought to market and then pulled off for the last 6 to 9 months. Really the topic is perhaps widening cap rates for more CapEx-intensive lower-quality assets. So I guess, over the last, call it, 6 to 9 months, have you had to change the types of assets you're actually selling? Has there been more re-trading when you bring properties to market and you're not getting a bit? Is there more churn in that kind of disposition pipeline to still hit a reasonable cap rate on the dispose? Robert Garechana: Yes, I wouldn't say that there's any more churn than what we expected or certainly anything different than kind of what we saw last fall versus what we're seeing today. Some of these assets that we're taking to market are unique and they have different opportunities. So those opportunities may not -- we didn't -- like we didn't expect 20 people to show on under the tent, and we didn't get 20 people showing up under the tent because they have kind of the capital components or the value-add components or they may have retail, they may have ground leases or other things. So -- but I don't feel a difference in sentiment like 6 months ago relative to what we sit here today. Certainly, I think what has been consistent is that the smaller the size of the deal, meaning if it's in that $75 million to $150 million range, you get a lot more people showing up, right? If you have a deal that is individually 150 or more, it just gets smaller, right? I think that's just -- that hasn't changed. But it feels the same, again, I haven't been doing this for that long, but it feels the same to me as it -- this right now the spring as it has last fall. Unknown Executive: And I might add, John, too, I think from a capital standpoint, right, I think the secured debt markets are still very supportive of these types of actions in multifamily. There's lots of capital available. So certainly no change from that end. John Pawlowski: Yes. Okay. So you haven't got the sense that pricing like market pricing really hasn't deteriorated at all for maybe larger CapEx-intensive older properties? Robert Garechana: I think that 6 or 8 months ago, I think larger CapEx-intensive assets were very hard to sell, and I think they continue to be hard to sell today. Operator: We'll go next to Nicholas Yulico with Scotiabank. Nicholas Yulico: I know you guys got rid of the blended and new lease pricing by market, which I was sorry to see you go. But I wanted to see if you could maybe just give some commentary on Southern California how that's trending year-to-date on new and renewal leasing versus last year? Have you seen any improvement there? Michael Manelis: Nick, this is Michael. So relative to Southern California for the first quarter, we're still seeing kind of negative new lease change and it's kind of most pronounced, I would say, in Los Angeles. And again, very consistent performance on the renewals. So I think for us, the SoCal portfolio continues to be the story around the Los Angeles kind of market. And sitting here today, right, I've got stable occupancy I've got a pricing trend curve. It's flat year-over-year. I've got less concessions right now in downtown and Korea Town, where we had some of that supply kind of pressure last year. So blends are starting to show some kind of positive momentum here, but it's less than what you normally would have expected. And I think last year, we started to feel some more of this pressure kind of more second quarter, third and fourth quarter. So relative to the first quarter, clearly, we see still some softening SoCal compared to last year. But as we work our way through the balance of the year, just expect kind of moderate performance this year out of L.A. We're not really seeing anything that's going to point to kind of a robust recovery in pricing power. Nicholas Yulico: Okay. And then second question is, Mark. If we look at the multifamily sector, there's kind of a clustering of valuation for the stocks that are in your peer group. What I'm wondering is are you thinking about -- and I know you have -- there is a differentiated strategy here that maybe people don't sort of pay attention to. But are you and the Board, there are conversations to sort of go even more in terms of differentiation and strategy, whether it's investments, platform, sort of how you're managing the balance sheet that you guys are sort of focused on to sort of differentiate yourself versus the peer group? Mark Parrell: Yes. Thanks for that question. We are -- the Board, the management team is always engaged on strategy. It's a topic every meeting. It's a topic between meetings. I think real estate expert investors, of which there used to be more than there are now understood the differences between the big 6 or 7 apartment companies. I mean we do have a different strategy. We're more urban-focused, more less development focused, we're more operationally focused on our kind of excellence and investment in our operations. So I think people that are experts in the area know the difference between us and others. I think the generalist investors, and of course, the index funds don't. And I think it's a little bit hard to know how you can break through that, except I don't know, by some really more dramatic step. But I do think dedicated investors know the difference between us and our peers. And I think more generalist investors probably don't. Operator: Our next question comes from the line of Jamie Feldman with Wells Fargo. James Feldman: Great. I guess here's an opportunity to talk about your operations. So we haven't really talked about the expense side of things. Can you talk about a couple of things here. Number one, the insurance renewal that I think was in March, how that played out? And how that looks versus your guidance? And then just energy costs. Is there anything that's changed your outlook on the expense side given where energy costs are going? Or is there anything you're doing to mitigate expenses? Maybe just talk through that? Or if there's any other expense line items that are meaningfully different than your initial outlook or that you want people to focus on how you're managing them? Unknown Executive: Yes. Thanks for the question. So I'd say maybe I start with the insurance, you're right. We did see -- actually we had our property insurance premiums. They have come down, which we actually viewed as an opportunity to buy some additional coverage. So I think that hedges us against kind of what we've been seeing in annual casualty loss expenses over the last few years. And so I think while property premiums were coming down, we also have seen the offset being general liability premiums have increased as well as some of the general liability expenses that run through our same-store ops. So I think putting that all together, the 4.5% quarter-over-quarter increase we had in the first quarter, that's not unexpected. But -- and was anticipated in our guidance. As far as energy, I would say utilities were up a little bit higher than we probably thought for the year a little bit. And a lot of that results, I think, from one, the number of storms we had early in the year in the Northeast in particular. Obviously, there's a lot of noise and energy costs just generally across the board and electricity and gas were certainly impacted for us in the quarter. We tend to hedge as much as we can. So there's only a small amount that we can hedge in the market. But to the extent we can, we are hedging energy prices. But I'd also say the flip side of higher utility cost being up is on the revenue side, we were able to have higher fees. And you noticed our other income was up about 60 basis points of contribution in the quarter. So that offset a little bit of the higher increases in expenses. Robert Garechana: Sorry. The one thing I was going to add, Jamie, is on the capital side. So we have a number of capital sustainability-driven capital projects. focused on reducing consumption because that's really the lever that you can manage the best, right? Because it's macroeconomic drivers will drive the utility costs. We have a number of projects underway. But to be honest with you, the rise in prices also led us to re-underwrite other projects that may not have otherwise hurdled in terms of what our capital returns would have been but now do. And so we have looked at -- we did a big exercise of looking at accelerating those to manage that both for our own P&L, but also for our residents overall. So we're applying the operational excellence that you've seen in Michael's world just across the platform in order to keep those costs down as much as we can. Michael Manelis: Yes. And Jamie, this is Michael. The only thing I would add there is we do have an energy conservation checklist. So our on-site teams have done a tremendous job every day showing up, going through that checklist and looking for areas of opportunity to reduce the overall consumption. We measure the consumption. We kind of share and highlight and spotlight where we're seeing those successes. And it doesn't take much, right? That little bit of focus of turning down the temperatures in the hallways or common areas by 1 or 2 degrees, starts to show up in some of the bills. It has a lag effect. But clearly, we have the right mindset in place to mitigate as much of the consumption risk as we can. James Feldman: Okay. That's very helpful color. And then we noticed your leasing and advertising is up pretty meaningfully year-over-year. I think it's over 20%, higher use of interactive marketing. Can you just talk about something -- is there anything changing on the AI side? Are you using more resources to optimize your appearance in AI searches? Is there anything to read into that data? And if there is, what are the -- how is it going? Bret McLeod: Yes, maybe I'll start -- sure, I'll start, Jamie, just on the cost side. I'd say it's nothing that we didn't expect. I mean, as Michael talked about, we've got some of our technology innovations that are rolling through that. I would also say specifically to that line item in the quarter, we did have an outsized increase from a write-off of a broker commission we took in the first quarter related to our non resi portfolio. So when a tenant vacates early, we will add off the full amount remaining on the amortized brokerage fees, which we did at 3 retail properties in the quarter. So that was contributing a little bit to the higher number. But otherwise, it was kind of in line with what we were thinking. Michael Manelis: Yes. And then I think just specific to AI, I mean, I do think the industry is changing very quickly and the way that consumers or prospects are finding people by leveraging some of the LLM models that are out there is going to change kind of the ILS environment. Our team is very focused right now on trying to figure out ways to become relevant in that kind of search optimization. Haven't really seen anything take hold and clearly not a driver to the expense that Bret just alluded to, but it's something that the team is very focused on. And we do think over time is actually going to reduce kind of the dependency and overall reduce the L&A expense. James Feldman: Okay. Do you think it can become a strategic advantage? Or does it level the playing field? Michael Manelis: No. I think there's absolutely ways to become more relevant in that environment. And I think the folks that are focused on it and put the right resources to it, will have a strategic advantage. Operator: We'll go next to Michael Goldsmith with UBS. Ami Probandt: This is Ami on with Michael. I was curious, how much of an impact does burning off of concessions have on your blended rent spreads? So are your blended rent spreads artificially boosted by concession burn off? Mark Parrell: They were always reported on the same basis, so they're always net. So they don't -- it's marked. They don't change from like 1 quarter, we reported it with concessions in the next quarter without. So obviously, getting rid of concessions is the beginning of that continuum of improvement, right? You get occupancy, you get confident you take concessions away, then you move up base rents and that it finally leads through the rents or to same-store revenue. So I guess I'd say it's on the continuum. But because we didn't change the basis of calculation, I don't see how that could be true. Ami Probandt: Okay. So not a material impact. And then I guess just to touch on the [indiscernible] that you're monitoring. We know Massachusetts is up. Are there any others that you're monitoring closely? Mark Parrell: Well, Massachusetts is the area of primary focus for us. It's likely to go to the voters. And I think the industry has mobilized just like it was in California to make the same arguments about the industry being more useful creating supply and at this rent control activity as a disincentive. There are a couple of deals we were looking at in Massachusetts to start building that we stopped. And I'll tell you that the 2 deals we are almost done building right now, we might have thought about them differently as well. So it's a very negative proposal for housing supply and long-term affordability. There is a measure in DC we're watching closely as well that will freeze rents for 2 years. A lot of our D.C. portfolio is already rent controlled. So it's a little bit of a different and less meaningful impact directly on us. But again, it's a hard place to do business. The market already knows about this. It's already harder to sell assets in the District of Columbia. So again, I guess the theme I'd give you is capital is sensitive to regulation. And when you do this and deny returns, you're going to have less investment in worse affordability. And I think a lot of smart policymakers like Governor Healy in Massachusetts already know that. So we're going to be hopeful. But Massachusetts is the main show this year. Operator: We'll take our next question from Adam Kramer with Morgan Stanley. Adam Kramer: Maybe a little bit more of a philosophical question. But just with turnover rates sort of as low as they are and even with all of the supply that we've had the last few years seeming to stay really low. Wondering sort of how you view that, right? I sort of recognize that from a same-store NOI perspective is benefit from reduced R&M cost. But just from a sort of renewals versus new lease growth perspective, wondering how you see the sort of lack of mobility sort of within the housing ecosystem currently sort of benefit on the renewal, but maybe hurt you a little bit on the new lease side? Or am I thinking about it incorrectly there? Mark Parrell: Adam, it's Mark. I'm going to try to answer. We've been reading articles, various bank research shops about less labor mobility, and that's been a trend in the U.S., people are moving less frequently. Interestingly, it does look like Gen Z, not surprisingly, younger people move more often and that higher wage folks move more often that describes our demographic pretty well. I think for the country overall, growth has benefited by people moving to where the jobs are. So I think less labor and mobility, less geographic mobility is less positive for the U.S. growth rate overall. But our group of folks will move around the country at their age to find opportunity and maybe aren't quite as tied down as older generations are by family or other considerations. So I think overall, less geographic mobility is bad for the country. But I think for our demographic, we just haven't seen it. And you heard Michael talk about San Francisco. We see the influx and we -- at our Investor Day last year, we talked about New York, which has lost people for a while. And -- but yet Manhattan is doing great for our demographic, and you see that in our occupancy numbers. So I think there's a big overall theme of it being a little bit of a negative. But for us, it's generally been either neutral or a bit of a positive because our demographic is more mobile still. Adam Kramer: That's great color. And then maybe just a little bit of different question. Just wondering about sort of the Sunbelt recovery. So a little bit of a crystal ball question. I know it's difficult. But I guess when you sort of sit here look at as what the supply forecast is for the Sunbelt for your expansion markets, sort of how do you think about sort of the pace of recovery there? Does new lease growth? Could it get positive later this year? Is that more of a 2027 story? I recognize there's nuances by market as well, Austin probably being the softest fundamentals. But just -- yes, I wonder sort of recovering the Sunbelt, the latest thoughts on timing there. Mark Parrell: It's Mark again. And if there's something, Michael, on stat, he can jump in here. But I think we need to see concessions go down. That's what we are seeing, in fact, in Atlanta and just occupancy firming and concessions, and that will be the indicator that rents will recover. The setup in all those markets are markets, which again, are just Dallas, Denver and Atlanta with Austin, a [ laggard], those all have decent forward setups. We just need more job growth there than anywhere else because we have more supply there than anywhere else. So I think they are more sensitive to jobs, and we've said that a few times. I don't know how many jobs you need in the market like D.C., new jobs where there's just going to be so much less supply. So I think those are higher beta markets, and they do have upside. And I think in some -- maybe a year or so, we'll be talking about that second derivative really inflecting up in those markets more than at this point. But what we really see is a bit of a slow recovery with Atlanta in the pole position for us in Austin at the rear. Operator: We'll go next to Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Yes. The other income line item this quarter, kind of some strong results coming out of that. Just curious if that's just really being driven more by just expense reimbursement because you have higher occupancy, whether it's kind of other ancillary income sources there that are more sustainable anything onetime in there? Just kind of curious about that line item and kind of what we can expect from it going forward. Bret McLeod: Yes, sure. This is Bret. I said -- as I mentioned earlier, I think we saw, as you noted, the higher rubs income a little bit. We said bad debt was better this quarter by 10 basis points. And then the last thing I'd say is we did see some positive trends in storage and some of the on-site ancillary charges that we've been generating, we're working on as long as -- as well as the continued rollout of the bulk WiFi program from last year. Operator: This concludes the question-and-answer portion of today's call. I would like to turn the call over to Mark Parrell for any additional or closing comments. Mark Parrell: Thank you all for your time today and for your interest in Equity Residential. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Welcome to Avnet's Third Quarter Fiscal Year 2026 Earnings Call. I would now like to turn the floor over to Lisa Mueller, Director of Investor Relations for Avnet. Please go ahead. Lisa Mueller: Thank you, operator. I'd like to welcome everyone to Avnet's Third Quarter Fiscal Year 2026 Earnings Conference Call. This morning, Avnet released financial results for the third quarter of fiscal year 2026 and the release is available on the Investor Relations section of Avnet's website, along with the slide presentation, which you may access at your convenience. As a reminder, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward-looking statements are not a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation. Please note, unless otherwise stated, all results provided will be non-GAAP measures. The full non-GAAP to GAAP reconciliation can be found in the press release issued today as well as in the appendix slides of today's presentation and posted on the Investor Relations website. Today's call will be led by Phil Gallagher, Avnet's CEO; and Ken Jacobson, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil? Philip Gallagher: Thank you, Lisa, and thank you, everyone, for joining us on our third quarter fiscal year 2026 earnings call. This was an outstanding quarter for Avnet, one that reflects both strong execution by our teams around the world and improving market conditions. Over the past several quarters and really over the past couple of years, our team has been operating in a challenging market environment. Throughout that period, we remain focused on the things we can control, supporting our customers coordinating closely with our supplier partners, managing inventory and working capital discipline, investing in our people, digital capabilities and distribution centers with a long-term view. This quarter's results and our June quarter guidance demonstrates that focus positioned us well coming into the beginning of the up cycle. We delivered financial results that came in well above our expectations including record sales in our electronic components business. As data center and AI demand proliferates throughout the market, we also saw broad-based demand across most of our core end markets. which translated into meaningful operating margin and EPS improvement. Before we give more color on the business, I wanted to take a moment to mention we're closely monitoring the current geopolitical environment and remain mindful of the potential broader macroeconomic impact. The conflict in the Middle East had no material impact on our Q3 results outside of some increases in freight expenses due to rising fuel costs. Now turning to our third quarter. We achieved sales of $7.1 billion, driving a 3.5% operating margin in our electronic components business and a 5.2% operating margin in our Farnell business. We also reduced inventory days 77% below our near-term target of 80 days. Our double-digit year-on-year sales growth was led by another quarter of record revenues in Asia, along with better than typical seasonal growth in the Americas and Europe. From a demand perspective, market conditions continue to improve across the majority of the verticals we serve, which includes data center, industrial, aerospace and defense, transportation, consumer and networking. The third quarter was led by strong demand in industrial, networking and our data center end markets. Year-over-year, we also saw broad-based improvement across most verticals led by the data center. Over the past 90 days, -- the lead time environment has shifted component lead time trends are increasing across many product categories. We have seen lead time extensions in over 50% of the product categories we track traversing semi doctors and interconnect passive electromechnical with stability being reflected in the balance. While lead time extensions continue in components supporting data center and AI builds, they are now spreading the broader set of products supporting diverse end market applications. Customers are increasingly recognized as the challenges of a tightening supply environment and are turning to Avnet's proven expertise to help manage their component supply chains. Our backlog is growing and our book-to-bill ratios are well above parity in all regions. In the December quarter, we saw early indicators of certain component price increases. During the March quarter, we have seen price increases across a few suppliers and technologies, most predominantly related to memory. We expect to see additional price increases over the next several months, and majority of which are being driven by increases in the underlying input cost of components. Ken will give more color on the impact of pricing during the quarter in his comments. Now with that, let me turn to highlights of our business. Our Electronic Components business delivered a record sales quarter, driven by growth across all regions and strong execution. Demand creation activity remained robust. Design wins continue to convert to sales and our interconnect passive and electromechanical or IP&E business outperformed, reflecting the benefits of our technical capabilities and our focus on the total solution selling. In Asia, sales reached another record high of $3.5 billion in a quarter that is usually impacted by the Lunar New Year holiday. This marks our seventh consecutive quarter of year-on-year sales growth in the region, which now represents almost 50% of our total sales. Demand increased across all the geographies and verticals we serve, led by the data center, industrial and networking markets. In March, I would be able to spend some time in China. With our Asia leadership team, including visiting with local customers and suppliers. This trip reinforced my belief in the opportunities for growth we see in the region that our Asia team is capitalizing on. In EMEA, we're pleased to see continued rebound in the region with sales growth both sequentially and year-on-year for the second consecutive quarter. EMEA is experiencing growth across a number of verticals, including industrial, networking and early signs of the long-term opportunities we see in aerospace and defense. Overall, I would say the market conditions in Europe are improving, although the demand environment is still mixed. We are seeing improvement in our strategic differentiators, including leading indicators in our embedded business, as customers and suppliers are looking for board and display level solutions. I was able to spend some time in Germany in late March, meeting with several of our IP&E suppliers and customers at our Avnet Apicus Technical Conference. The outlook and momentum I felt coming out of Europe was more encouraging than just even a few quarters ago. In the Americas, sales grew both sequentially and year-over-year marking our third consecutive quarter of year-on-year growth. Most end markets showed sequential growth led by networking, while aerospace and defense, networking and industrial were the strongest end markets year-over-year. Our Americas region recently hosted an IP&E Summit, bringing together leaders from our top suppliers to reinforce our focus and commitment to accelerating growth in the IP space. Our IP business had a record quarter, growing 25% year-on-year. We carry a world-class portfolio of IPD products and solutions and are benefiting from this multiplier effect as every active simulator chip requires surrounding IP components to function, think connectors, capacitors, passes, resistors and sensors, among other technologies. We continue to see success, driving conversations with customers about the full solutions we can provide with both our semiconductor and IP&E product offerings. Turning to our other value-added drivers of profitable growth. We continue to benefit from our field application engineers, complemented by our digital design capabilities and tools. Our Demand Creation revenues increased sequentially by 16% and from a design opportunity standpoint, the leading indicators remain positive, which bodes well for future design wins and downstream revenue. Our supply chain services offerings continue to grow and expand with many OEMs and that are household names. We are seeing opportunities and wins across many of the same verticals, where we are experiencing strong growth in the core business. These include transportation, data center and networking, among others. We believe we have the opportunity and capabilities to be the leading supply chain services and solutions provider in electronic components industry. Now turning to Farnell. We are seeing steady progress in Farnell's performance and recovery. Sales grew double digits year-on-year for the third consecutive quarter. Gross margins and operating margins expanded in line with expectations and the business remains on track with its return to double-digit operating margins over the next several quarters. Our [indiscernible] focus is gaining traction as we leverage Avnet's scale and relationships with pronounced capabilities and offerings. This unique combination differentiates Avnet and strengthens our value proposition to suppliers and customers. Farnell's continued investment in its e-commerce platform, customer experience, and inventory proposition positions us well as demand accelerates. Throughout this cycle, we remain committed to investing in the future of Advent with a focus on the long-term opportunities we see for the demand of electronic components. Our bankability has never been more critical. The proliferation of electronic components continues at a rapid pace with emerging opportunities in drone technologies, robotics and edge AI as just a few examples of the future trends. We have made substantial investments in our digital platforms and capabilities, supply chain and distribution center infrastructure and engineering resources. These investments are not just about near-term efficiency. There about future-proofing our company and ensuring we can support increasingly complex supplier and customer needs as technology and supply chains evolve. At the same time, we have stayed disciplined in managing expenses optimizing inventory and allocating capital. We have consistently said we will balance reinvestment in the business with returning capital to shareholders, all while prioritizing and maintaining a strong balance sheet and we have delivered on those commitments. In closing, I'm extremely proud of what our team has accomplished, and I'm excited for the continued recovery in our business. These results reflect not only an improving market environment, but also the resilience, experience and dedication of our team. With the breadth of our supplier [ Loncar ], our diversified customer base and the strength of the end markets they serve, we are well positioned to deliver sustainable growth and improve returns into the future. We are thrilled by the momentum of the business and are confident in Avnet's ability to execute at a high level. So with that, I'll turn it over to Ken to dive deeper into our third quarter results. Ken? Ken Jacobson: Thank you, Phil, and good morning, everyone. We appreciate your interest in Avnet. Our sales for the third quarter were approximately $7.1 billion, above the high end of our guidance range and up 34% year-over-year. On a sequential basis, sales were higher by 13%. Regionally, on a year-over-year basis, sales increased 39% in Asia, 31% in Europe and 27% in the Americas. During the third quarter, sales from Asia were 49% of total sales compared to approximately 47% of sales in the year ago quarter. From an operating group perspective, electronic components had record sales during the quarter as sales increased 35% year-over-year and increased 13% sequentially. In constant currency, electronic component sales increased 31% year-over-year. Cornell sales increased 24% year-over-year and 6% sequentially. In constant currency, Farnell sales increased 18% year-over-year. As Phil mentioned, supply dynamics have been driving some price increases, especially in memory. And in the third quarter, we saw the impact of these pricing increases in our sales growth. Approximately half of the sequential sales growth and approximately 1/4 of the year-over-year sales growth was attributable to higher memory pricing. For the third quarter, gross profit margin of 10.4% was down 68 basis points year-over-year and slightly lower sequentially. Electronic Components gross profit margin was flattish sequentially and down year-over-year, primarily due to a combination of higher percentage of sales coming from our Asia region as well as some differences in product and customer mix in the Western regions. We reported higher gross profit dollars as a result of the previously mentioned price increases. Although the pass-through of these price increases has less of an impact on gross profit margin. As a reminder, when component prices increase, we communicate the changes to our customers and pass through the corresponding increases. From a Farnell perspective, gross profit margins were up 34 basis points year-over-year and were up 49 basis points sequentially, in part due to an expected improvement in product mix of on-the-board components. Turning to operating expenses. SG&A expenses were $519 million in the quarter, up $83 million year-over-year and $27 million sequentially. The sequential increase in SG&A is primarily from a combination of higher sales volumes, including related incentive compensation expense as well as foreign currency. Foreign currency negatively impacted SG&A expenses by approximately $3 million sequentially and $22 million year-over-year. Excluding the impact of foreign currency, SG&A increased approximately 5% sequentially and 14% year-over-year. As a percentage of gross profit dollars, SG&A expenses were lower sequentially at 70% compared to 74% last quarter. As our business grows, we expect to continue to maintain our disciplined expense management and drive efficiencies in our business while still making investments in the future. We expect our SG&A expenses as a percentage of gross profit dollars to be in the mid-60s percentage-wise over the next year. For the third quarter, we reported adjusted operating income of $221 million and the total Avnet adjusted operating margin was 3.1%, an increase of nearly 40 basis points from last quarter. This represents the third consecutive quarter of adjusted operating income margin expansion. Adjusted operating income also grew more than 2x sales compared to last quarter. By operating group, Electronic Components operating income was $235 million and EC operating margin was 3.5%. And the nearly 40 basis point sequential increase in EC operating margin was led by the business recovery in Europe. This is EC's second consecutive quarter of operating margin expansion and is the highest EC operating margin since the first quarter of fiscal 2025. We continue to gain momentum in EC with the recovery of both Europe and the Americas, we currently expect our EC operating margin to reach our 4% near-term goal within the next fiscal year. For new operating income was $24 million, and their operating income margin was 5.2%. And which was up 55 basis points from last quarter, reaching its highest level in 3 years. This is Farnell's sixth consecutive quarter of operating margin expansion. Similar to our EC business, we see momentum in Farnell and expect to continue driving operating margin expansion with the near-term goal of getting back to double-digit operating margin by the second half of calendar 2017. Turning to expenses below operating income. Third quarter interest expense was $63 million, and our adjusted effective income tax rate was 23%, both consistent with expectations. -- adjusted diluted earnings per share of $1.48 exceeded the high end of our guidance for the quarter. Adjusted diluted earnings per share grew more than 3x sales compared to last quarter. Turning to the balance sheet and liquidity. During the quarter, working capital increased by $145 million sequentially, primarily due to an increase in accounts receivable driven by the growth in sales. Working capital days decreased 11 days quarter-over-quarter to 76 days. From an inventory perspective, Inventory increased by $168 million or 3% sequentially. The increase in inventories was primarily driven by an increase in certain memory products to support supply chain services engagements and from an overall increase in inventory received at the end of the quarter. inventory net of accounts payable decreased by $115 million compared to last quarter. We ended the quarter with 77 days of inventory, achieving our near-term target of below 80 days earlier than anticipated. Our EC business had 70 days of inventory and our Farnell business had just over 200 days of inventory. As a value-added distributor in the center of the technology supply chain, inventory is a critical enabler for our business. We remain focused on making the necessary inventory investments to position ourselves appropriately to capture the numerous opportunities we see in the markets we serve. We continue to prioritize servicing our customers' and suppliers' inventory needs through an overall pipeline of inventory and through a variety of supply chain programs to meet expected customer demand. Our return on working capital improved over 300 basis points sequentially from both higher operating income and the reduction in working capital days. Continuing to expand our return on working capital is a focus across all of our businesses. We expect to achieve our near-term goal for return on working capital of 16% by the second half of fiscal 2027. In the third quarter, we used $54 million of cash flow for operations to support $800 million of sequential sales growth. We anticipate a use of cash flow from operations in the fourth quarter to continue supporting the sales growth, primarily in the form of accounts receivable. Cash used for capital expenditures was $17 million during the quarter. In line with our stated priorities, we ended the third quarter with a gross leverage of 3.6x and down from 3.9x in the second quarter with approximately $1.7 billion of available committed borrowing capacity. We believe we are on track to reduce our leverage to our previously stated target of approximately 3x by the end of the calendar year. Returning excess cash to shareholders remains a core priority of our capital allocation program. In the third quarter, we paid our quarterly dividend of $0.35 per share or $29 million bringing our year-to-date shareholder return to $224 million, including both our dividend and share repurchases. Once our leverage returns to our target levels, we expect to use a portion of free cash flow to repurchase shares. We have $226 million remaining on our existing share repurchase authorization. Turning to guidance. For the fourth quarter of fiscal 2026, we're guiding sales in the range of $7.3 billion to $7.6 billion and diluted earnings per share in the range of $1.70 to $1.80. Our fourth quarter guidance assumes current market conditions persist and implies a sequential sales increase of approximately 5% at the midpoint. The sales guidance implies sales growth across all electronic components regions. This guidance also assumes similar interest expense compared to the third quarter, an effective tax rate of between 21% and 25% and 83 million shares outstanding on a diluted basis. This was a strong quarter with solid execution and continued recovery in the West. We are proud of our team for continuing to demonstrate the value we bring to our customers and suppliers. There is always opportunity for improvement, and our goal continues to be to ensure that we remain well positioned to meet our current customer needs while taking advantage of the positive market conditions we are seeing today and are expecting in the future. With that, I will turn it over to the operator to open it up for questions. Operator? Operator: [Operator Instructions]. Our first question comes from the line of Melissa Fairbanks with Raymond James. Melissa Dailey Fairbanks: I must have hit star one early enough for a change. Congratulations on a great quarter. Glad to see the continued progress in everything. So I know you mentioned you've seen some pricing increases from some suppliers. Obviously, memory was a very significant piece of that. But is there any way of contemplating how much of your revenue growth outside of memory has been driven by higher ASPs, even if it's just for some of the higher value components, not just the price hikes or like absolute that volume growth, have you quantified volume growth recently? Philip Gallagher: Melissa, thanks for the comments. This is Bill. Not -- not -- I mean, the memory -- we just wanted to be fully transparent on that because it's frankly so public right now. I know you have a question on that. a lot of them are sort I think more of the price increase will start to come into play this quarter as April 1. So we didn't have a whole lot to calculate as far as a percentage of growth based on ASPs and the balance of the technologies. And if there were ASP increase, they already would have been in the run rate from the prior quarter. You know what I mean. So effectively, it was the bulk was memory. It might change for here in the June quarter. Ken Jacobson: Melissa, I would just add, I think as we go forward with other price increases, we don't expect those to be anywhere near the magnitude we saw in memory and it won't be everything. Melissa Dailey Fairbanks: Okay. Yes. Hard to replicate that level of price increases. Maybe digging in a little bit further, you mentioned that you've had incredibly strong growth across industrial networking and data center. Are you able to quantify how much those markets contribute to overall components revenue? Philip Gallagher: Yes. So roughly, you said industrial at somewhere 50%, 60%, probably? [indiscernible]So industrial is in the 30-plus percent right there. We've been that way. Historically, it's coming back pretty strong, actually, year-on-year. So that's roughly the numbers. Melissa Dailey Fairbanks: Okay. Perfect. Can I squeeze in one more? Philip Gallagher: Yes. Melissa Dailey Fairbanks: You mentioned longer lead times are spreading across more of the portfolio. I know IP&E has had some tightness for quite some time and then some of the memory or storage stuff. But just wondering if there are any areas where you're seeing stock outs yet or maybe even double ordering the [ cabo ] phrase? Philip Gallagher: Well, let me work backwards on that. On the double ordering more -- our suppliers will see more of that more because they could see similar orders from the same customers to multiple channels. tougher for us to see that. We'll see inflated demand or inflated forecast from the customers, right? So we'll -- and we do -- we are pretty disciplined around that if somebody is using 100 pieces a month for years and all of a sudden at 500 pieces per month like, okay, what happened, right? This is an example. So we are doing our dentist to track that and call that out as much as we can from an analytics standpoint. As far as lead times go and stock outs, no, it's mostly memory right now. However, we are, for sure, seeing lead times, you already mentioned the IP. They've gone out a bit not to stock out levels by any stretch, but they've been leaking out a bit by discrete a tad, analog is about flat to up a tad, but it's been up storage -- storage is going to up and that's going to be tied to memory more than likely, right? lead times about memory to want to push out the storage. So yes, that's about the picture right now. Melissa Dailey Fairbanks: Okay. Perfect. I appreciate all the detail. I know you have the data. I just had to write that or ask the right questions. Thanks, Guys. Operator: our next question comes from the line of William Stein with True Securities. William Stein: Great to see another strong quarter, and I hope you're right that we're sort of in the beginning of this upturn. Phil, you mentioned strength in AI data centers driving demand. Can you remind us what your exposure is to that end market? Is that simply traditional component distribution where the ODMs are using the channel? Or is there some sort of supply chain services associated with that? Any characterization of that exposure or sizing, for example, would be helpful. Philip Gallagher: Yes. Thanks, Will. Thanks for the comments. Yes. So I think we estimated a couple of quarters ago is somewhere in the 5% to 7% range, probably increased a little bit closer to 10% to 15% that we have exposure. And to be clear to your question, to go directly into the data center. And that would be, I don't know what you call it traditional anymore, but it's definitely tied to supply chain, it's more in the core and traditional product lines. And we don't -- as you know, we don't carry video. So it's not that and the bulk of that is selling into directly the hyperscalers and data centers is more an ag and within agent Taiwan. That's what we try to track is and work in track is what other verticals are being impacted with the expansion of data center, right? Industrial and others are also seeing a lift, and that's our sweet spot, right? So the -- it's directly to the data center we're tracking is the number I gave you. And then you got the, I call it the n-minus-one factor, right? What is the -- the industrial segment is I'd like to mention customers names you can imagine in power, power management, heating, cooling, HVAC, et cetera. They're also increasing -- and we're trying to determine how much is tied to the data center. But I hope that answers -- and yes, we are expanding our supply chain as a service opportunities as well, but that's not as much in that number that I gave you, every more services revenue. William Stein: One other, if I can. I was a little surprised to see components grow faster than Farnell in the quarter. I think based on your comments, it sounds like that's more memory driven, maybe there's less of that in Farnell. But I would just expect that at this point in the cycle when things are -- you're just starting to hear about lead times stretch prices increasing shortages starting to show themselves that perhaps Farnell starts to be a more prominent part of the business. Is that -- is that on the comm in your opinion? Or anything you can talk about the sort of performance differential between these two because Farnell has quite a bit of gearing on the margin side. Philip Gallagher: Yes. No, thanks, Will. I think part of it is they've had now 3 quarters of double-digit year-on-year growth. So they've kind of gotten a lift ahead of some of the core balance of the quarter outside of Asia outside of Asia. The other thing is they have a lesser percentage of their business is on board components, right? So their percentages are lower because of the MRO test and measurements. A big part of their business. So it's not all apples-to-apples, like everything we have. They're not 90% on board to or 90% sevelectorn IP like we are in the core. So I think that's the biggest delta difference. And then the other one is their strongest region typically the largest region is in Europe. And as we said in the script, although we're encouraged with what we're seeing in Europe ones, for sure, oxygen in Europe, and that's great news for us. It's still a little bit more spotty than what we see in other regions. So what we need is for Farnell to accelerate its growth in Europe as well. And that -- you're absolutely right. that will help the margin mix too. And they don't have as much memory. Yes, they don't -- the volumes of memory and the core is much higher. So that would also impact I hope that answers it. William Stein: It mostly does. Maybe just let me tack on maybe half question. Is this perhaps related to inventory work down that's still perhaps we're done with that for the most part, but is there still more of that that's going to really make the difference in the Farnell business customers truly depleting so that they have to come reorder? Philip Gallagher: Yes. I think I sure hope so. I think most of that's behind us. There's still probably somewhat visibility to everybody's inventory and the end customers. But I think for the most part, that is behind us. And we did see -- I mean, it's. We have seen revenue per line item is increasing, the lightens themselves are increasing. So the signs I mean, we're actually pretty pleased with where the progress we're making in for now. There's still work to do, and I know that seems on this call right now. So they know that we have our long-term marching orders there, and we're just going to continue to work towards those goals. Operator: Our next question comes from the line of Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Maybe a few if I could. I think you said 50% of the sequential increase in revenue this quarter was related to pricing. Any help on how that contributed to this increase in EBIT on a sequential basis? Ken Jacobson: Yes, Joe, I think how I'd characterize it as we kind of try to get at in the script as we pass on prices, right, it does -- we maintain the same gross margin, but get incremental gross profit dollars. So I think it contributed to the overall drop-through in operating leverage. Now again, I think a lot of what we saw outside of the guidance and where the lot of the beat was, was in Asia. So continue to see that trend in Asia being strong, which now is close to 50% of our UC business. So -- but it helped the operating margin leverage like the other sales. But didn't have a meaningful impact on the gross margin. Joseph Quatrochi: Right. And I guess like on the EBIT dollar increase sequentially, fair to say that it was more than 50%. Ken Jacobson: I would say it was probably around the same as the sales growth in terms of the percent that coming from there. Joseph Quatrochi: Yes. Okay. And then I guess, as we think about just like what's embedded in the guidance, I think you said earlier, right, we've seen a round of price increases across maybe more of the broad analog mixed-signal space that kind of started taking place in April. So how do we think about that contemplate, I guess, in the 5% sequential growth for the June quarter? Ken Jacobson: Yes, I would say I think it's in there, at least what we know. But again, it's less pronounced than what we saw last quarter, right? So I think it's already kind of in the Q3 run rate for the memory pricing and then some of the other things are just a much smaller percentage. And again, it's not everything. And the timing is kind of throughout the quarter versus everything at the beginning of the quarter. So think about, yes, it might be double-digit increases in price, but it's to 0, let's say, on average right? If it's a like 100. Joseph Quatrochi: Yes. Yes. Okay. And then maybe just last 9 on the inventory, can you just kind of update us how you feel about your inventory positioning across just kind of the broader line card and where you see that going over the coming quarters? Ken Jacobson: Yes, I think we feel generally good. And again, I think Phil commented on the book-to-bill and the backlog, right, which is one of our challenges we've had over the past several quarters is trying to get that visibility so we can make sure our suppliers are building the right parts that are needed. So I think we feel good. There's still opportunity we have to some things that are in excess and some things that are aged right, continue to turn that and move that and convert did good inventory. But again, we're going to keep investing in inventory we want to make sure we're prepared and we've got enough to support the needs of the customers and the overall demand but we're happy with the progress on the inventory days, and we'll continue to work that where we have opportunities and continue to reinvest, especially in the IP side of things. Farnell still has some continued investment to make as well. So they're improving their inventory days as well, but there's still some things we want to make sure they're prepared as well. So again, I think you see it here continuing to kind of work down as we continue to grow, but still opportunities for some investment and some overall efficiency there. Philip Gallagher: Yes, Joe, I'll just add to that. I mean it's our life point, right? So inventory sometimes gets a bad word. It's we don't want to aging. We don't want too much of anything that we don't need, but we're constantly balancing that. And it's critical to obviously our suppliers that we've got the appropriate inventory and as importantly as lead times go out, that we're pipelining and part of that message is to our customers to continue to give us, as we talked in the script, more visibility longer term. And that's starting to happen, still not across the board, but that's starting to happen as well. So right now, we feel good with our inventory position. We'll continue to improve it. That means both the hopefully turning it but adding the appropriate inventory from SKU standpoint and to that point, Farnell, we've actually added -- and this is key back to Will's question even from an NPI or new product introduction, but we've added over almost 60,000 SKUs later another 70,000 additional SKUs just this year, and a lot of that is in the IP&E space, but as well across the board and semiconductor. So may we have a good handle on right now, and we feel pretty good about the position with inventory overall. Operator: Our next question comes from the line of Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: So you beat guidance for fiscal 2Q, you're guiding above seasonal for fiscal 4Q. Based on the visibility that you have -- do you think that you can maintain above seasonal growth for the second half of calendar '26? Philip Gallagher: Well, we don't typically -- as you know, we don't typically guide out that far, right? But again -- and I really remain vigilant on this route. So we're just managing the bookings, managing the backlog and Yes, it looks positive at this point in time that we'll continue to see some growth as we get through the year. Summer is always tough to judge, right, with the holidays and whatnot. But we're not seeing anything that would really negate at this at this point in time. I think it's the important one. Ruplu Bhattacharya: Okay. Maybe I can ask a follow-up to Ken on margins and specifically on incremental margins, revenues leaked quite a bit. You came above the high end of guidance. Were you -- was this the incremental margin that you were expecting in the core business? And how should we think about that as we move forward? And has your expectation for Farnell margins changed? Initially, you had guided on the Farnell side, 50 to 100 bps of improvement every quarter. I think on the call, you said that you'll get -- you're targeting double-digit operating margin now by sometime in the second half. I think you said of calendar '27. How should we think about that incremental margin on that side of the business? Ken Jacobson: Yes, I'll start with the last one first about Farnell Ruplu. And I would say, I think we're tracking pretty well. We saw a nice uptick in gross margin because the on-the-board component mix as expected. I think Phil mentioned here is that Europe really comes back, and we've had a couple of quarters of growth there now, but it's not the same as what we're seeing in Asia, for sure, or even in the Americas. In terms of the growth in Europe, both at Farnell and for the core business. So I think as that continues to recover, which we're monitoring, you'll get some more uplift there. So we feel good about the progress and the guidance implies improvement in that range. We were expecting in terms of the fourth quarter. I think for the quarter itself, going back to the last comment, a lot of that beat came from Asia, right? We expect it to be down a little bit because of the Lunar New Year, and it was up. And so that's impacting the overall operating margin. But I think, in general, we had good progress on operating margin expansion in and let's say, the guidance implies further improvement there. So we're tracking pretty well and have a few quarters in a row now. And then the combination of the two helps the Avnet Inc. operating margin expand. So it's still a few quarters away from kind of where our near-term milestones are, but I think we're making good progress and feel good about that. And then obviously, the broader leverage and operating income dollars is much growing much faster than the sales, which is what we'd expect. Ruplu Bhattacharya: Okay. Let me just ask a clarification on that. So on Farnell margins, where do you think that can get to by the end of this calendar year so that we set our expectations. And then on -- maybe my last question would be, you talked a lot about memory. How much is memory as a percent of revenue or as part of the product line? Like how big is that in terms of your product line or in terms of revenues? Ken Jacobson: A few different questions there. So I think we said 50 to 100 basis points a quarter for the Farnell improvement. So if you take that by 3 quarters left in the calendar year, you get $150 to $300 million, right? So I think that's not changing. And then from a memory perspective, obviously, with where pricing has gone, it's become a bigger percentage. So think about roughly in the low double-digit range. And that's primarily a core business kind of comment. EC, Farnell has much -- would be a much smaller concentration. Operator: And there are no further questions at this time. I will now turn it back to Phil Gallagher for closing remarks. Philip Gallagher: Okay. Thank you, and thanks for everyone attending the call, and I appreciate all the callbacks and the questions. So again, thanks for attending today's call. We look forward to speaking to everybody at our upcoming conferences and our fourth quarter and fiscal year 2026 earnings report in August. Okay. Thanks a lot. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon, and welcome to the Equinix, Inc. First Quarter Earnings Conference Call. All lines will be in listen-only mode until we open for questions. Also, today's conference is being recorded. I would now like to turn the call over to Mr. Ryan Burke, Vice President of Investor Relations. You may begin, sir. Ryan Burke: Good afternoon, and welcome to our first quarter conference call. Before we get started, I want to remind you that some of the statements that we make today are forward-looking in nature and involve certain risks and uncertainties. Actual results may vary significantly from those statements and may be affected by the risks we identified in today's press release and in our filings with the SEC, including our most recent Forms 10-Ks and 10-Q. Equinix, Inc. assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. In addition, in light of Regulation Fair Disclosure, it is our policy to not comment on our financial guidance during the quarter unless it is done through an explicit public disclosure. On today's conference call, we will provide non-GAAP measures. We provide a reconciliation of those measures to the most directly comparable GAAP measures in today's press release on the Equinix Investor Relations page at www.equinix.com. We have made available on the IR page of our website a presentation to accompany this discussion, along with certain supplemental financial information and other data. With us here today are Adaire Fox-Martin, CEO and President; Olivier Leonetti, CFO; and Phillip Konieczny, SVP of Finance. At this time, I will turn the call over to Adaire. Adaire Fox-Martin: Thank you. Hello, and a warm welcome to our Q1 2026 earnings call. This quarter's results reflect continued strength across the business as we capitalize on a large and growing set of opportunities. Demand is broad-based and durable, execution is driving efficiency, and AI continues to fuel infrastructure investments that play to our strengths. Before I get into our results, I would like to start with some important market context. Over the course of the past year, my conversations with customers have changed. A year ago, they were about piloting AI. Now our conversations are focused on enterprise-wide adoption—adoption at scale. Two forces are driving this shift. Inference has grown from experimental workloads to an engine of real-time business decision-making, and agentic AI is moving from demos into distributed deployments, with agents acting autonomously to achieve business outcomes. The reality is that most enterprise architectures are not optimized for these workflows. Agents need private, low-latency paths to data wherever it lives. They perform best at the edge, closest to where the decisions get made. And they must be able to move freely across models and clouds whilst staying within jurisdictional boundaries. Performance, cost, and compliance all suffer when today's agents run on yesterday's networks. Simply put, this deployment gap is an architecture problem. Enterprises need infrastructure that is purpose-built for the way AI operates—distributed, interconnected, sovereign by design, and in close proximity to the data that matters most. This is a market that we are built to serve. Equinix, Inc. is not simply the world's largest digital infrastructure company; we are the world's most deliberately curated digital ecosystem. And our Q1 results demonstrate the progress we are making to capture the market opportunity. In Q1, our recurring revenue grew 10% on a normalized and constant currency basis, coming in at the high end of our expectations. This is our second straight quarter of double-digit MRR growth. At the same time, we are driving continued margin improvement. Q1 was also the largest quarter of total sales activity in our history, inclusive of annualized growth bookings and pre-selling activity. Total sales activity was up more than 5% year over year. We drove significant interconnection and CapEx billing growth, while reducing churn, reflecting ecosystem strength across our key operating metrics. And we are expanding our capacity whilst bringing new products to market that extend our runway for growth. Our progress stems from the extraordinary efforts of our team, and I am proud of the way our employees are stepping up to meet the moment. Let me now provide some color on our overall results and what is driving our performance. As you saw in our press release, our Q1 results do not include the ExScale Hampton lease. We are nearing execution on expanded mutually beneficial terms with our customer. Unknown Speaker will provide additional details on how you should model Hampton. Adjusting for the timing of Hampton, our Q1 revenue, AFFO, and AFFO per share results were all ahead of our expectations. Overall, our ExScale pipeline is robust, given that our remaining capacity is in major metros. Our momentum reinforces our confidence for the year. As such, we have raised our guidance across several key metrics. I am especially pleased with the strength we are building across the AI inferencing ecosystem. The expansion of our relationships with the world's leading hyperscalers, neo clouds, AI security vendors, and model providers serves as a magnet for agentic AI workloads. Eight of the top 10 AI model providers and four of the top five neo clouds are actively expanding with Equinix, Inc. They have placed more than 110 separate network nodes with us to support mission-critical and latency-sensitive elements of their architectures. Consistent with the prior quarter, approximately 60% of our largest deals in Q1 were AI-related. Additionally, large-capacity Fabric connections have tripled from just a year ago. We believe there is meaningful upside to come, given we are still in the early days of the agentic AI wave and inferencing adoption. This momentum is part of a broader uptick in customer demand spanning a wide range of AI, cloud, and networking workloads. Now let me highlight some recent wins and associated use cases. Qubit Pharmaceuticals, a quantum AI-driven drug discovery company, relies on Equinix, Inc. for the high-performance, low-latency infrastructure required to run millions of GPU-intensive molecular simulations. By deploying a dedicated GPU cluster in Equinix, Inc. data centers with direct cloud interconnection, Qubit has reduced experimental cycles by 20x whilst lowering costs by a factor of five. Most importantly, our solutions are accelerating the path from discovery to potential therapies that can save lives. Gammon Construction, a leading construction and engineering services company in Asia, chose Equinix, Inc. because of our neutral platform presence across major metros and connectivity solutions to enable their multicloud AI platform. They are using our Fabric interconnection portfolio to power their network infrastructure, which is the base for innovative solutions such as AI-powered robotics and drones for on-site risk assessments and smarter decision-making. During the quarter, we expanded our partnership with Options IT, the number one provider of infrastructure to global financial services firms. They selected Equinix, Inc. because of our presence in the locations that matter most to their operations and ecosystems, including London, New York, Singapore, and Tokyo. We are enabling Options IT to deliver private cloud and AI-managed infrastructure solutions to grow their business whilst meeting the data sovereignty requirements of their customers. We also grew our relationship with Maersk, a global leader in integrated logistics, as it digitizes critical supply chain infrastructure. Maersk recently selected Equinix, Inc. as its primary data center partner to support high-performance and AI workloads, including its first liquid-cooled AI deployment in Frankfurt. Our global footprint, secure and resilient operations, and industry-leading interconnection capabilities are supporting Maersk’s ongoing network transformation and long-term growth strategy. I am exceptionally grateful to all our customers and partners for trusting Equinix, Inc. to help move their business forward. The outcomes we are enabling for them reflect rigorous execution against our strategic pillars. Starting with Serve Better, we delivered annualized growth bookings of $378 million in Q1, up 9% year over year, with approximately $140 million in pre-selling activity on top of that. As I mentioned earlier, that is 35% growth in total sales activity in the quarter, resulting in a record backlog. Transaction volumes continued to demonstrate a broad base of workload requirements, with over 3,800 transactions spanning more than 3,100 unique customers in the quarter. Importantly, we also saw increased customer adoption of our self-service portal. Our portal is a key area of focus as we work to create a better experience. It also drives efficiencies within Equinix, Inc. compared to traditional quote-based ordering. This is one example of our broader focus on digitizing processes and workflows across the company. Customers placed 20 thousand orders through our portal in Q1, up 12% year over year, and we intend to continue driving enhancements to this solution. Turning to Solve Smarter, our customers consistently raise two key challenges to us. The first is AI infrastructure fragmentation. Enterprises are spending too much time and budget navigating dozens of disconnected AI model providers, GPU clouds, data platforms, and security services. The Equinix Distributed AI Hub we introduced at NVIDIA GTC solves this by giving enterprises a single private, low-latency connection to the entire AI ecosystem. Unlike AI marketplaces built by providers with their own services to sell, our Distributed AI Hub is completely neutral, providing access to all models and clouds so customers can select what is best for them. The second challenge facing customers is network complexity. Most enterprise networks are not designed to handle distributed AI workloads, and it is resulting in degraded AI performance, inflated costs, and compliance risks. Equinix Fabric Intelligence solves these problems by monitoring network performance in real time, automatically adjusting configurations, and flagging anomalies before they become outages, all without human intervention. Unlike other network management tools that sit on top of the network, Fabric Intelligence is built directly into our Fabric interconnection platform. This is a structural competitive advantage given the more than 500 thousand live interconnections across our ecosystem. Our innovation is extending our market leadership and driving growth. Total interconnection revenue was up 9% year over year in Q1, boosted by Fabric revenue growth of 26% year over year. Fabric bookings were up 70% year over year as our attach rate continues to increase. These growth rates are all on a normalized and constant currency basis. On Build Bolder, we continue to expand our capacity to meet demand. We have 46 major projects underway across 32 markets, including six ExScale projects. More than 70% of this retail expansion CapEx is within our major metros, with the remainder focused on critical expansion markets, particularly in our Asia region. Given the strength of our pre-sales motion, approximately 25% of our 2026 retail capacity expansion has already been sold. We continue to meaningfully grow our pipeline for new powered land and capacity expansion opportunities that can enhance our long-term growth prospects in key metros and deliver attractive returns. And we are not just growing, we are doing it responsibly. Last week, we released our annual sustainability report. It shows how we are building essential infrastructure the world needs in ways that are affordable for our communities, sustainable for our planet, and reliable for our customers. These have long been core Equinix, Inc. values and they will continue to guide our future investment decisions. In Q1, we announced an important investment in one of the world's most sustainability-focused markets, as we signed a joint agreement with Canada Pension Plan Investment Board to purchase AtNorth. This deal will further enhance our position in the Nordics by giving us access to an installed and active development pipeline of approximately 800 megawatts expected to come online over the next five years. AtNorth's footprint in key markets such as Copenhagen is complementary to our existing EMEA operations and is well positioned to serve enterprise, cloud, and AI growth. The transaction is subject to closing conditions and is expected to be immediately accretive to AFFO per share upon closing. Overall, Q1 demonstrated continued momentum across the business, and we see significant opportunities to accelerate growth as we deliver on our strategy. I am now going to turn the call over to our new CFO, Olivier Leonetti, to go into more detail on our financials. Unknown Speaker joined us in March and has already proven to be an excellent addition to our leadership team. Previously, he was CFO of Eaton and Johnson Controls, two large suppliers to the data center industry. He has a strong track record of delivering profitable growth and creating shareholder value, and we look forward to his contributions to our success as we work to deliver healthy revenue growth, margin expansion, and superior returns. Over to you. Olivier Leonetti: Thank you for the kind words, Adaire. I am delighted to be here. Nearly two months in, I am excited about the strength of the markets we serve and very impressed by Equinix, Inc. company culture, vision, and unique positioning to serve accelerating customer demand. I look forward to helping enable our vision by prudently allocating capital and thoughtfully utilizing our balance sheet to drive durable, profitable growth. As Adaire summarized, we are executing well across our business. This was the largest quarter of total sales activity on record, up 35% year over year, reflecting broad demand and strong execution. Customer activity increased across all of our verticals, products, and channels. Turning to Q1 results on Slide 7, and with all figures discussed on a normalized constant currency basis: Recurring revenues were $2.3 billion, up 10% year over year, as our bookings performance from the second half of last year is converting into revenue. Total revenues were $2.4 billion, up 8% year over year. Adjusted EBITDA was $1.2 billion, up 13% year over year, resulting in a 51% adjusted EBITDA margin, which is up 190 basis points quarter over quarter and 300 basis points year over year. This is a result of our continued cost discipline, forward cost benefits, and scaling our operating leverage. As we have discussed, driving additional efficiency will be a focus moving forward. Quarterly AFFO surpassed the $1 billion mark for the first time, increasing 11% year over year, and AFFO per share was $10.79, up 10% year over year. Please note that, adjusted for the Hampton ExScale lease signing, which I will provide details on in a moment, we came in above the midpoint of our Q1 revenue and adjusted EBITDA guidance ranges. As Adaire mentioned, we are near execution on the Hampton ExScale lease. These types of negotiations are fluid, and we have adjusted the expected timing while discussing expanded mutually beneficial terms with our customer. Here are the moving pieces as they relate to guidance over the past couple of quarters. Our guidance for Q4 2025 assumed $54 million of non-recurring revenue from the deal based on the original terms being considered. Our guidance for Q1 2026 included the expanded terms, with an expected contribution of approximately $80 million of revenue, $65 million of AFFO, and $0.65 of AFFO per share. The expanded economics are now included in our guidance for Q2. This timing shift does not impact our full-year outlook because the economics were already incorporated. Now to our non-financial metrics, which also demonstrate strong momentum. We increased physical and virtual net interconnections by 5.8 thousand, with particular strength in Fabric additions. We added 4.1 thousand net cabinets billing, and our backlog of cabinets sold but not yet installed is at a record level. Churn came in at 1.7%, primarily due to the benefit of some delayed churn and a focus on execution during our renewal process. For the full year, we are tracking towards the low end of our 2% to 2.5% guidance range. And MRR per cabinet increased to $2,524, up 7% year over year, reflecting the firm pricing environment and continued increase in density. On Slide 12, our capital investments continue to deliver very strong returns. Consistent with prior years, this quarter we completed the annual refresh of our stabilized pool, which increased by five IBX data centers. Our 192 stabilized assets increased recurring revenue by 6% year over year, are collectively 82% utilized, and generated a 26% cash-on-cash return on growth PP&E. Turning to our capital on Slide 10, at quarter end, we had approximately $3.1 billion of cash and short-term investments on the balance sheet, and our net leverage was 3.8x annualized adjusted EBITDA. During the quarter, we issued $1.5 billion of senior notes at a blended effective rate of 3.1%, reflecting proactive execution in the market and our ability to take advantage of lower-cost debt around the world. Our balance sheet and diversified capital program are competitive advantages in all macro environments, particularly so in the kind we see today. In combination with significant retained cash flow, we continue to access lower-cost sources of capital to fund our robust growth opportunity. Now looking at capital expenditures on Slide 11, total capital expenditures for the quarter were about $1.3 billion, approximately 90% of which was growth and value-accretive capacity expansion. We continue to expect mid-20% unlevered cash-on-cash returns on investment. Since the last earnings call, we opened six projects, adding critical capacity to meet demand across six metros. Before we get into guidance, I will briefly address the energy environment given developments in the Middle East. We systematically hedge energy costs to provide predictability to our customers and broader stakeholders, particularly in volatile periods. Globally, we are more than 90% hedged for 2026, and, as usual, we are progressively hedging into the future. As a result, we expect minimal impact for 2026, even if energy prices were to remain elevated. Finally, please refer to Slides 13 to 17 for an update of 2026 guidance, with all growth rates discussed on a normalized and constant currency basis. Based on the robust environment and the team's execution, we are raising guidance across key financial metrics. For the second quarter, we anticipate continuing strength across the business including MRR growth of 10% to 11% year over year. For total revenue, the largest piece to consider is that it includes the expanded economics from the Hampton ExScale lease signing that I provided a moment ago. Again, please note that these economics were already included in our guidance for the full year; they simply shifted from Q1 into Q2. For the full year, we are raising total revenue guidance by $21 million based on our Q1 outperformance, improving expected total revenue growth range by 100 basis points to 10% to 11%. We are raising adjusted EBITDA guidance by $24 million, resulting in adjusted EBITDA margins of approximately 51%, a 200 basis point improvement over last year. Additionally, we are raising AFFO guidance approximately $40 million, improving our expected AFFO growth range by 100 basis points to 10% to 12%. This corresponds to a similar 100 basis point improvement in our expected AFFO per share growth range to 9% to 11%. We continue to execute on our capacity expansion to meet robust customer demand. Excluding ExScale and land acquisitions, we now expect total capital expenditures to approximate the top end of our prior range at $4.1 billion, including $280 million to $300 million of recurring spend and approximately $3.8 billion of non-recurring spend. Given our confidence in the growth opportunity in front of us, the team continues to evaluate opportunities to accelerate our capacity to deliver growth and value to our shareholders. Overall, we are pleased with our progress and confident in our plan. We will continue executing with discipline to deliver on our goals and create shareholder value. I now turn the call back over to Adaire. Adaire Fox-Martin: Thank you. Our Q1 results demonstrate strong performance, and our outlook reflects underlying strength across the business. We see immense opportunity ahead to drive revenue, enhance margins, and deliver attractive AFFO per share growth. But we take nothing for granted. Our continued success demands focused execution against our strategic priorities and disciplined investment to unlock structurally higher returns. Above all, it calls on every member of our Equinix, Inc. team to deliver exceptional value for our customers each and every day. This is the mindset guiding us forward. And I am confident in our direction. We are well positioned across our markets, we are building momentum in key growth areas, and we remain focused on delivering against the goals we have set. With that, let us open the line for questions. Thank you. We will now open the call for questions. Operator: Our first caller is Ari Klein with BMO Capital Markets. Your line is open. Ari Klein with BMO Capital Markets. Your line is open. We will go to the next caller, Michael Rollins with Citi. Your line is open. Michael Ian Rollins: And Unknown Speaker, congratulations on joining the team. I had a question about some of the comments you made earlier in the call. So I think, if I got this right, you mentioned that eight of the top 10—maybe it was AI model providers—and four of the top five neo clouds are actively expanding with Equinix, Inc. for AI, 110 separate network nodes. I am curious if you could provide more color. Is that 110 in addition to whatever cloud nodes they typically would have? And can you characterize the types of interconnectivity demand that you are already seeing for those AI nodes and how that is informing you, maybe early in this environment, of the type of growth that is out there from AI for your business model? Thanks. Adaire Fox-Martin: Hi, Michael. Thanks so much for the question. Maybe let me just clarify a couple of points. I mentioned that it was eight of the 10 AI model providers—the LLMs—and four of the five neo clouds. They have deployed between them 110 or so separate network nodes at Equinix, Inc., and that is in addition to all of the nodes that we see being deployed by the hyperscalers in order to manage their connectivity journey. When we look at the role of the neos here, we can see that for many of them their journey is evolving a little. Their value proposition was always based on pricing and based on GPU access and largely facilitating large training footprints, mostly focused with the SaaS providers and the hyperscalers. As we can see, they are transforming into AI inference workloads and looking to pursue enterprise customers and medium-sized businesses. We see them as potential inference magnets for our ecosystem going forward, and we see many of them converging, as I have mentioned already, and engaging at Equinix, Inc. It is about a couple of things in terms of the use cases. It is about network nodes that provide connectivity to the CSPs and the NSPs for the neos and the LLMs. It is about AI inference nodes for densely populated metros—so a little bit of a different picture. And it is about Fabric access to the enterprise customer base of Equinix, Inc. So that sums up the three things that we are seeing for the neo use of our environment. Operator: Thank you. Our next caller is Cameron McVeigh with Morgan Stanley. Your line is open. Cameron McVeigh: Hi, thank you. I wanted to ask about the $140 million in pre-leasing activity. Just curious how tenant appetite is changing and if tenants are willing to commit further in advance and for longer terms, and really how that is translating to the terms for Equinix, Inc., whether through pricing, terms, or deposits? Any color there would be helpful. Thanks. Adaire Fox-Martin: Pricing remains firm whether we are looking at pre-sales or bookings within the quarter. I think the pre-sales booking really provides our customers with security—security in terms of the infrastructure that they are defining and the opportunity to ensure that they are solving for their own compute and energy future. This is something that I think was not done only in the recent past, but we are seeing a great benefit from that in terms of conversations with our customers and our long-term ability to serve them. Would you like to go to the next caller? Operator: Yes, please. Matt Niknam with Truist. Your line is open. Matt Niknam: Hi, thanks so much for taking the question. Congrats on the quarter. My question is more big picture around macro. Have you seen any macro dynamics, particularly around rising memory or fuel and energy costs and the prospects for higher IT costs later on in the year, affecting customer behavior at all, whether it is pulled-forward demand or pushed-out deals if customers are running into supply shortages? Thanks. Adaire Fox-Martin: As it relates to concerns about energy costs, Unknown Speaker mentioned our hedging program, which means that we are in a position to be able to continue to support our customers at the price points at which we are operating today. Based on the demand environment that we see, it is a very durable and broad-based demand environment. It is very diverse, and we are not seeing any pullback from customers as it relates to increasing costs at this point in time. I think you can see that reflected just in the sheer scale of the number of transactions and that those transactions occurred across all of our customer segments and actually across all industries that were all growing at roughly the same percentage in Q1. Operator: Thank you. Our next caller is Frank Garrett Louthan with Raymond James. Your line is open, sir. Frank Garrett Louthan: Great. Thank you. As you see the rising demand for AI inferencing, is there any difference in the incremental capital required that you are seeing to fulfill those new workloads versus what you have traditionally seen? And can you quantify that, if there is? Thanks. Adaire Fox-Martin: No, we do not see any difference in incremental capital that will be required. Notwithstanding the fact that our strategy has been to be very metro focused, we are located in 77 metros across the world, and we will continue to build on that footprint. That is already embedded into how we have managed our capital, because that is part of our 27-year history, and therefore we do not anticipate any capital differences. I am going to ask Phillip to add an additional comment here. Phillip Konieczny: The only thing that I would add to that, Frank, is that we are always skating to where the puck is going, as they say, and thinking about the types of requirements that are needed for the deployments. When you look at some of our facilities that we are going to be bringing online in the next few years, the densities that we are building towards are much higher and much more suited for a lot of the requirements that we are hearing from our customers. We are always thinking about where we need to go and what the requirements are of our customers, and we are building towards that. Frank Garrett Louthan: Is that increasing or decreasing the returns that you are looking at going forward with that higher density requirement? Phillip Konieczny: The returns we are underwriting, even with those higher densities, are still in that mid-20% range that we have been talking about for a long time. Operator: Thank you. Our next caller is Vikram Malhotra with Mizuho. Your line is open, sir. Vikram Malhotra: Thanks. Good evening. Thanks for taking the questions. I just want to clarify two things. One, just the bookings dipping sequentially—how much of that is seasonal? And maybe you can give us some composition of traditional enterprise versus maybe chunky bits? And then secondly, the interconnection business—given the rapid tripling almost of the Fabric business, how is that playing into interconnection revenue growth overall? You mentioned network enhancements needed there, so I am wondering, how does that flow through? Does that mean in the future we see a greater pickup in the interconnection side? Thanks. Adaire Fox-Martin: On the sequential nature of our annualized gross bookings, Q1 is seasonally a quarter that has traditionally been lower. That said, I am especially pleased with the performance that we had in Q1 given that we came off the back of such a large Q4. The team worked really hard to deliver what was our largest Q1 ever and to drive our largest backlog ever. I look forward to moving that into revenue in the future, and I am proud that the delivery of our bookings in Q1 is not just related to top line; we did it at growing margins and growing profitability too. Across the Q1 booking profile, we saw strength across various industries, and we also saw very broad-based strength in our under-1 megawatt deal cohort. As it relates to interconnection revenue and interconnection revenue growth, we are very pleased by the performance we have seen here. Our interconnection revenue growth was 9% on a normalized and constant currency basis. Fabric revenue growth was 26%, and our Fabric bookings grew 74% year over year. This kind of growth and the value proposition we are delivering to customers are really behind our investment strategy around our Distributed AI Hub and our Fabric Intelligence, which is in pre-preview with a number of customers and partners who are very positive about the outcomes that we are driving with this solution set. Operator: Thank you. Our next caller is Jonathan Atkin with RBC. Your line is open, sir. Jonathan Atkin: I wanted to just follow up on that last response and maybe ask you more directly. Is there a scenario over the next couple of years where interconnection growth would exceed growth that you are seeing and would represent a meaningfully increased percentage of your overall revenue composition? Adaire Fox-Martin: In some ways, we are probably seeing that in our stabilized assets where our stabilized assets are growing at 6% and interconnection within that asset group is growing at 9%. I do believe that there is opportunity for us to continue to grow our footprint and the range of services that we are offering to our customers here because we fill a very specific niche in the market in terms of providing that neutral environment where the ecosystem around AI converges. There is potential for upside here, but that is not yet factored into our plans. Operator: Thank you. Our next caller is Analyst with Evercore. Analyst: Hi. Thank you for the question, and welcome, Unknown Speaker. I appreciate the color on energy hedging. Just given your exposure to the Middle East, I wanted to understand whether recent geopolitical crosscurrents in the region have had any impact on your operations, specifically related to your ability to sell and/or add IBX capacity? Thank you. Adaire Fox-Martin: Thank you very much for the question. First, the most important thing for us is the safety of our employees, our customers, and our partners, and that was our most important priority as we navigated recent events in the Middle East. Thankfully, all of our people have remained safe and our facilities are fully operational. We do have a limited footprint across the region. We have a total of six data centers across the Middle East region, comprising about 1% of total revenues. We have one project underway in Dubai at our DX3 facility, which is a construction project, and we have seen the RFP stage of that project be impacted due to the conflict. So, limited operational impact—we were able to keep our facilities up and running—but we are watching the situation very carefully. Our long-term view is that the region will continue to see growth and investment in digital infrastructure as the Middle East itself looks to position itself as a global AI hub. Operator: Thank you. Our next caller is Nicholas Del Deo with MoffettNathanson. Your line is open. Nicholas Del Deo: First, I want to congratulate Unknown Speaker on his appointment, and my question is also for him. I was wondering if you could elaborate—share with us your high-level capital allocation and operating philosophies, and whether your previous vantage point as a supplier to the data center industry provides any initial insights into areas where you think Equinix, Inc. might go to improve the business or things you will be focused on? Olivier Leonetti: Thank you for your question, Nick. First, regarding capital allocation, we are going to keep the course that has worked pretty well for the organization. To fund our ambitious CapEx growth program, we want first to use debt as a way to finance our growth. We can do that based upon the leverage we have today—triple-B+—and the 3.8x I mentioned in my remarks. We will use equity on an opportunistic basis, but the key is going to be to use debt. Relative to impressions as a former supplier to Equinix, Inc., we were very impressed by what we had seen. We view Equinix, Inc. as a pioneer in this market. After two months here, I have been impressed by the quality of the team, the culture, and the rigor with which we run the operation. What we have said before, you see that play: we have high-quality data centers in top-tier markets, we are connecting the world, and we are ready to power the AI agentic workloads. We are very differentiated, and I look forward to helping Adaire and the team grow this business even more. Nicholas Del Deo: Any particular areas where you are looking to drill down more? Or too soon to say? Olivier Leonetti: We want to enable the strategy that Adaire has outlined—Build Bolder, Solve Smarter, Serve Better. I am going to be a tool among many others to enable this strategy, but no change today, not that there was a need to. Operator: Thank you. Our next caller is Analyst with JPMorgan. Your line is open, sir. Analyst: Hi. I just wanted to follow up on the churn—1.7% is super low, but I think you mentioned some of it is delayed. Should we go back into the range? Should 2Q be above range and/or the rest of the year at the higher end, or could we be seeing maybe the lower end for the full year? Adaire Fox-Martin: As you saw, at 1.7% we were below the low end of our range. There were two elements as to why that was so. One was the timing of some churn, including in our Metal business, moving forward into this quarter, and the other is just the continued focus that we have had on the renewal process from our teams. We are very pleased with the performance in Q1. Notwithstanding that, we do not want to call victory too early. Therefore, to keep our churn in the range of 2% to 2.5% for the rest of the year is the right thing to do. We do believe that our focus on our available-to-renew contracts—doing that much earlier in the cycle—is starting to have an impact. We will watch those trends closely over the next several quarters, and our aim is to bring churn down consistently over time. But for now, we are holding to the 2% to 2.5% range for the year. Operator: Our next caller is David Guarino with Green Street. Your line is open, sir. David Guarino: Thanks. As we think about modeling in these large one-time fees related to the ExScale leases, is there any framework you can provide us to estimate and forecast how large they might be? And then, tied in with that, we heard some rumors that the Manukau campus might have been pre-leased, but you did not comment on that at all. Could you give an update on what is happening with that project and how soon we could maybe expect another large ExScale leasing fee after the Hampton one? Adaire Fox-Martin: These transactions are always very complex and multifaceted, particularly as we have very high-demand assets in locations that are energized within the right time frame and in great locations. As we look forward into the second half of next year in terms of Manukau, it is not timing that we have put into the short term. It is something that we are still working on. We have a very robust pipeline of interested parties, and we want to ensure that we are maximizing the outcome for our customers, our shareholders, and the company. As we look forward into the second half of the year and into 2026, the guide assumes a total NRR of approximately 5.8% for the full year, and a portion of that is associated with ExScale leasing. Olivier Leonetti: Additional comment, if I may, David. If you look at the balance of the year, with the exception of the ExScale deal we have mentioned many times now, the rest of the ExScale deals are qualitatively small in nature, and we believe that the risk is balanced for the rest of the year. Operator: Thank you. Next, Analyst with Goldman Sachs, your line is open. Analyst: Hey, good afternoon. Thanks for the question. Adaire, you talked about agents performing best when closer to the edge. Have you seen some customer workload repatriation or a shift in investment away from public cloud as a result? And then, when enterprises decide to do more at the edge, could you talk a little about the customer decision tree between co-located data centers versus on-prem today? Thank you. Adaire Fox-Martin: The reality of the environment that our customers operate in is the environment that we have been describing on many of these calls, and that is a hybrid, multicloud environment where data sits across a plethora of platforms. That creates the opportunity for a neutral platform like Equinix, Inc. to serve customers who want to run agentic workflows across those environments but need to access information that sits in more than one location. I would say that customers have a multicloud environment and they are looking at the cost associated with their environments, as well as important considerations in locations like Europe around sovereignty and compliance to sovereignty legislation, which may mean that certain parts of their dataset need to move into a private environment or be repatriated from cloud. But I would not say that this is a broad-based conversation across our customer base. As we talk to CIOs, it is less about on-prem versus cloud and more about the journey from token management and token cost all the way through to sovereign data controls that ensure the organization is compliant with whatever set of data governance rules they have in place. That is an important conversation because we can help customers navigate it by providing, through the Distributed AI Hub, access to all of the players as well as to private SLM models, which our customers have for smaller, less intense AI activity. So the conversation is really about how you navigate from token and training all the way through to that compliance conversation, often driven by sovereignty in some locations. Operator: Thank you. Our next caller is Analyst with Bernstein. Your line is open. Analyst: Thanks. You have talked about potentially building multiple incremental gigawatts with the Build Bolder program. With the full-year CapEx plan now around $4.1 billion, is this the kind of annual spend we should anticipate for the next couple of years? Is it more front-loaded? Do you think the intensity will ramp as you are moving into more large campuses? And a short follow-up: Are you anticipating maintaining the cash-on-cash return level throughout that build process? Adaire Fox-Martin: Thank you for the questions. We have 3 gigawatts currently either in land under control or in development today at Equinix, Inc., so that is the broad base of the portfolio that we are working with. As Unknown Speaker mentioned in his prepared remarks, we are at the top end of the range that we mentioned for CapEx earlier at Analyst Day last year. We are continuing to meaningfully grow our pipeline for new powered land and capacity expansion opportunities to enhance what we see as the long-term growth prospects in key metros, which we know deliver very attractive returns. We are excited to position ourselves for growth, but you can see that we are at the top end of our range as it relates to CapEx from the Analyst Day event when we provided that guide last year. Unknown Speaker will comment on the returns. Olivier Leonetti: The diligence we have before we do deals and deploy new CapEx is very strong. The mid-20% to 25% is a target—that is not an aspiration. We are seeing that quarter after quarter, and we feel very comfortable with achieving that return target as we are in a market where demand exceeds supply. We can be very selective about the deals we take. We are very differentiated today, and interconnection is more and more an important part of the value proposition of the company. We feel very confident about this mid-20% to 25% target. Operator: Thank you. Our next caller is Analyst with Stifel. Your line is open. Analyst: Yes, thanks for taking the questions. Unknown Speaker, good luck and I look forward to working with you. You talked about Maersk in one of your customer highlights and they had a liquid cooling deployment in Frankfurt. Maybe overall, can you give us a sense of where customer demand is for liquid cooling activity today? How many active or signed deployments are using direct-to-chip or immersion cooling, and how quickly is that moving from pilot to maybe scale production? Thanks. Adaire Fox-Martin: Thank you for the question. We had quite a significant quarter in Q1 as it relates to liquid cooling orders generally, of which Maersk was one. We saw approximately 50% growth in terms of our liquid cooling deployment. Today, we have 36 deployments across our footprint of customers using liquid cooling to facilitate the workload and density of the systems that they have put in place. It is active across all our regions, and it is something that we continue to evaluate and work closely on with our customers. In Q1 specifically, we had six deployments and seven orders across all of our regions, up 50% quarter on quarter. Operator: Thank you. Our last question comes from Analyst with Guggenheim Partners. Your line is open. Analyst: Wow, I made it. Thank you. Kind of a follow-up from the previous question: As you think about these fairly power-dense agentic workloads out at the edge of the network, are you encountering situations where either from a physical space or power, or just a thermal standpoint, you are running into constraints? I am just trying to understand how much of a challenge that is. Thank you. Adaire Fox-Martin: The availability of power would be the largest constraint in our environment. As densification increases, we would often need to put some space on hold around that particular implementation in order to ensure that, at an IBX, we are meeting not only the obligations of the highly dense workload but also the service level agreements and obligations that we have with the other customers who are sharing that space and power. That is one of the reasons why you see the yield on our MRR per cabinet grow so effectively, up to $2,524—up 7% year on year—partly due to the increase in densification and, of course, the association of value-added products like interconnection with every installation as one of the measures of that. Operator: I just want to thank you all for joining us for our Q1 call. Have a great rest of your day. Thank you. This concludes today's conference call. You may disconnect at this time.
Operator: Greetings, and welcome to the Microsoft Corporation Fiscal Year 2026 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jonathan Neilson, Vice President of Investor Relations. Please go ahead. Good afternoon. Jonathan Neilson: And thank you for joining us today. On the call with me are Satya Nadella, Chairman and Chief Executive Officer; Amy Hood, Chief Financial Officer; Alice Jolla, Chief Accounting Officer; and Brian Defoe, Deputy General Counsel and Corporate Secretary. On the Microsoft Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provide the reconciliation of differences between GAAP and non-GAAP financial measures. More detailed outlook slides will be available on the Microsoft Investor Relations website when we provide outlook commentary on today's call. On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid in further understanding the company's third quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency, when available, as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth rate only. We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission, in the transcript, and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Investor Relations website. During this call, we will be making forward-looking statements, our predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, the comments made during this conference call, and in the Risk Factors section of our Forms 10-K, Forms 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. And with that, I will turn the call over to Satya. Satya Nadella: Thank you very much, Jonathan. It was a record third quarter powered by the continued strength of Microsoft Cloud, which delivered $54 billion in revenue, up 29% year over year. Our AI business surpassed $37 billion ARR, up 123%. We are at the beginning of one of the most consequential platform shifts that will change the entire tech stack as agents proliferate and become the dominant workload. This will drive TAM mix and change the value creation equation across the entire economy. To capture this opportunity, we are executing against two priorities. First, we are building the world's leading cloud and AI infrastructure for the agentic computing era. Second, we are building high-value agentic systems across core domains such as productivity, coding, and security. These two layers reinforce each other, and we are focused on driving competitive value and differentiation for customers across each so that they can maximize their outcomes. Today, I will focus my remarks on both priorities starting with infrastructure. We are optimizing every layer of the tech stack from data center design to silicon to system software, the model architecture, as well as its optimization. This is translating into operational gains. We have reduced doctor lifetimes for new GPUs in our big regions by nearly 20% since the beginning of the year. Our Fairwater data center in Wisconsin came online earlier this month, six weeks ahead of schedule, allowing us to recognize revenue earlier. And we delivered a 40% improvement in inference throughput for our most used models across Copilot, driven by our software and hardware optimization work. All up, we added another gigawatt of capacity this quarter and remain on track to double our overall footprint in just two years. We are moving aggressively to add capacity aligned to the demand signals we see, and we have announced new data center investments across four continents. We also continue to modernize our fleet with our first-party innovation alongside the latest from NVIDIA and AMD. Across our fleet, millions of servers are powered by our custom networking, security, and virtualization silicon, including Azure Boost, as well as our first-party CPUs and accelerators. Our Maya 200 AI accelerator, with over 30% improved tokens per dollar compared to the latest silicon in our fleet, is now live in our Iowa and Arizona data centers. Our Cobalt server CPU is deployed in nearly half of our data center regions running workloads at scale for customers like Databricks, Siemens, and Snowflake. As our largest customers scale their AI deployments, they are increasingly leveraging other services across our platform and choosing to run those workloads on Cobalt. And we are expanding Cobalt supply significantly to meet this demand. The next layer up from infrastructure is the agent app platform. It starts with model choice. We offer the broadest selection of models of any hyperscaler so customers can choose the right model for the right workload across OpenAI, Anthropic, open source, and more. Over 10,000 customers have used more than one model on Foundry, 5,000 have used open source models, and the number who have used Anthropic and OpenAI models increased 2x quarter over quarter. For example, Bayer is using multiple models in Foundry to create its own in-house agent platform with more than 20,000 active monthly users. All up, over 300 customers are on track to process over 1 trillion tokens on Foundry this year, accelerating 30% quarter over quarter. We also remain focused on our first model work to differentiate our high-value copilots and agents and reduce COGS. We introduced MAI Transcribe One, a state-of-the-art speech-to-text model, and MAI Image Two, one of the top image generation models in the world. These models are already powering first-party scenarios like image generation in Bing and PowerPoint, and we are working towards having Transcribe One power transcription in Copilot and Teams. Early signals show a 67% increase in GPU efficiency with Transcribe One and up to a 260% increase in Image Two. We also brought MAI models to commercial customers like Shutterstock and WPP for the first time through Foundry. And we are innovating on OpenAI IP to drive product evals and lower COGS. Two recent examples are what we have done with step retrieval with WorkIQ and Copilot and how reasoning adapts to intent complexity in Researcher with much reduced latency and increased accuracy. The next layer up is all about enterprise data and context. Across Fabric, Foundry, Microsoft 365, and our security graph, we are building a unified IQ layer for organizational intelligence. Thousands of enterprises already are accessing context across these IQ layers. And as AI usage grows, so does the context layer, creating a flywheel that continuously improves the grounding, relevance, and effectiveness of every agent they use and build, making our IQ layers an unmatched context engine for organizational intelligence. More broadly, our database business accelerated quarter over quarter. Cosmos DB alone saw 50% year-over-year revenue growth driven by AI app workloads. We now have 35,000 paid Fabric customers, up 60% year over year. And the amount of data in Fabric OneLake increased nearly 4x year over year. Over 15,000 customers now use both Foundry and Fabric, up 60% year over year, as enterprises connect agents to real-time operational, analytical, and unstructured data that Fabric brings together. And we are very excited about the continued progress with Foundry Agents Service and how customers can now build durable, stateful agents that run across time boundaries, orchestrate tools and models, and close the loop with evals and improvement over long-running workflows. Beyond Fabric and Foundry, we are also helping knowledge workers build agents with tools like Copilot Studio. Nearly 90% of the Fortune 500 now have agents built with our low-code, no-code tools, and we are seeing fast growth of our Copilot credit-consumptive offer, up nearly 2x quarter over quarter, as customers increasingly extend Copilot with custom agents tailored to their workflows. Finally, with Agent 365, we offer a control plane that extends companies' existing governance, identity, security, and management frameworks to agents. Tens of thousands of companies are already managing tens of millions of agents in Agent 365, and we expect this momentum to grow significantly as agents will increasingly need tools for identity, governance, security, and more. Now let me turn to the high-value agentic systems we ourselves are building on this platform. We are evolving our family of Copilots from synchronous assistants to async co-workers that can execute long-running tasks across key domains. In knowledge work, it was another record quarter for Microsoft 365 Copilot seat adds, which increased 250% year over year, representing our fastest growth since launch. Quarter over quarter, we continue to see acceleration and now have over 20 million Microsoft 365 Copilot paid seats. The number of customers with over 50,000 seats quadrupled year over year, and Accenture now has over 740,000 seats, our largest Copilot win to date. And Bayer, Johnson & Johnson, Mercedes, and Roche all committed to 90,000 or more seats. Copilot is uniquely valuable at work where nearly every task depends on organizational context. WorkIQ grounds Copilot responses in the full context of an organization, including people, roles, documents, and communications, all within the company's security boundary. The system of work behind WorkIQ alone spans more than 17 exabytes of data, growing 35% year over year. The liquidity and freshness of that data matters, with billions of emails, documents, and chats, hundreds of millions of Teams meetings, and millions of SharePoint sites added each day. And that context is getting even richer as Copilot grows; Copilot and agent conversations and artifacts they create feed back into WorkIQ, making it even more context rich. We continue to increase the pace of feature innovation across Microsoft 365 Copilot, introducing over 625 updates over the past year, up 50%. In Microsoft 365 Copilot, you now have access in chat to multiple models by default with intelligent auto-routing. In Agents, with Critique and Counsel, you can use multiple models together to generate optimal responses. As of last week, agent mode is now the default experience across Copilot in Word, Excel, and PowerPoint. And with CoWork, you now have a new way to delegate and complete work using Copilot. All this innovation is driving record usage intensity across Copilot. We have seen a surge in usage of our first-party agents, with monthly usage up 6x year to date. Copilot queries per user were up nearly 20% quarter over quarter. To put this momentum in perspective, weekly engagement is now at the same level as Outlook, as more and more users make Copilot a habit. When it comes to business applications, we are seeing a new pattern emerge as customers shift from the traditional seat model to seats plus consumption. The customer service category is at the forefront of this transformation, as nearly 60% of our service customers are already purchasing usage-based credits. For example, HSBC uses prebuilt agents with Dynamics 365 to manage customer inquiries across products, markets, and regulatory requirements, reducing resolution time by over 30%. And our agentic products in LinkedIn Talent Solutions, which help hirers automate time-consuming tasks like sourcing, screening, and drafting messages, have already surpassed a $450 million annualized revenue run rate. When it comes to developers, GitHub itself is seeing unprecedented growth driven by the proliferation of agentic coding, and we are hard at work to scale and meet this demand. We see this even with GitHub Copilot. Nearly 140,000 organizations now use GitHub Copilot in Enterprise, nearly tripled year over year. The majority of users leverage multiple models. We are also seeing rapid adoption of GitHub Copilot CLI, with usage nearly doubling month over month. And earlier this week, we announced our move to a usage-based pricing model for GitHub Copilot as we align pricing to actual usage and cost. When it comes to security, the physics of cybersecurity has changed as AI compresses the window between vulnerability and exploitation. To help mitigate risk immediately, we sim-ship Defender protections when updates for AI-discovered vulnerabilities are released. And we are on course to productize new multimodal AI-driven scanning harnesses as well. Already, the number of Security Copilot customers increased 2x year over year. Our data security triage agents alone handled over 2 million unique alerts this quarter. And we are helping customers secure their AI deployments as well. Thirty-five billion Copilot interactions have been audited by Purview to date, up 7x year over year. Finally, when it comes to our consumer business, we are doing the foundational work required to win back fans and strengthen engagement across Windows, Xbox, Bing, and Edge. In the near term, we are focused on fundamentals, prioritizing quality, and serving our core users better. You see this in the work underway across our consumer products. With Windows, we recently announced performance improvements for lower-memory devices, streamlined the Windows Update experience, and brought back focus to core features and fundamentals that matter most to our customers. And you also see this in Xbox, where the team is recommitting to our core fans and players and shaping the future of play. Last week's Game Pass changes are one example of how we are staying close to customer feedback. Monthly active Windows devices surpassed 1.6 billion, and over time, Windows value will extend to deliver unmetered intelligence at the edge. Our Edge browser has taken share for twenty consecutive quarters, and Bing monthly active users reached 1 billion for the first time. LinkedIn has 1.3 billion members, and we are seeing increased depth of conversation, and it is the leading B2B sales and advertising channel for large and small businesses. We set new records for monthly Xbox users in the quarter as well as game streaming hours, and in Microsoft 365 Consumer, we now have nearly 95 million subscribers, and early signals show increasing satisfaction as we make agent mode the default. Across everything I have talked about, we are also hard at work changing the way we work. Our north star remains the same: delivering customer value with the highest quality and top-class innovation, and this is what gives me confidence in our ability to shape the next phase of growth for our company and our customers. With that, let me turn it over to Amy to walk through our financial results and outlook. Amy Hood: Thank you, Satya. Good afternoon, everyone. We delivered results that exceeded expectations across revenue, operating income, and earnings per share, driven by strong demand and execution. As Satya shared, our AI business annual revenue run rate surpassed $37 billion this quarter, growing 123% year over year. And we are accelerating our pace of innovation as we execute against the expansive opportunity ahead. This quarter, revenue was $82.9 billion, up 1815% in constant currency. Gross margin dollars increased 1613% in constant currency, while operating income increased 2016% in constant currency. Earnings per share was $4.27, an increase of 218% in constant currency when adjusted for the impact from our investment in OpenAI. And FX was roughly in line with guidance at the total company level. Company gross margin percentage was 68%, down year over year, driven by continued investment in AI infrastructure and growing AI product usage. The impact from these investments was partially offset by ongoing efficiency gains, particularly in Azure and Microsoft 365 Commercial cloud. Operating expenses increased 98% in constant currency, driven by continued investment in AI, including R&D compute capacity, talent, and data to support product development across the portfolio. This quarter, growth was impacted by a low prior-year comparable, particularly in sales and marketing and G&A expenses. Operating margins increased slightly year over year, to 46%. Total company headcount declined year over year as we focus on building high-performing teams that operate with pace and agility. When adjusted for the impact from our investments in OpenAI, other income and expense was $961 million. Favorability was driven by gains on investments that were partially offset by losses on foreign currency remeasurement. Capital expenditures were $31.9 billion, down due to the normal variability from cloud infrastructure buildouts and the timing of delivery of finance leases. And this quarter, roughly two-thirds of our CapEx was for short-lived assets, primarily GPUs and CPUs. The remaining spend was for long-lived assets that will support monetization over the next fifteen years and beyond. This quarter, total finance leases were $4.7 billion and were primarily for large data center sites. Cash paid for PP&E was $30.9 billion, roughly in line with capital expenditures as the impact from finance leases was partially offset by differences between the receipt of goods and payment. Cash flow from operations was $46.7 billion, up 26% driven by strong cloud billings and collections, partially offset by an increase in operating lease payments. Free cash flow was $15.8 billion reflecting higher capital expenditures. And finally, we returned $10.2 billion to shareholders through dividends and share repurchases. Now to our commercial results. Commercial bookings grew 7% when excluding the impact from OpenAI, driven by consistent execution in our core annuity sales motions. Bookings decreased 46% in constant currency when including Azure commitments from OpenAI. Commercial remaining performance obligation grew 26% in line with historic seasonality when excluding OpenAI. RPO increased to $627 billion and was up 99% year over year with a weighted average duration of approximately two and a half years when including OpenAI. Roughly 25% will be recognized in revenue in the next twelve months, up 39% year over year. The remaining portion recognized beyond the next twelve months increased 138%. Microsoft Cloud revenue was $54.5 billion and grew 2925% in constant currency, reflecting strong demand across the Azure platform and our first-party AI applications and services. Microsoft Cloud gross margin percentage was slightly better than expected, at 66%, and down year over year due to continued investments in AI, partially offset by the ongoing efficiency gains noted earlier. Now to our segment results. Revenue from Productivity and Business Processes was $35 billion and grew 1713% in constant currency. Microsoft 365 Commercial cloud revenue increased 1915% in constant currency, ahead of expectations. Strong execution and improving product quality drove accelerating Microsoft 365 Copilot seat adds this quarter, with paid seats now over 20 million. ARPU growth was again led by both E5 and Microsoft 365 Copilot. Paid Microsoft 365 Commercial seats grew 6% year over year, with installed base expansion across all customer segments, though primarily in our small and medium business and frontline worker offerings. Microsoft 365 Commercial products revenue increased 1% and decreased 3% in constant currency, down sequentially as Office 2024 transactional purchasing trends continued to normalize as expected. Microsoft 365 Consumer cloud revenue increased 3329% in constant currency, again driven by ARPU growth. Microsoft 365 Consumer subscriptions grew 7%. LinkedIn revenue increased 129% in constant currency with growth across all lines of business. Dynamics 365 revenue increased 2217% in constant currency with continued share gains and growth across all workloads. Bookings growth was impacted by weaker renewals, as customers balance spend between the traditional per-seat and the emerging seats-plus-consumption model. Segment gross margin dollars increased 1813% and gross margin percentage increased slightly, again driven by efficiency gains at Microsoft 365 Commercial cloud that were partially offset by continued investments in AI, including the impact of growing adoption and usage of Copilot. Against a low prior-year comparable, operating expenses increased 119% in constant currency driven by the shared R&D AI investments mentioned earlier, as well as higher Copilot advertising spend. Operating income increased 2114% in constant currency, and operating margins increased year over year to 60%. Next, the Intelligent Cloud segment. Revenue was $34.7 billion and grew 3028% in constant currency. In Azure and other cloud services, revenue grew 4039% in constant currency, against a prior year that included accelerating growth. Results were ahead of expectations as we delivered capacity earlier in the quarter, enabling increased consumption across both AI and non-AI services. Strong customer demand across workloads, customer segments, and geographic regions continues to exceed available capacity. In our on-premises server business, revenue increased slightly and decreased 3% in constant currency with ongoing customer shift to cloud offerings. Segment gross margin dollars increased 1918% in constant currency. Gross margin percentage decreased year over year driven by continued AI investment and increased GitHub Copilot usage, partially offset by ongoing efficiency gains in Azure. Operating expenses increased 97% in constant currency, driven by the shared R&D AI investment noted earlier. Operating income grew 2423% in constant currency, and operating margins were 40%. Now to More Personal Computing. Revenue was $13.2 billion and declined 1% and 3% in constant currency. Windows OEM and devices revenue decreased 23% in constant currency. Windows OEM increased slightly and was ahead of expectations as OEM and channel partners continued to build inventory given increasing memory prices. Search advertising revenue ex-TAC increased 129% in constant currency with growth driven by higher volume and revenue per search across Edge and Bing. In gaming, revenue decreased 79% in constant currency. Xbox content and services revenue decreased 57% in constant currency, against a prior comparable that benefited from strong first-party content performance. Segment gross margin dollars increased 64% in constant currency, and gross margin percentage increased year over year driven by a sales mix shift to higher-margin businesses. Against a low prior-year comparable, operating expenses increased 76% in constant currency driven by impairment and other related expenses in our gaming business, as well as continued investments in shared R&D mentioned earlier that benefits the entire portfolio. Operating income increased 41% in constant currency, and operating margins increased year over year to 28%. Now moving to our Q4 outlook, which, unless specifically noted otherwise, is on a US dollar basis. Based on current rates, we expect FX to increase revenue growth by roughly one point in Productivity and Business Processes and More Personal Computing, with no meaningful impact to Intelligent Cloud. Overall impact to total revenue is expected to be less than one point. FX should increase COGS growth by roughly one point with no impact to operating expense growth. Starting with our commercial business, in commercial bookings, when adjusted for the impact from OpenAI, we expect healthy growth on a growing expiry base with consistent execution in our core annuity sales motions against a significant prior-year comparable. Microsoft Cloud gross margin percentage should be roughly 64%, down year over year driven by continued investments in AI and increased GitHub Copilot usage. Just this week, we announced a business model transition in GitHub Copilot that will align pricing with usage and value that takes effect on June 1. Now to segment guidance. In Productivity and Business Processes, we expect revenue of $37.0 to $37.3 billion or growth of 12% to 13%. In Microsoft 365 Commercial cloud on an adjusted basis, we expect revenue growth to be between 15 and 16 in constant currency, when normalized for the prior-year comparable that benefited from two points of in-period revenue recognition. On a reported basis, we expect revenue growth to be between 13 and 14% in constant currency. Building on the Copilot momentum we saw in Q3, we expect net paid seat adds to increase sequentially, which will drive continued ARPU growth. Microsoft 365 Commercial products revenue should grow in the mid-single digits against a prior year that benefited from higher-than-expected Office 2024 transactional purchasing. As a reminder, Microsoft 365 Commercial products includes components that can be variable due to in-period revenue recognition dynamics. Microsoft 365 Consumer cloud revenue growth should be in the low 20% range, down sequentially as we start to lap the benefit from last year's price increase. Growth will again be driven by ARPU and an increase in subscription volume. For LinkedIn, we expect revenue growth of approximately 10%. In Dynamics 365, we expect revenue growth to be in the low double digits, down sequentially with impact from a strong prior-year comparable and the bookings trends noted earlier. For Intelligent Cloud, we expect revenue of $37.95 to $38.25 billion or growth of 27% to 28%. In Azure, we continue to focus on accelerating the delivery of capacity and increasing fleet efficiencies. Therefore, we expect Q4 revenue growth to be between 39 and 40% in constant currency against a strong prior-year comparable that included accelerating growth. Broad and growing customer demand continues to exceed supply, and we continue to balance the incoming supply we can allocate here against our other high-ROI priorities: first-party applications, R&D, and end-of-life server replacement. As a reminder, year-over-year Azure growth rates can vary quarter to quarter, based on capacity, timing, and contract mix. In our on-premise server business, we expect revenue to decline in the mid-single digits with ongoing customer shift to cloud offerings. In More Personal Computing, we are lapping strong prior-year comparables, navigating complex PC market dynamics impacted by memory prices, and refocusing on delivering quality and value to consumers. Therefore, we expect revenue to be $11.75 to $12.25 billion. Windows OEM revenue should decline in the high teens with roughly six points of impact from a prior-year comparable that benefited from Windows 10 end of support, six points from inventory levels that we expect to come down for the quarter, and six points from a lower PC market as prices increase due to memory cost. The range of potential outcomes remains wider than normal. Therefore, Windows OEM and devices revenue should decline in the mid- to high teens. Search advertising revenue ex-TAC growth should be in the high single digits driven by revenue per search and volume with continued share gains across Bing and Edge. In Xbox content and services, we expect revenue to decline in the low teens, reflecting a prior-year comparable that benefited from strong first-party content as well as the recent price changes for Xbox Game Pass as we focus on delivering more value to gamers. Hardware revenue should decline year over year. Therefore, at the total company level, revenue should be between $86.7 and $87.8 billion or growth of 13% to 15%, with accelerating commercial growth partially offset by our consumer business. Our Q4 outlook for COGS and operating expenses includes roughly $900 million in one-time cost for the recently announced voluntary retirement program. Therefore, we expect COGS of $29.4 to $29.6 billion or growth of 22% to 23%, including roughly $350 million from the retirement program, and operating expense of $19.3 to $19.4 billion or growth of approximately 7%, including roughly $550 million from the retirement program. Even as we invested through the year in additional capacity to serve the growing AI platform, apps, and services demand, and inclusive of these one-time costs, we expect full-year FY '26 operating margins to be up about one point year over year. Excluding any impact from our investments in OpenAI, other income and expense is expected to be roughly negative $100 million as interest income will be more than offset by interest expense, which includes the interest payments related to data center finance leases. We expect our adjusted Q4 effective tax rate to be approximately 19%. Next, capital expenditures. We expect CapEx spend to increase to over $40 billion as we continue to bring more capacity online. The sequential increase includes roughly $5 billion from higher component pricing as well as the impact from finance leases, which add variability given full value is recorded in the period of lease commencement. For calendar year 2026, we expect the mix of short-lived assets to remain similar to Q3. We expect to invest roughly $190 billion in capital expenditures, which includes approximately $25 billion from the impact of higher component pricing. We remain confident in the return on these investments given higher demand signals and increasing product usage, as well as the efficiencies we are already driving across the platform. Even with these additional investments and continued efforts to bring GPU, CPU, and storage capacity online faster, we expect to remain constrained at least through 2026. Despite these constraints, and the continued need to balance incoming supply, we expect Azure growth to show modest acceleration in the second half of the calendar year, compared with the first half. Now I would like to share some closing thoughts as we look to next fiscal year. First, we continue to evolve how we operate to increase our pace and agility. Therefore, we expect headcount will decrease year over year. Operating expense growth will be in the mid- to high single digits, reflecting ongoing investments in R&D, inclusive of AI investment in compute, data, and talent to accelerate product innovation. Next, as a reminder, we will lap strong prior-year comparables impacted by Windows 10 end of support, elevated OEM inventory levels, as well as increased Office and server transactional purchasing. Finally, we remain focused on delivering a platform that enables customers to build and run AI solutions and on driving innovation in our first-party AI applications and services. Therefore, we expect another year of double-digit revenue and operating income growth in FY '27. In closing, we are committed to delivering innovation that helps customers create new business value as we enter the final quarter of our fiscal year. With that, let us go to Q&A, Jonathan. Jonathan Neilson: Thanks, Amy. We will now open the call for questions. Out of respect for others on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions? Operator: And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed. Keith Weiss: Excellent. Thank you for taking the question, and congratulations on another really solid quarter. Those Microsoft 365 Copilot numbers are super impressive and way ahead of most people's expectations. I wanted to ask a broader question on demand. We have been talking about strong demand for a while. We see it in our CIO surveys, and you definitely express it in what you are seeing in your business. Maybe in the short term, can you talk to us about how that demand translates into commercial bookings and how that might be changing? You mentioned different contracting cycles between seats and consumption that may impact that, and then we also have to think about renewal bases. Longer term, and maybe this opens it up to Satya, what is supporting this demand over time? Or said another way, who is paying for all this? Because while we see excitement for Microsoft in our CIO survey, our overall IT expectations are not increasing, and GDP growth is not really increasing. So at some point, how does this get paid for, and do you start to see the indications of where those dollars are going to come from? Thank you. Amy Hood: Why do I not start with the first half of your question, Keith, around how some of these models impact bookings? I think it is really important. You are right. We have the normal cyclical things that happen with bookings. It is the expiration base, or large multiyear Azure commitments that get signed, and that has always had some volatility to it. But if you take a step back, which is the broader question you are asking, you are really thinking through how we go from using a model that is historically thought of as a per-seat business to getting work done and being more productive as a seat or a worker plus an agent. When I think about that model, I start to think about it as a licensed business plus a consumption business applied far more broadly than I think people have thought about. It starts to mean that over time, bookings will actually also look a little different. It will still have that per-seat license logic, but it will also have a meter, just like you see in Azure. It may not all flow through bookings in the same way; you will just bill for usage. If that usage has great value to customers—then you will keep spinning and keep using those agents if they are adding direct value or growth to your business. I think it is healthy to start to think about that transition in a broader way. While you may not see it in the short term in bookings, if I were to frame how to think about the opportunity, I would think about it more in that light. Satya Nadella: Amy captured it. The basic transformation of any per-user business of ours—whether it is productivity, coding, or security—will become a per-user and usage business. That is the best way to think about it. It is already happening with coding, where you see it at scale. Some of the business model changes we made this quarter speak to that and also speak to the intensity of usage. Where are these dollars going to come from? At the end of the day, they will come from some eval and outcome that a business has where these agents—working on behalf of users or with users—have created value. That is where it starts, whether it is customer service, individual productivity, team productivity, or a business process. Some cost is either decreasing because of the use of agents, or some revenue is increasing because agents compressed workflows. That is what you broadly start to see. Even when people talk about Copilot, they use chat and chat with reasoning, they use CoWork, they use agent mode inside Word, Excel, and PowerPoint, but it is all done in the context of some task trajectory. When they see that the task trajectory is compressing the workflow, improving revenue, or decreasing cost, that is what is driving usage. It may not be pure seat coverage motions like in the past. This is more about getting intense users and intense usage, and that is what we are focused on. Amy Hood: Keith, maybe just to take a quick second—just a big thank you to you. It has been a real privilege to work with you over many, many quarters. We have really appreciated your coverage over this time, and congratulations on your next chapter. Thank you so much. Satya Nadella: Keith, it has just been fantastic with you. Keith Weiss: I really appreciate that. Thank you so much. Satya Nadella: Thank you. Operator, next question, please. Operator: The next question comes from the line of Karl Keirstead with UBS. Please proceed. Karl Keirstead: Okay, great. Thank you. Maybe, Amy, could you elaborate a little bit on the CapEx guidance you just provided? Obviously, it requires a fairly material pickup in CapEx in the second half of the calendar year, maybe to the tune of $120 billion. I am just curious about your confidence in working through the physical component constraints to hit that number. Does it involve greater use of partners? And how are you thinking about allocating that increased capacity between third party and first party? Do you have a general framework you would advise us to keep in mind? Thank you. Amy Hood: Sure. Thanks, Karl. I actually feel quite good about our ability to work through the physical limitations. I think of the industrial logic of the supply chain to be able to put that in place. Some of that, as we have talked about, is getting capacity online, but a lot of that is short term in nature—being able to get CPUs, GPUs, and storage put in place to better support the demand signals we have been seeing. We tried to give some help on part of that being price; I think that just helps give you a sense on volumes, and obviously it leans more to short-term assets when you see that type of impact of price on the number. In terms of allocation, you should assume—based on what you were seeing in Azure—looking for 39 to 40 in constant currency in Q4 means that we are able to use some to make sure we are able to meet demand as we can, and do that in a balanced way across Azure. Our Copilot usage in Q3 has really been on a different trajectory than we saw up to this point. That applies across coding, across productivity, and I have some confidence it will also apply across security. When we talk about some acceleration into what I would call the first half of FY '27—the second half of the calendar year—it means we are getting insights into our abilities to increasingly put pressure on efficiencies, speed up the deliveries into our data centers, and make that revenue-ready as quickly as we can. I would expect the pressure between first-party usage and being able to meet Azure demand will persist, as I said, but we are doing our best to get things in as quickly as we can—hence the CapEx number that we see in the second half of the year. Karl Keirstead: Okay. Terrific. Thank you. Jonathan Neilson: Thanks, Karl. Operator, next question, please. Operator: The next question comes from the line of Brent Thill with Jefferies. Please proceed. Brent Thill: Thanks, Amy. One of the big pushbacks we all get is that AI is going to be really expensive, yet you, Google, and Amazon are showing higher margins tonight as you report. What are investors missing, and why is AI a potential better margin for the industry over time? Amy Hood: Thanks, Brent. We have been talking about where this AI business of ours has been in the cycle compared to the cycle we saw with the cloud, which now seems very long ago, and how margins were actually better and have remained better in our AI business versus where we saw them in the cloud transition looking back. We have been really focused on making sure that the business models reflect how these applications are both getting built and the value that they are bringing. When you think about that type of value, it tends to be captured more in consumption and usage-based pricing models, and I think that has been a little underappreciated in terms of margins going forward. It has been important to make sure we leverage the IP we have. The IP we get from our partnerships is obviously free to us for a long time, so we are able to take that and apply it to benefit our margins in a healthy way. You have also seen us work hard on the first-party hardware stack—being able to take cost out of the infra stack as well. And then, of course, the efficiency work. We have been in an accelerated phase of trying to get as much capacity as we can into production. When you go through that, you also then start to focus on the efficiency work—on the hardware side as well as on the software side—to be able to deliver these types of margins. One of the real focuses we all have to have—and this dates back to Keith’s question—is that when you move to usage-based models, you have to make sure you are delivering incredibly high value to customers. The focus starts with customer usage that creates value. If that creates value and positive output, then the TAM expansion here and the ROI will be very good. Satya Nadella: Thanks, Brent. Operator, next question, please. Operator: The next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed. Mark Moerdler: Thank you very much for taking my question, and congratulations on the quarter you delivered and the rate of growth and some of the commentary you have made on guidance. I would like to drill in a little bit on the CapEx and the spending that you are making. Obviously, the commercial cloud is growing fast, Azure is growing fast, and AI is growing even faster within your overall business. But there is a bit of a disconnect that makes investors a bit nervous between how fast they are seeing CapEx growing and how fast they are seeing revenue growing. Can you give some color about how the timing works out, or how much needs to be spent on replacement of equipment or first party, in order to build confidence that as we look toward this strong spending on CapEx, the core business will continue to be very healthy and that the margins will be good? Thank you. Amy Hood: Thanks, Mark. Let me start with Azure, which—given its size and its growth rates—where we have talked about acceleration from where we are, is the guide at 39 to 40 into a bigger number in the second half of the calendar year. When you start to see that type of growth rate on the size of the business we have, the amount of spend being done on short-term assets—which is the thing that correlates with revenue, as opposed to the third of that number that is going into fifteen-year assets, or some lumpy timing from lease contracts that can get confusing—I think in many ways this reminds us of the last cycle. When the TAM is so expansive and when shortages are generally growing between supply and demand, it gives you a lot of confidence in the ROI—certainly starting with the platform side. What you are really asking is whether, as we see these usage-plus-consumption models emerge at the app and services layer, are we starting to see the benefits of that? If you look at the last quarter, we saw some acceleration in the Microsoft 365 Commercial cloud number this quarter. We are guiding for that to be better again in Q4. I think that is where you are starting to see what investors have been asking about—when we will start to see that show up in revenue growth—and that is the first place I would point to. We can also point to it in GitHub, where you see revenue growth rates and usage consumption models result in acceleration in the top line. In general, we continue to see that. When you think about spending that amount of capital, putting it into production, seeing some delay before it turns into revenue-ready, having the book of business—over $600 billion of revenue that we still need to deliver—and that is before we are starting to see the acceleration in seats that we are seeing on Copilot, I feel very good about that number. Our real focus will be how much of that we can pull in as fast as we can. I want to be transparent: when you have revenue sitting there that can be grown faster, or efficiencies to gain, the focus needs to be on doing that—landing this CapEx as quickly as we can and converting to revenue as quickly as we can. Satya Nadella: I will add one point. One of the things we have learned in the last two years in AI—and what builds more conviction and confidence—is where the TAM is and the category economics of the TAM. It is fascinating that here we are in 2026, and the most exciting things are plug-ins in Word or Excel, or CLIs in coding. When you see that, it means we have a structural position in knowledge work, coding, and security—which are the big TAMs. Then you couple that with the right business model—user plus usage—that Amy referenced multiple times. Even the book of business we have is a true line. If anything, we want to make sure we are getting the CapEx to get the capacity in time for those increases in usage, which is going to be very key. The model capabilities are exponential. Think about agent mode in Excel—it kind of did not work until it started working, and that is because the model showed up. You have to be ready for those opportunities. Mark Moerdler: That is extremely helpful. I really do appreciate it, and again, congratulations on the quarter. Amy Hood: Thanks, Mark. Operator, next question, please. Operator: The next question comes from the line of Gabriela Borges with Goldman Sachs. Please proceed. Gabriela Borges: Hi, good afternoon. Thank you. Satya, I would love to hear some of your reflections on Copilot given the technical and commercial milestones that Microsoft has hit just in the last three months. Maybe share with us a little on your learnings from Copilot adoption to date—what you think is working, what is not working, and how that is informing your E7 strategy and the Copilot CoWork strategy. Thanks so much. Satya Nadella: Thank you for the question. The way to think about Copilot—especially Microsoft 365 Copilot in knowledge work—is that we have learned a lot from coding, but focusing on Microsoft 365 Copilot, the first thing is the form factor and the shape of the product and how it has evolved. There is chat—chat now with reasoning over WorkIQ. Then there are all the agents like Researcher and Analyst that you use within chat, or even custom agents that our customers are building. On top of that, you now have edit mode. A typical trajectory or session in Copilot starts with chat: you ask questions, get insights, ask it to generate an artifact, open that artifact in Word, Excel, or PowerPoint, and further refine it—in other words, you continue the conversation. Then we now have a complete new form factor where you delegate the task—you are not even interactively working but delegating the task with CoWorkers. These are the various form factors. One of the most important things to keep in mind is the usage. It is at the same level as Outlook—this is a daily habit of intense usage. What makes these form factors useful is intelligence, which is a function of two things: multiple models coupled to context. That is meetings, emails, Teams, SharePoint data—all of that rich, constantly updated data. This is not a static database; it is the most important database in any company that is constantly changing every second. The context and the models are brought together with a harness that is multimodal. We do this in GitHub, Microsoft 365, and security. Our core goal is to decouple the harness from the models and then have the context richness show through, because customers are going to use multiple models. Critique or Counsel is a great example, or Rubber Duck in GitHub Copilot. Even in Excel, I might generate using one model and check with another. That is what you want users to have access to. Coupled with the business model of user pricing plus usage, that is what is happening, and we are seeing it play out. Amy Hood: Thank you very much, Gabriela. Jonathan Neilson: Operator, next question, please. Operator: The next question comes from the line of Kirk Materne with Evercore ISI. Please proceed. Kirk Materne: Yes, thanks very much, and thanks for taking the question. Amy, I was wondering, could you talk a little bit about the change in the OpenAI agreement—if there is anything we should be aware of from a modeling perspective or financial perspective that would change today versus where we were a couple of weeks ago? And then, Satya, it seems like an opportunity for you to continue to diversify from a model perspective. Any other takeaways we should be thinking about in terms of where you landed with OpenAI in this new framework? Thanks. Satya Nadella: Maybe I will start. Overall, we feel good about our partnership with OpenAI. I am always very focused on any partnership and ensuring that there is a win-win construct at all times—that is how you can remain good partners. In this case, it starts with IP. Amy referenced this. We have a frontier model royalty-free with all the IP rights that we will have access to all the way to '32, and we fully plan to exploit it. There are examples I talked about in my remarks earlier, and we are thankful for that—that is one part of the agreement. The second part, of course, is them as a customer of ours. They are a large customer of ours, not just on the AI accelerator side, but also on all the other compute side, and we want to serve them well. And then, of course, we have our equity. Overall, I think the construct—as they have grown and we have grown, and our customers also have different expectations in terms of their model diversity—has evolved, but I feel very good about where we are. Amy Hood: The only two things to keep in mind are having the revenue share exist through 2030—the predictability of that is a real positive for us—and, as Satya pointed out, the IP being royalty-free with the elimination of our rev share to them. Kirk Materne: Thank you all. Satya Nadella: Thanks, Kirk. Operator, we have time for one last question. Operator: And the last question will come from the line of Rishi Jaluria with RBC Capital Markets. Please proceed. Rishi Jaluria: Oh, wonderful. Hi, Satya. Hi, Amy. Thanks so much for squeezing me in. I wanted to go back to the discussion we have been having today on models and consumption, and the philosophy for how this changes over time. We are in complete agreement with what you are seeing out there, and it totally makes sense. I want to drill into E7, which will come out and is predominantly seat-based with some consumption components. You are doubling down on that seat element, and it seems customers still want the predictability of seat-based models, as we have seen with usage issues companies are running into as AI has gone out of control. How do you bring these pieces together—how to maintain predictability within the customer base while increasingly growing consumption? And if we were to fast forward three to five years, how should we think about the mix of consumption versus traditional seat-based? Thanks so much. Satya Nadella: At a high level, you said it—customers want predictability for budgets and procurement, and the seat-based pricing is just entitlement to some consumption. That is the way to think about it: there are some base usage rights that get bundled in or packaged into seats. It is a convenient way for people to buy consumption packs that happen to be assigned to seats or agents. Beyond a certain level, there are overages that go into pure consumption. Even there, if you have long-term commitments to consumption, you get appropriate discounting. That is the direction of travel. From a customer perspective, they are going to evaluate it by eval—where they are seeing the value of tokens, as simple as that. Where they see the outcome—the eval on the token—whether it is improving revenue or efficiency. That will refine budgets. IT budgets will be reshaped by a combination of business outcomes making their way into IT budgets and reallocation from other line items on the income statement like OpEx. Operator: Thanks, Rishi. Jonathan Neilson: That wraps up the Q&A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with all of you soon. Amy Hood: Thank you. Thank you. Operator: This concludes today's conference. You may disconnect your lines at this time, and enjoy the rest of your day.
Operator: Thank you for standing by. Good day, everyone, and welcome to the Amazon.com, Inc. First Quarter 2026 Financial Results Teleconference. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's call is being recorded. For opening remarks, I will be turning the call over to the Vice President of Investor Relations, Mr. Dave Fildes. Thank you, sir. Please go ahead. Dave Fildes: Hello, and welcome to our Q1 2026 financial results conference call. Joining us today to answer your questions are Andrew R. Jassy, our CEO, and Brian T. Olsavsky, our CFO. As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2025. Our comments and responses to your questions reflect management's views as of today, 04/29/2026 only, and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financials is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-Ks and subsequent filings. During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Our guidance incorporates the order trends that we have seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates and energy prices, changes in global economic and geopolitical conditions, tariff and trade policies, resource and supply volatility, including for memory chips, and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market constraints, world events, the rate of growth of the Internet, online commerce, cloud services, and new and emerging technologies, and the various factors detailed in our filings with the SEC. Our guidance assumes, among other things, that we do not have any additional business acquisitions, restructurings, or legal settlements. It is not possible to accurately predict demand for our goods and services, and therefore, our actual results could differ materially from our guidance. And now I will turn the call over to Andy. Andrew R. Jassy: Thanks, Dave. We are reporting $181.5 billion in revenue, up 17% year over year. Excluding the $2.9 billion favorable impact from foreign exchange, net sales increased 15%. Operating income was $23.9 billion. Q1 was a strong quarter for Amazon.com, Inc. Starting with AWS, growth continued to accelerate, up 28% year over year, the fastest growth rate in 15 quarters, up $2 billion quarter over quarter, the largest Q4 to Q1 AWS revenue increase ever. AWS is now a $150 billion annualized revenue run rate business. It is very unusual for a business to grow this fast on a base this large, and the last time we saw growth at this clip, AWS was roughly half the size. We have never seen a technology grow as rapidly as AI. Amazon is already a leader, and companies continue to choose AWS for AI. To put our growth in perspective, three years after AWS launched, it had a $58 million revenue run rate. In the first three years of this AI wave, AWS’s AI revenue run rate is over $15 billion—nearly 260 times larger. There are several reasons customers are choosing AWS for AI. First, we have built broader capabilities than others. That includes model building with SageMaker, which reduces training time by up to 40%, high-performance inference with the leading selection of frontier models, and Bedrock, which saw 170% growth in customer spend quarter over quarter and processed more tokens in Q1 than all prior years combined. We are excited to make OpenAI’s models available in Bedrock. Yesterday, we added OpenAI’s GPT-5.4 model, with 5.5 coming soon. Yesterday, we also started the preview of Amazon Bedrock managed agents powered by OpenAI. The stateful runtime environment enables any organization to build generative AI and agents at production scale. We believe that modern agentic applications will be stateful, and this new technology will rapidly accelerate agentic AI adoption. OpenAI has said they are already seeing unprecedented demand for this new product, and we are seeing heavy customer interest as well. Most of the value companies derive from AI will be through agents, and AWS customers can build agents with their proprietary data in Strands, which has been downloaded more than 25 million times and saw 3x more downloads quarter over quarter. Customers can deploy agents with enterprise-scale security and reliability with AgentCore, which is being used to deploy an agent as frequently as every 10 seconds. We also offer turnkey agents for coding, software migrations, business operations, and knowledge workers in Quro, Transform, Connect, and Qwik, and they continue to resonate with customers. The number of developers using Quro more than doubled quarter over quarter, and enterprise customer usage increased nearly 10x. Customers have used Transform to save over 1.56 million hours of manual effort when migrating and modernizing their workloads. The number of new customers using Qwik has grown more than 4x quarter over quarter, and we just announced v1 of our Qwik desktop app yesterday. It is very compelling as it can query your email, calendar, Slack, local files, and several other applications you use every day to flag important communications, retrieve and summarize information, make recommendations, compose and send communications to others, and create agents that highlight or automatically do work that you used to have to do yourself. You can easily keep refining your preferences, and Qwik’s advanced knowledge graph enables its AI agents to automatically learn from you to become more personalized over time. One of our enterprise customers just told us, “Qwik is not just improving how we work. It is letting us reimagine it.” Second, and another reason customers continue choosing AWS is that as they expand their use of AI, they want their inference to reside near their other applications and data, and much more of it resides in AWS than any place else. Third, as customers expand their AI usage, they also want to consume additional non-AI services, and they are choosing AWS because we have built the broadest and most capable core offerings by a wide margin. We offer thousands of features across compute, storage, databases, analytics, security, and more, and Gartner consistently recognizes AWS’s leadership across their major cloud evaluation areas. Fourth, AWS has the strongest security and operational performance of any AI and infrastructure provider, and startups, enterprises, and governments continue to choose AWS as the foundation for their most critical workloads. These are some of the reasons even more customers are choosing AWS, and just since last quarter’s call, we have announced new agreements with OpenAI, Anthropic, Meta, NVIDIA, Uber, U.S. Bank, Fox, Southwest Airlines, U.S. Army, Bloomberg, Cerebras, AT&T, Nokia, Fundamental, the National Geographic Society, PGA Tour, and many more. Our chips business continues to grow rapidly and is larger than what a lot of folks thought. We saw nearly 40% quarter over quarter growth in Q1, and our annual revenue run rate is now over $20 billion and growing triple-digit percentages year over year, but this somewhat masks the size. If our chips business was a standalone business and sold chips produced this year to AWS and other third parties as other leading chip companies do, our annual revenue run rate would be $50 billion. As best as we can tell, our custom silicon business is now one of the top three data center chip businesses in the world. The speed at which we have gotten here is extraordinary, and we have momentum. For our custom AI silicon, we have recently shared very large multiyear, multi-gigawatt training commitments from the two leading AI labs in the world, Anthropic and OpenAI, as well as an increasing number of companies like Uber betting on Trainium, and we now have over $225 billion in revenue commitments for Trainium. Our Trainium2 chip has about 30% better price performance than comparable GPUs and is largely sold out. Trainium3, which just started shipping in 2026 and is 30% to 40% more price performant than Trainium2, is nearly fully subscribed, and much of Trainium4, which is still about 18 months from broad availability, has already been reserved. Amazon Bedrock, which is used expansively by over 125,000 customers, runs most of its inference on Trainium. Almost 80% of the Fortune 100 companies are using Bedrock. We also just announced that Meta is committed to using tens of millions of cores. Graviton is our industry-leading CPU chip, which allows Meta to run the CPU-intensive workloads behind agentic AI with the performance and efficiency they need at their scale. AI is commonly seen as a GPU story, but the rise of agentic workloads, real-time reasoning, code generation, learning, and multi-step task orchestration is driving massive CPU demand as well. As AI systems shift from answering questions to taking actions, and as post-training and inference scale up, the compute required falls heavily on CPUs. That is why Meta chose Graviton, which delivers up to 40% better price performance than any other x86 processors, and is now used by 98% of the top 1,000 EC2 customers. Nobody has a better set of chips across AI and CPU workloads than AWS with Trainium and Graviton, and we are unusually well positioned for this AI inflection. We are in the early stages of the experience. While the largest number of AI chips we are bringing in are Trainium, we continue to have a deep partnership with NVIDIA. We have immense respect for them, continue to order substantial quantities, will be partners for as long as I can foresee, and we will always have customers who want to run NVIDIA on AWS. And we will also have a very large chips business ourselves. Customers always want choice. It has always been true and always will be true. Different companies will offer different benefits for customers, and the uniquely strong price performance that Trainium offers is compelling to our external and internal customers. For perspective, at scale, we expect Trainium will save us tens of billions of dollars of CapEx each year and provide several hundred basis points of operating margin advantage versus relying on other chips for inference. Finally, we continue to be confident in the long-term CapEx investments we are making. Of the AWS CapEx we intend to spend in 2026, much of which will be installed in future years, we have high confidence this will be monetized well, as we already have customer commitments for a substantial portion of it and that it will yield compelling operating margins and ROIC. As we have been sharing, the faster AWS grows, the more short-term CapEx we will spend. AWS is to lay out cash for land, power, buildings, chips, servers, and networking gear in advance of when we can monetize it, typically six to 24 months before we start billing customers depending on the component. However, these CapEx investments fund assets with many-year useful lives—30-plus years for data centers, five to six years for chips, servers, and networking gear. The free cash flow and ROIC for these investments are cumulatively quite attractive a couple of years after being in service. However, in times of very high growth like now, where the CapEx growth meaningfully outpaces the revenue growth, the early years’ free cash flow is challenged until these initial tranches of capacity are being monetized and revenue growth outpaces CapEx growth. We have been through this cycle with the first big AWS growth wave, and we like the results. We expect to feel similarly about this next wave with much larger potential downstream revenue and free cash flow. I will now turn to Stores. Units grew 15% year over year, the highest we have seen since the tail end of COVID lockdowns. We continued expanding selection, including more than 600 new notable brands. Our grocery business continues to grow quickly across both perishables and nonperishables, and with more than $150 billion in gross sales in 2025, we are now the second-largest grocer in the U.S. We offer perishables delivered same day alongside millions of other items in more than 2,300 cities and towns across the U.S., with more to come. Prime members are loving the convenience of getting fresh groceries alongside other products they are buying in Amazon, and perishable sales have grown over 40x year over year and make up nine of the top 10 most ordered items for same-day delivery where the service is available. Customers shopping same-day perishables build larger baskets, adding nearly 3x as many items to their order and spending over 80% more than customers who do not. Whole Foods Market also continues to accelerate with over 550 stores today and 100 more coming in the next few years. We remain committed to meeting or beating other retailers on price. In Q1, the average prices of products offered on Amazon.com, Inc. decreased compared to the same period last year. Prime Day will take place in most countries in June, which will bring Prime members even more savings across every category. We continue to find new ways to speed up delivery for customers in both cities and rural areas. We offer millions of items available for same-day delivery with Prime—up to 40x the selection of a typical big-box retail store—and we have delivered more than 1 billion items same day or overnight so far this year. We are also making delivery even faster, recently announcing one- and three-hour delivery options on over 90,000 items, with one-hour delivery available in hundreds of cities and towns, three-hour delivery in 2,000-plus cities and towns, more on the way. And we continue to expand our ultrafast delivery service, Amazon Now, which offers delivery in 30 minutes or less on thousands of items. It started last year in India, where orders are increasing 25% month over month, with Prime members tripling their shopping frequency once they start using it. The service is now available to tens of millions of customers across nine countries, with more to come as well. The Stores team also continues to innovate and deliver for customers with AI. We launched Health AI, a 24x7 AI-powered personal health agent backed by One Medical clinicians that gives U.S. customers instant clinical guidance and takes action with their permission—from booking appointments to managing prescriptions to facilitating medical treatment with a real One Medical provider. Rufus, our agentic AI shopping assistant, continues to resonate with customers. Rufus can research products, track prices, and auto-buy products in our store when they reach a set price. Monthly active users are up over 115% and engagement is up nearly 400% year over year. And we recently introduced a new AI experience for sellers in Seller Central that dynamically generates a custom, personalized visualization of data, key insights, and scenarios tailored to the seller’s goals. It is early, but the initial response and feedback are very strong. Moving on to Amazon Ads. We continue working to be the best place for brands of all sizes to grow their businesses, and we are pleased with the continued strong growth across our full-funnel offerings, generating $17.2 billion of revenue in the quarter and up 22% year over year. Forrester recently recognized Amazon as a leader in omnichannel advertising platforms, with unmatched supply and insights for connected TV and commerce media. We deepened our Netflix partnership with Amazon Audiences, which enables advertisers to apply Amazon’s exclusive signals from shopping, browsing, and streaming to Netflix’s highly engaged viewers to reach the right audiences and drive even stronger performance. We also partner with Comcast to expand local advertising to thousands of brands, and expanded interactive video ad capabilities to partners starting with Samsung TVs. Our Ads team also continues to invent and deliver for advertisers with AI. For example, we expanded CreativeAgent—an agentic partner that plans and executes the entire ad creative process—to Canada, France, Germany, India, Italy, Spain, and the UK. And we recently introduced sponsored product and brand prompts in Rufus to help brands showcase products and customers make more informed buying decisions. It is early, but we are seeing nearly 20% of shoppers who interact with a brand prompt in Rufus continue the conversation about that brand. We are also continuing to invent and see momentum in several other areas; I will mention a few. Starting with Entertainment, moviegoers have flocked to Project Hail Mary, with nearly $615 million in global box office to date. Its opening weekend was the second biggest for any non-sequel, non-franchise film in the last decade. We also surpassed 100 million viewers globally for The Culprits movie trilogy, with all three films reaching number one in more than 170 countries at launch. In live sports, we offered exclusive coverage of the NBA SoFi Play-In Tournament, with total viewership up 18% compared to last year on cable. Alexa Plus early access expanded to millions more Prime members in Mexico, the UK, Italy, and Spain. Customers are loving Alexa Plus, talking to Alexa twice as much and for longer durations across a wider breadth of topics, completing purchases on devices 3x more, streaming music 25% more, and using smart home functionality 50% more than Alexa Classic. Zoox has now driven nearly 2 million miles and carried more than 350,000 riders, is available to the public in Las Vegas and San Francisco, and is testing in eight other cities. We recently announced that Zoox will be available through the Uber app in Las Vegas and in Los Angeles in the future. And finally, Amazon LEO continues gaining momentum, with commercial service on track to launch in a few months. We already have meaningful revenue commitments from enterprises and governments including Delta Air Lines, JetBlue, AT&T, Vodafone, DIRECTV Latin America, Australia’s National Broadband Network, DP World Tour, NASA, and others. We also announced that we plan to acquire Globalstar, which will expand LEO’s satellite network with direct-to-device capabilities, and we entered an agreement with Apple for Amazon LEO to power satellite services for iPhones and Apple Watches. We are in the middle of some of the biggest inflections of our lifetime, and Amazon.com, Inc. has the culture, the know-how, and the resources to make so many customers’ lives better and easier, and to build multiple new long-term businesses with substantial return on invested capital and free cash flow. We will continue investing and inventing to make it so. With that, I will turn it over to Brian. Brian T. Olsavsky: Thanks, Andy. Let us start with our top line financial results. Worldwide revenue was $181.5 billion, a 15% increase year over year excluding the 180 basis point favorable impact of foreign exchange. Worldwide operating income was $23.9 billion, with an operating margin of 13.1%, our highest operating margin ever. Across all segments, we continue to innovate for customers while operating more efficiently. In the North America segment, first quarter revenue was $104.1 billion, an increase of 12% year over year. International segment revenue was $39.8 billion, an increase of 11% year over year excluding the impact of foreign exchange. Our seasonal shopping events performed well in Q1, including our Big Spring Sale. We also saw particularly strong performance with third-party sellers, who are important contributors to our broad selection and competitive pricing. Our sellers saw strong sales growth in Q1, particularly in the U.S., as well as in Europe and Brazil where we have recently lowered seller fees. We are seeing our investments in the seller experience resonate and, in turn, grow our business. Prime continues to fuel our growth and reflects the value members receive from the program. Prime Video is a key pillar of the Prime value proposition and an important driver of new member acquisition. Our investments in original and exclusive content and live sports combined with our third-party partner titles offer the best selection of premium video content. In addition to delivering compelling value to Prime members, advertisers, and partners, Prime Video is now a large and profitable business in its own right. Now let us shift to segment profitability. North America segment operating income was $8.3 billion, with an operating margin of 7.9%. International segment operating income was $1.4 billion, with an operating margin of 3.6%. We are pleased with the fulfillment network performance in Q1. The team has worked hard to optimize our network. Overall unit growth of 15% continues to outpace our cost to operate the fulfillment network, as outbound shipping costs grew 12% year over year and fulfillment expense grew 9% year over year, both on an FX-neutral basis. As our network efficiency improves, we are able to deliver items faster and improve the customer experience while at the same time lowering our cost to serve. Looking ahead, we see meaningful opportunities to further enhance productivity across our global fulfillment network, all while continuing to raise the bar in delivery speed. We will keep optimizing inventory placement to shorten distance traveled, reduce touches per package, and improve consolidation rates. Alongside these efforts, we deploy robotics and automation, which have been integral to our operations for decades. Our latest generation technologies offer a step change in efficiency, which we are deploying in both new and existing facilities. All of our U.S. large-format fulfillment center launches in 2026 will have this latest generation technology. We are seeing early positive results with improved site safety, higher productivity, and lower cost to serve. Moving to our AWS segment, revenue was $37.6 billion and growth accelerated 480 basis points to 28% year over year, driven by both core and AI services. We continue to see customers increase cloud migrations and scale their use of AWS core services. Customers seeking the full benefit of AI are accelerating their transition to the cloud. We also see a strong correlation between AI spend and core growth. As customers spend more on AI, we see a corresponding demand increase in core. We expect this to increase over time as customers move more AI workloads into production, strengthening demand for our core services. Our AI revenue is growing triple digits year over year. We are bringing more capacity online to meet high customer demand while also driving meaningful efficiency gains across our installed base. Our AI offerings continue to gain traction with customers, and Bedrock has been a significant growth driver. In 2025, we delivered 4x improvements in Trainium2’s token throughput. A consistent majority of Bedrock’s workloads run on Trainium. These efficiency gains directly translate into more capacity to serve customers. AWS operating income was $14.2 billion and reflects our strong growth coupled with our focus on driving efficiencies across the business. Now turning to total company capital expenditures. Our cash CapEx is $43.2 billion in Q1. This primarily relates to AWS and generative AI, as we invest to support strong customer demand. We will continue to make significant investments, especially in AI, as we believe it to be a massive opportunity with the potential to drive long-term revenue and free cash flow. I will finish with our financial guidance for Q2. The following guidance assumes that Prime Day occurs in the second quarter in most of our largest geographies, including the U.S., and that Prime Day occurs in the third quarter in Australia, Brazil, India, and Japan. Note that in 2025, Prime Day was in Q3 for all countries. Q2 net sales are expected to be between $194 billion and $199 billion. We estimate the year-over-year impact of changes in foreign exchange rates based on current rates, which we expect to be a headwind of approximately 10 basis points in the quarter. Q2 operating income is expected to be between $20 billion and $24 billion. We continue to see strong sales trends carrying into Q2, and I will mention a few items on the operating income guidance. First, this assessment includes the impact of our seasonal step-up in stock-based compensation expense in Q2, driven by the timing of our annual compensation cycle. Second, within the North America segment, we do expect a year-over-year cost increase of approximately $1 billion related to Amazon LEO, as we manufacture and launch more satellites in preparation for our service offering, and we expect to begin capitalizing certain costs in Q4. Amazon LEO’s commercial service is on track to launch in Q3, including production and launch costs. Third, our guidance anticipates higher transportation costs related to fuel inflation, which is partially offset by the recently implemented fuel- and logistics-related FBA surcharge. I am thankful to our teams across the company for their hard work and dedication to customers. We remain focused on driving an even better customer experience, which is the only reliable way to create lasting value for our shareholders. With that, let us move on to your questions. Thank you. Operator: At this time, we will now open the call up for questions. We ask each caller to please limit yourself to one question. Thank you. If you would like to ask a question, please press star 1 on your keypad. We ask that when you pose your question, you pick up your handsets to provide optimum sound quality. Once again, to initiate a question, please press star then 1 on your touch-tone telephone at this time. Please hold while we poll for questions. The first question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question. Eric Sheridan: Andy, across an array of announcements you have made recently with AWS and reflecting upon what you wrote in the shareholder letter, can you talk a little bit about the needed levels of investment over the next couple of years to scale compute and capacity to meet your current state of revenue backlog, and how we should be thinking about your unique approach to custom silicon and AI infrastructure that maybe positions you competitively to build that scale? Thanks so much. Andrew R. Jassy: Yeah. Well, to your point, Eric, we have made a lot over the last several months, and we are really pleased with the growth that we are seeing in AWS right now. You know, 28% year over year, fastest growth rate in 15 quarters for us, we have not grown at this pace since we were about half the size, and growing 28% on a $150 billion annual run rate basis is not simple to do. And I think there are a few things around it. First is we continue to see people choosing AWS for AI, in part because of our really broad full-stack functionality, in part because people want their inference as they scale it to be close to their data and their applications—so much more of it lives in AWS than elsewhere—and in part because we have the strongest security and operational performance, and that is just what you can see in our numbers. It is leading to very substantial AI growth. And then, at the same time, we are seeing very significant growth in our core business. Some of that is the migrations that have picked up from enterprises from on-premises to the cloud, but a lot of that is also as AI growth is exploding, it turns out that it leads to a lot of core growth as well—all the post-training, all the reinforcement learning, all the agentic actions and tool usage that these agents are using. And it fits with what you are asking about on the chip side, which is because we have an unusual collection of chips—we have the leading CPU chip in Graviton, and we have the leading price-performance AI silicon chip in Trainium—it means that we are unusually well positioned for the inflection that we are seeing and the type of growth that we are experiencing. So I do not have a new update on capital. Our plan is largely the same, but we do view this as truly a once-in-a-lifetime opportunity where every application that we know of is going to be reinvented, and there are so many new applications that none of us have ever imagined or dreamed we could build that are starting to be built and will be built, and all of that is going to be built on top of AI with a lot of consumption of CPUs and core as well. So I expect that we will invest a significant amount of capital over coming years to pursue that opportunity, and that our customers, our shareholders, and Amazon.com, Inc. in general are going to be much better off down the road because we did so. Operator: And the next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question. Brian Nowak: Great. Thanks for taking my questions. I have two. One is on the accounting side—I will probably get it in the queue—but can you just give us an update on what the AWS backlog looks like and any visibility on the breadth of that backlog beyond the big labs? That is the first one. And then the second one, as you think about milestones for Rufus and agentic commerce for you in 2026, what are you most focused on making sure you accomplish on the agentic side this year just to make sure you stay at the knife’s edge of the agentic commerce offerings? Thanks. Andrew R. Jassy: Yeah. On the backlog, the backlog for Q1 is $364 billion. That does not include the recent deal that we announced with Anthropic for over $100 billion. There is reasonable breadth in that as well—it is not just one customer or two customers. On the agent commerce milestone question, we are very bullish on what agentic commerce will look like. I think it is going to be very good for customers in the long term. I think it will be good for us too. And you can see some of that focus from us in what we are building with Rufus. If you have not checked out Rufus in a while, it has really substantially improved over the last year, and we have a lot of customers using it. As I mentioned earlier, you see the monthly active users up over 115% and engagement up 400% year over year. While I think we will do a lot of work with third-party horizontal agents to try and make that customer experience better—and by the way, I do think today it reminds me in some ways of what we saw in the early days of search engines and their trying to refer business to e-commerce—it has never been a giant part of the referrals to our e-commerce business. But over the years, the experience got better. And what you see with agentic commerce is it is a small fraction of what we see with the search engine referrals, but the experience just has not gotten great with these third-party horizontal agents yet. They are not often able to get the pricing right or the product information right. They do not have any personalization data or any shopping history. So we do want to see that get better with third-party horizontal agents. We are having conversations with all those folks to try and make that better and find something that works for customers and all the companies. It will be interesting over time which agents customers choose to use. I happen to think that if you are going to a particular retailer that you would like to do business with, you would like to shop from, if they have a great agentic shopping assistant, you are going to often start there because it is where you are doing your shopping. It is easier—they have better product information, they have better information about what others like you are buying, and you can make all sorts of changes to how your account and your shipping information is working there. That is what we are aiming to make Rufus be—we are aiming to have it be the best shopping assistant anywhere, and I think we are on that path. Operator: Thank you. The next question comes from the line of Justin Post with Bank of America. Please proceed with your question. Justin Post: Thank you. I would like to ask two, one on models and then one on premium chips. So on models, it looks like you might have access to the full suite of OpenAI models on Bedrock. Just wondering how big of an unlock that is and how focused you are on your own Novo model. And then second, the shareholder letter mentioned you might be able to sell racks of Trainium. Just wondering, with your capacity constraints, how are you thinking about timing of that and how big of an opportunity? Thank you. Andrew R. Jassy: Yeah. On the models question, I think the fact that we are going to have all the OpenAI models available in Bedrock is a big deal. It is a big deal for customers. We obviously have a very large amount of AI being done in Bedrock today on the models we have—this is Anthropic, Llama, Mistral, and a host of others. But the one thing you learn over and over again with every technology—it was true in databases, it was true in analytics, it is true in models, it is true in chips too, by the way—is that customers want choice. There is not one tool to rule the world, and they want choice. Each of the models are better at some things than other models. People for a long time have wanted to consume OpenAI models in Bedrock. We just enabled yesterday the stateless model, the 5.4 model, and we will enable the most recent 5.5 model in the next couple of weeks. Most of the model work and most of the AI has been done in these stateless models—tokens in and tokens out. While I think there will continue to be a lot of work done that way, I think the future of using these models is a stateful model, a stateful API. That is because when you are building agents, you are building AI applications, you do not want to start anew every time you interact with the model. You want to store state. You want to store identity. You want to store what the conversation or the actions have been. You want to reach out and do a little bit of compute here. You want to have the models reach out to different tools to accomplish different tasks. That only happens if you are able to store state. The Bedrock managed agents that we collaborated with and invented with OpenAI that we just announced the preview of yesterday is also—I think that is the future of how these agents are going to be built. It is something that nobody else has, and I think it is very exciting to our customers. Of course, we will have other models like Codex and things like that as well. So I think it is a big deal for customers, and I think it is going to be good for our business as well. On the question about Trainium and the notion of our selling racks over time, I do think that is very much a possibility. Always, we have to balance—we have such demand right now for Trainium, and we have such demand from various companies who will consume as much as we make—that we have to decide how much we are going to allocate to the existing demand and customers, how much we are going to save to sell as racks, and for our existing customers that we sell Trainium to, how many will be Trainium plus running on our cloud infrastructure versus just the chips themselves. But I expect over time there is a good chance we are going to sell racks in the next couple of years. Operator: And the next question comes from the line of Rob Sanderson with Loop Capital Markets. Please proceed with your question. Rob Sanderson: Yes, thank you. Good afternoon, and thanks for taking the question. I wanted to ask a little bit about Amazon LEO. Can you maybe help dimensionalize some of the revenue opportunity in the consumer and in the enterprise space over the next few years? What are the governors on the ramp? Could you talk about types of new services that you will be able to develop with the Globalstar infrastructure and the spectrum that maybe you could not address before or would take you—maybe you can get to more quickly now? And then, how expansive is the longer-term vision? I know you are just beginning to launch commercial services, but over the long term, do you expect to include non-communication services like orbital data centers or things like that as this becomes feasible in the decade ahead? Andrew R. Jassy: Yeah. I will try and address as many of those questions as I can. I am very bullish about Amazon LEO and the opportunity there. There are billions of people around the world who do not have access to broadband connectivity, and there are many thousands of businesses and government assets that people do not have visibility to because they do not have the right connectivity. It means those entities cannot do a lot of the things that we all take for granted today, including education online, business online, shopping or entertainment online, having constant visibility and digital twins. There are all these things that they cannot do today. We think that Amazon LEO is going to help solve that problem. When we launch our service commercially—we just had another launch this week, so we have over 250 satellites in space—when we launch that service commercially, it will be one of two offerings that are on the current technology edge, and I think that we will have meaningful advantage in performance. I think we will be about 2x better on the downlink than existing alternatives and about 6x better on the uplink performance than existing alternatives. I think we will have a cost advantage for customers. For the governments and the enterprises—and we talk to a lot of them, and we have already signed agreements with many of them even though we have not launched the service commercially, the latest of which was with Delta Air Lines committing at least half of their fleet starting in 2028—when you talk to them, another really big part of what matters to them is they are going to want to take data off of the satellite constellation, they are going to want to store it in the cloud, they are going to want to do analytics on it, and they are going to want to do AI on it. Just the combination of LEO with the leading cloud in the world in AWS is very compelling to enterprises and to government. Today, if you ask what stops us from growing the business, we have to get the constellation into space. We have over 20 launches planned this year. We have over 30 launches planned in 2027. I think the business has a chance to be a very large, many-billion-dollar revenue business, and it has some characteristics that are reminiscent of AWS in that it is capital intensive upfront, where you are committing a lot of capital and cash in the early years for assets that you get to leverage over a long period of time. I like the free cash flow and return on invested capital characteristics of that business in the medium to long term. On your question about Globalstar, increasingly what we are finding with consumers, enterprises, and governments is that they do not like to have any periods where they do not have connectivity—it just upsets whatever customer experience they are going through. Even in metropolitan areas, we all hit certain parts of the highway or certain roads where you cannot get connectivity, or you are hiking, you are skiing. Increasingly, we see very large demand for consumers to have direct-to-device, and that was really the impetus for our acquisition of Globalstar. They have unusual and scarce global spectrum that is required to provide direct-to-device. We also really like the satellite know-how that we will get as part of that merger with Globalstar, and it also afforded us the opportunity to build a deep relationship with Apple, who is going to use our direct-to-device for their iPhones and for their Watches. So very optimistic about the business. Operator: And the next question comes from the line of Shweta Khajuria with Wolfe Research. Please proceed with your question. Shweta Khajuria: Thanks a lot for taking my questions. I wonder, Andy, if you could please talk about how you are thinking about the increase in price for memory and storage and just the supply chain inflation we are seeing and the impact it could have on CapEx this year and potentially next year as well. And then on agentic commerce, if you could talk about how you view the opportunity with advertising. I have no doubt that Rufus could be the best shopping assistant available over time, but for the advertising opportunity, do you view that if agents would be the ones taking action to shop? Andrew R. Jassy: On memory and storage and the supply chain, I think everybody knows that the cost of components, particularly memory, has skyrocketed. We are in a stage where there is just not enough capacity for the amount of demand. We have worked very closely with our strategic partners. We saw this trend happening early, in the middle to latter part of last year, and we have worked with our strategic suppliers to get a significant amount of supply. We are working very closely with them. I think the team has been very scrappy. I think we have done a good job in making sure that we are not capacity constrained there, but we will watch that very closely. One of the interesting things that we see right now with the change in price and supply on things like memory is that it is a further impetus pushing companies who have on-premises infrastructure into the cloud. A meaningful part of these suppliers are prioritizing their very largest customers, which cloud providers are. We have seen a number of conversations we have been having with enterprises for many months—where it has just been slower in getting the transformation plan to move to the cloud—accelerate rapidly just because we have a lot more supply than what others have. It will be interesting to see how that evolves over time. We are doing our best to have the supply we need and keep the cost in the right spot, but we will see how that continues to evolve. On agentic commerce and how that impacts advertising, I actually believe that we are going to like this for advertising. I think it is going to be good for customers and good for our business. First, the way that our Ads team has built tools and agents themselves is making it so much easier to do advertising. If you look at small and medium-sized businesses that had to take weeks and months to do creative and to pick the right audience, all that is so much faster and so much easier because of our advertising agentic tools, and you no longer have to take as much time or spend as much money building the creative. I think there are going to be a lot more advertisers with the rise of what is happening in AI. If you look at the agentic commerce experience, these agentic experiences tend to be multi-turn conversations where you are not interacting with one search and getting an answer—you tend to find that you are asking questions, you are narrowing questions, and it is asking you questions on what you want. In that process of having multi-turns, there are multiple opportunities to surface relevant products to customers, many of which will be organic and some of which will be sponsored. It also gives rise to opportunities like sponsored prompts. One of the interesting things that has been very successful for customers in our store has been when they ask certain questions, we give them a number of suggestions that are all created through AI, and we have gotten pretty good at also having sponsored prompts in that mix of questions and prompts that make it easy for people to keep digging deeper into what they are interested in. I believe that advertising will do well in a world of agentic commerce. Operator: Thank you. And our final question comes from the line of Colin Sebastian with Baird. Please proceed with your question. Colin Sebastian: Thanks very much. Good afternoon. Maybe a two-parter, if I could. Andy, first off, just wondering what you are seeing in terms of the trend between incremental AI demand from earlier adopters and larger AWS customers versus how the demand curve is shaping up across the broader enterprise base. And then at a high level, if you think about the use of AI internally across Amazon’s businesses—presumably the business overall looks very different in three or four years—maybe, Andy, if you could contextualize where you see the most opportunity for the technology internally, both in terms of product as well as driving more operating efficiency, I think that would be helpful. Thank you. Andrew R. Jassy: Yeah. On what we see in the incremental AI demand from early adopters versus the broader enterprise base, I think it is no secret that the AI labs are spending an incredible amount of money on compute at this point, and compute both on the AI side as well as on the core side. The models that they are building and the companies that have successful generative AI applications are certainly spending a lot. There are several of those labs, but we also see quite a bit of enterprise adoption and usage of AI. As I have said before, the largest absolute place that we see enterprises having success is in projects that are around cost avoidance and productivity—things like business process automation or fraud or things of that sort. But the number of projects that we are working with across enterprises, and that we are now starting to see come to production around brand-new experiences, trying to figure out how to reinvent their current experiences using inference and AI to be smarter, is also very significant. We are seeing the adoption in both of those segments. On the use of AI internally for our current businesses, the shortest summary I could give you, Colin, is that I do not see a place in any of our businesses or any of the ways that we do work where we are not going to have giant impact from what we do. I have long had this belief that while you can add incrementally to a lot of your existing customer experiences with different agentic and AI experiences, in the fullness of time—and I do not know if that is three years from now or five years from now, or it could be sooner too—all these customer experiences we know are going to be completely reinvented. They are going to have different interfaces. They are going to have different ways that people interact with them. People are going to want to have dialogue with them. It means that if you have an existing business that is doing well, you still have to look at every single one of your customer experiences and be able to carve off resource for that team to think anew about what the future customer experience would look like if you started from scratch today and if you had all the technologies like AI available to you when you start. That is what we are doing in every single one of our experiences. I have a chance to be involved in some of those, and it is really exciting. There are experiences that may take a while for customers to get used to and to use over time. You might find different segments like those AI-forward experiences more than others early on, but if you are not actually working on inventing those right now, I think it is going to be very hard to have the business and the experience leadership that we want over a long period of time. So every single one of our consumer businesses, every single one of our businesses in general, is working on that. Internally, I also think that it is going to radically change how we work—it already is. Just look at how agentic coding is changing how we are all building products. I think it is going to have a comparable impact on how we do DevOps, how we do customer service, how we do research, how we do analytics, how sales is conducted. I think every single one of these functions that we all do at work are going to very significantly change. That is another area of real focus for us. We have this experience I mentioned in my letter. If you look at one of our services, we swapped out the engine of the service while we were also running the service full tilt. Normally, that would have taken 40 or 50 people about a year to do. We took five really smart, AI-forward-thinking people building on agentic coding tools, and those five people rebuilt it in 65 days. That is a very different world of operating. That is the world I think we are heading to over the next few years. Dave Fildes: Thanks for joining us on the call today and for your questions. A replay will be available on our Investor Relations website for at least three months. We appreciate your interest in Amazon.com, Inc. and look forward to talking with you again next quarter.
Operator: Greetings, and welcome to Lithia Motors and Driveway First Quarter 2026 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the conference over to Jardon Jaramillo, Senior Director of Finance. Thank you. You may begin. Jardon Jaramillo: Good morning. Thank you for joining us for our first quarter earnings call. With me today are Bryan DeBoer, President and CEO; Tina Miller, Senior Vice President and CFO; and Chuck Lietz, Senior Vice President of Driveway Finance Corporation. Today's discussion may include statements about future events, financial projections and expectations about the company's products, markets and growth. Such statements are forward-looking and subject to risks and uncertainties that could cause actual results to materially differ from the statements made. We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission. We urge you to carefully consider these disclosures and not to place undue reliance on forward-looking statements. We undertake no duty to update any forward-looking statements that are made as of the date of this release. Our results discussed today include reference to non-GAAP financial measures. Please refer to the text of today's press release for a reconciliation of comparable GAAP measures. We have also posted an updated investor presentation on our website, investors.lithiadriveway.com, highlighting our first quarter results. With that, I would like to turn the call over to Bryan DeBoer, President and CEO. Bryan DeBoer: Thank you, Jardon. Good morning, and welcome to our first quarter earnings call. In the first quarter, we again achieved record revenues reaching $9.3 billion and adjusted diluted EPS of $7.34 and as our leaders demonstrated the power of our differentiated and diversified model and the operational resilience that has defined our business across all cycles. Our teams executed well despite weather challenges and a dynamic macro backdrop, delivering solid revenue growth year-over-year. We also generated high-quality earnings as our aftersales business continued its steady climb. Used vehicle revenue grew nicely on a same-store basis, and Driveway Finance Corporation delivered another quarter of record originations. These results reflect the differentiated power of our ecosystem when one part of the business faces a little bit of pressure. Our omnichannel platform creates opportunities that sustain earnings and cash flow generation. Across our network, our store teams and department leaders are leaning into what they do best: winning customers, growing share and finding new ways to drive profitability through volume, pricing discipline and cost efficiency. Every incremental customer we bring into our ecosystem multiplies the opportunity ahead of us, creating more DSC originations, stronger after sales retention and a deeper waterfall of future used vehicle trade-ins. During the quarter, our same-store revenues were down 1.7% and total gross profit was down 2.3%, reflecting resilient results against a very difficult year-over-year compensate comparison to the strong first quarter of 2025. Total vehicle GPU was $3,928 essentially flat sequentially from $3,946 in the fourth quarter a positive signal heading into the seasonally stronger months ahead. Our diversified earnings mix continued to provide balance as used vehicle revenues grew 4.6% on a same-store basis. After sales growth grew 5.7% and F&I per unit held steady at $18.13. Note that all vehicle operations results will be on a same-store basis from this point forward as well. New vehicle revenue declined 7.1% on a 7.1% decline in units, which reflected the challenging comparison to the first quarter of 2025 due to tariff avoidance pull forward last March. New vehicle GPU was $2,722 or down $227 year-over-year, but down only modestly from $2,766 in the fourth quarter. Luxury brand revenue was down 10.2%, domestic down 8.7% and imports down 5.4% year-over-year. We continue to see these conditions as cyclical and our teams are focused on operational discipline as the market stabilizes. Our used retail performance continued its industry-leading trajectory with used revenue of 4.6% and unit growth up 0.6%. The used GPU was $1,680, down $115 year-over-year, but up meaningfully on a sequential basis from $1,575 in the fourth quarter. This reflects the early results of our efforts around more dynamic used vehicle pricing and finding higher demand vehicles. Our focus on this high ROI area provides a stable anchor to offset new vehicle cycles and bring more customers into our ecosystem, leading to growth in our F&I after sales and DFC business lines over time. F&I per retail unit was $1,813 essentially flat year-over-year with solid underlying product attachment and pricing. As we have shared previously, record DFC penetration in the quarter intentionally shifted a portion of our finance gross profit from F&I to our captive finance platform where it generates reoccurring higher quality and countercyclical earnings over the life of the loan. Adjusting for mix shift, our F&I performance was up nicely and continued to build momentum. Inventory levels improved during the quarter, the new vehicle day supply at 49 days, down from 54 days at the end of the fourth quarter and used inventory was at 47 days compared to 48 days last quarter. After sales continues to be highlighted with revenues up 3.8%, gross profit of 5.7%, and we saw margins expand again year-over-year to 58.7%. The Growth was consistent across key categories with customer pay gross profit up 6.5% and warranty gross profit up 5%. This stable broad-based growth demonstrates the underlying strength of our aftersales business and its ability to generate predictable, high-margin earnings through every part of the cycle. Adjusted SG&A as a percentage of gross was 71.5%. And while we historically see this metric increase in the first quarter, this year, we held essentially flat sequentially, a sign that the cost discipline is gaining traction. Our sales departments are responding to the challenge we set for them. finding ways to operate more efficiently while continuing to grow volume and serve our customers. The structural improvements we are making across our network from technology investments to vendor consolidation, to back-office automation will continue to build on a foundation for a stronger future. In the U.K., our teams delivered strong results with gross profit up 12.5% SG&A as a percentage of gross profit improving 440 basis points year-over-year. Adjusted pretax income for the quarter grew 78%, building on the momentum we saw in 2025 and as we continue to optimize our international platforms. Our digital platforms also continue to increase our reach and enhance our customer experiences, making shopping financing in service simpler and faster. Our partnership with Pinewood AI continues to support our strategic vision to transform the customer experience, and we are jointly working to bring the Pinewood AI platform to all of the North American stores. Pinewood AI will reduce complexity and place team members in the same platform as our customers increasing retention, supporting operational efficiency and reinforcing the power of our integrated ecosystem. Driveway Finance Corporation continued to scale profitably with financing operation income of $21 million for the quarter, up 71% year-over-year driven by record originations and improving loss provisions. With a steadily growing portfolio now at $5 billion, increasingly efficient securitization and clear runway for penetration growth towards our long-term 20-plus target, DSC is delivering on its promise to convert more of our vehicle sales into reoccurring countercyclical income. Now turning to capital allocation. Our philosophy remains very consistent, deploy capital where it generates the highest returns for shareholders. With our shares continuing to trade at a significant discount to our intrinsic value, we maintained our aggressive repurchase pace, retiring approximately 4% of our outstanding shares in the quarter with total repurchases of $259 million. Our strong cash generation and integrated ecosystem positions us to continue returning meaningful capital to shareholders while simultaneously growing through acquisitions when it makes sense. In the first quarter, we were disciplined and strategic in our acquisition activity, adding import and luxury franchises in attractive U.S. markets while continuing to diversify our U.K. portfolio with the addition of emerging Chinese OEM brands. This helps us establish broader relationships to capture growth as these manufacturers expand their presence internationally. Our acquisition results over the past decade have yielded high rates of return, consistently exceeding our 15% after-tax hurdle rates through consistent and disciplined underwriting, targeting purchase prices of 15% to 30% of revenue or 3 to 6x normalized EBITDA. As we look ahead, we also stay disciplined in balancing repurchases, acquisitions, organic investments and balance sheet strength with a continued bias towards repurchasing while our shares are trading at a discount. Our confidence in the path ahead is grounded in the same strategic pillars that have driven our growth as follows: lifting store-level productivity, expanding our footprint in digital reach, scaling DFC penetration, improving cost efficiencies through scale, and growing contributions from our omnichannel adjacencies. Each of these levers builds momentum. And as they compound together, they reinforce our conviction in the long-term target of $2 of EPS and for $1 billion of revenue. The work our teams are doing today lays the groundwork for durable EPS and cash flow growth in the quarters and years ahead. With that, I'll turn the call over to Tina. Tina Miller: Thank you, Brian. Our first quarter results showed sequential improvement in earnings with year-over-year comparisons, reflecting pressure from margin compression and demand pull forward in the prior year. The strength of our business model continued to generate solid free cash flow, support meaningful share repurchases enabled top line growth while maintaining balance. The design of our business and our disciplined approach provides optionality through our resilient cash engine, and the long run efficiency generated by our size and scale will continue to compound value over time. Our talented leaders drive the financial discipline and execution that allow us to return capital to shareholders while funding our growth. Adjusted SG&A as a percentage of gross profit was 71.5% for the quarter, compared to 68.2% a year ago, while year-over-year pressure reflects the impact of lower new vehicle volumes and normalizing GPUs on our sales department, we held essentially flat sequentially. Our teams continue to focus on managing costs through growing market share and gross profit, which remains our most durable levers for SG&A improvement over time. our sales departments are actively rebalancing cost structures against current volumes and gross profit conditions, tightening variable compensation, aligning staffing to drive throughput and finding new ways to operate and protecting productivity while continuing to provide exceptional customer experiences. We're making steady progress on a set of structural initiatives that will compound across the business. lifting store and back office productivity through performance management and emerging AI tools, including chatbots and customer service automation, consolidating our technology footprint and retiring legacy systems improving our vendor economics at scale and removing manual work from our back office through automation. We're already seeing early savings flow through our results and the contribution is expected to build as adoption broadens. Pinewood AI remains an important piece of this work, and we're pacing the rollout with intention so that the efficiency gains we capture are durable. Ultimately, growing market share and volume is our most powerful lever for SG&A improvement combined with our unique ecosystem, every incremental customer compounds profitability across our adjacencies and as vehicle margins stabilize, that volume flows through to meaningful operating leverage. Moving on to financing operations. Driveway Finance Corp delivered another quarter of high-quality growth with financing operations income growing 71%, as Brian mentioned. We originated a record $840 million of loans and increased net interest margin to 4.8%, up 20 basis points. North American penetration reached 18% for the quarter, also another record. Credit performance continues to be exceptional, with an annualized provision rate of 3% and average origination FICO score of 750 and 95% LTV in the first quarter. Our unique position at the top of the demand funnel creates a fundamental advantage in credit selection, minimizing credit risk. This quarter, our portfolio reached $5 billion, powered by record originations and increasingly efficient securitization. As we continue to build toward our 20-plus percent penetration target, we anticipate steadily improving margins supported by efficient capital structures. DFC is delivering on its potential empowering the profitability of our unique ecosystem. Next, I'll discuss the strength of our cash flow and balance sheet. We reported adjusted EBITDA of $374.6 million in the first quarter, a 9% decrease year-over-year, primarily driven by lower net income. Adjusted cash flow from operations, a representation of free cash flow was $381 million for the quarter after adjusting for a onetime $1.1 billion benefit related to our conversion to a VIN-specific used vehicle floor plan line. This cash flow paired with our strong balance sheet allowed us to opportunistically deploy capital to share repurchases while completing strategic acquisitions of new stores in key markets and brands. We remain committed to share repurchases, and our regenerative cash engine positions us to continue flexible deployment of capital to maximize shareholder return. This quarter, we continued our commitment to focus on share buybacks while shares trade significantly below intrinsic value, and we allocated nearly $300 million to share repurchases and buying back 4% of outstanding shares at an average price of $275. As we move through 2026, our capital allocation philosophy remains disciplined and opportunistic. With a strong balance sheet, regenerative free cash flows and ample liquidity available, we will continue allocating capital to repurchases while relative valuations are attractive and investing in accretive acquisitions at the right price. This flexible deployment allows us to compound returns for shareholders through buybacks while enhancing our network through strategic acquisitions that strengthen our competitive position and diversify our brand portfolio. The investments we have made over the past 5 years in our platform, our network and our people are now positioned to deliver increasing returns. As vehicle margins stabilize and our structural cost initiatives gain traction, the earnings leverage inherent in our model will increasingly flow to the bottom line. Our diversified omnichannel platform and disciplined share repurchases at attractive valuations are compounding together to build a stronger, more predictable earnings base that translates into durable free cash flow growth and long-term value creation for shareholders. This concludes our prepared remarks. With that, I'll turn the call over to the operator for questions. Operator? Operator: [Operator Instructions] Our first questions come from the line of Michael Ward with Citi Research. Michael Ward: Good morning, everyone. I wonder, Bryan, in the past, you would talk about how some of your acquired stores, the SG&A costs were higher on a relative basis to the more mature stores. Can you give any update on where that is? And then the reason why I ask is, if I'm doing the math right, every 100 basis point improvement in SG&A is about $2 a share. And it seems to me that we have 5, 6, 7 points of improvement that could get there getting the acquired stores in line with historical? And then also what Tina was talking about with Pinewood and some of the benefits you have. Am I on the right track? Is that the way you're looking at it? Bryan DeBoer: You are, Mike. This is Brian. I think in that calculation, I think it's about $31 million, $32 million per dollar. So we are getting some pretty good traction on cost management. little different than last quarter, which is quite nice. It took us a little while to get everyone's attention. But our sales departments are starting to understand a little better that there's -- that they need to reinvent themselves in terms of what the org design is in those departments where we've got 4 layers in many of those departments, and we think we can run with 2. And I think a lot of our sales leaders are trying to figure out how to do that and combine jobs or oversee multiple departments or do things remotely. There's all kinds of fun actions that are happening. And I think that overlays the idea of acquired stores. I mean we have added over $27 billion in revenues over the last 6 years. So there's a lot of opportunity of people that maybe have never sold value auto cars in the past. They've never really thought about doing more with less, and now they're really starting to hit their stride. Michael Ward: And Tina, you mentioned the rollout of some of the Pinewood technology. Do you have any -- can you give any data points on like what you're looking at from a timing standpoint and one that could be across all stores. In addition, when that's completed, does it make that integration faster when you make acquisitions? Tina Miller: Yes, Mike, it's a great question. This is Tina. From Pinewood, I think right now, what we're tracking toward is piloting a couple of the stores on that DMS system here in the U.S. later this year. So it would be towards the end of this year is what that pilot is looking toward making great progress on that with the Pinewood team and the technology, which we see it as an easier experience for employees, puts customers in a similar to streamlined experience for -- with that technology there. We also are piloting and trying some of the AI technology that Pinewood has, both in the U.S. and the U.K. So I think good progress there in the U.K., obviously, with Pinewood out their DMS system, there's good strong progress as they work through that, and we're piloting here in the U.S. as well. So excited to see that great partnership with the Pinewood team as we continue to iterate through how that can make our processes simpler and faster and better experiences for the customers and employees. Bryan DeBoer: Mike, maybe just to add on a little bit. In terms of integrating a store, I don't know that it would help integrate a store faster during a purchase. What it's mainly intended to do is put the customers and our team members into the same environment to help with productivity. And I mentioned those 3 or 4 things in redesigning sales departments, service departments and so on. Those are the things we're doing today. So this is an adjunct to that, that as that AI starts to help be a genetic and help make that process simpler and more unified between the customer and our team members. That's what we're really looking for. That's why we invested in Pinewood AI, and it's a big part of our future and being able to drive down that SG&A cost. Operator: Our next questions come from the line of Ryan Sigdahl with Craig Hallum. Ryan Sigdahl: I want to say on SG&A. -- there were some weather challenges from an industry just across the board earlier in the quarter. One of your peers yesterday said that quantified that the exit rate or trajectory on SG&A to gross profit was much improved at the end of the quarter. Curious if you guys saw that or if you're willing to comment kind of month by month what that looked like? And then any guidepost you're willing to put on SG&A to gross profit ratio for the year? Bryan DeBoer: Ryan, I think that's a fair statement that we saw a softer January we hit forecast in February or we're real close to it in North America. The U.K. exceeded forecast. And in March, the U.K. exceeded forecast and so did the United States. Ryan Sigdahl: Willing to put any guidepost around the year or what SG&A to gross profit will be? Bryan DeBoer: I would probably say this more, Ryan, that I think our teams got the attention. They're responsive, they're dynamic, and they've got they've got the con and they can make the decisions as they see what happens in the market. There is a large variability across manufacturers and across geographic areas of the country that I think is important for them to respond to. Let alone the U.K., we're seeing some nice movement because we're able to actually add franchises and partnerships in stores and dual franchises, much different than what the U.K. or Canada is, and we're doing that with Chinese brands, which is helping in the mainstream revenue lines in some ways. So we're real pleased with what's happening. And I think SG&A, we're going to continue to drive towards that mid- to high 50 percentile range in the long term. Ryan Sigdahl: Then just on DFC, your penetration rate is near kind of your long-term target. Curious, as you think about the longer term, I mean, some of your peers are on orders of magnitude higher than where you guys are targeting? Any reason why that can't go higher than the 20% and any reconsideration there? Charles Lietz: Ryan, great question. This is Chuck. So yes, we were very pleased that we hit 18% for the quarter. And I do think that's getting us close to our 20%-plus target. But I think really, it kind of goes back from a forward-looking perspective to Lithia Driveway just leaning more into used cars. And we really see a lot of opportunity to grow used cars. That really plays in well to DFC's value proposition because historically, and I think going forward, we do better in used car penetration rate than new. And I think new is probably the area that holds us back versus some of the peers that you're probably referencing us. But we definitely see positive upside to the 20% plus that we're targeting. Operator: Our next questions come from the line of Rajat Gupta with JPMorgan. Rajat Gupta: Just a couple on moved in parts and service. In the past, you've typically given more weightage to growing the volumes in that business. It seems like there were some reprioritization that happened in the first quarter given the performance on GPUs. I'm just curious, was there any change in how you're approaching profitability there? Or was it just like a supply issue that led to the flattish volume number in the first quarter? And just how should we think about used car growth versus GPUs for the remainder of the year? Bryan DeBoer: Rajat, this is Bryan. I think this is our -- the secret sauce of Lithia. I mean, we hit 1.25% used to new ratio, which is the first time in a long darn time that we were able to do that. And it's coming off the back of a marketplace to some extent, it's a little tighter than it typically is. But values are still strong. And I think as we think about how do we drive performance in used cars, it's getting that $26 billion to $27 billion of revenue that had never really sold value auto cars 3 years ago, 4 years ago to understand that, that is where the profits are in the business. And that ability to procure those through trade-ins or through other or other sources is quite important. If you look sequentially quarter-over-quarter, including F&I, our used cars moved from $2,830 in Q4 and to $3,309. It was up $470. And I would attribute most of that to some repricing efforts on 2 key areas, and I may have spoke about that on the last call. It's primarily the value auto cars, okay? And then secondarily, it's vehicles that are low mileage for their model or their vintage, okay? And those 2 areas where we're getting some pretty good traction fairly quickly. Also, remember that in our ecosystem, a lot of stores price things because that's what they can sell it for, okay? But in our ecosystem, because we have Driveway and Green Cars marketplaces, it reaches out beyond the 30 to 50-mile range that a typical stores reach can achieve. And we're now reaching 500 to 1,000, 2,000 across the entire country. So when stores are a little gun-shy because they don't have the ability to sell that car at that price, when you start to expand the ecosystem, you all of a sudden are able to expand your pricing model. And I think that's where I attribute a lot of that increase sequentially. Rajat Gupta: Understood. That's helpful color. And just on parts and service, second quarter a pretty good profit growth. despite some of the weather challenges you might have seen. Any way to just double click on that and give us a little more detail into what's driving that? I know maybe U.K. maybe had a bit of an FX benefit, but maybe if you want to break up U.S. versus U.K. as well, that would be helpful. And just any more detail within those regions and what's driving the growth? Bryan DeBoer: Yes. Our growth globally, the U.K. is slightly better than North America. But North America is starting to gain traction. What we're finding again when we think about the customer experience and taking out layers and making it simpler, more transparent and more empowered by the customer, just creates better experiences. And I think when we think about going to market, it is about those frontline people making a difference each and every day to create memorable experiences. And that happens through lots of different options, okay? And those options create what we would call individualized experiences for each customer, where one customer may want to sit on their accounts or they may want us to pick up their car from work and another might like to enjoy sitting in our living room and seeing the new product and so on and so on. So it's really giving our people the flexibility to think on their feet, okay? And then the ability to execute lots of different ways to create a more appealing experience and a more memorable experience so they continue to come back month after month during their ownership life cycle. Operator: Our next questions come from the line of Alex Perry with Bank of America. Unknown Analyst: I guess first, I just wanted to ask a little bit more about your outlook for the U.K. It seems like performance there is improving. Can you talk about what specifically is driving that? And if you would expect that to continue? Bryan DeBoer: Sure, Alex. Brian again. I think we've got an exceptional group of leaders and an acceptable group of operators that over the last 2 years, we've been able to purge and then modify the network to adjust to the consumer demands in the United Kingdom, and that includes adding Chinese brands, eliminating some other brands, finding some underperforming stores and getting rid of those. But most importantly, this is coming from the United Kingdom and Neil, Richard and our vice presidents that are there, and their teams underneath them. They are very good at structurally putting in plans and then executing to that plan. It's a real refreshing thing to be able to know that halfway through the month that they're going to hit forecast or they're going to be above forecast, a million or two, whatever it is, they're very definitive and they're very intentional in their actions, okay? We're really hoping that the example that they said as we start to roll out Pinewood AI into the United States and into Canada, what they're seeing over the last 2 years by being on Pinewood AI is an experience where their customers and their team members are sitting in the same environment. In fact, many of the stores now have moved their service drives from the back of the dealership or back a house to write on the showroom floor where they're actually meeting and greeting customers, and some of those are even multiple tasks, meaning they may deal with sales, they may deal with service, they may deal with accessories or whatever else it may be, where they're truly thinking about a one-touch type of experience. And then this is all wrapped around the idea of the Pinewood AI is now starting to give them the ability to manage their expenses in an incremental way downward, okay? And I think, if I remember right, it was 447,000 hours that our CFO, there Richard had defined that service loans, AI will be able for them to capture that money within the next 4 quarters or so. So they're making pretty good progress on that, and we're pretty excited because that is the seeds to what's going to happen in North America, and we're really proud of their leadership over there. Unknown Analyst: That's incredibly helpful. And then just my follow-up question, I just wanted to ask if you had seen any impact from the current sort of geopolitical environment. any slowdown on the new vehicle side as you sort of look through April? Any change in mix seemed like you hit some of your targets through March, so that would sort of indicate that you haven't been seeing anything, but I just wanted to ask about that. Bryan DeBoer: Yes. I think it appears that the quarter ended up strong. We feel pretty good about the start of Q2. I think that the geopolitical climate has been balanced with some higher tax returns. I mean, I really feel like it doesn't feel quite as good as March was in the United States. But I also know that if the war can come down and if tariffs can gain some clarity, and it's a matter of things can fall in the line that we can through this and hopefully have a decent second half of the year. So it's a little bit of a mix of things, but we're sure pleased with where the market's at, despite it only being a 15 8 SAAR as an industry. We really believe that when affordability can get a grip on things and start to trend back down a little bit, then we should be able to start trickling up again towards that 17 million units a year number. Operator: Our next questions come from the line of Jeff Lick with Stephens. Jeffrey Lick: Congrats on a great quarter guys. Brian, I was wondering if we could dig into the used a little more DPU at $1,700-ish. First of all, could you remind us what percent you guys self-source versus any sourcing from auctions? And then I was just wondering, Bryan, if you could just kind of pontificate a little bit as we get into these lease returns and we'll probably have a little bit more of a higher level of supply in the summer that change the dynamic one way or another for you? I'm assuming it does. I'm just curious how that will change the dynamic for you guys and the... Bryan DeBoer: Good insights, Jeff. Our customer-sourced vehicles our 2,483 a unit. And remember, without F&I, the numbers I gave previously were with F&I, okay? Our 24 83 on our customer acquired units, okay? The units that are acquired outside from the -- not from the customers like auction are around $700 to $800. So it's a big delta between those. At one time, you remember, we were $1,000 to $1,100 a difference. Now the difference is $1,500, okay? So it's hyper important of our ability to continue to acquire cars from trade-in. And I think if you look at where we are, this is a big opportunity for Lithia. I mean, we acquired less cars year-over-year by about 3% from our customers. okay? But we also still drove up our margins. So that, I believe, is more of a pricing function than a cost function, okay? But I believe that we can attack both if we're properly valuing cars that are coming in off-trade in, making sure that any online pricing through Driveway or others, are met and matched to be able to ensure that those customers are creating a 2-part buying process, meaning they're giving us their trade and they're buying a car from us. So we're pretty pleased with what's happening there. In terms of the off-lease vehicles, we do see a little bit of a bulge there. We're actually -- it's surprising when we try to push used cars and we talk value auto. Some stores get it. Others just go buy more lease vehicles. So off-lease vehicles and -- to be fair, that's okay, too. We were actually at 22% of our volume was from -- I may have that off. I'm sorry, 40% of our volume was CPO last quarter, okay? So that was a pretty big amount, okay? And I think that could be indicative that we've got lots of stores. That's natural, okay? I mean that's part of our staple diet in our business that you just automatically sell those CPO cars. So I think with more cars available, it will help us definitely. We just want to make sure that our teams are still focused on their core product between 4 and 8 years and most importantly, make sure they've got the affordable cars of $15,000 average price or so in our value auto cars. Jeffrey Lick: And then just a quick follow-up. You had talked on the last call about some of the used car managers maybe being a little quick to break price and maybe not the greatest buyers. And so you kind of thought, hey, there was some room there on the spread at that $1,700. I'm just curious where you're at there and where you think you might be able to get that because previous presentation last year as potential of 1,800 to 2,100 [indiscernible] Bryan DeBoer: Jeff, we're not -- we're going to be -- we want you to be conservative here in this response, but these numbers will probably shock a lot of people on the call, okay? Our price to market, okay? The price that we sell our vehicles for through both driveway because our stores price cars on Driveway and our stores is approximately 95% of what the 1 price used car retailers are selling the same Carrefour. That's an apples-to-apples comparison. If you then figure that your average price is somewhere between $25,000 and $30,000, you're talking about $1,250 that could come just from the pricing equation. Why can't that happen overnight, okay? The reason is, is because most of our cars are still sold within 20 to 30 miles of the footprint of those cars. So the more that we can create visibility, you get more eyeballs on cars and to higher-demand cars, then will command the price that are needed, okay? Where we do pretty good and we sell cars about for market is certified, okay? That's where we sell cars for market. What we don't do is when it's the value auto car or it's a car that's less than its miles for its age. That's where we lose approximately 8% to 9% on pricing. And that makes up that entire 5%, okay? So that's our focus, is how do you convince your stores to look past the transaction that isn't getting them to market pricing on the deal. And that is some underpricing or dropping your pricing too quickly. But most of the time, it's under pricing. It's they don't price the car right at the start. Why? They're salespeople, their service departments and their sales managers are convinced that, that car can't sell for that price. And they don't let it season long enough to be able to do that. I believe, and I think our team believes velocity can hurt your gross profit in used cars. Velocity can hurt your gross profit in used cars. Okay, your ideal time to sell in used cars is between 15 and 40 days, okay? And if you sell it before that, you probably sold it for too little, okay? So it's a function of both eyeballs, belief, end market pricing to be able to get that $1,200 approximate dollars that we know is sitting out there. Operator: Our next questions come from the line of John Saager with Evercore. John Saager: I wanted to discuss the rollout of Prime rod. So you're expecting to complete that by the end of -- can you discuss the impact that will have on expenses during the course of the rollout. I would expect that there would be some headwinds that you counter along the way as you're working through the process. Is there any way you could quantify those headwinds for us? Bryan DeBoer: Sure, John. We're basically doing a rollout by manufacturers. And what we saw in the United Kingdom, and this is data that's, what, 3/4 to 5 quarters old. It took us about 2 quarters to complete the rollout on 150 businesses in the United Kingdom. It went extremely smoothly. We did not see additional costs in that rollout. It's truly a 2- to 3-week prep process and a 2- to 3-week climatization process where they get used to that work. We're also going to be preempting in the sales department, a CRM product. So they'll get used to the CRM product way before the Pinewood full DMS comes in and about 1/3 of our stores are already on that product in North America. So we're very cognitive of that. There was a cost last quarter, if you remember, in CDK that we ended up buying out that contract. So that's been front loaded and is behind us. But beyond, once you get through the integration point, which is truly a 2-month period, okay, the true cost of Pinewood is lower and most importantly, the true benefit of Pinewood is it allows you to do things and have our -- the IT solutions because it puts the customer and the team member into the same environment, there's not redundancies, okay? And today, with multiple vendors, with CDK having all these attached vendors, there's massive amounts of redundancy. Those redundancies can come out almost immediately. Hopefully, that helps, John. A follow-up on that? John Saager: Yes. That makes sense. Actually, the timing of that is fast. But the it is going to take a long time to get there until 2028. And so I wanted to ask about like how does that impact the timing of the path to your medium-term targets. So to get SG&A as a percent of gross down to that 60% to 65% range. What are the primary initiatives or drivers are using to get there? Is there like a revenue per employee number that you have in mind? Or is there some other way of tracking that progress? And do you need Pinewood to be fully rolled out before you... Bryan DeBoer: No we don't. No, we don't. I mean Pinewood is going to help us take it from mid-60s to mid-50s, okay? And I think that's how we think about it. So in the interim -- the single biggest thing that can help us get there is a marketplace that has stable GPUs and is a 17 million SAAR because we gain leverage as we gain volume, okay? Alongside that, what can we focus on, we focus on what we can control. And we basically built a 4-legged stool that's wrapped around a couple of things. First and foremost, we call it the everyday plan. It came off the back of the 60-day plan a couple of years ago. That's vendor management, that's compensation management. And that's typical productivity and efficiency metrics that our people are pretty good at, okay? And they're pretty savvy at. The other 3 items are what I mentioned briefly. It's job combinations. It's re-architecting the sales departments and the service departments to remove layers and combine jobs, okay? It's managers and leadership overseeing multiple departments in multiple stores, which we've moved that quite nicely. We're up to almost 2.5 stores per office manager and about 1.4 stores for a general manager, big moves there. And lastly, and not least, is this idea of remote F&I or remote desking or possibly even remote service advisers, okay? Meaning when you're maybe a half a person short, you don't add a full person. And that makes massive -- and that's probably the easiest example, but that's our push each and every day in our organization over the last few quarters. John Saager: If I could maybe push back just a little bit on that. You've had relatively stable GPUs for the last 2 or 3 quarters now. And the long-term trend on SAAR is around $16 million, not $17 million. So is it realistic to sustainably have SG&A as a percent of GP below 60%, given those long-term trends? Bryan DeBoer: Yes, John, we -- our GPU decrease each of the last 4 quarters has been around $150 to $200 a unit. So -- and that on a base of 100,000, 150,000 units, it's a big number, okay? And that's something that we have to manage. So that is something. I do believe that the volumes, for some reason, each and every quarter, there's something that's semi-soft and again, this quarter, you're seeing it with the 3 people that have reported so far. We had 1 person that was double-digit declines in new vehicle sales, and that all has implications on your SG&A costs. So I really believe that a 17 million SAAR is out there. It may not be coming off the back of tariffs and in a war, but I hope things can settle down because I think there's a world where that can happen, okay? If it doesn't, we're still managing on those 4 legs of our stool and we'll continue to drive down costs. And I think in the quarter, it appears that we're right in step in stride in terms of year-over-year SG&A, and should be able to exacerbate that, relative to our peers. The other thing to remember is we also have the tailwind of [ D&C. ] And that's on track to hit somewhere around $100 million in profitability on its way to $0.5 billion profitability. So that's not in SG&A, okay? So let's not focus as much on SG&A because we are an industry that has costs, but that also gives us the opportunity to drive them down. And I think as an organization, we typically -- if you equalize for the companies that have the United business, U.K. business, we're typically either second or third lowest in terms of SG&A cost as a company, okay? Important to remember. Operator: Our next questions come from the line of Chris Bottiglieri with BNP Paribas. Christopher Bottiglieri: The first one is, can you elaborate on the $20 million contract buyout. Is that a DMS or what does that implicate for future cost savings? Tina Miller: Yes. It's just the planned vendor termination here with part of it, there was a buyout of the contract. Christopher Bottiglieri: Okay. And then wanted to ask, you mentioned the importance of marketplace to get in your targeted GP stability. Just hoping to get an update on Driveway. And then it seems that you made a change to the Chief Technology Officer earlier in the quarter. Just kind of curious if you can give some update on the road map for technology and like what are some of the initiatives that have to be done? What's gone right? What's gone wrong? Just an overall update on all that would be helpful. Bryan DeBoer: You bet, Chris. This is Bryan again. It's neat that the management team really wanted because the ecosystem is so integrated, they wanted to take IT themselves. The after sales team wanted to integrate that. The sales teams wanted to integrate everything across the DFC driveway and green cars. So they were the ones that basically built structure to allow George to be able to go on to bigger and better things, which is exciting. George is a class act and we'll end up in a good space, doing coding and other things that he is amazing at. But as an organization, we just felt it was an impediment, having it as an independent department and then it needed to be integrated into operations. Fundamentally to be able to respond quicker and to be able to capture that marketplace. So Driveway as a whole, it was up 8% in volume across its platform, which was a nice number. And more importantly than that, we've started to gain some traction in new vehicles. New vehicles was up almost 500% in Driveway business. So a big number there. It's still there. I don't know that we dedicate enough resources to it, but we also believe that there will be a time in place where that marketplace disconnects again because we think the market -- e-commerce market is being pushed somewhat fictitiously in regards to one of the competitors out there. And once their financing changes, it should change and possibly open us an opportunity to turn the accelerator back on and driveway. So real successful. We're still sitting at of all customers that come into Driveway are still new to the ecosystem entirely. So pretty cool to be able to have that still out there. Operator: Our next questions come from the line of John Babcock with Barclays. John Babcock: I guess just first on the M&A market. Could you talk about how that looks right now? And then as a tag on to that, you obviously have typically divested a couple of stores each year and I just want to get a sense, recognizing future acquisitions may add to that. How much of your footprint do you think you still have to turn over. So in other words, maybe it's underperforming or for some other reason, you want to divest it. So any color you could provide on that would be useful. Bryan DeBoer: Great, John. As you can tell, we've been -- we've always remained disciplined on acquisitions. We typically pay somewhere between 10% and 30% of revenues and there's deals including 1 large deal out there that's sold for 120% of revenue. We don't see how those returns can make sense. And obviously, with our stock price at where we're at, that's what we reinforce. In terms of what have we done and what does our network look like in terms of cleanliness, we've done almost $500 million so far in revenue this year. That's net of divestitures. We've got, let's see, 1, 2. We've got 3 stores under contract and 2 stores that are close to being LOI and outside of that, I've got one more store that we would consider not part of our network strategy and will be divested. Those are all in North America. The United Kingdom is fully clean. They're really now iterating on which brands are best to put into their facilities. And outside of that, we shouldn't have many other problems other than there's an occasional time where someone offers us some stupid amount of money in the stores always kind of performed mediocre. In those times, we do redeploy the capital into buybacks or to finding other acquisitions that are more attractive pricing wise. Our focus again is in the -- or the Southeast and the South Central, okay? And again, that is where stores are a little bit pricier okay? We have been able to find some pretty nice acquisitions at appropriate pricing, but the market is still quite frothy. John Babcock: Okay. And now just shifting gears to parts and service. Could you break down your growth this last quarter across customer pay and warranty? Bryan DeBoer: Our gross mix? Are you looking for mix? John Babcock: So growth in revenue. Bryan DeBoer: Growth. I think it was 7% on customer paying 5% on warranty. They were virtually -- they were real close. Tina Miller: Yes, they were really close. Those are gross profit numbers that he's quoting in terms of the growth, but they were both pretty close to each other. Bryan DeBoer: And revenue was 5 and 4 million customer and warranty, okay? Operator: Our next questions come from the line of Bret Jordan with Jefferies. Bret Jordan: Could you talk about the impact of negative equity, I guess, on recent volumes. It's obviously getting some press. But is the conversion being impacted as customers come in and realize that their car is going to require a check as opposed to generating a return on the trade. Bryan DeBoer: Yes. Great question, Bret. It's funny. That was what we were discussing prior to the call. So negative equity has climbed a little bit. It started to subside, which is nice to see. But remember, this is the advantage of being as far up funnel as you possibly can be as a retailer. As a new car retailer and is a certified used car retailers, those are the cars that have the most margin which means the most incentives, right, which allows us to absorb the disequity in their future financing of their new vehicle, okay? So that's really why you want to be up funnel is to be able to transfer disequity so then someone doesn't have to write a check. Now most customers still are writing a check. It's around $2,000 is the true amount that they write a check for. but this is where our stores and the traditional network of automotive retail is pretty darn good, okay? Our average disequity that we're focused on in the stores is $2,000 higher than what our AI and Driveway technology approves in the e-commerce platform of driveway.com. So that $2,000 is the benefit of what we get or having some level of negotiation and experts in our stores that are financing cars each and every day. So really, though, does it impact our business? It impacts affordability I think it's important to remember that our manufacturers still don't have tons of incentives out there. I think we're averaging just under $4,000 a unit, okay? At one time, it was as high as $6, 000 or $7,000. So that's a big number that then can be applied to this equity and allow customers to have a little less down payment and still be able to finance their vehicles. Now anything I talk about is equity don't apply that directly to our DFC explanations, because we have extremely disciplined strategies on that. We only have about a 96% check, 96% LTV on our DFC loans, and we're way over 100 as a company as a whole -- way over 100. So we're financing everything we can, but most of that is going to our captive partners, our manufacturer captives or other bank relationships. Hopefully, that helps, Bret. Bret Jordan: Yes. And just real quick on the geopolitical impact in the U.K. I think you sort of talked about the U.S., but -- and maybe it requires sort of looking into April. But given the spike in energy costs over there, you sounded like U.K. beat expectations in the first quarter, but was there any deterioration of the consumer standpoint as the quarter has progressed? Bryan DeBoer: No. What we've actually found and I would say that Neil and the team have done a nice job. The U.K. is built differently. It basically is built off March and September and those months are massive. What they've done a nice job is diversification. They now sell used cars at different times. Those places don't get reregistered, even though you get spikes in those 2 months in use. They're trying to sell those at all times, which is a good thing. Also in their after sales business, that somehow gets spikes. So now they're starting to balance their portfolio we're pretty confident on where the U.K. looks short term, okay? They're able to see out a good 60 to 90 days because 80% of their business is orders. Okay. So they're feeling pretty good about Q2. I got off the phone with Neil yesterday and then the rest of the team the day before. So all things are looking pretty good there and our ability to adjust franchises to be fair, within a 90-day period, 69-day period and do it at about a $50,000 entry price, basically signage for these brands in the store, it's pretty easy to be able to balance your volumes on the new car side and still maintain your units and operations with some dual brand on the aftersales side. So hopefully, that gives you a little bit of color, Bret. Operator: Our next questions come from the line of Daniela Haigian with Morgan Stanley. Daniela Haigian: Just one quick one. We've covered a lot of the core businesses here, but more strategically thinking about the influx of Chinese EVs taking share in Europe. How are the unit economics at your BI stores relative to your other OEM stores in the U.K.? And what are your views on Chinese OEMs coming to the U.S. either directly or indirectly? Bryan DeBoer: Great, Daniela. I think it's critical that everyone hears this, okay. Our relationships with the Chinese manufacturers are growing in the United Kingdom, and we cherish those relationships. However, we need to not apply the economics that are happening in Western Europe over Canada or the United States, okay? And here's the reason why. You heard me talk about this idea the Chinese manufacturers are coming into the United Kingdom. They now have about 12% market share, okay? It's not happening from EVs. It's happening from ICE engines and hybrid engines. The EVs that were brought in by BYD and MG, 2.5, 3 years ago, they virtually sold no cars. It was less than 0.5% market share. It wasn't until about a year ago that they started to bring in plug-ins and hybrids and ICE engines until they gain market share, okay? And that's because of affordability.So important to remember that. Remember this also, in Canada, they've now decided that they're going to bring 50,000 vehicles into Canada as well. That authorization by the federal government is authorized for all electrified vehicles, not just BEVs, okay? So remember that as well. In those areas, they do have the ability to take some market share if pricing allows it and if tariffs keep that in an advantageous spot. Here's the problem. The Chinese manufacturers in Canada, which is the most likely scenario of how they're going to look at things in the United States have decided to use a dealer network in Canada. They've also decided that the network is going to be fairly lean initially, and that it's going to be exclusive stores. Hear that, exclusive stores, okay? In the United Kingdom, our Chinese brands, 14 out of 15 are not exclusive, okay? They're sitting on the same showroom with Ford stores and [ Stellantis ] stores and Renault stores that have a unit in operation base, in after sales that allows those stores to have incremental gross profit that helps the stores profitably. If we were to have to have opened stores independently, even in the United Kingdom, those stores would not be profitable. Why? Because 60% of our profits come from after sales. And there is no units and operations built for the next 5 to 10 years, okay? So when you think about Canada or the United States, you've got to think about the dealer network and how is it going to be designed. Also remember that in Canada, real estate is -expensive. We may have some facilities that have some vacancy and it may make sense to create some partnerships in Canada. We may have the same thing in the United States. We'll have to see what their strategies are. But if we're talking about 50% to 100% tariffs in Canada, the price advantage on like-for-like cars in the United Kingdom is somewhere around 7% to 8%, okay? And on the BEV, there is 0 price advantage at this stage in the United Kingdom, okay? So I don't -- it's difficult to overlay. And I think that for us, it was easy to be a pioneer in the United Kingdom. But being a pioneer in the United States or in Canada, when you're opening an exclusive facility and that facility could cost up $10 million or $15 million, pioneers are probably going to get shot and the settlers are going to be the ones that get rich, and we may take a little bit of a wait-and-see approach on that. Hopefully, that helps. Oh, you asked about margins as well. The margins on those vehicles are very similar to our mainstream margins in the United Kingdom. Operator: We'll now turn to our final questions from the line of Mark Jordan with Goldman Sachs. Mark Jordan: I'll just do one quick one on used retail. Looking through the slide deck here, it looks like the average selling prices for core and value auto has increased nicely both year-over-year and quarter-over-quarter. But prices for CPO vehicles decline. Can you talk about what drove the decline there? Maybe was it a mix or something else that drove that? Bryan DeBoer: Sure, Mark. I actually think it's what one of the other analysts had asked about, which is the availability of those cars is becoming easier, especially remember, those vehicles were driven off of 13 million, 14 million SAAR during COVID. So we're starting to get some units back into operation and availability of those. So we're excited to see that happen. The other thing that can drive ASPs on certified vehicles is incentives, okay? So I think when you start to see incentives come up, that drive to late-model vehicles, down accordingly. Operator: We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Bryan DeBoer for closing comments. Bryan DeBoer: Thanks for your questions today. Thanks for joining us, and we look forward to seeing you on our Lithia Driveway second quarter call in July. Bye-bye, everyone. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines at this time, and enjoy the rest of your day.
Operator: Hello, everyone. Thank you for joining us and welcome to Lemonade's Q1 2026 earnings call. Operator Instructions] I will now hand the conference over to Lemonade to begin the call. Please go ahead. Unknown Executive: Good morning, and welcome to Lemonade's First Quarter 2026 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; Tim Bitsy, Chief Financial Officer; and Nick Stead, SVP Finance. A letter to shareholders covering the company's first quarter 2026 financial results is available on our Investor Relations website at lemonade.com/investor. I would like to remind you that management's remarks made on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent Form 10-K filed with the SEC and our more recent filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We will be referring to certain non-GAAP financial measures on today's call, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key performance indicators, including number of customers, in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex cat, trailing 12-month loss ratio and net loss ratio and a definition of each metric, why each is useful to investors and how we use each to monitor and manage our business. With that, I'll turn the call over to Daniel for some opening remarks. Daniel Schreiber: Good morning, and thanks for joining us to review Lemonade's results for Q1 '26. This was another excellent quarter, marked by continued acceleration in growth, strong underwriting performance and clear operating leverage across the business. In the first quarter, in-force premium reached $1.33 billion, growing 32% year-over-year. This extends our streak of accelerating growth to 10 consecutive quarters. Revenue grew even faster, up 71%, boosted by a recent reinsurance transition and the result in higher premium retention. Underwriting performance continues to be very strong, and it is the combination of accelerating growth and strong underwriting results that led to 159% growth in our gross profit. We also saw solid cash flow from operations, generating $17 million in adjusted free cash flow, a $48 million improvement year-over-year. On the bottom line, adjusted EBITDA loss narrowed 64% year-over-year, reflecting continued progress towards profitability, and we reiterate our long-standing expectation that Q4 this year will be EBITDA positive as will the full year of 2027. We often note 2 specific drivers that power our financial performance, grow the business and scale the operation. I'll share a couple of comments on each of those. As it relates to growth acceleration, strength in marketing efficiency has been a consistent tailwind for us. Conventional wisdom suggests that increased growth spend comes at the expense of efficiency, yet we continue to see the opposite. Since Q1 2023, we've grown our spend by roughly 200% while maintaining an LTV to CAC ratio of above 3. This is enabled by our proprietary LTV AI that dynamically allocates capital to maximize returns and is supported by the diversity of channels, products and geographies, which we enjoy. At the same time, increased bundling activity is boosting customer lifetime value, which enables us to scale growth investments while preserving strong unit economics. The second notable driver of our performance is leverage across our expense base. In the first quarter, we surpassed $1 million of IFP per employee, representing a nearly 3x improvement over the past 4 years. This progress reflects the growing impact of our AI and automation tools, which are enabling us to scale efficiently. The impact of 10 years of investment in AI infused into our single proprietary and vertically integrated system is now visible throughout our business and on pretty much every line of our P&L. Against that backdrop, we expect recent trends to continue and are raising our full year guidance for both top and bottom lines and looking forward to continuing to deliver increased growth and increased profitability throughout 2026 and beyond. With that, let me hand over to Shai. Shai? Shai Wininger: Thanks, Daniel. I'm going to spend a few minutes discussing PE, which is now our largest line of business and recently reached a notable milestone, $500 million of IFP, becoming the first product in our portfolio to reach that milestone. In less than 6 years from launch, we become the most searched pet insurance brand in the U.S. and the fourth largest carrier, competing against incumbents with decades of operating history. As it relates to growth, a couple of drivers to highlight. We have a notable cross-sell advantage versus many pet insurers with over 3 million customers to whom we can sell directly CAC free. In fact, 85 million of current pet IFP was sourced from our existing customer base. We also benefit from high conversion rates due to delightful AI-powered customer experiences. Lastly, our distribution strategy is diversified across direct-to-consumer channels and partnerships, which has allowed us to scale spend quickly without reliance on any one channel. At the same time, we have a structural expense advantage versus peers. Our AI-powered automation engine enables excellent expense efficiency when it comes to claims management. Unlike many of our other lines of business, Pet is a high-frequency, low-severity product, which means that a vast majority of customer claims are excellent candidates for our end-to-end automation. With that, I will lead off to Tim, who will cover our financial performance and outlook. Tim? Timothy Bixby: Thanks, Shai. Let's start with Q1 results, which were excellent. In-force premium grew 32% year-on-year to $1.33 billion, driven by customer growth of 23% and premium per customer growth of 7%. We added 158,000 new customers in Q1, 37% more than the roughly 115,000 in the prior year. Within our reported gross loss ratio of 62%, our favorable prior period development of 3% was driven primarily by our homeowners, multi-peril and car products. Total cat impact in the quarter was 5%, primarily due to winter storm activity, and this excluded cat prior period development. Prior year development, which we report on a net basis, was $4 million favorable in Q1. Gross profit increased 159% to $100 million, while adjusted gross profit increased 119% to $101 million for a gross margin and adjusted gross margin, both of 39%. These metrics use revenue as their denominator. Adjusted gross profit as compared to gross earned premium was 33% in Q1, up 13 points from 20% in the prior year. It's worth noting that the prior year results include the impact of significant California wildfires as well as a California fare plan assessment, all reported in Q1 last year. Revenue rose 71% to $258 million, while our adjusted EBITDA loss improved to a loss of just $17 million. Notably, revenue grew roughly 40 percentage points faster than IFP, a dynamic we expect to continue through at least midyear. Importantly, adjusted free cash flow was positive for the fourth consecutive quarter at $17 million and has been positive 7 of the 8 last quarters, while operating cash flow was negative $1 million, following a common seasonal pattern. We ended the quarter with roughly $1.1 billion in cash and investments, of which about $290 million is required to be held as regulatory surplus. Annual dollar retention or ADR remained stable sequentially, primarily due to the continuing impact of our clean the book efforts in our home business at 85%, flat versus the prior quarter. Operating expenses, excluding loss and loss adjustment expense, increased by $32 million or 25% to $159 million in Q1 as compared to the prior year. Now let's break down those expense lines a little bit. Other insurance expense decreased by $2 million or 8% in Q1 versus the prior year versus a 32% growth rate of IFP. The prior year period included the $7 million California Fare plan expense assessment. And absent this fee, the annual increase in this line item would have been about 26%, a bit less than our top line growth rate of 32% Total sales and marketing expense increased by about $23 million or 53% due to increased growth spend versus the prior year. In Q1, gross spend was $54 million, up 43% as compared to the prior year. Importantly, as we continue to ramp growth spend, marketing efficiency levels remained stable and strong in the first quarter with an LTV to CAC ratio above 3x, in line with the prior year. We expect Q2 gross spend to step up about 12% versus Q1 and expect total gross spend of about $235 million for the full year 2026. Technology development expense was up 22% year-on-year to $27 million, and G&A expense increased 18% as compared to the prior year to $42 million. Notably, G&A improved sequentially and was down by about $1 million versus the prior quarter. The year-on-year increase in G&A was driven primarily by an increase in stock compensation and interest expense. Our expected stock compensation expense for the year is expected to be approximately $95 million. This is somewhat higher than our previous guidance, primarily due to a multiyear equity grants given to our 2 founders. Headcount increased slightly by about 2% to 1,291 in Q1 as compared to the prior year. Our net loss was a loss of $36 million in Q1 or $0.47 per share as compared to a net loss of $62 million or $0.86 per share in the prior year. Adjusted EBITDA loss was $17 million in Q1, dramatically improved versus our EBITDA loss of $47 million in the prior year. Our detailed guidance for Q2 and our updated full year 2026 guidance are both included in our shareholder letter, and that new guidance represents a 32% top line growth rate in Q2 and a 33% full year top line growth rate. Roughly 77% revenue growth is implied by our Q2 guidance and roughly 63% full year revenue growth implied by that guidance. And unchanged, we do expect a positive full quarter of EBITDA in Q4 this year. With that, I'd like to pass back over to Shai to answer some questions from our retail investors. Shai? Shai Wininger: Thanks, Tim. We now turn to our shareholders' questions. We'll start with Paperbag, who asked why ADR hasn't improved faster. So just to level set, ADR or annual dollar retention is a training metric. It compares the IFP generated by a specific cohort a year ago and measures how many dollars we are able to retain from that same group 12 months later. Over the past year, ADR has been held back by a targeted nonrenewal initiative in our homeowners line focused on reducing cat-exposed business. That deliberate move created a temporary headwind for ADR while improving the overall health of our business and has largely wrapped up by the end of 2025. Looking ahead, that headwind should start to fade as those cohorts roll off the base used to calculate ADR. It's also worth noting that if you exclude homeowners, ADR actually improved over 300 basis points year-over-year. Paperbag also asked about multiline customers currently about 5% of total, asking when we'll see that tick upwards. It's a great question, Paperbag. And actually, if you look at the dollars rather than customer count, you can already see the impact of cross-sell showing up quite clearly in our financials. As of the end of Q1, 18% of total IFP is bundled. Importantly, cross-sold business is largely acquired with little to no CAC, which is a meaningful driver of the improvement you're seeing in our overall profitability. With improving performance and growing data, we now have greater confidence in the impact of cross-sells on new customer LTV. Higher LTV gives our growth team more room to operate, so they can increase allowable CAC and lean further into growth while still maintaining our 3:1 LTV to CAC ratio. We've seen a strong momentum here over the past few quarters, and we feel good about continued acceleration, especially as we expand KAR into more states. 19B asked for an update on our efforts to build an excellent shareholder base with strong institutional ownership. Our Investor Relations efforts are producing excellent results. In the past couple of years, we've seen institutional ownership, excluding SoftBank, increased by more than 50%. A handful of our top 20 shareholders are net new institutions who initiated the position in the past year or so. This work is ongoing, but we are encouraged by the recent momentum. NDK asked what prevents a competitor who launched tomorrow with unlimited compute and the latest models from being where we are in a couple of years. That's a thoughtful question. Thanks, Andy. Well, our differentiation doesn't stem from access to AI tools, but rather from a decade of compounding execution around an AI-first architecture, unique organizational structure and successful navigation through complex and expensive regulatory environments in multiple geographies. We've spent the last 10 years building, training and integrating our technology and h-g models into every layer of the business, turning real-world data into continuously improving underwriting, pricing and claim loops now show up in superior growth and efficiency metrics. Importantly, commercial AI models as advanced as they may be, can't price insurance on their own. Underwriting and pricing depend on statistical models trained on large data sets built over time, and that's where our advantage is most pronounced. A new entrant would start from 0 on data, regulatory approvals, brand trust and production- validated models. These are things that only accrue with time. Meanwhile, our head start means that our systems keep learning and accelerating. So even with equal technology, the distance continues to widen. In short, you can launch with cutting-edge AI, but you can't fast forward the decade of compounding data integration and operational learning that defines our advantage. With that, I'll pass it over to the moderator, and we will take some questions from the Street. Operator: Your first question comes from the line of Jason Helfstein from Oppenheimer. Jason Helfstein: So I'll ask 2. Just talk a bit about the AV insurance. When could that begin to kind of impact the financials? And I guess, how are you thinking about the initial margin impact on that business? Just so any color there as we all begin to think about that? And then just, Tim, when do we reach normalized or peak levels with the reinsurance transition? Daniel Schreiber: Jason, Daniel here. So I assume that by AV, you mean autonomous because a lot of our cars are AVs already, and that's nothing. Yes. So this is something that's very exciting, really, I think, a dramatic demonstration of the kind of capabilities that we bring, and it shows our differentiation, I think, at its maximal effect, which is that we are able to price every mile driven per driver, and we recognize AI as a driver and therefore, we can price it accordingly. This launched and has been very well received. We're seeing our conversion rate for these policies almost twice as good as our average conversion rate, something like a 70% increase in conversion for such customers. But it has launched in only a couple of places so far. So the rollout will be throughout the year to all of our markets. But at the moment, it is still relatively modest in terms of the impact on our financials as reported at the moment. As the year rolls out, you'll see this being expanded to more and more states, and we will gather steam as it goes, and we'll update you throughout. Timothy Bixby: Yes. And on the reinsurance question, Jason, you're right on the transition or the shift in the rate of business that we are retaining continues to shift in our favor where we're retaining more business over time. We renewed our reinsurance last about 9 months ago in July. And so that retention rate has increased consistently quarter-over-quarter since that time. Q1, the seed rate was about right around 30% versus the peak last year of 55%. Q2, that will ebb further. We'll retain more. The ceding rate will be something like 25%. And then we'll normalize in Q3 at right around that 20% rate that we announced when we renewed last year. So it phases in over 4 quarters. That assumes no change in our reinsurance. At July 1, that's our renewal date. We're well into that process now as is typical each year for renewal. We've not yet determined what that will be. That's something we do share with the market once we get to final terms that we like. We have some optionality there. As we have for quite some time, we can confidently retain more business. So the likeliest outcome there is perhaps no change or perhaps a greater rate of retention. It's unlikely that we would see it at a higher rate, and we'll share that update not too far out post the July 1 renewal date. Operator: Your next question comes from the line of Andrew Anderson from Jefferies. Andrew Andersen: You've highlighted operating leverage from automation. Where specifically are you seeing some savings today? And how much of that is being reinvested versus dropping through? I'm just kind of taking a look at some of the operating expense line items that are still growing. Timothy Bixby: Yes. So we kind of think about expenses in really 3 buckets, and this has been really consistent over time. There's truly variable costs, and there's a few of those, things like premium taxes and processing fees and that -- those tend to vary quite in line with the growth rate of the business. So if we're growing 31% or 32%, then you'll see those expenses kind of grow in line with that. That's a relatively small bucket. The largest bucket is our fixed cost, and that's things like salaries and overhead and legal and finance and compliance and all of those things that every insurance company has. And those scale consistently really, really well over time. I'd point you to the shareholder letter where for some time, we've shared a chart, which the highlight today, I think, was a headcount decline over 3 years, where the premium has more than doubled or tripled over the same time. So that's where we really see scale. The expenses that are increasing tend to fall into the discretionary bucket. They're at our choosing. So the most clear one is growth spend, where we choose and determine our growth rate. We work hard to push that up each quarter. You've seen the results of that with growth rates increasing sequentially quarter after quarter. And that's the result of 2 things. Our investing more, maintaining our LTV to CAC ratio, maintaining that marketing efficiency, coupled with really an unlimited TAM, total addressable market. And so those come together and you kind of see that every quarter. We do choose to invest in other things that have either short-term or medium-term payback, and we continue to do those as well, but those are really at our discretion. So over time, you'll see a similar trend, I would expect, where you'll see great leverage, continued growth. Our guidance implies a 32% Q2 growth rate, 33% for the full year. And I expect continued scale across all of those expense lines. Nicholas Stead: And Andrew, maybe if I can jump in. I think one place in particular, you can really see the impact of AI-powered automation at scale is in the cost of adjudicating claims, and that's our LAE ratio, which is currently at 6%, which we consider levels that are roughly -- that are best-in-class today and materially improved over time. Andrew Andersen: And which acquisition channels are contributing the most to incremental growth today, whether that be direct or cross sales? And maybe how does agency factor into distribution, if you can size that at all? Timothy Bixby: Yes. So I'll take that and then maybe Nick jump in. So the short answer is all of the channels, meaning every month, every quarter, we've been successful at expanding into new channels. That doesn't mean the existing channels are going away, but there tends to be a broadening or a deepening of the number of channels. And so the concentration in the top 5 or so channels today is much less than it was 2 or 3 years ago. So that long tail is getting longer. And that's really the result of an amazing growth marketing team that through human intelligence and really intense AI automation have been able to do that quarter-over-quarter. Our partners are strong and continuing to get stronger. it's the minority of growth. The vast majority of our sales come from our direct-to-consumer efforts, and that will -- I expect that will continue for quite some time. But the indirect or the partner referral that continues to be strong, whether it's homesite or Chewy or real estate management or landlords. We've got a really long set of folks who drive lots of strong sales for us. Nick, anything you want to add on the agent front? Nicholas Stead: I was just going to note that we're seeing real strength across channels to your question, Andrew. and that is both new business to Lemonade as well as cross-sells to existing customers. As it relates to new business, we saw our highest ever new sales volume in the first quarter, and we've been able to sustain really strong efficiency metrics on our growth spend. And at the same time, on cross-sales, we saw a near doubling year-over-year of cross-sales to existing Lemonade customers. And those are trends we really hope to sustain strength across our various channels that have enabled our growth acceleration curve until now. Operator: Your next question comes from the line of Tommy McJoynt from KBW. Thomas Mcjoynt-Griffith: Yes, I had suspected that all of the effectively free advertising and brand building that Lemonade benefited from with the media's attention on the autonomous vehicle announcement in the first quarter that, that might allow Lemonade to actually dial down its need for growth spend while still exceeding the 30% in-force premium growth. Can you talk about why that wasn't the case? Does sort of mainstream media coverage of Lemonade help with attracting customers? Daniel Schreiber: Tommy, Daniel here. That coverage is fabulous for us in terms of general perception. I think it draws attention to the widening gap between us and everybody else. The rest of the industry pricing based on gender and credit scores and marathon status. And on the other end of the spectrum, you have us partnering with Tesla to price per mile and per version of the AI that's driving. So definitely, that captures the imagination. I think it drives home the unique elements that Lemonade has and the differentiation from the industry. So that drives attention and brand building, but that was never about getting clicks and sales instantaneously. This is the kind of long-tail investment in brand that builds over time. We see our organic sales growing. We see our conversion rates growing. We see the trust scores and brand recognition growing. You'll have noticed in Shai's comments that in pet, for example, we are now the #1 most searched brand. So we are definitely seeing the cumulative effect of all the coverage of Lemonade and our differentiation in our tech-centric offering. But we had no -- the expectation implicit in your question was never shared by us. Thomas Mcjoynt-Griffith: Okay. That all makes sense. And switching over to the stock-based comp. I saw for the full year, the guide for stock-based comp was raised by $20 million. To clarify, is that an incremental? Or is that just a switch from cash comp to stock-based comp? And is that new $95 million a fair base level to assume in the out years as well? Timothy Bixby: Yes. So I would think of that as a step-up that will be a new roughly base level. I would note that those are unique grants and are multiyear in nature. All of that info is disclosed and out there. But big picture, there's a performance-based aspect to a subset of those grants. -- and that focuses on the next 2 years and requires significant value increase in order for those to become vested and drive value. In addition, there's a long-term multiyear grant that you've seen at other thoughtful companies, particularly for the founders to kind of drive a long-term vest. Our standard vesting for new employees is 4 years. These grants are have an 8-year view with a thoughtful vesting pattern. So I think of this as a onetime for a multiyear view. If you think about our stock-based comp kind of zoom out a little bit and look over, say, the last 5 years or so, which gives a better picture and takes away some of the noise of stock volatility and things like that and look at our actual effective burn rate or dilution rate, which is really the thing that financially we're concerned about, it's right on target with best-in-class. It's sort of a 2-ish percent number, 1 point something to 2-point something over that very long-term period. That's really the focus number for us, and we expect over time that, that will continue to be the case. Founder grants are unique things, and so you'll see some volatility in the short term due to that. Nicholas Stead: And also, I maybe wanted to add, notwithstanding the increase in our expectation for expense within the calendar year, we're seeing stock-based comp scale very nicely as a percentage of any metric you'd like to index against, whether that be in-force premium, revenue or gross profit. Those levels are improving and from our view, healthy relative to benchmarks. Operator: Your next question comes from the line of Mike Zaremski from BMO. Michael Zaremski: My first question is a follow-up on Lemonaid's, I think probably best-in-class loss adjustment expense ratio. Does it have something to do with -- on an NAIC statutory basis, we've always seen that Lemonade's claims, we call it denial rates, so claims closed with no payment has been materially higher than the peer average or industry averages. Does that have something to do with kind of why the LAE ratio is so much better than others? Timothy Bixby: So the short answer to that is no. the more thoughtful answer is that Lemonaid is -- has some unique aspects to the business. We have a very large number of relatively low premium policies because of the nature of our renters business. That has changed and diminished over time. So the renters book of business in terms of premium is now under 30% of the business in the high 20s. It used to be 90-something long, long ago. So the book of business is nicely diversified. That said, if you just count the policies, you're going to get a very large number of renters. And so that can skew rejection rates because you can get a lot of claims, which are thoughtful claims, but not necessarily a covered claim, claims below the deductible for example, claims that are not covered by the policy. And that's not uncommon when you have a customer base who in a certain subset can be newer to insurance. It might be their first policy or it might be the first time filing a claim. And so that will definitely skew the numbers. If you isolate the part of our business that makes us look more like a more established incumbent, if you took just homeowners and car and pet, for example, you'd see a different number that looks much more in line. And I think our NPS scores and our customer satisfaction scores, which I would put up against any insurance company on the planet, show that over the arc of the total business, Lemonade almost every time as best we can, does the right thing and pays every valid claim effectively. Nicholas Stead: And let me just also to note, Mike, sorry, LAE ratios cost to manage claims over earned premium and claims without payment generally don't have costs attached to them. So I wanted to offer that as well. But I want to take the opportunity to share that fully aligned to Tim's points around product mix and how that has certain nuances within our LAE ratio. But we're actually seeing favorable trends in LAE over time across all of our lines of business. And that's especially true in CAR, where we've seen notable improvement in recent periods and our CAR LAE ratio is, at this stage, not materially different than the overall Lemonade result of 6%. So we're encouraged to see that momentum across lines. Michael Zaremski: That's thoughtful. My follow-up is just kind of also benchmarking kind of looking at Lemonade's gross combined ratio, about 138% this quarter, improving materially year-over-year. If I benchmark Lemonade to the industry and maybe Anders business mix is a bit different. I think the industry is running 90%-ish, so lower. I'm curious, does Lemonade have a goal to kind of lower that gross combined ratio materially over time towards the industry average? Or will there always be kind of a material gap? Timothy Bixby: Yes, you're exactly right. The improvements have been dramatic. a little color, something like a 60-point improvement, I think, which is significant. And obviously, you're really seeing it in the expense ratio for sure. The loss ratio, we reported a gross loss ratio of 52%, this quarter at 62%. So we're right where we need to be with loss ratio. Expense ratio continues to show dramatic improvement. Two things to note. Because of the nature of reinsurance, depending on the way you calculate combined ratio, there's a couple of different ways, but reinsurance certainly has an impact on that where the growth and the net will differ. But anyway life, we're seeing significant improvement. we're right on track is breakeven. You'll see that in Q4 for the full quarter for the first quarter, we've noted that for several years now. That's the point where b.ll.Asy10,'ades quite close. So we're right on track for that. And that's not the fact that the vast majority of our business, we're expensing the cost of acquiring that business upfront. So that's a headwind for us. It's a good news, bad news for our business. We love it because we're able to acquire customers, we have to expense that upfront. So given that it's a handicap, it's a nuance of our business you're seeing these really dramatic improvements quarter-over-quarter. So we feel like it's right on track. We now move to your next question, which comes from the line of Bob Wong from Morgan Stanley. Jian Huang: First question is on the growth of the car business. I just -- I know you addressed it a little bit, but I just want to maybe double-click on that a little bit more. Obviously, Pet is now one of the bigger business here. And if we go back to the Investor Day thinking about it, you were talking about car eventually being the biggest driver for 10x your business going forward. Just given the current competitive environment, can you maybe just talk about your competitive positioning versus the industry and where you are in the car business today and how we should think about that growth engine going forward? Daniel Schreiber: Bob, yes, I think a lot of what I would encourage you to think about going forward is really a straight-line continuation of what we've seen in the last year or 2. So we shared, if you go back a year, car was growing at something memory was about 9%. contrast that with the 60% of this quarter. If you went back a year more, you'll probably be in negative growth territory. So not only are we reaching fast growth rates and rates of acceleration, but we're seeing very rapid acceleration from negative to positive to 60%. We don't intend to slow down too much thereafter. And the IFP component of car in our book is still modest, but its portion of our sales in the last quarter is already pretty significant, something like 1/3 of our sales in the last quarter came from car. So because we have a larger base, it will take time for it to capture its fair share, but it's catching up pretty dramatically. So definitely significant. The other thing I would point out, and I touched on this in earlier responses, we think we have an offering that is highly differentiated and structurally advantaged relative to the incumbency. We are, to the best of our knowledge, unlike any incumbent in that over 90% of our customers have continuous telemetry on. And that just really gives us x-ray goggles into which risks we have, how we should be pricing them rather than using broad strokes proxies that are meant to, in some way or fashion, mirror driving behavior like where you live and your gender or age, education level, we're pacing through all of those, de-averaging those really big monolithic groups and being able to price every individual per se as they drive depending on a per mile basis oftentimes and adding AI into that mix as another driver. So I do think that this is a structural advantage that will allow us to continue to compound that business and the messages that you're recalling from our last Investor Day are ones that we would stand behind absolutely today as well. Jian Huang: Okay. Really appreciate that. Second question is on autonomous, not specifically for your business, but really just how you think about the growth trend of autonomous vehicles for the industry going forward, right, right? So right now, if we think about autonomous, the L3 or better autonomous vehicle penetration rate is still very insignificant. As we think about just the autonomous vehicle technology advances as well as penetration rate going forward, can you maybe help us think about the potential size of that market and the growth opportunities there for the industry, but also for Lemonade. Just curious your thought on that. Daniel Schreiber: I'll share a couple of thoughts and then invite my colleagues to add if they feel I missed anything. Cars have very long ownership cycles, and therefore, newer technologies do take a while to penetrate into the installed base. But there's got to be little doubt that various degrees of autonomy is the future, and it is going to be growing much faster than the rest of the industry. And Tesla may be leading the way, but every major car manufacturer is adding these capabilities. And they aren't entirely binary. They have everything from various forms of adaptive cruise control all the way up to full self-driving of the likes of Tesla. And we can see into each of those different gradations and we can price them accordingly. So if you widen the aperture a bit, you start seeing all different ways in which cars are adding safety features and degrees of autonomy and those are absolutely things that we are focused on and pricing into our policies. So I think if you are a $50 billion, $60 billion, $70 billion insurance company with dominant market share, this may seem insignificant. but our market share is maybe 0.1% of what a Progressive or GEICO is right now. We have maybe less than 1 per market share, which is to say we can see in this emerging sector, a very promising growth opportunity. We don't limit ourselves to it, but I think you will see autonomy impacting our financials much more significantly than perhaps on the incumbency with a very, very large installed base. Timothy Bixby: Yes. I think you're exactly right. This is this is an area where I'd love us to have a better crystal ball than you do, but I fear we may not. What we do know is 2 things. One, the numbers today are small. And as Daniel noted, small numbers can have a really significant impact on a company the size of Lemonade. -- if you're a $1 billion player versus a $50 billion player, that plays to our advantage. Two, the name of the game here when you have an uncertain growth curve, and this like many other technology advancements, this adoption rate will be very, very slow and then all of a sudden, it will be very, very fast. And the point of that bend in the curve is quite difficult to predict. Lemonade and our depth and level of agility is such that we love that. fast, quick, thoughtful adaptation is really what we were built to do. And so when that curve comes, whether it's a year from now or 6 years from now or something in between, we'll be ready and we'll be more as adept as any player in the market to react to it. And we'll have several years of autonomous experience behind us rather than still to build. So we love these curves, and we're looking forward to it coming. Operator: There are no further questions at this time, and we've reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Greetings. Welcome to the Materion First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Kyle Kelleher, Director, Investor Relations and Corporate FP&A, you may begin. Kyle Kelleher: Good morning, and thank you for joining us on our first quarter 2026 earnings conference call. This is Kyle Kelleher, Director, Investor Relations and Corporate FP&A. Before we begin our remarks this morning, I would like to point out that we have posted materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access the materials to the download feature on the earnings call webcast link. With me today is Jugal Vijayvargiya, President and Chief Executive Officer; and Shelly Chadwick, Vice President and Chief Financial Officer. Our format for today's conference call is as follows: Ju will provide opening comments on the quarter. Following Jugal, Shelly will review the detailed financial results in addition to discussing expectations for the remainder of 2026. We will then open up the call for questions. Let me remind investors that any forward-looking statements made in the presentation, including those in the outlook section and during the question-and-answer portion, are based on current expectations. The company's actual performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release we issued this morning. Additionally, comments regarding earnings before interest, taxes, depreciation, depletion and amortization, net income and earnings per share reflect the adjusted GAAP numbers shown in Attachments 4 through 8 in this morning's press release. The adjustments were made in the prior year period for comparative purposes and removed special items, noncash charges and certain discrete income tax adjustments. And now I'll turn over the call to Jugal for his comments. Jugal Vijayvargiya: Thanks, Kyle, and good morning, everyone. I'm pleased to be with you today to discuss our first quarter performance and share what we're seeing for the remainder of the year. VA sales were up 10% year-over-year, excluding precision clad strip, reflecting strong demand across most of our end markets. Electronic Materials sales increased 18% versus last year, driven by AI-led demand for high-performance memory and data storage applications, along with strengthening demand in power applications and communication devices. Precision Optics delivered 43% year-over-year top line increase with new business coming online across multiple end markets and applications. While Performance Materials sales were roughly flat, excluding precision clad, this was primarily due to shipment timing. The order book continues to build driven by strong demand in aerospace and defense, energy and telecom and data center. We expect a meaningful step up in sales in Q2 and throughout the rest of the year. As for precision clad strip, the production ramp-up is progressing well and remains on schedule. We are now producing at the same rate as before the quality issue. We also delivered strong earnings in Q1 with EBITDA margins exceeding 20%, a record for our first quarter, given our typical seasonality. Electronic Materials continues to be an outstanding performer, achieving record profitability on very strong sales. Precision Optics continued to exceed expectations delivering its fifth consecutive quarter of profitability improvement through strong execution on its expanding top line. Turning to our end markets. It's encouraging to see most markets in the high single-digit to low double-digit growth rate. Even more importantly, our order book continues to strengthen. We exited the first quarter with the highest backlog in our company's history. Order backlog is up more than 20% year-over-year and 15% since the start of the year. Defense orders remain strong with $60 million received in the first quarter, and we have more than $300 million in open RFQs. Over the last 12 months, aerospace and defense order rates are up 50%, energy is up 20% and semiconductor is up 10%. We are seeing clear acceleration across many of our end markets, and our teams are preparing to meet the higher levels of demand. Going a layer deeper. I want to step back and frame a broader trend that is having a significant impact on Materion, the rapid proliferation of AI. When people think about our role in AI, they often focus on our semiconductor deposition materials and with good reason. We are a leading supplier of advanced electronic materials that enable advanced node chips and data storage devices. We're in the midst of an AI-driven semiconductor growth cycle and that strength is evident in our Electronic Materials performance. But our impact on AI extends far beyond the chip itself. Materion has become a critical enabler of the AI ecosystem not at the edges, but at the core. AI acceleration depends on advances in semiconductor performance, high-speed connectivity, next-generation optics and high-reliability energy and space systems. Each of our 3 businesses provides foundational materials for these applications. Our Performance Materials business plays a strategic role across the infrastructure powering AI F.rom advanced data centers to global connectivity networks and next-generation energy systems, our engineered alloys and beryllium-based materials enable performance, reliability and safety at scale. We supply growing nickel materials for fire protection systems and data center build-outs and specialty alloys for connector technologies and high-speed semiconductor fab equipment. Our materials support the wireless backbone that carries AI-driven data, including towers, undersea cables and base stations. In energy, our beryllium alloys enable breakthrough nuclear reactor technologies needed to deliver the continuous power AI will require and are widely used in oil and gas drilling and processing equipment. In space, our materials are integral to propulsion systems, spacecraft structures and launch components supporting global connectivity and observation networks. Our Precision Optics business provides advanced optical coatings and engineered components essential for data center expansion, immersive AR/VR technologies and advanced semiconductor manufacturing. Our solutions support connectivity and semiconductor equipment applications, and we supply optical filters and systems for satellite technologies that enhance communication and earth observation capabilities. As semiconductor devices become smaller and more complex, advanced optics have become increasingly important for lithography, inspection and metrology, improving accuracy, boosting yield and enabling scaling for next-generation chips. Our Electronic Materials business sits at the center of semiconductor innovation, supplying the advanced deposition materials and engineered targets required to manufacture chips at the most sophisticated nodes. These materials power both high-performance computing and data storage devices used in data centers as well as the semiconductor components that enable global connectivity. Beyond deposition, we provide a range of high-value niche materials supporting AI, including alloys for next-generation nuclear reactor technologies, specialty metals for base station applications and chemicals used in satellite heat shield tiles. While smaller in scale, these applications highlight the depth of our capabilities and our ability to solve complex materials challenges in high reliability environments. As AI workloads scale, demand for the engineered materials we produce is rising rapidly, and we are already seeing that momentum reflected in customer demand, order rates and new business wins. Looking ahead to the remainder of 2026, we are energized by the growth our businesses are experiencing and the opportunities emerging across our markets. We're seeing momentum build across the company in our end markets, our incoming order rates and the new business opportunities our teams are securing. Our results reflect their hard work and commitment. We now see a path to delivering low double-digit top line growth for the year while continuing to seize opportunities for the future. This gives us even greater confidence in delivering results toward the high end of our earnings guidance provided in February. I want to express my gratitude to our global teams for their dedication and unwavering commitment to excellence. Their work, driving innovation, ensuring quality and supporting our customers is the foundation of Materion's success. And finally, I'd like to thank our customers and shareholders for their continued trust and partnership. With that, I'll turn the call over to Shelly to review the financial details. Shelly Chadwick: Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning, starting on Slide 11. In the first quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were $261.8 million, up 10% from the prior year when excluding Precision Clad Strip. All in, value-added sales were up 1%, reflecting broad-based demand across our portfolio. Growth was led by semiconductor and aerospace and defense, consistent with the momentum Jugal outlined. Electronic Materials delivered another very strong quarter with 18% growth, supported by continued strength in semiconductor applications and new business wins. Precision Optics grew 43%, driven by new programs across multiple end markets and marking its highest quarterly sales since 2021. Adjusted earnings per share were $1.27, up 12% from the prior year. Turning to Slide 12. Adjusted EBITDA was $52.9 million or 20.2% of value-added sales, a record first quarter margin for Materion and an increase of 9% year-over-year. We delivered 140 basis points of margin expansion, driven by higher volume, favorable price/mix and strong operational performance, particularly within Electronic Materials and Precision Optics. Moving to Slide 13. Let me review first quarter performance by business segment. Starting with Performance Materials, value-added sales were $139.5 million in the quarter, down 13% year-over-year, but up 5% sequentially. This year-over-year decline was driven by lower precision clad strip sales as production levels ramped through the quarter. Outside of clad, we saw strength in aerospace and defense and telecom and data center, partially offset by timing in energy orders. Adjusted EBITDA was $28 million or 20.1% of value-added sales, down 32% compared to the prior year period. This decrease was driven by the lower clad strip volume and the impact of operational challenges in the back half of 2025 that amortized into this year. Looking ahead, we expect meaningful sequential improvement in the top and bottom line, driven by stronger aerospace and defense sales and higher PMI shipments with momentum building into the second half. As Jugal highlighted, the order backlog continues to expand, and we are well positioned to support higher demand levels throughout 2026. Turning to Slide 14. Electronic Materials delivered another exceptional quarter. Value-added sales were $91.6 million, up 18% year-over-year, driven by semiconductor strength as our materials continue to enable advanced node technologies and AI-related applications. Adjusted EBITDA reached a record $25.9 million, up 95% year-over-year with more than 1,000 basis points of margin expansion and a record adjusted EBITDA margin of 28.3%. The meaningful improvement reflects higher volume, favorable price/mix and strong execution across the segment. For the remainder of 2026, we expect to see continued growth, supported by semiconductor market outgrowth and contributions from new business wins. On Slide 15, Precision Optics value-added sales were $30.7 million, up 43% year-over-year, driven by new business wins and growth across every end market. This marks the segment's strongest quarter since 2021 and its fourth consecutive quarter of top line growth. Adjusted EBITDA was $5.5 million or 17.9% of VA sales with significant year-over-year margin expansion. This reflects higher volume, favorable mix and continued execution on the business transformation. The segment has now delivered 5 consecutive quarters of bottom line improvement. We expect both top and bottom line growth to continue in 2026 as new business ramps in key high-growth markets and the transformation progresses. Now moving to cash, debt and liquidity on Slide 16. We ended the quarter with a net debt position of approximately $474 million and $192 million of available capacity on our existing credit facility with leverage slightly below the midpoint of our targeted range at 2.1x. We strategically built inventory in Q1 to support expected sales growth in Q2 and into the second half, which temporarily constrained free cash flow generation. We continue to expect strong free cash flow for the full year as volume increases and working capital normalizes. Finally, turning to Slide 17. Our record backlog and strong order rate momentum exiting Q1 give us increased confidence in our full year outlook. We now expect low double-digit top line growth for 2026 and are affirming our adjusted EPS guidance of $6 to $6.50 with growing confidence in delivering toward the upper end of that range. With the strong start to the year, we also remain committed to making progress toward our midterm EBITDA margin target of 23% while generating strong cash flow over the balance of 2026. This concludes our prepared remarks. We will now open the line for questions. Operator: [Operator Instructions]. Your first question is coming from Daniel Moore from CJS Securities. Dan Moore: obviously, you gave a lot of color, Jugal, but always good to talk. Start with semi. Maybe just talk about the sort of the cadence of order rates exiting Q1 and into Q2. And obviously, you talked about many of the different applications. Just a sense of how your customers see the outlook for kind of '27 and beyond maybe relative to what those expectations would have looked like 6 or 9 months ago? Jugal Vijayvargiya: Yes. As you know, Dan, I mean, semis was a really good quarter for us here in Q1, up 16% on a year-over-year basis. In fact, up, I would say, about 40%, if you exclude some of the China business, which we know have been going through some changes, and we've talked about that over the last 12 to 18 months. So a very, very strong Q1 for us. We expect semi to continue to be a very strong Q2 and then the rest of the year. Our order rate for semis have been improving sequentially. I would say that our exit out of Q1 was stronger than the exit out of Q4, and we expect that sort of trend to continue. I mean, the great thing with semi for us is we really do play in all the areas of semi, so whether it's power semiconductor or communications, data storage, logic devices, memory devices. And so I think we're seeing that -- we're seeing the growth rate across really all of those areas. So it's not concentrated with 1 or 2 areas. And so we expect it to really be more of a broad-based growth in the remaining quarters as well. When we look at, for example, our high-performance memory in our data storage, which is really much more aligned towards the AI applications, our sales were up 47% on a year-over-year basis in Q1, and we expect that to continue as well. So we -- and then, of course, from the profitability side, and I know you didn't ask that question, but I'll add it to it, the business has performed with EM, which semi really mainly resides in, has performed very well, and our profitability in this business is improving substantially on a year-over-year basis as well. So we expect this to continue. We'll see what '27-'28, of course, has to bring to your point about maybe what are our customer is saying. But I think for the rest of the year, we expect strong order intake and a very good growth curve on a year-over-year basis. Dan Moore: Really helpful. Switching to aerospace and defense, orders up 50% year-over-year. Obviously, you announced the CapEx funded projects for the large prime last quarter. Just how does the war in Iran change your outlook and growth expectations? And just maybe a little bit of kind of under-the-hood dialogues with customers, not necessarily for the rest of this year, but looking out into '27 and beyond as well? Jugal Vijayvargiya: Yes. Well, defense, in general, was getting a lot of attention, even prior to the conflict that started, right? And there was a discussion about higher budget for this year or next year. And I think the war has just strengthened that talk in Washington. And so what I would say we're seeing and we've been talking about over the last 2 or 3 quarters is the open RFQs, right? We started out saying a couple of quarters ago that when we had $100 million in open RFQs, we kind of increase that, say, $150 million, $100 million in open RFQs. And at this stage, we sit at $300 million-plus open RFQs. These are inquiries that have come in from various primes from different countries on the defense side of our business. The $60 million that we booked in Q1 is a record for us. We haven't booked -- we haven't had a $60 million Q1 ever. And so the momentum, I would say, has certainly shifted even more. It was there before the conflict, but certainly, that has aided the order rate as well as the open RFQs that are on the defense side. So we expect this trend to continue during the rest of the year and probably the next 3- to 5-year window as well, and that certainly plays into our overall aerospace and defense market. As you know, some of our space activities are certainly related to defense area as well, and we see the same type of trends that I'm highlighting here in that area as well. So in general, defense is a strong market, and I think will continue to be a very strong market and probably even become a stronger market as we get into the next 1 to 2 years. Dan Moore: I'll sneak one more in and jump back in queue. But -- and I know you don't guide quarterly, but just looking at the low double-digit growth -- top line growth for the full year, obviously, a meaningful inflection from what we saw in Q1. So just how do we think about the cadence of that growth? Do you thinking about kind of double-digit growth starting in Q2 or do you see it maybe a little bit more back-end loaded? Jugal Vijayvargiya: Well, I think considering the fact that overall, our business was about 1% in Q1, certainly up 10% year-over-year, excluding the precision clad. So we're already seeing the 10% or the, let's call it the double-digit growth even in Q1 when you exclude the precision clad, we expect double-digit growth really for each of our quarters. And certainly, it will be more of a growth in the back half of the year, no question, but we expect strong growth throughout the year. Shelly Chadwick: And maybe just to pipe in, Jugal, on that, we think how that translates through to bottom line. I think we'll see probably a 15% to 20% step-up from an EPS perspective next quarter, but even much more meaningful step-ups in the back half as that flows through. So looking at a really great outlook for the rest of the year. Operator: Your next question is coming from Mike Harrison from Seaport Research Partners. Michael Harrison: I was hoping you could address a couple of questions on the Performance Materials segment. I guess just in terms of the precision clad strip quality issue, it sounds like there was kind of some amortization of that impact dragging on Q4, and it also impacted Q1. I'm just curious, how should we think about Performance Materials earnings in the second quarter compared to what is obviously some unusual weakness in Q1? And then can you also give some additional color on, is this quality issue fully resolved? What changes had to be made? And I know you said you ramped back to where you were before the issue came up. But I guess how much additional capacity or capability do you have beyond what you had before this issue came up? Sorry for like 6 questions in one there. Jugal Vijayvargiya: No problem. Yes, let me start with the quality issue and kind of where things stand and then Shelly will jump in, I think, on the financials and what we expect in Q2. I would say that our team has made significant progress and really very, very good progress in working with the customer and resolving the quality issue. We had indicated in the last time that we spoke that we were back up and running. It was really just a matter of ramping here in Q1, which I think the team did and has done a really nice job of ramping. And like I indicated, we are back to running at the rate that we were running prior to the quality issue. So we're producing now at those rates and starting to ship at those rates to the customer. So the team is very excited about the rest of the year in Q2, Q3, Q4. We expect good growth, I would say, in each of the quarters as we go forward. So there are certainly changes that we made to our manufacturing processes and changes that not only did we make to that manufacturing process, but there are great learnings that you take across the entire company, and we're doing that. We're in the midst of actually doing that across our entire company so that we can be -- we can continue to improve and be a better company overall. We, as I said, have back to the earlier production schedules, and we still have capacity. So if the customer wanted higher volumes, the capacity is there, and we certainly can do that. And we're working with the customer on what type of volumes they like for the rest of the year. But we expect the rest of the year, like I said, to be at or better than the production levels that we had prior to the quality issue. Shelly Chadwick: And maybe just to hit the profitability side, right? So it's great to see the production levels back to kind of normal rates. That obviously ramped during the quarter, right? So a big impact on the quarter from an underutilization of the plant perspective. And as you know, we're going a little bit slower, taking a few more steps that are impacting the profitability right now, but we'll see a really strong step-up on the top line in Q2 and then very normalized, I would say, both top and bottom line in the back half for the clad specifically. When I look at PM overall, which I think was also in your question, we're going to see a meaningful top line step-up next quarter, more than a couple of hundred basis point step-up from a profitability perspective. And again, working past some of the operational issues, working past the clad item in the back half, we'll see even better profitability. Michael Harrison: All right. Very helpful there. Then I had a broader question on Performance Materials. I just was wondering if you can help us understand how we might think about pricing going forward because you've got a portion of the business that's more beryllium-based -- and arguably, there aren't substitutes for some of those products and there aren't many alternative sources either. So maybe help us understand what portion of your sales are more towards the beryllium and harder to substitute side of the spectrum versus products that are alloys and maybe could be subject to competition from other metals or could be substituted for other alloys. Does that question make sense? Jugal Vijayvargiya: Yes. No, it absolutely does. And let me address that because that's probably 6 questions. And one also like you indicated on the earlier one, but let me address, I think, some of the points that you've brought up here. I'd say roughly about half of our sales are somehow beryllium or beryllium-based type of materials that we supply and the other are non-Beryllium type. Certainly, beryllium type of business is a very good rich mix business for us. We tend to look at the business in terms of much more of a longer cycle and more harder to change, sticky type businesses, I think, tend to be better from a profitability standpoint, from a -- obviously, from a sales security standpoint. And I think beryllium provides that, right? I mean, so whether it's the defense side or whether it's some of the aerospace side or even some of the energy side, I mean, that's what beryllium gives us is it gives us a longer runway in terms of sales as well as I think it gives us some better mix, and better profitability, like you indicated on that. We do have to keep in mind, of course, that there's always a substitution risk, but it does take a longer period of time. And beryllium's performance, the material performance far exceeds, of course, other materials. So I think pricing is certainly an important enabler for us in this business. It has been, as you know, Mike, I mean, if you look at the last 5 to and kind of where the profitability was and where the profitability of the business is today, pricing was an important enabler to that. We continue to focus on that. We continue to look at what opportunities we have in pricing. And yes, but in general, I would say we like, I think, the direction that the business is headed. We like the mix -- the general mix of the business in terms of some of the markets that we're -- that beryllium is being used in. That certainly broadened, I think, the use overall. So I think overall, in PM, as Shelly indicated, we see a little bit of a downturn here in Q1, and we kind of explained kind of what those are, but we expect it to be right back to the type of levels that you are used to on PM in a very short order. Michael Harrison: All right. Then in terms of the defense RFQs and this $300 million number, are you the incumbent in most of those applications? Or are a lot of them new technologies? And I guess these quotes, is this business that could come to you in the next 12 to 24 months or could it be spread out over a much longer period? Jugal Vijayvargiya: Yes. So I would say, in many cases, of course, we are the incumbent because in many cases, the primes and the government is looking to produce more of things that we already do. But I would say there are a number of things that we're involved in that are new, both in our optics business and in our Performance Materials business. There are new activities that we are involved in both on the state side as well as in some cases, outside the U.S. But -- so it's a mix. Of course, when we win a business, typically, as you know, it's a 12- to 24-month type of a window. In some cases, it's maybe even a longer window. So if we get a multiyear order, 3- to 5-year type of order, that certainly could be the play as well. But in most cases, it is in the next 12- to 24-month window is how we look at these businesses. We're -- we've been increasing this number. Like I indicated, I think when Dan asked the question, just within the last 2, 3 quarters, this number has grown to $300 million. It was starting out around $100 million. And we've been increasing the dollar amounts that we've been actually booking. This feeds right into our record backlog that we talked about, the highest backlog that our company has ever had as we exited Q1. So that's how we see the business kind of playing out over the next 12 to 24 months. Michael Harrison: All right. This is my last one, I promise. Just on Electronic Materials and the gross margin strength that you're seeing there. Q1 was almost 1,000 basis points higher than the gross margin rate you had in '22 or '23. I'm curious how much of that strength would you attribute to mix that maybe is going to fluctuate or normalize over time? And how much of that improvement is more sustainable in nature? Just trying to understand if something north of 40% gross margin is what we should be modeling going forward? Jugal Vijayvargiya: Yes, Shelly, I think, can comment on the numbers, but let me just tell you a little bit about, I think, the last couple of years and what we've done to the business, Mike, we've talked about it. As you know, the semiconductor market and the electronic materials market in general, had a little bit of a downturn over the last couple of years. We took the opportunity to make significant operational improvements and cost improvements in that business, and that's benefited us. So as the volumes are now coming in and the volume for Electronic Materials was $90 million plus, right, for Q1. I mean the flow-through has been really, really fantastic because of the significant improvements the business has driven over the last couple of years. So I think that's been a key contributor to our margin expansion. Shelly Chadwick: Yes. And maybe just to add to that, Jugal, I think if you go back a few years, we felt the margins in Electronic Materials were not what they should be, right? And so there was certainly a lot of upward potential when we think about where EM margins could go. And so the work that has been done was really impactful. And now that we see the volume coming in on top of that, we're seeing margins that are much closer to typical what I would call Electronic Materials margins. Now was this quarter particularly strong? Yes. And we've talked about the fact that this does bounce around a little bit with mix. The mix absolutely is positive right now, and it will move around a little bit. But I think we expect this trend to continue in terms of delivering stronger margins in EM. Operator: Your next question is coming from Samuel McKinney from KeyBanc Capital Markets. Samuel McKinney: The business transformation and cost initiatives have obviously been the focus in Precision Optics recently, but the first quarter value-added sales was the best quarterly figure for that segment in years. Can you just talk about what's driving that top line improvement and the associated operating leverage within that business? Jugal Vijayvargiya: Yes. Sam, as we've highlighted, I think, in our remarks, and we've talked about it in the last couple of quarters, the team has made really, really great progress in transforming that business in a very short order. When you look at kind of how things finished out in Q1, 43% year-over-year growth on the top line, highest since 2021, almost 18% of EBITDA margin. You may recall that even when you go back several years and you kind of look at the peak of that business, it was about a 20% EBITDA margin, right? And so the team has done a nice job of driving the turnaround of that business, and we feel very good with where we're positioned for Q2 and the rest of the year. top line has been an important enabler of that turnaround. And that's a combination of general market improvement, I would say, but also significant new business activities that our folks have been involved in, in markets such as semiconductor and automotive, defense, some of the key markets that, that business participates in. There's a lot of new business initiatives that they've been involved in. And the most importantly is we've been able to close on those new business initiatives and get sales, in fact, in Q1 and then for the rest of the year. So the top line has been recovering as a result of both market and that. And certainly, the transformational activities on the operational side, cost side have been important enablers. Samuel McKinney: Okay. And then with the Chinese portion lagging the overall semiconductor business, can you give us an update on the progress made and when you expect to start deriving benefits from the Konasol acquisition? Jugal Vijayvargiya: Yes. That's an important activity for us, as you can imagine, for the rest of this year and then because it's an item that we're looking for key contributions in the '27-'28 time frame for sales. We expect that we should have some level of small-scale activity perhaps at the end of this year. But really, I would say, '27-'28 is when we start to have a meaningful impact into the semiconductor business, into the EM business for that. The Chinese component, as we have spoken, certainly is a year-over-year headwind. But the rest of our markets are performing very, very well in that area. Like I highlighted earlier, the business was up 16% in Q1, 40%, 41% actually for -- excluding the Chinese activity and strong order intake, very, very strong order intake that's happening in that business across all of our areas of semi. And so we expect very solid growth in the rest of this year, which is, I think, one of the reasons why we feel that our business can be low double digits type of growth rate for this year. Operator: Your next question is coming from David Silver from Freedom Capital Markets. David Silver: I had a couple of questions, I think, mostly on Electronic Materials. But I think you sort of touched on some of these before. And let me preface my remarks. I did have to step away for like 2 minutes. I apologize in advance if I'm making you repeat yourself. But the growth on the electronic materials side, top line and at the EBITDA level, very, very strong. I was wondering if you could maybe characterize it a little bit. So one thing would be whether the bulk of the improvement was tilted maybe towards Milwaukee versus Newton? Or was it very broad-based? And then maybe just a comment. would I be correct in assuming the top line growth is mostly due to volume and not so much to price? So I'll just stop there, but price versus volume component. And then is tantalum participating as much as the sputtering targets and the deposition products? Jugal Vijayvargiya: Yes. Well, first of all, very impressive growth, like you indicated, our top line has done very well in that business. When we look at our semiconductor business, we really look at it more from an angle of the type of semiconductor that we end up serving, right? So we end up serving power semiconductor, which is a very strong part of our business, memory, so both, I'll call it, legacy memory, but then also high-performance memory is an important part of our business. And then it cuts across communication devices, data storage, logic devices. So it kind of goes across really all of those. And our factories, you mentioned Milwaukee, we have Newton with the Tantalum business, but we also have facilities in Brewster in Buffalo and [indiscernible] in Singapore, Taiwan, et cetera, that support these businesses globally. We are seeing growth rate across all of these businesses. And we're seeing order intake be really good across all of these businesses. So it's not a single area that we are seeing the growth rate in. The market, I think, is coming through on all of these areas. I want to talk about new business. So one of the areas -- one of the reasons that we're seeing the growth is new business initiatives that our teams have driven over the last couple of years that now that the market is recovering, we're starting to see the benefit of that, right? So as you know, in Electronic Materials or in semiconductor type market, it takes about 24 months -- 18 to 24 months to qualify new products at customers. But we did that. In many cases, we did that over the last 18 to 24 months when the markets were a little bit challenged. Now that the markets are recovering, we are seeing the benefits of those new business initiatives come through in our sales. So it's market recovery is certainly an important part of it. New business wins and new business initiatives that we've been able to get is certainly an important part of it. And certainly, price is an important part, but it is not the main part, right? So there's a little bit of price in here, I would say, but not really a significant part of the growth story that we have for electronic materials or, let's say, the semiconductor business. David Silver: Okay. Great. And then if I was to just ask a question on the Performance Materials side. And again, apologies if I'm making you repeat yourself. But in your current guidance, the upper end of a range of $6 to $6.50, you have discussed the resumption of normal operations on the precision clad strip line. I believe there was also a timing or the belief that there might be another line of Precision Clad strip starting up at some point this year. Again, apologies if I missed it, but what is the assumption for that or do we have any clarity on when that large customer might be back and utilizing that most recent clad strip line? Jugal Vijayvargiya: Yes. So in our facility, we have a level of capacity that we are using for that customer, and we do have more capacity if that customer comes back with, let's say, higher levels of demand. We are -- as I indicated earlier, David, is that we are back to pre-quality issue type of production levels. And so we are producing that, we are supplying that to the customer. And if there is a demand during this year to go higher, we are prepared and we can go higher. I mean it really depends on what the customer -- what type of orders the customer gives us. As you know, and we've talked about it, they're also looking at their U.S. application and kind of the approval on the U.S. side. If that happens, that may trigger higher levels of demand. If it does, we'll utilize that capacity to do that. But I want to -- I think -- in general, I want to stress, though, I think on the PM side that in Q1, I know our margins and our sales level were a little bit depressed from our historical levels. We expect a step-up in Q2 and then further step-ups in the back half of the year. And these are not based on -- solely based on a precision clad type of recovery. These are broad-based type of recoveries that are happening across defense, across aerospace, across industrial, across energy. All of those areas are contributing, in fact, to that business, our order rate that we've been getting indicates exactly that. So we're -- I believe we're really well positioned to have a meaningful step-up in that business in Q2 as well as the rest of the year. David Silver: Okay. I meant to start off with this comment, but I really did appreciate that extra slide you put in, I believe it was Slide 8, where you highlighted kind of some of the key end uses for your products. It's great that it's all kind of laid out in one place like that. I appreciate it. Kyle probably did some work on this, and he's going to buy himself some more work as I go through it with them. But anyway. One other question on budgeting or your guidance page. And in particular, I wanted to hone in on the CapEx budget, $75 million, and then there's another $25 million, I guess, for mine development. But in that $75 million, certainly, there's a sustaining sustaining component of it. But if you could kind of hone in on the growth-oriented or discretionary part of that $75 million in CapEx that you expect to spend this year. Just where are those incremental resources targeted for? Shelly Chadwick: So yes, as you know, we've had pretty strong capital spending over the last several years because of the organic opportunities that we've had laid out, and you see that coming through in our results, which we're happy about. I would say we've got projects in each of our businesses that are focused on expanding capacity and capabilities as well as sort of recapitalizing and making sure that our plants are up to snuff and ready to produce at the levels we need them to produce that. So I wouldn't say it is -- it's all Performance Materials or it's all EM. We've got big meaningful projects in each business, even some in optics as that business is performing really well. So I wouldn't call it discretionary so much as continuing the support of organic growth and what we expect going forward. David Silver: Okay. So not one major project to call out, more broad-based... Shelly Chadwick: Sorry, I was just going to mention, we talked about the $65 million investment that we're getting from a customer to expand capacity in the beryllium side of the business, and that will be somewhat additive, not all spent in 1 year, but you'll see that come through as sort of customer funding and additional CapEx, and that's obviously all on the TM side. Thank you. Your next question is coming from Dave Stones from [indiscernible]. Unknown Analyst: Just want to maybe circle back to some of the EM new business wins. I know it was mentioned in the prepared remarks, and it sounds like a lot of that 12 to 24 months is kind of starting to come to fruition. Maybe if you could just go a little deeper into what's working and what that sales cycle looks like now and maybe how the top of the funnel has changed. I got actually you're probably seeing more inbounds than you were at this time a year, 18 months ago? Shelly Chadwick: Yes. So are we getting more requests and opportunities from a new business perspective particularly the EM, right, Dave? Unknown Analyst: Yes. Jugal Vijayvargiya: Okay. I got it. So yes, as I indicated, I think in the earlier comments, we've been working with the customers over the last couple of years on a number of different initiatives, and those initiatives have been coming through, and then that's been contributing to some of the sales increases that we're seeing right now. But that's not slowing down, right? That's not slowing down. That's not stopping. We are working with our customers on other new business initiatives across the whole semiconductor space, across the entire EM space, and we'll continue to do that. Typical validation or, let's say, verification, qualification cycle lasts maybe somewhere in the 12 to 24 months is probably more reasonable and some where you have just a small modification or something like that could be 12 months, but longer when you have a new product, it's maybe more of a 24-month type of a cycle. And we continue to have that. Our funnel is strong, and I think it will continue to contribute towards the growth that we are expecting over the next year. Unknown Analyst: Understood. Appreciate that. And just maybe a follow-up on that. With those new customers, I mean, are you seeing them be more trial customers where they're maybe only tasking you with a smaller portion of their projects and there's room to expand or do you see them being full scale out the gate? Jugal Vijayvargiya: Both. I mean we're seeing -- in some cases, we're seeing a scenario where maybe we're entering in as perhaps like, let's say, a second supplier or a third supplier with a smaller share. In other cases, they're brand-new projects. They're brand-new projects, in which case that we are working with them on the majority of the volume or perhaps even all of the volume. So it cuts across, I think, with a number of different opportunities that we have. Operator: We reached the end of the question-and-answer session. I'll now turn the call over to Kyle Kelleher for closing remarks. Kyle Kelleher: Thank you. This concludes our first quarter 2026 earnings call. A recorded playback of this call will be available on the company's website, materion.com. I'd like to thank you for participating on this call and your interest in Materion. I will be available for any follow-up questions. My number is (216) 383-4931. Thank you again. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Welcome to Hayward Holdings First Quarter 2026 Earnings Call. My name is Carrie, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kevin Maczka, Vice President, Investor Relations and FP&A. Mr. Maczka, you may begin. Kevin Maczka: Thank you, and good morning, everyone. We issued our first quarter 2026 earnings press release this morning, which has been posted to the Investor Relations section of our website at investor.hayward.com. There, you can also find the earnings slide presentation referenced during this call. I'm joined today by Kevin Holleran, President and Chief Executive Officer; and Eifion Jones, Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind everyone that during this call, the company may make certain statements that are considered forward-looking in nature, including management's outlook for 2026 and future periods. Such statements are subject to a variety of risks and uncertainties, including those discussed in our most recent Forms 10-K and 10-Q filed with the Securities and Exchange Commission that could cause actual results to differ materially. The company does not undertake any duty to update such forward-looking statements. During today's call, the company will discuss non-GAAP measures. Reconciliations of historical non-GAAP measures discussed on this call to the comparable GAAP measures can be found in our earnings release and the appendix to the slide presentation. All comparisons will be made on a year-over-year basis, unless otherwise indicated. I will now turn the call over to Kevin Holleran. Kevin Holleran: Thank you, Kevin, and good morning, everyone. It's my pleasure to welcome all of you to Hayward's first quarter earnings call. I'll begin on Slide 4 of our earnings presentation with today's key messages. The headline is clear. We delivered an outstanding first quarter, meaningfully ahead of expectations, highlighted by double-digit sales and earnings growth. Net sales increased 12% against the prior year comparison of 8% growth, driven by strong price realization and positive volume. Adjusted EBITDA grew 15% and adjusted diluted EPS increased 30%, demonstrating the earnings power of our model. Margins expanded further with both gross margin and adjusted EBITDA margin rising despite incremental inflation, tariffs and targeted investments in innovation, operations and customer initiatives. We also made further solid progress on the balance sheet. Q1 is typically a seasonally low cash flow quarter, yet we reduced net leverage from 2.8x to 2.4x year-over-year. These results underscore the strength of our predominantly installed base aftermarket business model and disciplined execution of our strategic initiatives. Given our strong first quarter performance and confidence in our outlook, we are increasing our full year guidance. For the full year 2026, we now expect net sales to increase approximately 5% and adjusted diluted EPS to increase approximately 9% to 13%. Turning now to Slide 5, highlighting the results of the first quarter. Net sales increased 12% to $255 million, driven by strong pricing execution, positive volume and a favorable contribution from foreign exchange. North America and Europe and Rest of World increased 12% and 9%, respectively. As demand remained resilient across our installed base aftermarket, we were pleased to see some of our more discretionary products like automation and heaters outpace core categories in the quarter. This top line growth, combined with disciplined cost management translated into meaningful margin expansion. Gross margin increased 50 basis points to 46.5% and adjusted EBITDA margin expanded 60 basis points to 22.1%. Adjusted diluted EPS increased 30% to $0.13. Overall, this was another quarter of strong execution, delivering balanced growth and increased profitability. Turning now to Slide 6. 2025 marked Hayward's 100th anniversary and 2026 marks the fifth anniversary of our IPO on the New York Stock Exchange. These milestones provide an opportunity to reflect on the significant evolution in the company over the past 5 years. During this period, we've transformed Hayward into a more efficient, more disciplined and better-positioned organization for long-term market leadership. We strengthened our senior leadership team with proven operators to guide the next phase of growth. Innovation remains our engine. We continue to develop industry-leading aftermarket-focused products and solutions to expand our total addressable market. On the commercial side, we've redesigned our commercial excellence programs to support builder, dealer and servicer conversions to Hayward. Operational excellence has long been part of Hayward's DNA, and we further consolidated our manufacturing and distribution footprint to improve efficiency, better serve customers and derisk our supply chain amid geopolitical uncertainty. At the same time, we elevated how we operate day-to-day, accelerating lean and continuous improvement initiatives to drive productivity across the organization. All of this is underpinned by disciplined financial management. We've strengthened the balance sheet, meaningfully reducing net leverage and increased flexibility to invest through challenging market environments. In parallel, we're increasingly leveraging AI across the organization to enhance decision-making, sharpen execution and improve productivity. These are not just incremental improvements. Together, they set a strong foundation for Hayward's next chapter of profitable growth. Turning now to Slide 7. These accomplishments are important, but what matters most is how they translate into results and support future value creation. When you step back and look at our track record, the results are clear. Over the last several years, we've delivered top line growth in line with our long-term targets, while expanding margins and growing earnings, all in a challenging macro backdrop. Specifically looking back to before the pandemic, our 6-year CAGRs from 2019 to 2025 were approximately 7% for net sales and 10% for both gross profit and adjusted EBITDA. That performance underscores the resilience of our organic growth profile. Our position is advantageous and differentiated with approximately 85% of our sales derived from serving the aftermarket needs of a large and growing installed base built over decades. This mix provides visibility and a significant runway for continued growth. Our pricing discipline, operational agility and cost control have helped us expand margins despite inflation, giving us the financial strength to fully fund growth and productivity initiatives. Looking ahead, our momentum is supported by an aging installed base requiring continuous maintenance, repair and upgrade. We are expanding our addressable market through new aftermarket innovations such as OmniX, providing pool owners a low-cost path to a connected pool pad and an improved overall experience. By investing in customer care, we are strengthening our competitive position and driving conversions to Hayward. At the same time, we continue to expand our presence in commercial pool and flow control. With durable secular tailwinds in place, we remain confident in our long-term growth trajectory and our ability to deliver compelling value for shareholders. With that, I'd like to turn the call over to Eifion to discuss our financial results in more detail. Eifion Jones: Thank you, Kevin, and good morning. Turning to Slide 8. I'll walk through our financial performance in more detail. We delivered a strong first quarter with results meaningfully ahead of last year. Net sales increased 12% to $255 million against an 8% growth comparison a year ago. Price realization remained strong, offsetting inflation, and we also saw positive contributions from both volume and foreign exchange. The majority of the net price realization reflects underlying price increases over the last 12 months, including a specific product category increase in Q1 this year related to specialty metal components inflation. A portion of the increase, approximately 2 percentage points, was attributable to incentive mix across the retailer and builder channels. Gross profit increased 13% to $119 million, driving gross margin expansion of 50 basis points to 46.5%. Adjusted EBITDA increased 15% to $56 million, with margin expanding 60 basis points to 22.1%, reflecting cost management and operating leverage in the model. The effective tax rate was 22%. Adjusted diluted EPS increased 30% to $0.13. Moving to Slide 9, segment performance for the first quarter. North America net sales were up 12% to $210 million, driven by positive pricing and volume. Within the region, U.S. sales were up 11% and Canada was up a robust 26%. Gross margin was consistent with the prior year as operating leverage offset incremental tariff and inflationary pressures. Sales in Europe and Rest of World increased 9% to $45 million, largely due to favorable FX gains and relatively stable price and volume. Europe sales increased 14% and Rest of World reduced 1%, impacted by geopolitical disruption in the Middle East related to the ongoing conflict in Iran. Margin performance in the segment continued to improve with gross margin increasing 230 basis points to 35.8% and adjusted segment income margin expanding 280 basis points to 19.4%, driven by improved operational execution. Turning to Slide 10. We have a strong balance sheet and cash flow profile. Cash flows are seasonal in nature with typical cash usage in the first quarter due to extended payment terms offered for the Early Buy program, followed by cash generation in the second quarter, driven by the collection of the Early Buy receivables. Cash flow used in operations was $151 million in the first quarter 2026 compared to $6 million in the year ago period. As a reminder, the first quarter 2025 benefited from $99 million in net proceeds from the sale of accounts receivable, whereas we did not recognize any such proceeds in 2026. We continue to strengthen the balance sheet, reducing net leverage to 2.4x from 2.8x a year ago. While net leverage increased in the first quarter from 1.9x at year-end, this is expected due to the seasonal cash usage tied to the Early Buy program. Net leverage usually rises in Q1 due to the extended Early Buy payment terms, then reduces in Q2 due to cash inflows from those receivables. Importantly, leverage is lower year-over-year, reflecting ongoing balance sheet improvement. We have ample liquidity and financial flexibility to support continued organic investment, strategic M&A and return capital to shareholders, all while maintaining disciplined leverage. Capital allocation on Slide 11. We balance strategic growth investment with stockholder returns, while maintaining prudent financial leverage. As an OEM, we prioritize organic investment into our manufacturing and supply chain footprint, followed by strategic M&A, while remaining opportunistic for share repurchases. In the first quarter, we made a modest anti-dilutive repurchase of approximately $6 million. Turning to Slide 12. We are updating our outlook for 2026. Following a better-than-expected first quarter, net sales are expected to increase approximately 5%, up from our prior guidance of approximately 4%. We now expect adjusted diluted EPS to increase approximately 9% to 13% to a range of $0.84 to $0.87. Geopolitical disruptions and rising costs for specialty metals, freight and resins are currently applying a modest downward pressure on gross margin with some year-over-year compression expected in Q2 before our mitigation efforts are fully realized. We anticipate that these countermeasures will safeguard gross profit levels and allow us to maintain full year gross margin in line with last year, with margins expected to normalize during the second half as our initiatives are implemented. We expect free cash flow in the region of $200 million, exceeding 100% of net income. This outlook includes modest working capital improvement, net interest expense of approximately $45 million, a normalized effective tax rate of around 24% and increased CapEx of approximately $40 million as we continue to invest in upgrading our operational capabilities. Overall, we're confident in our ability to execute in the current environment and remain positive on pool industry growth, supported by the strength and the resilience of the aftermarket. With that, I'll turn the call back to Kevin. Kevin Holleran: Thanks, Eifion. Before closing, I want to thank the team again for their performance. Hayward delivered an outstanding first quarter, highlighted by double-digit sales and earnings growth. Given the strong start to the year and our confidence in our outlook, we are increasing our guidance for the year. Importantly, the company is far stronger today than it was just 5 years ago at the time of our IPO and the structural improvements we've made across leadership, innovation, commercial execution and operations are enduring and continue to compound. With a large aging installed base, industry-leading technologies like OmniX and a disciplined operating culture, we believe Hayward is exceptionally well positioned to deliver consistent growth, expanding profitability and strong cash flow over time. We remain confident in the long-term fundamentals of the pool industry and excited about the opportunities ahead. With that, we're now ready to open the line for questions. Operator: [Operator Instructions] And our first question will come from Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Great start to the year. I wonder, one, just what really surprised you? Was it weather late in the quarter? Was it better Early Buy follow through? And then just around Early Buy, some concern or question about channel inventories, big distributor showing good growth and a competitor kind of talking about some normalization of inventories needed to happen. Just touch on how you're feeling about your inventories and sell-in versus sell-through? Kevin Holleran: Sure. So first about the quarter, Jeff, weather was certainly good. I would say warm and generally dry, which are good for our industry. There were some regions that certainly had some exceptions to that, namely parts of the East Coast with some extremely cold and some precipitation. But in general, I would think weather was a pleasant surprise for the winter months, which are not always that way. I would say the other thing that was really positive is as you look across the geographies and the specific end markets, we saw a nice participation and double-digit growth out of most regions. Overall, U.S. was 11%. Canada continues with its strong recovery in the mid-20% growth. Commercial has been a great story for us, nearly 20% growth. Industrial Flow Control, low double-digit growth. And then Europe, in the low teens growth year-on-year. I would say the one exception to that would be Rest of World, which is where Middle East is part of that. We did see some softness for some obvious reasons during the quarter. But on balance, I would say sales across all end markets and geographies was very strong for us. You mentioned Early Buy. We were well positioned coming into the start of the year with a nice carryover from our Early Buy orders that were received during fourth quarter. Because of some nice flow business in fourth quarter, we were able to really meter the Early Buy shipments both fourth quarter and carried more of that into first quarter of this year, allowing us to really stage the inventory in the channel as the season starts. As for the inventory question, second part of your comments there, we closely monitor channel inventory levels with our partners. And as I said, we were able to manage the timing of those Early Buy shipments to ensure that the inventories remain balanced at year-end, and we feel good about where they are exiting the first quarter. On balance, we're comfortable with overall inventory levels from a days on hand standpoint based on our current outlook for the seasonal demand profile. As of today, our mid-single-digit net sales guide assumes sell-in approximates to the sell-out for the full year. and the normal inventory levels will be achieved within the channel throughout the year and exiting the year. I know you're aware of this, but just as a reminder, the normal cadence for our industry is that sell-in exceeds sell-out in fiscal fourth quarter and first quarter. And then as you work through the season in Q2 and Q3, the sell-out of the channel exceeds what the OEMs or what Hayward sells into the channel. So in summary, we feel comfortable with the inventory levels that are staged in the channel and in the market currently and expect it to stay that way through the year. Jeffrey Hammond: Okay. Good. Just a follow-up here. Eifion, you mentioned some inflation and margin impact into 2Q. Can you just speak to where you're seeing incremental inflation, how the Section 232 update does or doesn't impact you? And what you're doing in terms of price? Is it broad or more targeted? I know there's some issues with ruthenium and other -- with salt chlorinators, et cetera, but just walk us through that. Eifion Jones: Yes. Jeff, before I jump into the response, let me just lead off by saying, despite these high pockets of inflation, which are higher than we originally expected, the team is doing a really good job getting after limiting the impact of these cost increases. And we're executing the playbook that we've become adapted to over the last several years. But to be clear, look, we are experiencing some inflation as we step into 2026. I'd also say, despite -- just to clarify what I said in the call, we continue to expect sequential gross margin to improve from Q1 to Q2, but it will be probably a little bit more modest than we did last year, in part because we'll start to lap price increases that we put into place. But specifically, we're experiencing higher energy-based costs coming through as a consequence of the disruption, I'd say, on a global basis. And we've also experienced slightly higher specialty metal costs earlier in the year, and we've acted quickly. We put 2 price increases and the first one in Q1, which was an out-of-cycle price increase on the alternative salt sanitization line. That went in on orders in Q1, most likely to start impacting invoices in Q2 onwards. And then more recently, early on in Q2, we put in a surcharge of approximately 2.5% which, again, on orders early in the quarter may be affecting invoices positively at the end of the quarter, but certainly rolling on to the full invoice profile in Q3 and Q4 onwards. So those are the necessary actions that we've taken. I'd say as a consequence of both of those actions, we still expect full year gross margins to be comparable to the record we set last year. And the operational team continues to execute all of their supply chain initiatives to limit the impact of any further inflation. There was the second part of the question that you had, second part? It is tariffs. In terms of the tariffs, Jeff, what I would say is the roll of IPA and then the reinstitution of the 122s and to your point, the 232s, we've evaluated the net impact of that, and it's no different from what we thought coming into the year. So we don't see any further headwind to the year as a consequence of this change in tariff regime. Operator: And our next question comes from Nigel Coe with Wolfe Research. Nigel Coe: So I just -- Eifion, I just want to go back to the 10% price in North America. You mentioned a couple of what sounds like unusual contributions. I just wanted to make sure we understand that. And maybe just specify what's baked in for price in your guide? I think it was 3% prior. How does that look right now? Eifion Jones: Yes. As you mentioned, we originally thought pricing for the full year would average broadly speaking, plus 3%, obviously, higher in North America, lower outside North America. We now expect it to be plus 4%. Some of that now is consequential to the benefit we took in Q1, slightly different incentive mix across the channel, retailers and builders earning a little bit less, normal distributors earning their normal margin benefits there. But we've increased guidance up 1% to reflect the pricing positivity. As I mentioned, the Q1 price increase associated with specialty metals impact salt chlorination. That's a very discrete product line. It doesn't affect -- that price increase does not affect the entirety of our product line. So that has a very small positive impact on the full year when you think about total Hayward pricing. The surcharge, which is 2.5%, we've put that in, in early Q2. We have not built that into guidance because we view it as temporary but structural. At any particular point in time, we may withdraw that 2.5%. So it's not appropriate for us to include that within our guidance. But for the balance of the year, we expect pricing to be developing quite similar to what we originally thought, which is, again, mid-single digits for North America, maybe slightly higher in the U.S. specifically, and then lower single-digit development in Europe and Rest of World, overall averaging about plus 4% for the entire year. Kevin Holleran: Just to reiterate what you said, to Jeff, again, we'll be lapping in Q2, Nigel, the tariff off-cycle increase that was announced in Q2 of 2025. So that will start to expire here as we work through the second quarter. Nigel Coe: Okay. And then just you made it very clear that you're not expecting there to be any channel inventory headwind this year, sell-in versus sell-through relatively similar. Do you think that there's any impact though from the price increases? Obviously, there's been a lot of price going in over the last several years in 2026 as well. Is there any elasticity impact here? Are you seeing any mix away towards lower-cost competitors? Any descoping of the pads? Anything you can point to? Kevin Holleran: Yes. I mean we certainly have our eyes peeled for that, Nigel. It's a very logical question with the amount of price that has been passed through to the pool owner. We can't point to anything specific that would say absolutely yes. I would say here in first quarter, we were very encouraged to see positive volume for the first time in several quarters. So that would actually be absolutely contrary to that concern. That said, there is a lot of price there. We continue to try and price products for the value that we think they create for the pool owner, and that's how we're driving our product development and our pricing decisions. Again, when we make these announcements, they're not necessarily blanket same percentage across all product categories or all SKUs, Nigel. We're fairly tactical and specific in where we think the market can accept the pricing, and frankly, where it can't. From a sales standpoint, as we look at first quarter, we were encouraged by some of the sales in numbers on what we would call discretionary products. You don't necessarily need color LED lights on your pool or salt chlorine generators or controls, but we saw a nice sales up in those numbers in the first quarter. So to summarize, we certainly are very aware of the question that you're asking, looking for data and early indication. But thus far, we see that the market is accepting the pricing that we've put in. And we hope it's nearing an end, though. We're not -- we don't want to continue having to put these dollar-for-dollar price increases into the marketplace. So stay tuned on that one, Nigel. Operator: We'll go next to Andrew Carter with Stifel. W. Andrew Carter: First off, I wanted to ask, I think Pentair said yesterday, their sell-out was above what POOLCORP said, that their equipment sell-out was 7%. Could you kind of comment directionally where you were? I think it's interesting in there, you said that weather was favorable. You're heavier skewed to the Northeast. That weather has been absolutely terrible. So I think that'd be late. So if you want to add any context to that. Kevin Holleran: Yes. I mean in terms of sales out with the larger channel partners that we get that information from, I would say our sales out was consistent, Andrew, with really what our full year guidance is. So we saw, call it, mid-single-digit sales out through our larger channel partners, which gives us confidence there. In terms of weather, yes, I mean, some of our larger share geographies, certainly in the U.S. are more seasonal in nature. And we view that -- while sales were okay in those regions, it certainly didn't help us in the first quarter. So we see that as an opportunity as the weather finally starts to turn in the Northeast and the Midwest. I quoted Canada earlier at plus mid-20s, high share region or country for us as well. So it didn't necessarily help. But overall, the balance of the country where we are growing share, which has been very targeted in our go-to-market and our dealer conversion strategies helped mute some of the weather impacts from the Midwest and East Coast, Andrew. Operator: Moving next to Rafe Jadrosich with Bank of America. Rafe Jadrosich: Just on the guidance increase for the full year, can you just talk about sort of what's driving that? Is that just 1Q upside? Is it better price realization or volume compared to your expectations? Or are you seeing it in the order book? What's changed versus what you're expecting a couple of months ago? Kevin Holleran: Yes. Let me start on that, Rafe, and then I'll ask Eifion to give more detail. But for the balance of the year, our guide assumes relatively stable demand environment with some regional differences. In North America, we're expecting pricing, as Eifion mentioned earlier, to be up in the mid-single-digit range, supported by disciplined execution and with modest improvements in aftermarket volume, perhaps offset slightly with new construction activity. And then in Europe, Rest of World, where pricing is more limited and volumes will be broadly flat. So taken together, all of this supports the full year outlook of that approximate 1% increase in the net sales growth. Eifion Jones: Yes, I think you got it, Kevin. The increase from 4% to 5% of top line growth is a reflection of the better pricing performance in Q1, recognizing Q1 typically only represents about 20%, 21% of [indiscernible] sales, but we moved up modestly there. In terms of the EPS guide, we've moved up, I think, a little bit more meaningfully. Original guidance that was $0.82 to $0.86. We've now moved that low end up to $0.84 and top end to $0.87. So about $0.015 increase at the midpoint in those ranges. And that really reflects continued leverage across the SG&A base. And we've been investing in SG&A progressively over the last couple of years. We increased in Q1 year-over-year in SG&A, but less than the net sales growth. So we're beginning to see leverage come across the SG&A base as we talked about as we exited last year. So we're pleased with the development in the EPS, obviously, again, fueled in part by the top line movement. Rafe Jadrosich: Okay. That's helpful. And then just on the -- on your market share, it's obviously tough for us to tell because you have different channel dynamics and sell-in and sell-out. But it seems to us like you're gaining a little bit of market share. One, would you agree with that? And if it's true, like what are the -- what do you think the key drivers are? Is it like were you underpenetrated regionally? Is it like OmniX? Like what's leading to that outperformance relative to the industry? Kevin Holleran: Yes. I mean we think that we are picking up some modest share. It's hard fought certainly because there are some great competitors out there. But this has been a concerted effort several years in the making, Rafe. And it is a combination of things from some great new product launches. OmniX is certainly grabbing a lot of headlines. But there's other products behind it, whether it's entry into a 4-horsepower variable speed or some aftermarket lights or bringing some new cleaner products to the market. As Eifion just mentioned, we've added some resources to our field sales and service teams to provide better service, better support in our efforts to gain the attention of some new dealers out there. And then certainly, geographically, as we spoke, Andrew highlighted earlier some of our higher share regions. We were underpenetrated in some markets, not only around the country, but around the globe. And we've had some very focused regional approaches to try and grow out West and in the Southwest and in the South Central and parts of Florida. So it's a multipronged approach across new product introduction, in-market sales support, marketing programs and focused on some of those underpenetrated markets where Hayward has been historically underrepresented. Operator: [Operator Instructions] We'll go next to Brian Lee with Goldman Sachs. Brian Lee: I guess on the guidance, it does sound like most of it is price in terms of the incremental 1 percentage point on the top line. But you did allude to the fact that volume went positive here for the first time in a while and your tone sounds relatively constructive. I know it's early in the year, but any sense of kind of the demand environment maybe picking up or at least modestly being better and that being a potential tailwind as you move through the year? I know prices obviously helped a lot and looks like it will continue to help. But any additional commentary you can make on sort of what you're seeing here from a demand perspective and what it might translate to for the rest of the year? Kevin Holleran: Yes, I think it's a great question. As you said, when you're framing the question, Brian, it's early in the year, though. And Q1, not all markets are even open for business at that point in time. So while we're optimistic, I don't -- we're not yet confident to assume that there will continue to be market demand or market volume that could assist with the revision to guidance at this point. As we look, the aftermarket continues to be resilient. As I mentioned, we see nice sales in demand for some of the upgraded -- or products that we see adding features and functionality to the pool pad. From a remodel standpoint, there seems to be some pockets of optimism as we interact with our dealers in the first quarter. And new construction, I think it's just responsible for us to assume that it's going to remain flattish until there's some catalyst for us to think otherwise or see otherwise on the new construction side. So we certainly would like to be back in front of this audience in the coming quarter talking about some more bullish outlook on market demand, but we're not yet to the point of adding that as an element of our guidance. Eifion Jones: Yes. Maybe just to tag on one last point, which is a follow-up to what Rafe was asking as well. We have introduced the OmniX, I'll call it, platform into our product range. We started last year. And we've seen good momentum year-over-year in the adoption of OmniX as it was launched attached to that original pump category. That confidence there, that uptick in activity allows us to think about expanding, and we are expanding it across other product categories. So as Kevin just mentioned, we're being reserved a little bit, but the aftermarket remains resilient. Discretionary spend for us, at least both in sell-in and what we can see in sell-out is positive and the adoption of OmniX has been good. Brian Lee: Yes, absolutely. I appreciate that color. And maybe on that point, I know in the past, you guys have kind of shared some product vitality statistics, and you're clearly gaining some share and definitely from a body language perspective, you sound more constructive than some of your peers. So this feels company specific. But is there anything you can share in terms of product vitality, sort of what amount of growth is coming from new products? And -- because that seems like that could be one of the more sustainable uptrends for you from a growth perspective. I get the underpenetrated regions and things of that nature, there's multiple prongs to it. But maybe on the new product front, anything you can share just to provide some additional growth for you guys? Eifion Jones: Yes, sure. It's probably more appropriate for us to share vitality as we come out of the season, so we get a really good view on what's sold out right now for the last couple of quarters we've been selling in. So let's maybe hold the answer to that question until we come out of Q2 when we can get better visibility on vitality out of the channel. What I would say is we -- last year, we did launch and introduce a number of different new products. We're very pleased with the success of that. We featured a bunch of those at the end of last year in our earnings presentation. And as we look at Q1, specifically this year, we're very pleased with what we would call the discretionary side of the product range. It continues as a positive momentum sell-in over the last -- certainly in Q1, but over the last couple of preceding quarters. So we're seeing good adoption of technology, good adoption of features, including lights, control systems, heaters on an LTM basis continues to do well. So from a discretionary perspective, which is attached to a lot of our new product launches, we're seeing very good adoption. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Kevin Holleran for closing comments. Kevin Holleran: Thanks, Carrie. In closing, I want to thank our employees and partners around the world. Your dedication and hard work continue to be critical to the progress we're making across the business. We're encouraged by our strong start to the year and remain confident in our strategy. If you have any follow-on questions, please reach out to our team. We appreciate your continued interest in Hayward and look forward to speaking with you again on the next earnings call. Carrie, you may now end the call. Operator: Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good day, and welcome to the Brookfield Infrastructure Partners 2026 Results Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. David Krant, Chief Financial Officer. Please go ahead. David Krant: Thank you, Sherry, and good morning, everyone. Welcome to Brookfield Infrastructure Partners First Quarter 2026 Earnings Conference Call. As introduced, my name is David Krant, and I am the Chief Financial Officer of Brookfield Infrastructure. I'm joined today by our Chief Executive Officer, Sam Pollock; and our Chief Operating Officer, Ben Vaughan. Also joining us today is Dave Joynt, a managing partner on our investments team. I'll begin the call today with a discussion of our first quarter 2026 financial and operating results, followed by an update on our capital recycling initiatives. I'll then turn the call over to Sam, who will provide an update on our recent strategic initiatives before concluding with an outlook for the business. At this time, I'd like to remind you that in our remarks today, we may make forward-looking statements. These statements are subject to known and unknown risk factors and future results may differ materially. For further information on known risk factors, I would encourage you to review our latest annual report on Form 20-F, which is available on our website. So with that, Brookfield Infrastructure had a strong start to the year, delivering record results while continuing to advance a number of strategic initiatives across the business. We generated funds from operations, or FFO, of $709 million or $0.90 per unit in the first quarter. This is a 10% increase compared to the prior year. This performance was driven by strong base business results, highlighted by FFO from our data and Midstream segments increasing 46% and 12%, respectively, compared to the prior year. Results in our Utilities and Transport segments reflected resilient underlying performance with the current period impacted by higher levels of capital recycling activity achieved during 2025. I'll now go through our results by segment in more detail. Our Utilities segment generated FFO of $201 million, up 5% year-over-year. The increase was primarily driven by inflation indexation and the benefit of over $500 million of capital commissioned into rate base, along with the contribution from our recently acquired South Korean industrial gas business. Moving on to our Transport segment. FFO was $283 million, slightly below the same period last year. The decrease was primarily attributable to loss contributions from our successful asset sales. As a reminder, this included our Australian export and container terminal operations, the partial sale of a U.K. port operation and the majority interest in a portfolio of fully contracted containers at our global intermodal logistics business. This was partially offset by the acquisition of our North American railcar leasing platform that closed on the 1st of January. After adjusting for all these factors, FFO was ahead of the prior year, reflecting higher volumes and tariffs generally across our rail and road operations. Our Midstream segment generated FFO of $190 million, up 12% compared to the same period last year. The increase reflects attractive commodity pricing, strong asset utilization and robust customer activity levels across our portfolio. Lastly, FFO from our data segment was $149 million, representing a step change increase of 46% compared to the prior year. The increase was driven by the contribution from our U.S. bulk fiber network, which we acquired in the third quarter of last year as well as organic growth across our data storage businesses, which included the commissioning of over 200 megawatts of operating data centers into earnings over the last year. In addition to the strong financial and operating results we have delivered, we also made meaningful progress towards our 2026 capital recycling goal with proceeds secured of $1 billion to date. This includes closing the initial tranche of our partnership on a portfolio of stabilized and under construction data centers in North America and the closing of the sale of the largest of 4 concessions within our Brazilian electricity transmission business. We also completed a secondary sale of a 12% interest in our North American gas storage business. And finally, in April, we signed an agreement to sell our bulk liquid storage business, the largest independent storage provider in Scandinavia. These asset sales improved our strong corporate liquidity position, which was $2.5 billion at the end of the first quarter. Our balance sheet remains well capitalized and our proactive approach to managing debt maturities has allowed us to remain opportunistic in the capital markets. During the quarter, we refinanced approximately $1.5 billion of nonrecourse debt on a net to bid basis, with no incremental borrowing costs for the business. Before turning the call over to Sam, I would like to briefly note that we have recently begun exploring whether a single combined corporate structure would be the best path forward for the business. The goal is to determine if on a tax-free basis, we can create a single corporate security that would enhance liquidity, increase index inclusion and create value for investors. We are in the early stages of this evaluation, and we'll provide an update when appropriate. So that concludes my remarks for this morning. I'll now turn the call over to Sam. Samuel J. B. Pollock: Okay. Thank you, David, and good morning, everyone. For my remarks today, I'm going to discuss our strategic initiatives before concluding with an outlook for the year ahead. We have had an active start to the year with business development activity resulting in new strategic capital partnerships and continued progress under established frameworks. These partnerships are bilaterally sourced with high-quality counterparties and gives us exclusive access to investment opportunities that require long duration capital at scale. Increasingly, these frameworks are becoming a more meaningful avenue for growth, reinforcing our position as a partner of choice and expanding our opportunity set to deploy large-scale capital at attractive risk-adjusted returns. During the quarter, we established a new framework with a leading global investment-grade OEM, and launching an exclusive leasing platform for industrial equipment. Through this platform, we will provide long-term leasing solutions that are expected to generate predictable cash flows without residual value interest rate or refinancing risk. We will have the sole discretion to enter leases under the framework with BIP's share of the equity investment expected to be upwards of $375 million. Our $5 billion strategic partnership to install up to 1 gigawatts behind-the-meter power generation advanced further this quarter as well. We secured an additional $430 million CapEx project, bringing the total capital committed under the framework to approximately $1.6 billion. BIP's total equity commitment associated with the framework to date is approximately $60 million. Given the success of the behind-the-meter solution and strong customer demand based on speed to market, we may have the ability to expand the platform in the coming months. We also remain on track to close Clarus. This is New Zealand's leading gas infrastructure utility in the second quarter. For an equity purchase price of approximately $70 million at our share. Now moving to our outlook. We are progressing through 2026 from a position of strength, and remain very constructive on the backdrop for infrastructure. While recent geopolitical developments have contributed to greater market volatility, the essential nature of our businesses and the regulated or contractual profile of our cash flows continue to provide resilience and growth. More broadly, demand for additional power, connectivity and logistics capacity continues to expand. This is being driven by digitalization, accelerating power demand, the rapid build-out of AI infrastructure and the ongoing reconfiguration of global supply chains. These tailwinds are expanding our opportunity set and providing attractive avenues to deploy capital at compelling risk-adjusted returns. Coupled with strong operating performance and a visible pipeline of organic growth projects, these factors position us well to deliver 10% plus per unit FFO growth in 2026. As David mentioned, our capital recycling program and balance sheet continues to provide the flexibility to fully self-fund the growth ahead. With multiple sale processes underway across our business and continued access to capital markets during windows of opportunity, we are well positioned to fund our investment pipeline while maintaining financial discipline. Taken together, this supports our confidence in the outlook for 2026 and our ability to continue compounding value for our unitholders over the long term. That concludes our remarks, and I'm going to pass it back to Sherry for -- to open the line for Q&A. Operator: [Operator Instructions] And our first question will come from the line of Devin Dodge with BMO Capital Markets. Devin Dodge: Wanted to start on the recently launched equipment leasing business. I'm just trying to get a sense if this is part of the strategy for investing inside data centers, what kind of time frame you'd expect to deploy that $1.5 billion of capital and what do you view as the main risks associated with that investment? Samuel J. B. Pollock: Devin, this is Sam. I'll tackle that one. So the opportunity, I think, will likely be broader than just data centers, but initially, a good portion of the investment will be equipment for data centers. The -- we get a lot of comfort over the transaction itself because we're able to provide capital to essentially high-quality counterparties with investment-grade profiles with fully self-amortizing cash flow streams. So it's very attractive from that perspective. We think we can scale this up as far as timing and deployment of capital. I think our hope is that on a gross basis, we'll deploy $1 billion to $2 billion of equity capital. So BIP share would be 25% of that. And we expect -- it's hard to predict flow, but I think we would hope to do that within a 24-month period. Devin Dodge: Okay. I appreciate that. Second question, I was going to ask about that Intel JV. I didn't see any mention of it in your release, but I think Intel disclosures suggested the payments to the JV may have started in Q1. I guess, first, was that the case? And how quickly can return on investment ramp up in the coming quarters as both those fabs come online? David Krant: Devin, it's Dave here. I'll take that one. Look, I think in the past, we generally won't provide many updates specifically on the project. I think those generally come, as you said, from the Intel side. I think largely, the project has gone well. It's coming online, in line with our targets in terms of scheduling. They did make their first small wafer payments in the quarter. I would expect the initial -- the final capital contributions to go in over the next 6 months. And as those go in, I would expect the earnings to start to ramp up. And so I would expect to start seeing that come through our transmission and distribution segment of our data business in Q3 and then full run rate will be in 2027. Operator: And that will come from the line of Maurice Choy with RBC Capital Markets. Maurice Choy: I wanted to start with this concept of a single combined corporate structure. I have to assume that when the BIPC shares were first created back in 2020, something like this was contemplated. And if so, what were some of the obstacles back then and how those may or may not no longer be as big of an obstacle or even at all this time round. David Krant: Maurice, it's David again. But I think -- as we talked about this morning, we are in the early stages of considering this with the Board direction. And so it's probably hard to say what the obstacles are today. That's the word we'd like to complete over the next little while. As you know, the 2 companies for the last 6 years have served us well, but we're always looking at ways to improve our access to capital. And we think following a few things, obviously, the completion of our sister company BBU's process. We can now have some insights into how 1 simplified corporate structure will trade in the market. An early indication to that that's been positive, that this is the right time to reassess. And so I think that's probably all we can say at the moment in light of that, and I'll leave it that. Maurice Choy: Fair enough. Maybe if I could just finish off more on your energy portfolio. Obviously, we've seen a series of support of federal and provincial government changes in Alberta and broader Canada. And also, there's been the conflict in the Middle East. Just your thoughts on the outlook for your business in the province notably into pipeline and NorthRiver? Benjamin Vaughan: Yes. And it's Ben here. I'll take that question. And look, all those developments are very positive for our Midstream business in Canada. We're seeing really strong demand from all of our clients for more access to our facilities and our pipelines. We completed about $400 million worth of growth projects in the past several months that are now starting to ramp up in terms of the revenue profile and delivering results. And probably most importantly, we have a really tangible, meaningful pipeline of pretty bite size, relatively straightforward to execute and very low build multiple and highly accretive growth projects right in front of us. So I would expect the backlog -- our pipeline to grow. The backlog in Midstream is really attractive right now, and we expect to bring a number of those projects to FID in the coming quarters. And maybe just to put in perspective, the magnitude of the projects that we're looking at the opco level would be roughly in the $8 billion range from a pipeline perspective. So it's a fairly meaningful size number of projects we have to look at. Operator: One moment for our next question. And that will come from the line of Robert Catellier with CIBC Capital Markets. Robert Catellier: I'd like to follow up on the potential corporate conversion that the Board is exploring, understanding it's quite early days. I wondered if you had any time lines for us in terms of what's reasonable to expect in terms of when a decision might be made? Samuel J. B. Pollock: Rob, as I said, unfortunately, there's probably not a ton we can share on the time line as of yet. As I said, we're just kicking off the process now. Robert Catellier: Okay. No, that's reasonable. I just wanted to just dig into the Csquare IPO, which I understand they filed a confidential registration statement. I'm just curious as to how you chose the IPO route versus private sale and maybe you're dual tracking it, but maybe you could comment on that and how much you're expecting to sell by way of IPO. Samuel J. B. Pollock: Robert, I'll tackle that one. Look, I think in discussions with our advisers, the capital markets for IPOs are quite open at the moment. And obviously, there's a lot of anticipation for the upcoming SpaceX IPO. The one thing that public investors are looking for businesses that generate high cash flow, have still strong growth prospects and have great tailwinds related to the AI sector. And our business Csquare basically ticks all those boxes. We think it has the potential to be one of the leading IPOs of the year. And we're really excited about bringing that forward. And so just stay tuned. Operator: One moment for our next question, and that will come from the line of Cherilyn Radbourne with TD Cowen. Cherilyn Radbourne: I wanted to ask a couple of questions on the data segment. And I appreciate the data centers and Intel are the major growth drivers at the moment. Just curious how you think about the balance of your data portfolio in towers, fiber and so forth? And what value that provides in terms of diversity but also what you see in terms of inorganic opportunities there? Samuel J. B. Pollock: Cherilyn, maybe I'll start. But then I think you've given us a good segue to maybe talk about what's going on in the AI infrastructure sector, in particular, and we have Lief Williams here. who I think can expand on some of the things going on. But maybe just talking about some of our other businesses, we're seeing continued strong growth across the sector. One of the situations. And our colleague, Scott Peak mentioned it a number of months ago at our Investor Day. There's this domino effect. And the huge growth in data centers and AI is having impacts across basic utilities, power, Midstream and our other data businesses, including fiber -- our towers. And the types of things that we're seeing is all our customers are looking to expand density across their networks. And so on the tower side, we have a number of build-to-suit opportunities that we continue to execute in all our businesses across Europe and Asia. On our fiber businesses, there's still a huge amount of the U.S. in particular, but other parts of the world that have not been fiberized that are still operating on copper. And so that remains a lot of white space for us to continue to build out those networks and allow people to run all these new devices and programs more effectively. So we see this as a continued 5- to 10-year build-out. And so all our businesses are well positioned. But maybe turning to some of the more, I'd call it even more exciting stuff going on in the AI infrastructure space. Peak, maybe just give us a little update on that. Scott Peak: Yes. Thanks, Sam. And good morning, Cherilyn. So the large users of AI factories and data sectors are highly, highly active in the market. There's effectively no data center inventory remaining for 2026. And even 2027 is quite scarce. What's interesting as well is that the demand profile has broadened from just data center capacity into also looking for compute. So leasing GPU as a service as well as behind-the-meter power opportunities. And so we see a large opportunity for groups like Brookfield, who have tremendous access to capital and an asset base to participate across all of those different asset classes. Cherilyn Radbourne: Great. And then maybe just a quick follow-up on the data center side. I imagine that site selection and acquisition is particularly competitive and secretive. And so I'm not going to ask you to reveal anything proprietary. But to what extent is having a sister real estate business help in that regard? Scott Peak: I would say it certainly helps. And certainly, the scale of Brookfield is helpful in that regard. Just to give a sense, I would say there is a kind of dual track search for powered land. There's front of the meter options and then there's behind-the-meter options. Front of the meter options are challenging in the sense that the number of load applications going to utilities. It just kind of massively overwhelms the grid. And so utilities are now increasingly requesting large levels of credit or financial deposits, which is a huge disincentive to many of the parties out there looking for those front of the meter power solutions. Behind the Meter also has its challenges in terms of delivering baseload power. At speed, the low emissions and highly modular. And so that's a place where, again, we think our Bloom partnership will be tremendously effective. I would say more broadly, we're starting to see some pushback in some locations in terms of the scale of these AI factories and then the risk of it pushing up rates for local ratepayers. And so again, I think Brookfield has been doing large-scale projects across a number of asset classes for many years. And so we think that we're very well positioned to help identify credible powered land sites. And help bring them to fruition. Operator: One moment for our next question. That will come from the line of Robert Hope with Scotiabank. Robert Hope: Hoping to dive a little bit deeper on the AI factory and digital hub strategy. How are we progressing on those discussions with counterparties. And should we be in a position in 2026 to see some notable or sizable project announcements? Scott Peak: Robert, it's Peak again. I'll take this one as well. Yes, look, I think you do see, as I mentioned, tremendous demand from the large technology companies. The demand profile has broadened a little bit as well. There used to be a handful of large hyperscalers. We now have a wave of foundation model companies and inference operators who are also looking to secure the capacity. So I would say there's a tremendous amount of noise in the market in terms of number of sites available and when does the power ramp. But what we're increasingly seeing is these users are looking for credible partners who have placed long-lead equipment orders and you have true dates for when the power is available. And we think that, that will benefit groups but Brookfield who are institutional and who have tangible sites that have a real ramp. And so I would say the demand profile is very strong. I think you will see and we have seen strong leasing activity on the Brookfield portfolio over the last couple of quarters. And I think you'll continue to see strong demand through '26 and certainly through '27. Robert Hope: All right. Appreciate that. And then maybe moving over to kind of to the 10% organic growth rate or to the 10%-plus FFO growth rate for 2026. Can you comment how you're tracking on that? The organic growth at 8% seems strong, and the commodity price environment seems to be helping. Though it does appear that asset sales are coming a little quicker than M&A activity on the other side. So can you maybe talk about what the headwinds and tailwinds that you're seeing there are. David Krant: Yes, Rob, it's Dave here. And look, I think you did a great job summarizing my answer probably, but I think the -- I'll start by saying the first quarter was an excellent start. We delivered on our 10% target. And so with that behind us, I think we feel good with how the year is progressing. It's always hard to predict the timing of new investments and asset sales. But to your point, we have had some good initial success on the capital recycling. Front, I think from an all-in cost of capital is very attractive. The yield we'll see on that $1 billion, somewhere in the mid-single digits probably. And so I think from an accretion perspective, I don't expect that to be a meaningful drag on the business as we look ahead. So all in all, I think we started the year off well. I think we feel confident with our 10% for the year still, and we'll continue to provide an update as we progress through the year. Operator: [Operator Instructions] our next question will come from the line of Frederic Bastien with Raymond James. Frederic Bastien: Good morning. You've historically leaned into periods of uncertainty in this location to pursue large acquisitions. How are you thinking about your ability to deploy capital into a sizable transaction this year? Samuel J. B. Pollock: Fred, I'll talk -- take that one. Yes, I think you're right. We've been historically successful in I think, taking advantage of dislocations. And when others have paused, we've seized the moment. At the moment, I'd say the market remains relatively calm and constructive, given all the volatility. There's still a fair amount of buyers out there. So I wouldn't describe this as an opportunistic market environment. Nonetheless, I do think we're always on the lookout for large value opportunities. We -- what we're seeing is, today, the opportunity set around our AI infrastructure strategy is extremely strong. And so I'm very optimistic about us being able to do some exciting transactions there. We're also seeing an uptick in activity across Europe. And I think there's some larger value opportunities there that I think we can take advantage of. And then we keep on monitoring the capital markets. Often some of our best acquisitions are when the public market will pull back, and we can take advantage of a take private opportunity. So those are the things that we're up to I can't give you like a time line on when we'll do our next large deal, but we're always out there. We have tremendous partnerships so that we can execute on those things and optimistic there will be some exciting deals in front of us. Frederic Bastien: That's helpful. I just wanted to tack on a Midstream related question as well, thinking switching gears on monetization. Are you -- how are you thinking about NorthRiver and a potential monetization there? Samuel J. B. Pollock: Sorry, that was about monetizing NorthRiver. Frederic Bastien: Yes. Samuel J. B. Pollock: Well, look, I could turn it over to Ben in a second if he wants to add anything. But what I would just say is the business has had tremendous commercial success in the past couple of years. We've extended our contract term, I think, to close to 12 years now. And we think it's really well positioned. Our debate internally is whether or not we continue to build out the business and take advantage of some of the additional growth that's there or whether we bring it to market and sees what is probably a pretty constructive environment for Midstream businesses. So we're weighing those considerations. It's performing really well, and we just don't have an answer for it at this point in time. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call over to Mr. Sam Pollock for any closing remarks. Samuel J. B. Pollock: Great. Thank you, everyone, and thank you, Sherry, for hosting this call. We appreciate you joining us today to hear about our results. And we look forward to the warmer weather that's in front of us and the hockey playoff season. I hope all you Habs fans are cheering for my team. And we look forward to providing an update in the quarter ahead. Operator: Thank you. This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Good day, and welcome to Ionis' First Quarter 2020 Financial Results Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the over to Wade Walke, Senior Vice President of Investor Relations, to lead off the call. Please begin. D. Walke: Thank you, Sabrina. Before we begin, I encourage everyone to go to the Investors section of the Ionis website to view the press release and related financial tables we will be discussing today, including a reconciliation of GAAP to non-GAAP financials. We believe non-GAAP financial results better represent the economics of our business and how we manage our business. We have also posted slides on our website that accompany today's call. . With me this morning are Brett Monia, Chief Executive Officer; Kyle Jenne, Chief Global Product Strategy Officer; and Beth Hougen, Chief Financial Officer. Holly Kordasiewicz, Chief Development Officer; Eugene Schneider, Chief Clinical Development Officer; and Eric Swayze, Executive Vice President of Research, will also join us for the Q&A portion of the call. I'd like to draw your attention to Slide 3, which contains our forward-looking language statement. During this call, we will be making forward-looking statements that are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors contained in our SEC filings for additional detail. And with that, I'll turn the call over to Brett. Brett Monia: Thanks, Wade. Good morning, everyone, and thank you for joining us today. Ionis entered 2026 with significant momentum, which continued to accelerate through the first quarter of this year. Our performance to date highlights our strong execution across the business, which positions us to fuel substantial growth for years to come. We are very pleased with the continued success of Tryngolza. Demand continues to grow, reflecting both a compelling clinical profile and strong launch execution by our team. The launch of Tryngolza is now also underway in Europe through our partner, Sobi, expanding access to this transformational therapy for people with FCS. We also continue to advance our launch of DAWNZERA. We're very encouraged by the strong early trajectory and the breadth of prescribers across patient segments. Outside the U.S., DAWNZERA received European approval earlier this year and our partner Otsuka has now initiated launch activities across the region. Together, Tryngolza and DAWNZERA give us a strong foundation of a successful commercial execution as we look ahead to 2 additional independent launches this year with more to come. We are on track for the launch of olozorsen in severe hypertriglyceridemia, which represents our first independent launch in a broad patient population. We are pleased to have received priority review by the FDA with the PDUFA date of June 30, reflecting the significant unmet need in SHTG and the groundbreaking results from our landmark core and CORE 2 studies. In these studies, we demonstrated profound and highly statistically significant reductions in triglycerides and acute pancreatitis events, along with favorable safety and tolerability. Today, based on HCP demand and payer research, we are increasing our annual peak sales estimate for olezarsen from greater than $2 billion to now greater than $3 billion, positioning olezarsen to become Ionis' first wholly owned multibillion-dollar medicine as the new standard of care for treating patients with severe hypertriglyceridemia. Zilganersen for Alexander's disease is our second planned independent launch this year and the first from our industry-leading neurology pipeline. Zilganersen is the first and only medicine to demonstrate clinically meaningful and disease-modifying benefit in Alexander's disease, a devastating and orphan fatal leukodystrophy with no approved treatments today. We submitted our NDA in January. And based on the results of our pivotal study, the FDA accepted our NDA with priority review and a PDUFA date of September 22. Overall, we are on track to have 3 independent medicines for 4 indications on the market in 2026. Tryngolza for FCS and SHTG, DAWNZERA for HAE and Zilganersen for Alexander disease. This marks a major step in Ionis' Evolution is a fully integrated commercial biotech company. Complementing our wholly owned portfolio is our partner pipeline, a rich pipeline that continues to advance toward multiple value-driving events this year. Bepirovirsen our potential first-in-class medicine for chronic hepatitis B is on track to launch in the U.S. and Japan this year by our partner, GSK. And just this week, the per version was granted Breakthrough Therapy designation and and accepted for priority review by FDA with a PDUFA date of October 26. Next month at EASL, GSK will present the unprecedented results of the Phase III program in which bepirovirsen achieved statistically significant and clinically meaningful functional cure rates in patients with chronic hepatitis B. We also remain on track for data from 2 major cardiovascular outcome trials from our partner pipeline this year. The pelacarsen Lp(a) HORIZON trial in patients with elevated Lp(a) and cardiovascular disease and the eplontersen cardio transform trial in transthyretin-mediated cardiomyopathy. Including these programs, along with pepireversen, we expect 5 partner-led launches by the end of next year, creating a diversified stream of royalties and milestones for Ionis with multibillion dollar potential well into the next decade. In addition to our commercial and pipeline achievements, we also delivered strong financial results in the first quarter. As a result of this strong Q1 performance and outlook for the balance of the year, today, we are announcing a significant improvement to our financial guidance, which Beth will cover in details in a few moments. Ionis has achieved a great deal of late. Our pipeline and our launches are delivering tremendous value, and we continue to strengthen our financial position. But even more importantly, we are well positioned and committed to build on the success to drive far greater value for patients and our shareholders. And with that, I'll turn the call over to Kyle. Kyle Jenne: Thank you, Brett. As we enter 2026, Ionis is capitalizing on the exceptional launch momentum we generated in 2025 to drive even greater impact. We are set up for continued success with our independent launches. Tryngolza, demand is accelerating. DAWNZERA early launch metrics are tracking extremely well. And enthusiasm continues to build for our upcoming olezarsen launch in SHTG and zilganersen launch in Alexander's disease. Bingo continues to build on the strong performance from last year. Q1 was our strongest quarter in terms of demand with patient starts increasing significantly versus prior quarters and patients on treatment are doing extremely well. . Our patient finding initiatives continue to identify appropriate FCS patients, and we are successfully converting prescriptions to patients on treatment. We are seeing ongoing expansion in both breadth and depth of prescribing with more clinicians initiating Tryngolza and existing prescribers writing additional scripts. Prescribers span a broad mix of specialties, including cardiology, endocrinology and lipidology, which is exactly the prescriber base we want as we prepare for the broader SHTG population. Physicians remain highly satisfied with Tryngolza's overall profile. Efficacy, safety, tolerability and the patient experience, and that is translating into an accelerating rate for new patient starts. Additionally, we are highly encouraged by the updated ACC and AHA clinical practice guidelines, which singles out olezarsen as the recommended treatment to lower triglycerides and reduce pancreatitis risk in patients with FCS. Outside the U.S., our partner, Sobi, is now in the early stages of launching Tryngolza for FCS in Europe. This is expanding access for FCS patients and will bring in additional revenue over time. Following the groundbreaking CORE and CORE 2 data and SHTG, we conducted extensive market research with high-volume lipid specialists, cardiologists and endocrinologists. That work consistently showed a clear understanding that preventing pancreatitis is the key treatment goal in SHTG and that current options fall short. Strong recognition of all olezarsen's differentiated clinical profile, especially the acute pancreatitis data and the very low number needed to treat. And HCPs have stated a high intent to prescribe across a range of patient types with initial use expected for individuals with triglyceride levels above 880 milligrams per deciliter, or above 500 milligrams per deciliter, with a history of acute pancreatitis or other high-risk comorbidities, including progressive cardiovascular disease and type 2 diabetes. In line with our commitment to patient access and to a successful transition into the broader SHTG market, we recently announced an important pricing decision for Tryngolza. Effective April 1, we set the new annual wholesale acquisition cost to $40,000, which applies to the current FCS indication and will be maintained for the anticipated SHTG indication across both doses. Importantly, by establishing a new price ahead of the June 30 PDUFA date, we are integrating olezarsen into 2027 payer contracting cycles, positioning us for accelerating access following approval. From a go-to-market standpoint, our full U.S. field organization is now in place, trained and deployed. Today, that team is focused on supporting Tryngolza for FCS and deepening our relationships with the key specialists who also treat SHTG. With this expanded footprint, we are positioned to engage approximately 20,000 high-volume SHTG prescribers across the country. The DAWNZERA launch is gaining significant momentum in what is largely a switch market in the U.S. We are seeing increasing adoption across all patient segments. Patients switching from existing prophylactic therapies, patients who were previously using on-demand treatment and treatment-naive patients. Our free trial program has been very effective with high conversion to paid therapy rate to date. Just as importantly, feedback from both physicians and patients has been consistently positive, highlighting DAWNZERA's strong efficacy, its differentiated RNA-targeted mechanism, the positive switch data, which HCPs described as "differentiating and motivating" and DAWNZERA's patient-friendly profile that includes a self-administered auto-injector that can be stored at room temperature for up to 6 weeks. We are also seeing a growing base of repeat prescribers, which is a key indicator that Dawnzera is providing a substantial benefit for patients. While it will take time to fully transition appropriate patients off legacy therapies, especially in a well-established market like HAE. The launch fundamentals give us confidence that DAWNZERA will contribute significantly to the increase in our commercial revenue in 2026 and beyond. Outside the U.S., DAWNZERA is now approved in the EU and our partner Otsuka has initiated launch activities. Over time, we expect ex U.S. markets to become an important contributor to the global DAWNZERA franchise. Finally, we are preparing for our first independent launch from our neurology portfolio with Zilganersen for Alexander's disease. On the back of the positive Phase III results, we now have FDA priority review with the PDUFA date set of September 22, and our expanded access program is underway. On the commercial side, our focus has been on continuing to strengthen current relationships and build new relationships with a highly specialized community of leukodystrophy and rare neurology HCPs, further advancing partnerships with patient advocacy groups, and ensuring the right support infrastructure is in place for diagnosis, treatment and ongoing care. Our medical affairs team has been engaging with top leukodystrophy centers, sharing data and helping to build awareness of Alexander's disease. Our marketing and access teams are finalizing the launch strategy, and we will hire the customer-facing team closer to approval. Zilganersen is not only an important medicine for people living with Alexander's disease, but it's also a template for how we will commercialize future rare first-in-class neurology therapies emerging from our pipeline. With 2 independent launches building momentum, 2 additional launches anticipated this year, and a strong pipeline behind them. We believe Ionis is well positioned to change the lives of patients around the world. With that, I'll turn the call over to Beth. ? Elizabeth L. Hougen: Thank you, Kyle. The strong operational execution you've heard about this morning translated into very strong first quarter financial results. We delivered year-over-year revenue growth and maintained disciplined expense management while continuing to invest in our current and upcoming independent launches. First quarter total revenues were $246 million, an increase of 87% compared to the first quarter of 2025. This increase was driven by year-over-year commercial revenue growth from Tryngolza and DAWNZERA and substantial R&D revenue, including approximately $95 million of milestone payments from multiple partnerships. Commercial revenue increased over 42% year-over-year in the first quarter, driven in large part from Tryngolza and DAWNZERA growth. Tryngolza delivered over $27 million in product sales reflecting continued strong demand that was offset by an anticipated decline in net price. DAWNZERA contributed meaningfully to commercial revenue, delivering $16 million in the first quarter. an increase of 125% compared to the prior quarter. Collectively, our expanding commercial portfolio positions us for robust revenue growth. and is expected to represent an increasing share of total revenue year-over-year. Operating expenses for the quarter were in line with expectations and increased to 29% year-over-year, primarily driven by commercial investments supporting Tryngolza and DAWNZERA and launch readiness activities for olezarsen in SHTG and Zilganersen in Alexander's disease. We ended the quarter with cash of approximately $1.9 billion. The change in cash from year-end 2025 was primarily related to $633 million we used to repay our 0% convertible notes, which were due on April 1. The strength of our balance sheet is the result of our prudent fiscal management which enables us to make strategic investments as we advance and launch our wholly owned medicine. Our Q1 performance underscores the value of our diversified revenue model, which combines growing commercial revenue with substantial and recurring R&D revenue from partner programs. Based on our strong year-to-date financial results, accelerating launch momentum and positive outlook for the rest of the year, we are improving our 2026 financial guidance. We now expect total revenue in the range of $875 million to $900 million, an increase of $75 million versus prior guidance, with total revenue weighted slightly more towards commercial revenues. For the first time this year, we are also providing product level guidance for Tryngolza and DAWNZERA. We expect Tryngolza product sales to be between $100 million and $110 million for the full year. and generally in line with 2025 full year Tryngolza revenue. Our guidance assumes a significant decline in second quarter Tryngolza revenue based on the updated price effective April 1 and and a steady return to growth after the June 30 approval for SHTG. We are projecting Denver product sales to be between $110 million and $120 million for the full year. Our guidance assumes DAWNZERA will continue to be a significant contributor to year-over-year growth in 2026, with revenue steadily increasing as the launch advances. We also anticipate significant R&D revenue from existing collaborations, including potential development and regulatory milestones across our partnered portfolio demonstrating that R&D revenue is indeed an important financial accelerator. In fact, we recently learned that the first patient initiated treatment in the Phase III program for salanersen, which triggered a $45 million payment we will recognize in the second quarter. Over the balance of the year, we also are eligible to earn additional milestones tied to sapoblirson, Vibro pelacarsen and other partnered programs as they advance. We expect our 2026 operating expenses to increase in the low-teen percentage range compared to last year. This modest increase reflects our commitment to financial discipline as we bring multiple medicines directly to patients and advance our pipeline. The key drivers of expense growth will be sales and marketing investments to support Tryngolza and DAWNZERA and to ensure successful launches for olezarsen in SHTG and Zilganersen in Alexander's disease assuming approvals. We anticipate our R&D expenses to remain steady this year, similar to last year. As late-stage studies reach completion, we are redeploying our resources towards the drugs in our pipeline that we expect to fuel our next phase of growth. Our focus on improving operating leverage is enabling us drop the full increase in revenue guidance to the bottom line. As a result, we expect a non-GAAP operating loss between $425 million and $475 millionm a $75 million improvement over our previous guidance. This is similar to our 2025 operating loss after adjusting for the one-time sapablursen license fee we earned last year. We are projecting a 2026 year-end cash balance of greater than $1.6 billion. This reflects the repayment of the 0% convertible notes, which were due on April 1. The strength of our balance sheet, combined with our diversified revenue streams supports our continued strategic investments in ongoing and planned launches as we advance our wholly owned pipeline. Our financial outlook reflects accelerating commercial launches, a progressing pipeline and a diversified revenue base, positioning us for continued growth and keeping us on track for cash flow breakeven in 2028. And with that, I'll turn the call back over to Brett. Brett Monia: Thank you, Beth. First quarter and our outlook for 2026 underscore the strength of Ionis today. With 2 successful independent launches underway, 2 more independent launches anticipated this year, a robust pipeline advancing toward multiple near- and midterm catalysts and a solid financial position that supports the continued investments we are making to maximize the value of our commercial medicines and pipeline. With all these key elements in place, we're confident in our ability to accelerate revenue growth and deliver increasing value for patients and for all Ionis stakeholders. Now in closing, I want to highlight that this week at Ionis, we are holding our annual YWeek. It's a time when our employees come together to hear directly from patients and caregivers about their personal stories and reinforce our purpose, which is bringing better futures to people in need. I've never been prouder of the impact we are having on patient lives and clinical medicine, and I'm even more excited about the greater impact we are positioned to make in the near term and sustainably well into the future. And with that, we'll now open the call up for questions. Sabrina? Operator: [Operator Instructions] the first question comes from Jessica Fye of JPMorgan. Jessica Fye: So you once again raised peak expectations for Trungolza. Can you just spend a little time elaborating on what enabled you to increase it from at least $2 billion at JPMorgan to now at least $3 billion? And can you also talk about your expectation for gross to nets on Trungolza following this price reset? Brett Monia: Yes. Jess, thank you for the question. So our increase in peak product sales for Trungolza and SHTG and SCS combined in the U.S. to $3 billion was based on several factors. As you recall, we increased the price or the peak sales to $2 billion in January based really solely on the Phase III data and some preliminary HCP demand research that we had conducted. The demand was very high. Since then, we've completed our HCP demand research. But more importantly, we completed our payer research, which landed on our $40,000 annual WACC price, so price as well as priority review. Those are the biggest drivers of the increase in peak sales that we have put out today. As far as gross to net, we're not commenting on that at this time. Operator: The next question comes from Mike Ulz of Morgan Stanley. Michael Ulz: Congratulations on the progress. Maybe just a question on the Tungolva trajectory for the year. You mentioned return to growth in the second half, really driven by the SHTG launch. Just curious in some of your market research, are you picking up on maybe any pent-up demand? Could we anticipate a bolus early in the launch here, just given the groundbreaking data? Brett Monia: Kyle, would you take that, please? Kyle Jenne: Yes, Mike, I appreciate that. And I think what's important first is the strong performance that we saw in Q1 in terms of demand. We are -- it's the best quarter that we've had in terms of the FCS patient population, the number of scripts that were received and the number of patients that are starting on therapy. So that actually lends us a lot of confidence, not only in the FCS space, but also as we get closer to the June 30 PDUFA date in SHTG, I think it's indicating that there is a lot of interest in using olezarsen very broadly in this patient population. In terms of the launch in SHTG, we do know that there are a number of patients that are waiting, right, especially the patients that have a history of acute pancreatitis, patients that are above 880, and those are really the patients that we're going to focus on out of the gate. The trajectory, I think, is going to be modest at the beginning here in 2026. I think the revenue guidance that Beth shared of $100 million to $110 million is consistent with that expectation, and we'll see it steadily grow over time with that focus being on the highest risk patient population. But some of the dynamics here, as typically seen is it takes some time for the HCPs to be educated on the label. We've got to get those patients into those centers in order to get the prescriptions and then get the execution of the scripts to turn into patients on treatment. So it will be a build over time, and it will accumulate, and we expect modest and steady growth throughout the back half of this year. Operator: The next question comes from Gary Nachman with Canaccord Genuity. Gary Nachman: Congrats on the progress. So again, on SHTG, -- just talk about how you expect the payer access to ramp up the timing of that, when you think it will really kick in -- and you got updated guidelines for FCS. Will you be able to get that for SHTG as well? And how long before you think you could expand to a less severe patient population over time? Brett Monia: Kyle, do you want to take -- do you want to start and I can touch on the guidelines. . Kyle Jenne: Sure. On the payer access piece, Gary, part of the price change decision that we made on April 1 to change the WACC price to 40,000 is directly with working with those payers, right? It fits into the annual review cycle as they're getting ready for their 2027 decisions to be made. So we believe that it will help us get ahead of SHTG a little bit, not only in 2026, but also will help us in anticipation of -- that being said, some payers or all payers will actually wait for the final label, right, before they make any payer coverage decisions. because they want to see what the indication statement is. They want to see what information is in the label, including acute pancreatitis and some of the other clinical study data. that will be included in the label. So it will take a little bit of time. Some payers will say, we're not going to review anything for 6 to 9 months, for example, that standard policy with some payers. But we hope that we'll be able to get ahead of that with the payers that do review earlier by making that price change and also with our current interactions that we're having leading up to the SHTG approval. So we're going to work quickly, and I think we're in a good spot right now in terms of the way that we're approaching the payers. . Brett Monia: And Gary, to your other question, we were very pleased by the fact that the cardiovascular treatment guidelines for FCS, a single do Trengolza as the treatment of choice for this disease indication. And we applaud the aggressiveness that they are taking to update their guidelines for treatments. And we believe that SHTG will be part of that in the future, which, again, we believe Tryngolza will be a treatment of choice for severe hypertriglyceridemia. They've been very, very supportive of the new treatments that are coming out, and we think that they will move pretty quickly. We're also pleased by the fact that they have increased the -- or updated their guidelines on Lp(a) testing, which bodes well for a potential positive Phase III readout for pelacarsen and the subsequent launch. So -- it's great news for patients, and it's great news for our pipeline. Unknown Executive: And in terms of the less severe patient population, we'll start with the over 880 and over 500 with history of However, those same physicians that are treating that patient population also have patients that are 500 to 880, for example. So the education will be ongoing. We're in the right segment HCPs in terms of our targets, right, focused on cardiology, endocrinology and lipid specialists. So they'll see a mix of those patients. So I think some of those patients will already be picked up, especially if they have comorbidities, type 2 diabetes and/or ASC -- but the broader population will take a little bit of time just for awareness and for more of the data and information to come out and more experience of using olazarsen in the SHTG population. So there's a lot of optimism and a lot of excitement around the category and around the use of a product like this because they've never seen the triglyceride-lowering effects that they're going to see on top of standard of care and they've never seen the outcomes in acute pancreatitis like they've seen with the core and CORI data. Operator: Next question comes from Jason Gerberry with Bank of America. Chi Meng Fong: This is Chi on for Jason. On olezarsenSHTG, could you give us an update on the levels of liver fat you've observed in the core open-label extension studies -- to what extent those open-label extension study data have been incorporated into the NDA as the FDA reviews the totality of the safety data -- and when would you expect to present the updated OLE data later this year? Brett Monia: Yes. Let me start, Chi. Thank you for the question, and then I'll pass it on to Eugene. Maybe you can comment on where we are in the regulatory process for SHTG briefly. But we're very pleased with the ongoing open-label extension data that we're continuing to accumulate with respect to MRI assessment of hepatic fat fraction. As you recall, the increases in hepatic fat that we saw were relatively minor, interested with other modalities that have taken that silencing approach in lowering APOCIII in this patient population. And it's completely logical, based on the mechanism of inhibition of APOCIII which leads to a rapid and substantial clearance of triglycerides in large part through the liver. . And we've always felt that the changes that the observations in liver fat that we've seen here, again, no clinical sequelae associated would be transient based on deliver just needing to have a little bit more time to clear out the delivery that's coming -- that's been shunted through delivered. And that's what we're seeing in the long-term extension data. We're seeing a return to baseline in liver fat. Again, no clinical sequelae associated with anything in the long-term extension. And we look forward to presenting the data in the second half of this year at a major medical congress. So stay tuned for that, Eugene, you want to provide an update on regulatory? Eugene Schneider: Yes. The applications under review. Everything is going as planned. Of course, the emerging safety data has been provided to the agency as part of routine day 90 safety update. So that's under review now with no questions asked so far. . Brett Monia: I'll also add that the discontinuations in the long-term extension are extremely low. We're seeing excellent compliance with long-term treatment in the open-label extension. So stay tuned. We're very much looking forward to presenting the results. Operator: The next question comes from Elly Merle of Barclays. Unknown Analyst: This is Tejus on for Eli. -- in FTE, you have a set of competitor readout coming up later this year. Curious just how you would frame those data in the context of the space and if any outcomes there would impact your peak sales view and SHTG. Brett Monia: We'd rather not comment on competitor data that doesn't even exist yet today. I mean, we're looking forward to seeing any additional data that comes out this year, next year and years to come in SHTG from other programs. All I'll say is that the Phase III data that we presented at American Heart Association and the late breaking clinical trial session last year is incredibly compelling. It's going to be -- it's a very high bar to me with respect to efficacy, with respect to safety, with respect to tolerability, 85% reduction in acute pancreatitis which has resonated very well in the HCP community, as Kyle highlighted earlier in his prepared remarks, 72% reduction in triglycerides on top of standard of care. We're focused on our program. We're ready to launch in June, and we're not -- and I'll just leave it right there. Unknown Executive: I'll just add, this is a large market, greater than 3 million patients that are potentially addressable here. We have a lot of confidence in the greater than $3 billion peak that we've put out there. That's really based on the Phase III clinical trial outcomes that we have. It's based on our HCP demand research. It's based on the comprehensive payer research that we've done and also the final pricing decision that we made. So we stand behind the increase, and we're excited about launching this program and getting it to as many patients as possible after the June 30 PDUFA date. . Operator: The next question comes from Jay Olson with Oppenheimer. Jay Olson: Congrats on the quarter, and thank you for this update. Maybe I'll shift gears to DAWNZERA. Can you talk about how you expect the competitive landscape to evolve in HAE and any feedback that you're getting from patients and physicians on DAWNZERA? And any color that you're getting on what percent of patients are currently on every 8-week dosing. Unknown Executive: Yes, happy to, Jay. Thanks for the question. The competitive landscape obviously is evolving. I mean there was some recent announcement as late as this week related to some of the dynamics in the marketplace. Keep in mind that in the United States, over 75% of the patients are currently on a prophylactic treatment. This is a switch market as we understand the dynamics to be. And we are really pleased with the momentum that we're seeing in terms of the interest in using DAWNZERA, which is the first RNA-targeted therapy modality in order to treat these patients. The patient and HCP feedback has been extremely positive when they've been able to transition over to DAWNZERA or start as a naive patient. What led into this in terms of our market research is consistently being played out in the market. Really, this is about efficacy, it's about tolerability and convenience. And all 3 of those things are stacking up very nicely with the profile of DAWNZERA, and patients are responding very positively to the therapy. Now the majority of patients start on a 4-week dosing schedule. This is to make sure that they get transitioned over that they're well controlled and then they have the option for the labeled indication to move over to every 8 weeks if they choose to do so. So as early in the launch as we are right now, you would anticipate that the majority of patients would be on a 4-week regimen. And we will expect over time that they'll be able to progress on to an 8-week schedule as they're doing well on therapy and we saw that in the clinical trial as well. So patients are doing great. Momentum is very strong, and we're encouraged by what we're seeing in terms of the metrics with the launch at this point. Operator: The next question comes from Moritz Reiterer with Guggenheim Securities. Moritz Reiterer: This is Moritz for David. I'll continue on, on era. Your 2026 guidance for DAWNZERA is essentially above what consensus was going into the quarter. So I was just trying to understand a little bit better what data drove this guidance number. And also if you could comment a little bit more on the current mix between new patient starts versus switches and how you expect this to evolve through the end of the year. Unknown Executive: Yes, I'd be happy to touch on that. Thanks for the question. We had a very strong first quarter, $16 million in net product sales. This is a 128% increase over Q4 and I just spoke about the momentum that we're seeing in this market and the dynamics and also the receptivity by both HCPs and patients as they get started and gain experience with DAWNZERA. So all of those things that I just described are really what is encouraging us, and I think where we feel very confident that $110 million to $120 million in sales this year is very achievable. In terms of the new patient starts, the majority are switches, right? This is a switch market, greater than 75% of the patients are on a prophylactic therapy in the United States. . So it's going to take time and time to build the revenues quarter-over-quarter. But it's happening the way that we expected it based on what we're seeing in the trends with Q4 as well as Q1. In addition to that, we are seeing some patients that haven't been on a prophylactic therapy before start on DAWNZERA. So those patients, in addition to those that are being treated with an acute therapy only today that are starting on DAWNZERA. Those 3 patient segments, I think, speak to the fact that the profile is very strong in what patients and HCPs are looking for. We have a differentiated mechanism of action. And our sales execution and market access teams are doing a great job in terms of supporting these patients to get started and stay on treatment. Operator: The next question comes from Yaron Werber of Cowen. Unknown Analyst: This is Steven on for Yaron. Congratulations on the progress. On the collaborative revenues for the rest of the year and for maybe 2027. Can you talk about what you're projecting because those came out a bit higher, I think, than consensus may have. Further on zilginersen, can you talk about how many patients awareness efforts have found any new updates to the size of the market. You had mentioned before that about 50% of patients have been identified. Any updates on sizing there would be helpful. Brett Monia: Do you want to start and then Kyle, take the second part. . Elizabeth L. Hougen: Sure. So on the collaborative revenue for this year, the way to think about is we've raised our revenue guidance for the total year to $875 million to $900 million. That is slightly weighted towards commercial revenue, so you can think about that split being slightly more weighted towards commercial revenue versus R&D revenues. Obviously, we've already realized and recognized $95 million in milestones plus our ongoing collaborative revenue, which put us well over $100 million, closer to $130 million, $140 million for the first quarter. We've got a host of other milestones that we could potentially earn over the remainder of this year, plus our ongoing collaborative revenue from renew a cost share and amortization. So that is all the items that really give us confidence in the overall collaborative revenue for this year. And then for '27, we've got think about it this way. There's some very large potential milestones for approvals coming in '27 with the Phase III data that we're expecting to see from from pelacarsen, in particular. And those milestones are likely going to drive collaborative revenue in '27. Brett Monia: And our launch preparations are going really well, right? Kyle Jenne: Yes. For Zilganersen, I just -- I want to just reinforce the excitement that we've got around this program. This is going to be our first anticipated neurology launch program and to be able to potentially bring this therapy to patients living with Alexander's disease, I think, is really an exciting opportunity for the community and also exciting for Ionis. In terms of the approach here, we're really going to be focused on the patients that are currently on the clinical trial in helping get those patients moved over so that they can maintain treatment. The second area that we'll focus on are patients that are going to be enrolled in our expanded access program, which is ongoing and going very well. . And then as you asked, what about the patients that are currently being identified and how do we help get those patients on treatment. We believe that there are approximately 300 or so Alexander's disease patients in the United States. About 50% of those have been identified thus far. Some of them are on therapy that I just referenced. But we are doing some expanded work through our omnichannel and through our nonpersonal promotion campaigns to help identify more and more of these patients. And really, what we want to make sure of is that they have the opportunity to experience sogonersen as the patients in the clinical trial did to potentially have the positive outcomes that we're seeing in that trial. So patient identification will be a key area of focus. And we're doing that while we're really making sure that we're going to take care of the patients that are on treatment today and those that are awaiting treatment that have already been identified. Operator: The next question comes from Luca Issi of RBC Capital Markets. Unknown Analyst: A quick question on why now. What happened to for the quarter. Drug is actually down 35% versus the fourth quarter what drove the weakness here? And it looks like AstraZeneca is flagging the availability of the drug now as a prefilled syringe to be administered by a healthcare provider. Did that have a negative impact on gross to net? Any color there is much appreciated. Unknown Executive: Yes. So in Q1, we continue to see very strong demand in terms of patients on therapy as well as new patient starts. So demand is still there. Oftentimes, you see some some January, February pressure as it relates to reauthorizations and the timing of those reauthorizations, which drove some of the pressure early in the quarter. But we expect to see that pick up in subsequent quarters and return to revenue growth as we move into Q2 and beyond in the U.S. You asked about the prefilled syringe. Really that's been put out there for optionality, right? It's flexibility of dosing and it's to allow HCPs to determine if they want to use the auto-injector or if they want to be able to treat these patients in some of the major centers with the prefilled syringe. So it's really optionality for the program. That is not impacting the gross to net at this point. It's way too early to see any impact of that. And so I would just keep an eye towards future quarters. And again, this is the hereditary polyneuropathy space. The market is growing rapidly in the cardiomyopathy space and the eye towards cardio transform readout and getting ready for that launch is definitely where the line of sight is. Operator: The next question is from Yanan Zhu with Wells Fargo Securities. Yanan Zhu: Great. So wondering for the FCS, you mentioned continued growth in demand. Could you help quantify that a little bit? In terms of percent growth, given that the price change making it difficult for us to appreciate. And then can you talk about how to think about SHTG in 2027, what kind of growth could we expect from the initial launch quarters in 2026. Obviously, you guided for peak revenue, $3 billion. Any sense that how long that might take? Any color would be super helpful. Brett Monia: Yes, and let me start and then I'll -- and Kyle already touched on what the expectations are for 2026 launch in SHTG -- you can cover that again, but maybe comment on 2027. But for FCS, as Kyle mentioned earlier, our first quarter of this year is our strongest quarter to date. -- on patient demand and gaining access to Tryngolza for FCS. And that's purely a product of patient finding and the great experiences, the HCPs and patients are having with Tryngolza in managing their disease from an efficacy standpoint and from a tolerability standpoint. So demand has never been higher. We're thrilled with what we're seeing, and we think that, that's going to bode quite well for the SHTG launch trajectory. Kyle Jenne: Yes. I think what's important, again, is to mention that in 2026, the revenue guidance is $100 million to $110 million for olazarsen this year. We expect that to grow steadily over time. As I also described, the focus initially is going to be on the high-risk SHTG patient population, over 880 or over 500 with history of -- and then as we get into 2027, I would expect that more and more patients will start to come on board that are broader than that, Type 2 diabetes, ASCVD, et cetera, as I described, and the launch momentum will build. And so will the patient base as we get these patients on as HCPs get experience in seeing the triglyceride lowering levels and seeing the reduction in acute pancreatitis that were demonstrated in Core and Core 2. And I think that experience and that evidence ultimately will help us drive the trajectory into next year. Operator: The next question comes from Salveen Richter of Goldman Sachs. . Unknown Analyst: This is Mark on for Salveen. -- are -- you kind of touched on the Doner quarterly dynamics, but we were wondering what are the specific drivers for the quarter-over-quarter jump? And are there quarterly dynamics we should be aware for the rest of 2026? And how are you thinking of these dynamics going into 2017 and beyond? Kyle Jenne: Yes. The real quarter-over-quarter growth is coming from the switch cadence that we are expecting to see, right? This being a switch market, and we expect that to continue throughout the course of this year. But that's the big driver, right? We know that there's a need. We know that the profile of DAWNZERA meets the need of many of those patients being efficacy, tolerability and convenience. And we've got the data with the Switch data to help support how to move those patients over from existing prophylactic treatments over to DAWNZERA. And as HCPs are gaining experience, we're seeing more and more HCPs not only prescribed for the first time, but we're also seeing those that have used the treatment before, use it again and again. . So I think that plus payer coverage tells us that we've got an optimistic outlook in terms of what 2026 looks like. And I think the $110 million to $120 million guidance is in line with that expectation. Eugene Schneider: And we have time for 1 more question, please. . Operator: The last question comes from Myles Minter with William Blair. Myles Minter: Congrats on the car. Just on the TTR cardiomyopathy market, if I did settle for a potential generic entry from Vindemax in mid-2031 versus something like in 2035. Does that change the way you're AstraZeneca are thinking about the cardiomyopathy moving market moving forward? And how much emphasis you're going to place on that are stabilized of background therapy subgroup in cardio TTR transform. Brett Monia: The news that has been emerging this past week or so on genericizing tafamidis versus brand pricing is not come terribly surprising to us. is consistent with our product sales guidance that we've put out there with AstraZeneca previously. We believe we remain completely and believe that the filing or class will end up being the mechanism of choice for TTR amyloidosis. We believe that the silencer class will be utilized as first-line treatment. -- as well as in those patients that inevitably progress on stabilizers and combination usage to your question. We'll also be will be utilized very, very robustly, especially if there's data supporting that combination usage will add further benefit to these patients that inevitably are progressing on current treatments. . And our study is designed to actually generate the data that we believe could be convincing to HCPs who are asking the question whether or not a combination of a stabilizer with a silencer will add further benefit to these patients. So -- it's the largest study ever conducted in ATTR cardiomyopathy and the combination subgroup is quite sizable. So we're looking forward to the data in the second half of this year. and we're prepared to submit the NDA by the end of this year and to launch next year. So thank you, Myles, for that -- thank you for the question, Myles. Thank you, everybody, who joined us today and participated on our call. We're looking forward to an outstanding year and sharing our progress along the way. So until then, thank you, and have a great day, everybody. Elizabeth L. Hougen: Goodbye. Operator: Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Kite Realty Group Q1 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Bryan McCarthy, Senior Vice President of Corporate Marketing and Communications. Please go ahead. Bryan McCarthy: Thank you, and good afternoon, everyone. Welcome to Kite Realty Group's First Quarter Earnings Call. Some of today's comments contain forward-looking statements that are based on assumptions of future events and are subject to inherent risks and uncertainties. Actual results may differ materially from these statements. For more information about the factors that can adversely affect the company's results, please see our SEC filings, including our most recent Form 10-K. Today's remarks also include certain non-GAAP financial measures. Please refer to today's earnings press release available on our website for reconciliation of these non-GAAP performance measures to our GAAP financial results. On the call with me today from Kite Realty Group, our Chairman and Chief Executive Officer, John Kite; President and Chief Operating Officer, Tom McGowan; President and Chief Financial Officer, Heath Fear; Senior Vice President and Chief Accounting Officer; Adam Jaworski and Senior Vice President, Capital Markets and Investor Relations, Tyler Henshaw. [Operator Instructions] I'll now turn the call over to John. John Kite: Thanks, Bryan, and good morning, everyone. We entered 2026 with an ambitious set of operational and strategic goals. And through the first quarter, we are firmly on target. Tenant demand remains healthy, our signed-not-open pipeline remains elevated and the underlying fundamentals of our portfolio have never been stronger. This is a result of deliberate work over the past 2 years to reshape KRG into a higher caliber, faster-growing and more resilient company. We have sold over $600 million of noncore assets, entered into strategic and transformational joint ventures, repurchased shares at pricing well below consensus NAV and repositioned the portfolio squarely toward higher growth and higher quality grocery-anchored, lifestyle and mixed-use assets. These actions are proactive, decisive and disciplined designed to capitalize on the disconnect between public and private market values while fundamentally elevating the company. The KRG you see today is significantly improved from where it was 24 months ago. The first quarter was another clear example of that discipline in action. We repurchased 6 million common shares for approximately $152 million and sold Coram Plaza on noncore lower growth asset. Together with the activity completed in 2025, we have now repurchased 16.9 million shares for $400 million at an average price of $23.67, representing a compelling arbitrage buying our own stock at an FFO yield meaningfully wider than the yields at which we have sold lower growth assets. As we advance through 2026, we will continue to evaluate capital recycling opportunities that further optimize the portfolio and support our long-term strategic objectives. None of this is possible without the strength and versatility of our balance sheet. Our ability to sell assets, repurchase stock, enter into strategic joint ventures, fund growth and continue investing in the portfolio is a direct result of the disciplined financial posture we have maintained over multiple years. We remain committed to operating with conservative leverage, ample liquidity and meaningful financial flexibility, which allows us to stay opportunistic while continuing to protect the long-term durability of the platform. That discipline is translating directly into operating performance. Demand for space in our high-quality centers remains exceptionally healthy, and our first quarter results reflect both the strength of the portfolio and the quality of our execution. Same-property NOI increased 3.6% in the first quarter, a strong start to the year. During the quarter, we executed 151 new and renewal leases, representing over 700,000 square feet. Blended cash leasing spreads were 13.5%, including 31.3% on new leases. Our non-option renewal spreads were 12.3%, demonstrating the continued mark-to-market potential embedded within our portfolio. Our lease rate stands at 94.7%, a 90 basis point increase year-over-year, reflecting the continued absorption of our inventory by high-quality, well-capitalized retailers. During the quarter, we signed new leases with a variety of sought-after concepts, including on running reformation, Warby Parker, Total Wine and Barnes & Noble. ABR per square foot reached $22.89 at quarter end, a 6.5% increase year-over-year. Our signed-not-open pipeline remains elevated at approximately $36 million of NOI, representing a 350 basis point spread between our leased and occupied rates. The average ABR for leases in our signed-not-open pipeline is $28 a square foot. Embedded rent escalators are the first stone in the foundation of long-term total return, contractual growth that compounds over time. 2 years ago, our embedded rent escalators were just 156 basis points. Today, they stand at 182 basis points. As we advance towards our 200 basis point target, that trajectory is driven by factors within our control: strong lease structures, disciplined merchandising and the deliberate reshaping of our portfolio. Simply, but KRG is an inceptional position. We have a better portfolio, a rock-solid balance sheet, a more durable growth profile and a team that continues to execute with urgency, discipline and focus. I want to thank the entire KRG team for the hard work that got us here and for the continued energy commitment and conviction required to keep raising the bar. I'll now turn it over to Heath. Heath Fear: Thank you, and good afternoon. After the first quarter, KRG is exactly where we want to be, on offense on plan and operating proposition of strength. We are elevating the portfolio, sharpening the platform and building momentum for another highly productive year. Turning to our results. KRG generated $0.52 of NAREIT FFO per share and $0.52 of core FFO per share in the first quarter. Same property NOI increased 3.6% in the first quarter driven primarily by a 250 basis point contribution from higher minimum rents, a 55 basis point improved in net recoveries and a 45 basis point improvement in overage rent. On our last call, I indicated our expectation for same property NOI growth in 2026 to be lower in the first half of the year and accelerate the second half. It's important to note that the 3.6% result in Q1 exceeded our expectations as a result of higher-than-anticipated average rent, lower-than-anticipated bad debt and the reversal of a large real estate tax reserve. As for the trajectory of same-property NOI for the balance of the year, we anticipate a moderation into the second quarter, followed by a reacceleration to the back half of the year as the rents from our large signed-not-open pipeline begin to commence. Due to our performance in Q1, we are increasing our 2026 same-property NOI range by 25 basis points at the midpoint. As illustrated on Page 5 of our investor deck, the uptick in our same-store guidance is being offset by a corresponding reduction in our recurring but unpredictable items. As a result, we are affirming our NAREIT FFO and core FFO guidance of $2.06 to $2.12 per share based on a same-property NOI growth range of 2.5% to 3.5%. Our bad debt reserve of 95 basis points of total revenue at the midpoint, reflecting our actual first quarter results blended with a continuing assumption of 100 basis points for the balance of the year. And interest expense net of interest income, excluding unconsolidated joint ventures of $121.2 million at the midpoint, up from $121 million. This guidance fully incorporates the incremental $100 million stock we have repurchased since our last earnings call and further contemplates $170 million of 1031 acquisitions scheduled to close in the second quarter. This represents a $60 million increase as compared to original guidance and $145 million of noncore and/or tax loss driven dispositions with $12.5 million closed in the first quarter and the balance closing in the back half of the year. This represents a $30 million increase in the disposition pool as compared to original guidance. As a reminder, the aforementioned 1031 acquisitions or noncore sales are not completed, it could result in a special dividend for 2026. The changes in our transaction assumptions are opportunistic and a continuation of our disciplined focus on matching sources and uses in an earnings-friendly manner. John alluded to, moving to the back half of the year, we will continue to evaluate opportunities to further refine our portfolio, provided that we're able to prudently deploy the proceeds. Our balance sheet remains one of the strongest in the sector. As of March 31, our net debt to EBITDA was 5.2x, consistent with our long-term range of low to mid-5s. It is worth thing to step back to appreciate the level of transactional activity we've executed over the past 18 months while still maintaining one of the lowest leverage profiles in the sector. We have access to over $1 billion of total liquidity, providing us with significant flexibility to pursue value-enhancing opportunities. Thank you to the KRG team with a relentless efforts in driving our results and creating long-term value for our stakeholders. Operator, this concludes our prepared remarks. Please open the line for questions. Operator: [Operator Instructions] Our first question will come from the line of Cooper Clark with Wells Fargo. Cooper Clark: As we think about the share buyback program moving from $300 million to $600 million, just curious about the willingness to potentially upsize disposition volumes even higher in the back half of the year as we think about the $145 million of noncore assets contemplated in the back half given the demand for product in the market today and the ability to improve portfolio quality with potentially minimum dilution as we think about buybacks, coupled with 1031 acquisitions? John Kite: Sure. Cooper, I think as we said in the prepared remarks, we're going to continue to evaluate the market and evaluate the opportunities. We want to execute what we have in front of us in terms of the 1031 opportunities to try to close on in the next quarter. And it's always going to be a function of where cost of capital is, what the opportunities are to reposition the capital. So I think we're trying to make it clear that we're reviewing that. That's a potential opportunity. If you go and look at what we've done in the last year and you include and what Heath has said is in the guidance, I mean, you're talking about if we execute on that, that's like $750 million approximately of sales. So this is significant. We continue to try to do that in a very meaningful way in the sense of how we manage the total portfolio, manage the balance sheet and manage protecting earnings as good as we can. So that's a long-winded answer of saying, yes, that's a possibility, but a lot of factors involved in that. Heath, do you want to add to that? Heath Fear: No, those are okay. Cooper Clark: Great. And then moving towards the economic occupancy side, I believe current economic occupancy is about 260 basis points below your historical highs as many of your peers are near or above historical high economic occupancy. So curious if you could just talk about the opportunity set there longer term, and how much the SNO pipeline may contribute to higher absolute economic occupancy levels in the back half of '26 and '27 as we also contemplate some more regular weight churn? John Kite: Sure. I mean we think we're bullish on our ability to continue to push occupancy higher, both economic and lease rate. We are -- year-over-year, we're up obviously sequentially, slightly down, which is not unusual in the first quarter. If you look back over the past 4, 5 years. I think 5 years, probably 3 of those first quarters are slightly down sequentially, but what we're focused on is the year-over-year growth. We do think there's real opportunity based on lack of supply and continued strong demand. But as we tried to point out, we're very focused in on proper merchandising, and we're very focused in on getting the right retailers in the right spaces and trying to pursue this embedded rent growth that is going to pay dividends in the future. So we're not in a super hurry to hit any particular number, but we do feel like there is really strong demand. And that's part of what we're doing in terms of repositioning the portfolio is in the sense that this stronger portfolio will be able to maintain higher occupancy over longer periods of time. So again, yes, we believe we have plenty of room to run. Heath Fear: I would add a lot of attention, questions and comments have been around the transactional activity and refining the portfolio. But at the end of the day, one of the biggest opportunities in front of us is that core opportunity in leasing. If you look across the, you said in your question, Cooper, we've got the most room to run in terms of just growing organically. So all this other stuff is certainly moving us along, but let's not lose focus that, that we've got the most occupancy run left. Operator: One moment for our next question and that will come from the line of Samir Khanal with Bank of America Securities. Samir Khanal: I guess, John or Heath, maybe expand on your comments on capital recycling, maybe broadly, kind of what you're seeing in the transaction market, the interest level that you've gotten for your assets that you could potentially sell down the road? John Kite: Sure. I'll start with that, Samir. I mean it's -- there is a strong demand for open-air retail, and it's coming from really many, many avenues. And I would say in the last 6 months, 9 months, but even 6 weeks, you see a lot more institutional capital positioning to want to be in the space a rotation, if you will. So that obviously puts -- that puts pressure on cap rates to move down over time, and we really still haven't seen a movement in interest rates. So if that happens in addition, that would be additional fuel. But really, even without that, the demand is strong. I think when people look at their portfolio and they look at how they balance it and they look at risk-adjusted returns, our product screens well. So you have seen that. I mean -- but we still have this ability. We hope to continue to do what we're doing, which is to -- if we're going to recycle capital, we want to recycle it into higher-growth assets and honestly, if you look at Page 6 of our investor deck, it kind of shows you what we're doing. And then I think a couple of pages later, which is the Page 6 shows the increase and decrease that we've had in various product types. And then a couple of pages later, you see the embedded rent growth, and it's just you can chart that, that's going up. And as long as we're able to sell these lower growth assets at yields well inside the stock yield, that's attractive. Now how we deploy that capital comes down to a complex set of -- complex set of items based on taxable income and 1031 opportunities and stock price, et cetera. But it's really a real estate exercise, I want to remind everybody of that. We are very focused on the real estate exercise. But obviously, the equation relates in the sum of what do we do with the capital. So it's complex, but right now, we think there's opportunities. Heath, do you want to? Heath Fear: I would just say, Samir, there isn't a pocket of historical retail capital that hasn't been reignited. So the breadth of the demand is just incredible. And frankly, it's better to be a seller right now than it is to be a buyer. With that said, we do have some traction on some of these 1031 acquisitions that we've been talking about. So yes, but the market is very, very constructive right now. Samir Khanal: Got it. And then I guess my second question, Heath, is on the guidance, right, side, you raised same-store low end, high end, but we didn't see a follow-through on FFO. Maybe EPC can unpack that. I think that would be helpful. Heath Fear: On Page 5, you'll see that the same store did boost us up $0.5 on a full year basis, but then that was offset by a corresponding reduction in recurring but unpredictable item. Basically, that item is still there. It's just being pushed into 2027. So timing-wise, we thought it was '26 and it's being pushed into early '27. So nothing happening there. So that's why the same-store bump didn't flow through the FFO. John Kite: The other thing I would add to that, Samir, is obviously, we held Q2, Q3, Q4 bad debt at 100 basis points. I think the first quarter was closer to 75%, but I think we view it as very early in the year. I think we're always reticent in the first quarter to really jump on to too much. You still got 75% of the year to unfold. So I think you can look at it as prudent in my opinion, to not jump on a lot of these things that may or may not happen. I think bad debt and then just recurring but unpredictable are 2 big categories. I mean, especially on recurring unpredictable, I think if you look at last year, we were like $21 million. I think our guidance is closer to $10 million. So we'll see how the year plays out. A lot of things left to happen, but the core business is very strong. . Operator: One moment for our next question. And that will come from the line of Todd Thomas with KeyBanc Capital Markets. Todd Thomas: Beyond the capital recycling that you have lined up right now and with what's under contract, would you move forward with the dispositions without new investment opportunities lined up? Or is the plan really only to activate incremental dispositions if you have something on the buy side? John Kite: Todd, I mean, as you know, our goal is always to kind of pair these things. We've got the same where we like to do stuff in pods, buying and selling. But of course, we're also opportunistic. And if we think that there's a really excellent opportunity to recycle out of a lower growth asset at an attractive yield versus other yields than that is possible that we would do that in front of knowing exactly where that capital would go. Again, this is what a really strong balance sheet before you that opportunity to be forward thinking. But the goal is to always try to couple these things. So we'll see how that plays out, Todd. Todd Thomas: Okay. And then does the current disposition pool the, I guess, $145 million, although I think you mentioned the $12.5 million was included in that in the first quarter. Does that pull include City Center. Can you provide an update on progress for that asset disposition? Heath Fear: It does include City Center, Todd and listen, we hope to have transacted on City Center by now. But as we said in the past, it's a complicated vertical asset and the plan is still to transact before the end of the year. Operator: One moment for our next question. That will come from the line of Michael Goldsmith with UBS. Michael Goldsmith: First question is just on the same-store NOI growth for the quarter. It sounds like it was pleasantly -- you were pleasantly surprised with the upside to that number due driven in part by maybe upsides to the overread the net recovery. Is there anything in the backdrop that is driving those numbers maybe higher than you were expected? And maybe what would you kind of see as kind of the run rate number for the second quarter before it reaccelerates as the sale starts to kick in? Heath Fear: Yes. It was basically -- the outperformance was ratable between 3 things. It was bad debt, overage and also that real estate tax reversal. And again, as I said in my opening remarks, you'll see it moderate into the second quarter and then reaccelerate to the back half of the year. So to your earlier point, it was higher than we had anticipated. And moving into the back 3 quarters, we still have opportunity to outperform on bad debt. We had 80 basis points -- I'm sorry, 75 basis points of bad debt in the quarter, we're still assuming 100. So there's still some things that we hope to be able to outperform in the same-store line as we move throughout the year. Michael Goldsmith: For the record, I'm not complaining that the number is higher -- communicate... Heath Fear: You were not complaining. We were happy. Michael Goldsmith: And then you highlighted a significant arbitrage between asset sale yields and your equity buyback yield. Stock has been doing well. Shares are up 8% this year, up 10% in the last month. So at what point would you think to slow or pause your repurchases and have to look into -- start to look at some other ways to reallocate from here? John Kite: Yes. I mean, obviously, as we alluded to, that is one of the variables as we move through the year. As we sit here today, we're still in a pretty good position as it relates to discount to NAV and core FFO yield relative to where we think we can sell assets that we would want to sell, but that's a moving target, and we'll see how that goes. It's just kind of one of those things it is what it is. I'll address it as it comes. But I think right now, our strategy is, again, it's really real estate based and future growth based. So we will figure out how to best do that. If this isn't part of the plan, there are other things we can do. Obviously, last year, we did pay a special dividend, and we'll see how that goes in the future. But we'll just -- it's just too many variables to really say, Michael, where that's going to be tomorrow or a month from now. Heath, do you want to add to that? Heath Fear: That's great. Operator: One moment for our next question. And that will come from the line of Floris Van Dijkum with Ladenburg Thalmann. Floris Gerbrand Van Dijkum: Just curious, the $36 million SNO pipeline, not all of it is same-store. I think only 84% of it is in the same-store pool. Could you maybe -- is that Legacy West that's not part of the same-store pool and maybe talk about the upside there and when that becomes -- when that will get recognized in same store? Heath Fear: It's really 2 elements there, Floris. One of it is Legacy West and we have an annual same-store concept. So Legacy West won't be in the same-store bucket that we've owned it for a full calendar year. So you will see it in 2027 as part of the same-store pool. The other piece that's not included in same store are the leases that we're executing aloud. So those are the 2 major components outside of same-store that comprise the same the signed-not-open pipeline. Floris Gerbrand Van Dijkum: Got it. And maybe as my follow-up question, I know you put a little thing out there about -- obviously, you've done a lot of anchor repositioning. You've added a number of new grocery concepts to your portfolio, a number of trader goes and a couple of Whole Foods you talk about the returns on capital there, presumably, that's the return on -- direct return on invested capital. Maybe talk about -- I'm curious to Centennial, we were out in Vegas with you guys on your 4 x 4, I can't remember what it was, or maybe it was NAREIT or maybe ICSC. But obviously, you repositioned one of those boxes into a Whole Foods. What is that done? What do you typically see in terms of the [indiscernible] effect to shop leasing and rents in your portfolio when you add one of those grocers to your property. And what would you say would be your fully adjusted return on capital if you were to include those things in there? Thomas McGowan: So Four's, there's no doubt that if we bring a Trader Joe's, we bring in Whole Foods, there's tremendous impact, and it's just that continual shop that occurs through the day. And -- both of those are tremendous drivers for us. So without question, when you have a new retailer or a new grocery like that, when new deals are going into committee, it helps tremendously plus that consistent shop helps drive additional sales throughout. So you have the cap rate compression component. And in addition, you have the lease up through new committee deals and you're driving sales inside your existing tenant base. So we always find a way to generate strong returns on these boxes. But if you carry that in, that factor grows incrementally to a number probably 2 to 3x more than what that would start off with in terms of like 200, 300 basis points. So it's wildly attractive for us to reposition like that. John Kite: Floris, the returns we're generating on capital are like in the 30% range. It depends on the deal. It could be 20%, it could be 40%. So -- but generally speaking, that's just return on capital spend for that retailer. We don't look at it relative to the -- how that might impact the adjacent space other than the ability, as Tom said, to drive a cap rate down by adding a grocer. And again, it's not all about that. It's about merchandising, too. When you look at adding how much we've done in terms of adding Trader Joe's and adding Whole Foods. Then the next thing you know the quality of the surrounding shop grows. And maybe that's why our ABR and our signed-not-open is $28, right, versus the portfolio average of $23.50, I guess, somewhere close to that. So I think it's definitely moving us in the right direction. Floris Gerbrand Van Dijkum: But by the way, your ABR growth even year-over-year is 6.5%, which is, I think, pretty juicy. I mean is that one of the highest growth that you've experienced? John Kite: Yes. I mean, it's been a pretty good growth rate over the last 5 years, actually. I don't have it in front of me, but 6.5% is pretty strong. And when you look at our ABR and you add into that our embedded rent growth and compare that to the peer group, it doesn't reflect where we trade. . Operator: One moment for our next question. And that will come from the line of Michael Mueller with JPMorgan. Michael Mueller: Maybe somewhat of a follow-up. But aside from general portfolio leasing capital, is there any visibility as to how much your annual development or major redevelopment investment could grow to over the next say, 3 to 5 years? John Kite: Michael, that's -- we don't generally, as you know, we don't throw out a number at the beginning of the year and say we're going to spend x million on development, redevelopment because we don't like people to chase the target versus chasing great opportunities. We've been pretty moderated on that in the last couple of years because of the significant spend that we've had in just the lease-up portfolio, which is obviously on a risk-adjusted basis, a much higher return. But as we look out over the next 3 years, that begins to slow down in terms of the internal lease-up capital because we're spending about a little over $100 million a year right now over the next 2.5 years. And so when that moderates through this lease-up, as Heath said earlier, then all of a sudden, you have a lot more choices to deploy free cash flow. And we have a very long history in development and redevelopment, and we know how to do it, and we know how to judge risk. So I would say we will pivot more to that over the next couple of years, and you're going to see us do some smaller projects over the next couple of years. And I think our view is we'd rather have more projects of smaller size than a couple of huge ones. Right now, we have we have a large one in our development at One Loudoun. But frankly, it's very manageable against a $7 billion balance sheet. So long-winded way of saying, I think we can lean into that as we -- as the lease-up firms up over the next 2 years. Heath Fear: I would add, we shouldn't construe the lower development spend now with the development opportunity in the portfolio and lowest hanging fruits Loudoun. We still have 35 acres of land after we're done with this expansion. I think it includes another 1,100 multifamily units, another 1.7 million square feet of commercial. So we've got lots of opportunities in the portfolio, but as John said, the current priority right now is leasing. And when that spend starts to climb, we will -- that pipeline will pick up. Thomas McGowan: Loudoun is moving along very nicely in terms of the lease-up as well. Michael Mueller: Got it. Okay. And second, I apologize if I missed this some place, but what's the range of cap rates for the 1031 in noncore sales? John Kite: We didn't have an exact cap rate range, Michael. But I think in terms of the 1031s, we continue to see opportunities for stuff that we want to own a very high-quality assets kind of like in the 8% to 9% unlevered IRR range. That's kind of what we're pursuing. And as we've said before, the type of stuff that we're selling is kind of in the 7% range depending on what it is. So that's where the trade is currently. Operator: One moment for our next question. And that will come from the line of Alexander Goldfarb with Piper Sandler. Alexander Goldfarb: John, as we look at the SNO pipeline, pretty good ramp from now through '28. But just sort of curious, is there -- is there a way to accelerate this? Or is a lot of this just dependent on their people already in that space and you have to wait for those leases to expire? And then just the time it takes to move for the tenants to build out the space move in, just trying to understand any way to accelerate this timing versus it's structural, and there's really not much you can do because of all the moving pieces and perhaps existing leases that are already there. John Kite: Yes, Alex, it's -- obviously, we're always trying to accelerate the build-out of these spaces in the SNO pipeline. The majority of or a lot of this, I should say, a lot of this space was former anchor space, right? So that's going to have a longer gestation period. And as you know, those generally on average between lease signing and rent commencement could be 15 to 18 months, depends on what it is, depends on the level of construction. Also, don't forget that we have to deal with municipalities in multiple markets that slow you down despite the narrative that, that's changed. I don't think it's changed that much. So yes, we like to accelerate that. We absolutely would. I mean, in one regard, you're just pulling forward something you know you're going to get, but NPV-wise, it makes sense. So we're pushing hard to accelerate, but I think it is what it is. And the good news is the demand is there, the snow is strong. And as I said earlier, if you look at the rents, it really reflects where we're going as a company. So that's a very positive thing to take out of that. Thomas McGowan: Alex, we're doing everything we can, whether it's permit expeditors starting drawing right out of a real estate committee. We try to pull every lever, and it's a huge objective around here to move those up. Alexander Goldfarb: Between you and John, Tom, I never have to worry about not moving quickly. The second question is on the heels of a quorum sale and you talked about more dispositions. Have you sort of outlined how much more of your portfolio you think -- I don't want to say it's a quorum like, but how much more doesn't fit as you think about where you want to take the portfolio? Is it still 10% more, 20% more? Or do you think that most of the lower-performing assets are gone, and now it's really sort of fine tuning based on opportunity? I'm just trying to figure out how much of sort of definitely, we got to sell versus, okay, these are potentials if we have opportunity for something accretive on the other side? John Kite: Yes. I mean I think, obviously, we do a robust analysis of the portfolio all the time. There definitely are assets that we believe don't fit the future KRG, as we talked about in the prepared remarks, we still have a goal of pushing our embedded rent growth to 2 versus where we are today. So there's work to do there. And these are -- some of these assets that we're selling, Alex, are high quality but lower growth, and there are a few like you mentioned quorum that just didn't fit at all. And so there are a handful of properties like that probably the bigger number would be the properties that just don't have the growth profile that we're looking for. And that we also think are potentially a little more tethered to at-risk future tenant issues, right? So there is a portion there, but it's not a huge portion, and this is more methodical around the underlying future growth and real estate quality. Heath Fear: And I'll just add. I'm sorry, Alex, go ahead. Alexander Goldfarb: You go, and then I'll follow up. Heath Fear: I was going to say, when we started this disposition program is the best we could to ensure folks, this is not a multiyear program that's going to result in FFO dilution over 3, 4, 5 years. This was trying to get this done in '25 and '26. And as John said, there's a handful of left and we can get it done and we deploy the proceeds in a prudent manner, we will. But if we don't, that's okay, too. We're always sort of cycling out of 1, 2, 3 assets a year, and that's sort of the expectation, but I can get it done this year, we will. Operator: One moment for our next question. And that will come from the line of Alec Feygin with Baird. Alec Feygin: So one for me is about Legacy West. Curious how it's performed versus initial expectations? And if there's been any incremental opportunities with new tenants expanding from Legacy West to other assets in the portfolio? John Kite: Yes. Thank you for that. Legacy West has performed marvelously. It's been a great asset for us and our partner. We've made really significant progress in a short period of time on increasing rents, particularly on the retail front. As you followed, I'm sure we've announced lots of new leases that we've signed out since we bought it. And the mark-to-market on the rents has been exactly what we thought it would be when we acquired the center, the ABR and the retail component was like $65 a foot, and we're doing deals north of $100 a foot routinely. So that's spectacular. The multifamily side has picked up a lot in the last quarter quite well. The office is really strong. This is really high-quality office and a very sought after a little slice of a fabulous submarket in Plano. Obviously, AT&T has recently announced their global headquarters there, which is just one of a few major announcements that they've had in Plano. So we feel really good about that. And in terms of transferring of opportunities to other parts of the portfolio, that was another reason that we wanted to add it to our portfolio. And when you now look at, for example, our top 3 lifestyle assets, South Lake, Legacy West and One Loudoun, you look at the NOI it's generating versus the -- I think it's about 15% of our ABR now just those 3 assets, but it's like 5% or 10% of our total GLA. It shows you the strength of that, and now we're doing deals across the portfolio with these high-quality tenants that now are very aware of KRG. So it's been a massive win for us, a massive win for our partner, and we're looking forward to trying to find more of those opportunities. Operator: One moment for our next question. And that will come from the line of Craig Mailman with Citi. Craig Mailman: Maybe I'll go back to your comment about the strength of the operating portfolio to maybe step away from cap rate cycle for a minute. Just as -- just looking at [ kind of the ] percent leased here over the last several quarters, Anchor obviously, has been doing well, but small shop, you briefly got over 92% and space down slightly below it. I mean, what's the time frame or the outlook internally to get this maybe the 93% plus? And what's been kind of the obstacle to ramp it as quickly as you ramped Anchor? Heath Fear: We don't guide to occupancy, Craig, but we have said publicly before that we think by the end of this year, we should be at occupancy levels that are approximating our historical highs right before COVID. But the good news is that we don't think that that's at all, and we've seen a lot of our peers sort of bus through their historical high watermarks, and we intend to as well. At the end of last quarter, we were at 92%, I think, in the small shop space, which was 40 basis points away from where we were at a historical high, took a seasonal step back but we can think we can lease way through 92.5% to maybe 93% or 94% of the small shop space. On the anchor side, the step back at this quarter on a sequential basis was related to Value City. But again, we are busy backfilling those boxes and making great progress. So we're very, very bullish on our occupancy opportunity. And again, it is the largest and most meaningful opportunity in the peer set, right? So we've got -- as I said before in the past, everyone's on a peak on their occupancy gains in terms of their same-store. Ours is coming at a different time, and we're going to start seeing that in the back half of this year at '27. Thomas McGowan: And one other thing that we've been doing, Craig, is we've been very proactive in terms of trying to improve the mix. So if somebody is coming off of a nonoption scenario, I mean, what we'll do right away is we'll just say, "Hey, if we can do better, we're going to move them out and end up with a better quality tenant". So we've been doing a lot of that inside these numbers, and we'll continue to do it. But we're absolutely in and up with great decisions and great tenants. John Kite: Craig, I think you remember me talking a couple of years ago about the fact that we're never going to lease space quickly. We're going to lease space in a very, very diligent way, and that's part of what Tom means is that can we take deals maybe faster by accepting a tenant that we don't love or a rent structure that we don't love, particularly rent growth, yes, we could. But if you look at our statistics relative to the peers, I mean, there's no doubt we were, in my opinion, a market leader in rent growth in the small shop space, right? And if you look at where we were in 2019 versus where we are today in 4% a year small shop growth, it's incredible in terms of the number of tenants we've been able to convert, it's to 4% or north of 3%, right? So if you do a bunch of deals at 2% rent growth, you're going to do them faster. But if you're diligent about this and you end up with the right tenants that are growing at 3.5% to 4% in the shops, you're going to thank me for that in a couple of years. Craig Mailman: No, that makes sense. I appreciate the detail there. And then maybe actually shifting back to the capital recycling. John, I think you said $750 million of kind of sales is what you guys have left. Is that right? John Kite: No. What I said was if you look at what we sold last year and then you combine what Heath pointed out that we are targeting to sell this year combined, that's like, I think, close to $750 million. That's what I said there. So we'll see if we hit that, that we still have to do another $130 million, I think, this year to get to that number. And that's just what we have identified, Craig. Craig Mailman: Got you. I guess the gist of my question was going to be if you could snap your fingers today, kind of where would the mix of kind of neighborhood, regional power lifestyle ultimately be to where you feel like the risk-adjusted returns are maximized. And maybe as you look at what you would have to sell to get there, kind of how much of it is the more difficult bucket versus there's definitely pockets of capital that would want to -- would be sort of easy to mediate difficulty? John Kite: Yes. I mean, obviously, everybody kind of classifies what's power versus what's a community center, maybe a little differently. But if we -- if you look at how we have identified it in our investor presentation, our power is down 500 basis points and we're at about 19% of our portfolio relative to ABR is in power, we've said we'd like to get that down to I don't know, 12%, 13%, 14%. But there's some really high-quality assets in there. And then if you look at our regional community versus our neighborhood community and shop and grocery, we'd like to pivot that more to the neighborhood side as well. So maybe the same amount, maybe another 5% to 10%. But really, in the end, it's not going to be about, oh, we've got this perfect composition on a percentage basis, it's going to be more about the embedded rent growth and the quality of the real estate, Craig. And again, I would challenge you to look at where our -- where we trade, where our ABR is, what our embedded rent growth is and what the higher multiple guys are at. And it is what it is. And as long as it's there, we'll continue to try to take advantage of that in the way that we can. Certainly, the private institutional investors are well aware of that and well aware of what's going on in our space. And it's odd to me, but it is where it is, which I keep saying it's odd to me, but that we wouldn't actually, as a group, trade at a premium for liquidity, but it's actually vice versa. You're trading at a discount for the liquidity, which is quite odd. But at any rate, I do think there's a real opportunity there to improve that, Craig. But we're going to have to take it one step at a time. We've identified what we have and we'll see. We still got 3 quarters of the year left. And as Heath said, if those opportunities avail themselves, we'll try to take advantage of that. And then after the end of this year, then we would think, man, we have the portfolio composition is really good. And then again, as he said, we're just back to the normal paired trades, a couple of deals here, a couple of deals there. Operator: I'm showing no further questions in the queue at this time. I would like to turn the call back over to Mr. John Kite for any closing remarks. John Kite: Well, I just again want to thank everyone for joining us today, and have a great day. . Operator: This concludes today's program. Thank you all for participating. You may now disconnect.