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Operator: Hello, everyone. Thank you for joining us, and welcome to the Delek Logistics Partners First Quarter 2026 Earnings Call. I will now hand the conference over to Robert Wright, EVP and Chief Financial Officer. Robert, please go ahead. Robert Wright: Good morning, and welcome to the Delek Logistics Partners First Quarter Earnings Conference Call. Participants joining me on today's call will include Avigal Soreq, President and Chairman; Reuben Spiegel, EVP; as well as other members of our management team. As a reminder, this conference call will contain forward-looking statements as defined under the federal securities laws, including statements regarding guidance and future business outlook. Any forward-looking statements made during today's call involve risks and uncertainties that may cause actual results to differ materially from today's comments. Factors that could cause actual results to differ are included in our SEC filings. The company assumes no obligation to update any forward-looking statements. I will now turn the call over to Avigal for opening remarks. Avigal? Avigal Soreq: Thank you, Robert. DKL reported $132 million in adjusted EBITDA in the quarter, and we are very confident about achieving full year EBITDA guidance of $520 million to $560 DKL saw a strong execution in the first quarter despite some challenges associated with Winter Storm Fan. These results are a reflection of strength in all segments, advancing our position as a premier full-service provider of crude, gas and water in the Permian Basin. Now let me talk about each one of the business in detail. Starting with gas. We have successfully completed the drilling of our first AGI well, taking additional step towards completing our industry-leading comprehensive sour gas solution. We are very excited about providing a comprehensive capability to our customer, further supporting long-term oil gas production growth in the Delaware Basin. Moving to crude. Both DPG and DGG crude gathering operations continue to see strength despite some challenges tied to well shut-in related to winter storm fern. We have increased our overall gathering capacity and look forward to further optimizing and growing the business over the rest of the year. Our water business continued to perform strongly, and we are exploring additional opportunities in this space. Rouven will share further insight on these developments. The combined gas, crude and water offering in the Permian Basin has increased our competitive position and build a strong platform for growth. We will continue to capture the growth opportunities in a disciplined manner, managing leverage and coverage. We also intend to remain good stewards to our stakeholders' capital. Our Board of Directors has approved our 53rd consecutive quarterly distribution increase. raising the distribution to $1.13 per unit. This is an extraordinary achievement, and we're extremely proud of our team and the financial prudence that brought us here. Delek Logistics is thermally positioned as a strong independent full suite midstream service provider. With the foundation we have built and the opportunities ahead, we are confident in our ability to continue delivering sustainable growth and long-term value for our unitholders. I will now hand it over to Robin, who will provide more details on our operations. Reuven Spiegel: Thank you, Avigal. As Avigal mentioned, we are excited about DKL's future and recent rally in group prices, along with the strength of our 3 service platform is presenting incremental opportunities to further increase our advantage Permian position. The strength in third-party business continues to increase our economic separation from our sponsor DK. In 2026, on a pro forma basis, we expect approximately 80% of our run rate EBITDA will come from third parties. Turning to our business. We continue to work hard to bring an industry-leading sour gas solution in the Delaware basin. The first step in the process was to complete our processing capacity expansion. As Abigail mentioned, we have completed the drilling of our first AGI well. And currently, we're in the process of completing the build-out of the sour gas gathering infrastructure such as compressor stations before transferring the system to operations. We are in sync with our producer customers and the system is expected to be in line with producer needs. As we have mentioned in the past, while our ramp-up has been slower versus our initial expectation, both our Sargas system build out, we expect to see a step change in our utilization. The step change in utilization is likely to bring forward the need for additional processing capacity. We are looking at our options and continue to explore innovative ways to add capacity along with making selected investments that will support future expansion of the Libby complex. Our Delaware crude gathering volumes were impacted by well shut-ins because of winter storm firm and the colder than normal temperature during the quarter. We have seen these volumes recover in the second quarter and expect Delaware crude gathering volumes to continue to increase over the rest of the year. Our crude gathering business is in a very strong place, and our combined crude and water offering is yielding great results. Moving to our Water business. I'm very pleased with the start we have had in our produced water gathering business. Our larger water footprint in the Permian Basin post our acquisition of Citi and H2O Midstream, along with the rising water cuts in the basin, accentuating the need for increased innovation to meet customer needs. We believe produced water gathering and disposal will require a platform approach as permitting for new SWDs remain limited and producer activity shifts across the basin. We look forward to updating the market as we bring forward these solutions. With that, I will pass it on to Robert. Robert Wright: Thank you, Ruben. As Avago and Ruben noted, we began 2026 with strong momentum, continuing to advance the Delek Logistics growth story. While we are delivering meaningful financial and operational progress across the partnership, we remain equally focused on achieving our long-term leverage and coverage targets. Despite approximately $10 million in headwinds from Winter Storm Fern, we outperformed expectations in our growth trajectory, and we're able to achieve our best first quarter results to date. This performance reinforces our confidence in the outlook for the balance of the year. . We continue to make solid progress on our planned growth capital spend of $180 million to $190 million, which we expect will yield approximately $75 million in incremental EBITDA on a run rate basis. From a balance sheet perspective, we exited the first quarter in a position of strength, having upsized and extended our revolving credit facilities to $1.3 billion, now maturing in 2031. This increased available liquidity to approximately $1.1 billion. We ended the quarter with an adjusted leverage ratio of 4.05x, providing meaningful financial flexibility to execute on our growth agenda while maintaining a disciplined capital structure. Turning to our results. Adjusted EBITDA for the quarter was approximately $132 million compared to $123 million in the same period last year. Distributable cash flow as adjusted totaled $72 million, and our DCF coverage ratio remained stable at approximately 1.2x. We are also pleased to announce our 53rd consecutive distribution increase, bringing the quarterly distribution to $1.13 per unit. In the Gathering and Processing segment, adjusted EBITDA for the quarter was $83 million compared to $81 million in the first quarter of 2025. The increase was primarily due to increased margins recognized within the segment. Wholesale Marketing and Terminalling adjusted EBITDA was $14 million compared to $18 million in the prior year. The decrease was primarily due to the impact of the 2024 amended extend agreement with Delek. Storage and tranportation adjusted EBITDA in the first quarter was $25 million compared with $14 million in the first quarter of 2025, the increase primarily reflects the impact of the January 2026 related party transaction. Finally, the investments in pipeline joint venture segment contributed $18 million this quarter in adjusted EBITDA compared with $17 million in the first quarter of 2025 driven by strong performance from the Wing to Amster joint venture. Moving now to capital expenditures. Total capital spending for the first quarter was approximately $50 million. Of this amount, $42 million was gross capital, primarily related to the drilling of our first AgeWell in addition to the build-out of new sour gas gathering infrastructure. The remainder of the spend was directed towards other growth projects, including advancing new connections across our crude gathering systems. Looking ahead to 2026, as Avigal mentioned, we remain confident in our earnings trajectory and are reaffirming our full year 2026 EBITDA guidance to a range of $520 million to $560 million. With that, we can open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Doug Erwin from Citi. Douglas Irwin: I just wanted to -- First question, just wanted to start with the guidance range and how you're thinking about it in today's macro environment. Does the low end of that range look like an easier lift today than when you gave it kind of earlier in the year. I'm just curious what you're hearing from producers on your acreage as well as if you might have any pockets of direct commodity or spread exposure you might be able to take advantage of in the current environment. Unknown Executive: Yes, Doug, you nail it, right? So our optimism around our guidance is being driven from 2 things, right? One is the macro environment, and I will talk about it in a second. And second is our execution, our strategy. So on the macro side, obviously, the premium risk that you have between brand TI is going to change. It's very obvious that the premium risk that we had last year on brand is not the premium risk we see today. And the second, obviously, is that we see a lingering effect for the macro, even after the kinetic event is over, which will emphasize probably the Shell -- the U.S. shale as a safe harbor for crude supply around the globe. So that's put us in a very good position, both in the Midland area and on the Dara area. Our combined offering of gas, crude and water is a unique offering that gives our customer offering that not many does, and that position us very well and also the development we see around our gas business. was giving a comprehensive solution. It's also where we are seeing a very encouragement development. With that, I will levittoRuven to give his insights. Reuven Spiegel: Thank you, Avigal. If we look at our -- at the segments, water is performing above our expectations. And the combined water and crude option is opening opportunities for continued growth. Crude is solid, and we are seeing opportunities in our Delaware business. And in addition, we enjoy some tailwinds from the Iran conflict. And finally, gas will ramp up in the second half of the year. So with that said, we feel very comfortable at our guidance range. . Douglas Irwin: Great. And maybe just following up on the gas ramp in the second half of the year. Could you maybe just provide a little more detail around kind of what's left to do on the gathering side and what that timing might look like? And then just curious how soon after Web 2 ramps you might be positioned to be able to announce the next expansion and just what that build cycle might look like, just given that you've already spent some of that early CapEx on future expansions. Reuven Spiegel: Yes. Thank you for the question. We actually made a lot of progress this quarter, as we mentioned in the prepared remarks, it has been a multistep process. One of the critical path was drilling the AGL well. which we completed successfully. And now we're focusing on completing all the associated infrastructure like the compressor stations. We do expect our gas utilization to reach capacity in the next 3 to 6 months. In addition, as you mentioned, we have already made some selective investments and we're looking at different ways to make additional processing capacity available in the most cost-effective manner. . Operator: Your next question comes from the line of Gabe Moreen from zoo. Gabriel Moreen: You catalyzed a little bit with some, I think, growing in water comments. So can you maybe just talk about what you're seeing? Is there some systems whether it's private equity, producer backed, what you might be seeing out there size-wise, materiality, Just curious on those comments. Unknown Executive: Yes, absolutely. I will give some higher view around it and Mario energy around the topic, he will chime in. So obviously, we're not going to be specific about deals and size until we are fully ready to say. But the combination of crude, water and gas in the area we're operating in a meaningful and sizable way is giving us a tailwind, and we are very happy about that. We have a very good strategic discussion. And I think that the strategies and location and execution, that's the combination we are trying to achieve and we're very happy about that. oven, do you want to chime in? Reuven Spiegel: Yes. Thank you, Avigal. We are likely to see continued growing need for water with each barrel of produced oil. Water is already produced on a very large scale and the demand keeps growing. So we believe there is a need for effective treatment, a more comprehensive approach for gathering treatment and disposal in particular with the length of time and complexities that needed to get permits today. So we're looking at ways to come up with creative solutions around this, and we'll probably give more color and updates when we are ready in the near future. . Gabriel Moreen: And then you mentioned, I think, the impact on volumes from some of the winter storms that I think they're recovered at this point. I'm just curious also WAHA seems to be a fairly big factor based on where natural gas is pricing in the basin. Are you seeing any shut-ins that are Waha related or producer timing delays because of pricing in the basin? Unknown Executive: Yes. So you're right, your observation. It was an event that was -- it was a close event. It was not a lingering event but it was when it happened, it was meaningful and then it came back to normalcy. But Robert, our CFO, will chime in and give you more color around it. Robert Wright: Yes. Thanks, Avigal. Primary impacts were on crude, both in the Midland and Delaware Basins and also a little bit on the gas processing side. as we stated in our remarks, very limited impact, if any, to our water business overall. But it did have an approximate $10 million headwind to our results for the period. That said, as you saw, we did have very strong performance throughout the partnership for the first quarter. and our outlook for the remainder of the year remains strong with firm behind us. But I'll pass to Mohit as well to talk about the Waha question. Avigal Soreq: Gabe, so we've discussed this in the past. Waha is an important piece of the Permian story, and you covered this very well. And you know that a lot of resides pipelines are going to start coming up in the second half of this year. which is going to relieve a lot of pressure that some of our producer customers have faced in terms of takeaway capacity on the natural gas side. Overall, these 2 developments, as Avigal mentioned at the beginning of this call, higher call on shale crude as a result of the Iran conflict. And the Waha gas prices and finding a floor based upon incremental restogas takeaway capacity that's going to come online is a very positive development for DKL because we are in the right neighborhood. And as producers have capacity to put this gas into the right market, you will see more production to come in. And all 3 of our business, gas water and crude will benefit from that. So we are excited about how this year plays out as far as the gas take capacity is considered. Operator: Thank you for the questions. There are no further questions at this time, and we have reached the end of the Q&A session. I will now turn the call back to Avigal Surek, President and Chairman, for closing remarks. Avigal Soreq: Thank you. I want to thank my colleagues around the table. I want to thank the investor that join us today and believing us and sticking to the stories. -- to the story, and I want to thank our Board of Directors and most importantly, our employees that does nights and days to make our company the best we can. Thank you, guys. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome to the Artisan Partners Asset Management Inc. Business Update Earnings Call. Today's call will include remarks from Jason A. Gottlieb, CEO, and Charles James Daley, CFO. Following these remarks, we will open the line for questions. Our latest results and investor presentation are available on the Investor Relations section of our website. Before we begin today, I would like to remind you that comments made during today's call, including responses to questions, may include forward-looking statements. These are subject to known and unknown risks and uncertainties, including, but not limited to, the factors set forth in our earnings release and detailed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those disclosed in the statements. We assume no obligation to update or revise any of these statements following the presentation. In addition, some of our remarks today will include references to non-GAAP financial measures. You can find reconciliations of these measures to the most comparable GAAP measures in the earnings release and supplemental materials, which can be found on our Investor Relations website. Also, please note that nothing on this call constitutes an offer or solicitation to purchase or sell an interest in any Artisan Partners Asset Management Inc. investment product or a recommendation for any investment service. I will now turn the call over to Jason. Jason A. Gottlieb: Welcome to the Artisan Partners Asset Management Inc. business update and earnings call. Thank you for joining the call today. At Artisan Partners Asset Management Inc., our purpose is to generate and compound wealth for our clients over the long term. We do so by maintaining an ideal home for investment talent, providing a unique combination of autonomy, degrees of freedom, resources, and support. Our model has proven repeatable over time as we have steadily expanded our capabilities across equities, credit, and alternatives. Across a wide range of market environments, we have maintained our focus on high value-added investing, driving positive outcomes for both our clients and our shareholders. Long-term investment performance remains strong across our platform with 74% of our AUM outperforming their benchmarks over three years, 76% over five years, and 99% over ten years gross of fees. All 12 Artisan Partners Asset Management Inc. strategies with track records over ten years have outperformed their benchmarks since inception net of fees. These 12 strategies have compounded capital at average annual rates between 6% to nearly 13%, and have exceeded their benchmarks by an average of 202 basis points annually net of fees. Highlighting our track record of positive long-term investment outcomes, two of our investment teams were recently recognized by Morningstar and Lipper for investment excellence. Morningstar nominated the Global Value team’s Dan O’Keefe for the 2026 Morningstar Award for Investing Excellence, Outstanding Equity Portfolio Manager. Lipper named the team’s Global Value Fund Institutional Class the best fund in its Global Large Cap Value Funds category for the three-, five-, and ten-year periods ended 12/31/2025. Lipper also named Select Equity Fund Institutional Class the best fund in its Global Multicap Value Funds category for the trailing three-year period ended 12/31/2025. Lipper also named the M Sites Capital Group’s Global Unconstrained Fund Institutional Class as the best fund in its Global Income Funds category over the trailing three-year period ending 12/31/2025. External recognition is not our goal, but the consistency with which Artisan Partners Asset Management Inc. has earned accolades like these across time, teams, and asset classes validates the quality of our platform and repeatability of our business model for both talent and clients. Congratulations to the Global Value team and the M Sites Capital Group on these recent recognitions. Shorter term, trailing one-year performance has been weighed down by underperformance in a couple of our largest equity strategies, all of which have strong long-term track records. Turning to slide four, firmwide net outflows in the first quarter were $3.1 billion. Outflows were concentrated in a few equity strategies where we saw clients de-risking, reallocating after periods of asset class outperformance, and some shifting to passive alternatives. Those outflows mask positive business developments across many parts of the platform. Year to date, we have net inflows in 13 of our investment strategies. The Sustainable Emerging Markets strategy raised $250 million in the first quarter and assets under management are nearing $3 billion. We have continued our multiyear success in growing our credit businesses, with $800 million of net inflows in the first quarter. This was our fifteenth consecutive quarter of positive credit flows. In alternatives, we raised $300 million in the first quarter, primarily in the Global Unconstrained strategy, where we continue to build a realizable pipeline. We expect to see continued strong business development in credit and alternatives, while the backdrop in equities is more challenging and difficult to predict. Our teams have been operating efficiently during recent market volatility. At the end of last week, our AUM was back up to nearly $184 billion, near the all-time high that we achieved in late February. Our business and financial model allows us to remain focused on delivering high value-added investment outcomes for clients, servicing our existing clients, while actively developing new client opportunities across channels globally. Slide five highlights our methodical approach to expanding our platform with new talent and investment capabilities. In the first quarter, we onboarded Grand View Property Partners, a real estate private equity investment firm specializing in U.S. middle market assets, and laid the groundwork to launch the team’s next flagship fund later this year. We also added key distribution talent in EMEA and the intermediate wealth channel and filed an exemptive relief application with the SEC to offer ETF share classes of Artisan Partners Asset Management Inc. mutual funds. These investments build on success we are seeing with additional distribution resources accessing the intermediate wealth channel in particular, and the broadening and modernizing of our investment vehicle capabilities with custom credit solutions and model delivery. The asset management landscape remains dynamic, and we are actively exploring opportunities to expand the breadth of our platform. We are looking at a full range of opportunities from individual lift outs to larger acquisitions. Our platform remains differentiated and compelling for great investment talent, and we have more ways to access, resource, and support talent than ever before. I will now turn it over to CJ to review our recent financial results. Charles James Daley: Thanks, Jason. Our complete GAAP and adjusted results are detailed in our earnings release. We exited 2025 with record assets under management, a new all-time high in quarterly revenue, and our second-highest annual revenues and earnings. As of 03/31/2026, assets under management were $173 billion, down 4% from December and up 7% year over year. Average AUM was $182 billion, up 1% sequentially and up 9% compared to the prior-year quarter. While AUM declined sharply in March due to market conditions, it has largely recovered in April, as Jason mentioned. Revenues were [inaudible] down 10% from December and up 9% compared to the prior-year quarter. The sequential decline was primarily due to the expected absence of performance fees, as December included $29 million of performance fees realized across six strategies, with the majority of our performance fee opportunities measured and realized annually in that period. In addition, approximately $6 million of the sequential decrease in revenue was due to two fewer days in the quarter. Our weighted average fee rate for the quarter was 67 basis points, down from December due to the absence of performance fees. Adjusted operating expenses increased 4% compared to December, primarily due to the addition of expenses of Grand View Property Partners, seasonal expenses, and the impact of long-term compensation expense. Our full-year 2026 expense guidance remains unchanged. Excluding approximately $20 million of incremental fixed expenses related to long-term incentive compensation and Grand View, we continue to expect fixed expenses to increase at a low single-digit rate in 2026. Compared to the prior-year quarter, adjusted operating expenses increased 11%, driven primarily by higher variable incentive compensation associated with increased revenues. As a result, adjusted operating income decreased 30% sequentially and increased 6% year over year. The decline in margin compared to the prior-year quarter was primarily a result of the addition of Grand View results. Adjusted net income per adjusted share declined 31% from December and increased 5% compared to the prior-year quarter, consistent with operating income trends. In our non-GAAP measures, nonoperating income includes only interest income and expense. While valuation changes in our seed investments impact shareholder economics, we exclude these changes from adjusted results for greater transparency into our core operating performance. Our balance sheet remains strong with $271 million in cash. During the first quarter, we redeemed approximately $50 million of seed capital, reducing seed investments on the balance sheet to $110 million. Proceeds from seed capital redemptions are included in cash available for corporate purposes, reinvestment, or potential return to shareholders through our year-end special dividend. Consistent with our dividend policy, our Board of Directors declared a quarterly dividend of 77¢ per share for the March 2026 quarter, representing a 24% decrease from the prior quarter and a 13% increase year over year. The sequential decline reflects lower cash generation due primarily to the absence of performance fees and seasonal expense patterns in the first quarter. After funding the quarterly dividend, we retained approximately $150 million of excess capital to support organic growth initiatives, evaluate potential M&A opportunities, and return to shareholders. That concludes my prepared remarks. I will now turn the call back to the operator. Operator: Ladies and gentlemen, at this time, we will begin the question and answer session. To ask a question, you may press star and then one on your touch-tone phones. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, you may press star and two. In the interest of time, we also ask that you please limit yourselves to two questions. At this time, we will pause momentarily to assemble our roster. Our first question today comes from William Raymond Katz from TD Cowen. Please go ahead with your question. Analyst: Okay. Thank you very much for taking the questions. So first question, I guess in your prepared comments and also in the commentary yesterday with the release, you mentioned the equity attrition. Where do you think we stand in terms of that reallocation? And then within the $184 billion that you cited as of last week, can you frame what you are seeing in terms of that equity attrition? And maybe the broader question on the institutional pipeline at large is how has that been reshaped a bit between EM and credit versus what you are seeing on the equity side? Thank you. Jason A. Gottlieb: Hey, Bill. I will talk about the equity business for a second. There were two primary drivers. The first was rebalancing across our international strategies given the strength in the EM market being up 30% and a still relatively strong U.S. market. We experienced it across a number of teams and within our International Value franchise in particular, given the size and nature of their business. As you know, David and the International Value team have been soft closed for quite a long time, but he has always been able to manage capacity and the flow dynamics to a neutral to slight forward lean. We would expect that to remain in place. Everything we have seen in that business has been very much rebalance-oriented; there has not been any termination activity. The other piece is coming from our Growth business, which is another large component of our AUM. There are a lot of underlying dynamics occurring. Our Global Opportunities strategy remains a bit challenged on shorter- and intermediate-term performance, causing some headwinds with some of our institutional relationships globally. But there are important positive developments. The Franchise Fund we launched about a year or so ago raised net $400 million in the quarter from a global client, getting us close to $1 billion in AUM there. The Mid Cap Growth strategy, another large strategy on that team, has seen a meaningful performance turnaround that began in late 2024, accelerated into 2025, and we are continuing to see it in 2026, which we think will continue to help bolster that franchise. And Global Discovery, another meaningful opportunity within that franchise, is also seeing really good pipeline activity given its stable and good long-term performance. So from an equity perspective, the dynamics have been primarily institutionally focused given the rebalance and the challenges coming from Global Opportunities. In Emerging Markets, we are seeing really good opportunities. This was an asset class that was left for dead until 2025. We have seen strong performance from the asset class and, importantly, from our teams. Sustainable Emerging Markets in particular—the $250 million flow we saw for the quarter—is the beginning of what should be a good path to crystallize the great performance the team has put up over the last several quarters. We believe that will be a good opportunity for us as we look ahead as it relates to the pipeline. Analyst: Thanks for that. And as a follow-up on the pipeline for team lift outs and acquisitions—appreciate you are working on Grand View right now—how does that look today versus a year ago or even last quarter in terms of the nature of the pipeline, where it is seasoned, and where you are leaning in terms of incremental opportunity? Thank you. Jason A. Gottlieb: As I have mentioned in previous calls, our Investment Strategy Group and broader management team are operating extremely efficiently, not only with the existing platform and franchises, but also with the external opportunity set. There are two areas in particular where we are focused: expanding our credit business and expanding our alternatives platform. We are seeing really good opportunities to expand more traditional credit globally—so much so that there is a strong possibility we could get something done by the end of the year. We are excited about that, though you never say it is done until it is done—strange behavior always seems to happen near the end—but we feel very good about where we are and think this will be a big opportunity for our platform. On the M&A landscape, we are seeing a robust pipeline across the areas we have talked about: differentiated credit, secondaries in both private equity and real assets. Private credit, not surprisingly, is becoming incrementally more interesting. It is an area we have shied away from given the lack of a clear cycle; it is hard to tell whether what we are seeing is truly a cycle or just idiosyncratic situations, but we are very focused on having good conversations there. Relative to the past, the pipeline has incrementally strengthened, and we feel very good about the forward lean with the opportunity to globalize credit. We are also constantly evaluating and doing R&D with our existing business, and there are two incremental opportunities we are working through. If they come to fruition, they could be meaningful and interesting, but they are still in the R&D phase, so it is a little early to discuss those. Operator: Thank you very much. To enter the question queue, please press star and one. To remove yourself from the question queue, you may press star and two. Our next question comes from John Joseph Dunn from Evercore ISI. Please go ahead with your question. Analyst: I was wondering if there are any institutional client segments that historically you had not done much with that you are targeting now that you have a bunch of newer strategy areas? Jason A. Gottlieb: I do not think, institutionally, there is any new client segment that has not been tapped or that we do not have a good handle on. The majority of where we are seeing opportunity is in the intermediate wealth space. We have built out the platform in terms of people and capabilities in the U.S., and more recently, we have recruited, hired, and onboarded in the U.K., the European market, and more broadly in EMEA. That is yielding interesting results even over the short term. The intermediate wealth platform having a slight positive flow for the quarter is a good indication. Breaking the flow pattern between gross in and gross out, it was our second-best gross inflow quarter dating back to 2021 when there was a lot of equity activity. We feel good that there is a correlation between the quality and talent we have brought on and the inflow outcomes. We obviously have to work through a few equity strategies we talked about from a rebalancing and performance perspective, but what we are seeing from an intermediate wealth perspective feels very good. Institutionally, we just have to continue to block and tackle with some of our larger relationships. Analyst: Got it. And then on that, is there anything you can point to in terms of line of sight to any larger mandates that might be looking to exit, and maybe a quick wraparound on the regional factors impacting institutional demand? Jason A. Gottlieb: I do not have a strong perspective on line of sight there. We are heavily engaged with all of our institutional relationships. The teams that sit alongside our investment franchises and service our clients are well equipped to provide us with intel, and we do not see any direct line of sight to massive outflows or massive inflows. It has been a steady state of staying close to clients—certainly when performance is more challenging—and continuing to build on those relationships, recognizing we have work to do. Where we have a strong forward lean in performance, we are leaning in, and we are seeing some green shoots. It could be a bit of an exchange of kicks where we have some attrition in areas with weaker performance, but we also have great capabilities. I mentioned Global Value. I am sure you have seen performance from Mark Yockey’s group and the Global Equity team, both International and Global. Our Sustainable Emerging Markets franchise is getting a lot of looks institutionally as well. We feel good about the positioning, recognizing that inevitably you will always have a strategy or two facing some challenges, and we are maintaining our discipline around those strategies. Operator: And with that, we will be concluding today’s question and answer session as well as today’s conference call. We thank everyone for attending. Have a pleasant day. You may now disconnect your lines.
Operator: Thank you for standing by. My name is Rebecca. I will be your conference operator today. At this time, I would like to welcome everyone to the UMB Financial Corporation first quarter 2026 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I will now turn the call over to Kay Gregory, Investor Relations. Please go ahead. Kay Gregory: Good morning, and welcome to our first quarter 2026 call. J. Mariner Kemper, Chairman and CEO, and Ram Shankar, CFO, will share a few comments about our results. Then we will open the call for questions from equity research analysts. James D. Rine, president of the holding company and CEO of UMB Bank, along with Thomas Terry, chief credit officer, will be available for the question-and-answer session. Before we begin, let me remind you that today’s presentation contains forward-looking statements, including the discussion of future financial and operating results, as well as other opportunities management foresees. Forward-looking statements and any pro forma metrics are subject to assumptions, risks, and uncertainties as outlined in our SEC filings and summarized in our presentation on Slide 50. Actual results may differ from those set forth in forward-looking statements, which speak only as of today. We undertake no obligation to update them except to the extent required by securities laws. Presentation materials are available online at investorrelations.unb.com and include reconciliations of non-GAAP financial measures. All per-share metrics refer to common shares and are on a diluted share basis. Now I will turn the call over to J. Mariner Kemper. J. Mariner Kemper: Thank you, Kay, and good morning, everyone. We will share some brief comments and open it up for questions. We reported another strong quarter, with results well ahead of expectations. We had 10.8% linked-quarter annualized loan growth, boosted by $2.3 billion in gross production; nine basis points of core margin expansion, driven by a 24 basis point decrease in the cost of interest-bearing deposits; high-quality credit metrics, including 19 basis points of net charge-offs, and provision of $27 million, driven mostly by the $1.4 billion increase in period-end loan balances; and, finally, continued momentum in our fee businesses, with strong contributions from corporate trust, investment banking, and fund services, where assets under administration increased nearly $20 billion from the prior quarter and stand at $565 billion. I will let Ram get into more detail around our results in a moment, but first, I would like to address some of the headlines around the private credit industry, which appear to exaggerate exposures and risks at regional banks. Private credit has been around for years and has been, and will continue to be, an important part of capital formation on a global basis. We have heard some concern that, due to our varied lines of business, we may have some outsized exposures that could impact our performance. The fact is that we have negligible exposure to the private credit industry, and what exposure we do have is to high-quality and experienced operators that have diversified holdings, strong credit structures, and low leverage at the fund level, all underwritten to low loan-to-value metrics. We are proud to partner with a few of the strongest players by providing asset service solutions to their funds. This quarter, we have added additional disclosures to our IR deck to explain what private credit means to us—and, more importantly, what it does not. First, on Slide 31, we have outlined our total NDFI lending exposure, providing additional color to the standard call report categories. As you can see, our total NDFI exposure is $2.6 billion, or just 6.6% of total loans. Within that total, approximately $300 million, or less than 1% of the loans, are to private credit funds. Those loans are subscription lines, which carry an even lower level of risk. As noted earlier, these private credit funds are primarily secured by diversified holdings of senior secured loans, at strong borrowing bases, with minimal exposure to at-risk industries, low leverage, and they have continued to see strong gross inflows. Just under $1 billion of our NDFI loans are to private equity funds, with the largest portion of these being subscription lines, also known as capital call lines. As you can see from the definition included on page 31, subscription lines inherently carry even lower risk to lenders, as they are short-term lines that are repaid with funds received on capital calls made to investors who are contractually obligated to contribute the capital to the fund upon request. The slide gives other detail and characteristics of our high-quality portfolio, including the fact that over 98% of NDFI balances are pass rated. As you have heard us say before, lending to NDFIs is not a new phenomenon and has long been a part of our C&I portfolio, with minimal historic losses. Turning to our fee income exposure to private credit funds, we have added some additional detail on the asset service and custody slide on page 36. Approximately $43 billion of our more than $565 billion in assets under administration is related to private credit, representing just 7.6% of the total. More significantly, the AUA tied to private credit funds increased nearly 5% from the end of the prior quarter. The related annual fee income totaled approximately $13 million, or just 1.6% of annualized first quarter fee income. Similarly, any deposit impact from these funds is immaterial. Moving on, our capital levels continue to build, with a March 31 common equity tier 1 ratio of 11.16%, a 20 basis point improvement from December. While our capital priorities remain the same—with organic growth at the top of our list—our board approved an increased share repurchase authorization, and as you can see in our earnings release, we opportunistically repurchased approximately 178,000 shares in March. We will continue to remain opportunistic in the second quarter. Finally, our results this quarter drove positive operating leverage of 0.4% on a linked-quarter basis, a 155 basis point improvement in operating ROTCE, and an operating efficiency ratio of 47.6%. We continue to expect positive operating leverage for the full year of 2026, even with the impact of lower expected contractual accretion benefits. I am extremely pleased with the performance of our newer markets, and I am excited to continue the momentum throughout the remainder of this year. And now I will turn it over to Ram for some additional detail on the drivers of our first quarter results. Ram? Ram Shankar: Thanks, Mariner. The first quarter included $51 million in net interest income from purchase accounting adjustments, $15.1 million of which was related to accelerated accretion from early payoffs of acquired loans. The benefit to net interest margin from total accretion was approximately 33 basis points. On Slide 10 is the projected contractual accretion, which is estimated at approximately $71 million for the remainder of 2026 and $79 million for 2027. These totals do not include any estimates for accelerated payoffs. Slides 12 and 13 include some key highlights and drivers of our quarter-over-quarter variances. Noninterest income for the quarter was $204.8 million, an increase of $6.4 million, or 3.2%. Drivers included strong performance from both fund services and corporate trust, increased deposit service charges, and investment banking revenue, where municipal trading income increased by 39% from fourth quarter levels. Within the other income category, we had $5.9 million in nonrecurring gains on previously charged-off HCLF loans, a variance of $5.4 million from the fourth quarter. And we had a $3.8 million decline in COLI income, which has a similar offset in reduced deferred compensation expense. Adjusting for investment gains, the nonrecurring items I noted, and mark-to-market on COLI, our fee income for the first quarter was approximately $198 million. On the expense side, we had just $4.4 million in merger-related costs, compared to elevated levels in the prior quarter, when the largest portion of contract termination and conversion expenses were recognized. Excluding the impact of one-time costs, operating noninterest expense was $375.4 million, a reduction of 4.2% compared to the fourth quarter. The largest drivers included a reduction of $5.9 million in salaries and benefits expense related to lower bonus and commissions accruals following strong fourth quarter performance, and a $3.9 million reduction in deferred compensation expense, partially offset by seasonal increases in payroll taxes, insurance, and 401(k) expense. Compared to the guidance I provided last quarter, the favorability in expenses was driven by timing of marketing and other spend, sooner-than-expected synergies realized on contract terminations, and deferred compensation expense. Looking ahead, we would expect second quarter operating expense to be in line with the current consensus expectations of $383 million. The increase from first quarter primarily reflects one additional salary day, as well as the impact of our merit cycle that went into effect in April. Turning to the balance sheet, driving the 10.8% annualized growth that Mariner mentioned was 22% annualized growth in average C&I balances, led by strong activity in Texas. Other regions—California, St. Louis, Colorado, and Utah—posted double-digit quarterly growth. It is great to see the momentum building in several of our acquired regions along with Utah, where we opened our first physical bank location in December. Our pipeline remains strong heading into the second quarter. Average deposits, as shown on Slide 25, were essentially flat in the first quarter, as the 10.4% linked-quarter annualized increase in DDAs was largely offset by lower interest-bearing deposit balances. We added a metric this quarter that adds customer repurchase agreement balances, which are deposit surrogates. Average customer funding increased $702 million, or 1.2% from the prior quarter, and 4.8% on a linked-quarter annualized basis. This balance remix, coupled with the residual impact of the rate cuts in the fourth quarter, drove our cost of total deposits down by 19 basis points to 2.06%, while cost of interest-bearing deposits declined by 24 basis points to 2.79%. We realized a blended beta of 70% on total deposits for the quarter, driven by favorable mix shift as well as continued outperformance for pricing on our soft-index deposits. Reported net interest margin for the first quarter was 3.38%. Excluding the 33 basis points contribution from purchase accounting adjustments, core margin was 3.05%, increasing nine basis points sequentially. The primary drivers of the linked-quarter increase in core net interest margin included benefits of a favorable deposit mix shift and repricing of deposits following the reduction in short-term interest rates, and the positive impact of day count in the quarter, partially offset by loan repricing and lower loan fees, and the impact of liquidity balances and a lower benefit from free funds. Relative to the first quarter adjusted margin of 3.05% that excludes accretion, we expect second quarter margin to be relatively flat, as the benefits from fixed asset repricing are offset by day effects and stable deposit costs and mix shift. I will add my typical caveat that net interest income will depend on the levels of DDA growth and excess liquidity, any SOFR movements, and mix shift within the lending and funding portfolios. Finally, our effective tax rate was 21.1% for the first quarter compared to 20.3% for the fourth quarter. Looking ahead, our tax rate is expected to be between 20–22% for 2026. Now I will turn it back over to the operator to begin the question-and-answer session. Operator: At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Jon Arfstrom with RBC Capital Markets. Your line is open. J. Mariner Kemper: Hey, good morning to everyone. Jon Glenn Arfstrom: Maybe Mariner or Jim, for you guys on the pipelines. Good number, the $2.3 billion—maybe there is a little seasonality in there—but do you expect that to continue to grow from here? And you flagged this in the release, but have you seen any impact on pipelines from some of the geopolitical risks or higher energy costs? J. Mariner Kemper: I will take that first. James, feel free to add anything. I think this is a good news story, which is that I do not really have anything new to tell you from being in the seat for 22 years. It is the same thing every quarter for 22 years, which is the next quarter looks pretty good. It is not seasonal at all. We continue to book loans based on our strategy—bottoms-up capability, capacity of the officer, and market share opportunity in the markets that we are in and in the verticals we are in—and there is a very long runway for us across our entire footprint, including some new, very big markets like California. James D. Rine: The only thing I would add is it continues to be strong, and it is from a cross-section from all markets. Jon Glenn Arfstrom: Okay. And then anything on the payoffs and paydowns slowing? I know that number jumps around, but it was a pretty big step down in the quarter. Is there anything you would flag on that? J. Mariner Kemper: No. Actually, I would say that the anticipated payoffs and paydowns in the first quarter actually materialized, so what we expected to happen happened. It can bump around. The reality as we look forward—if we are going to be higher for longer instead of seeing rates come down—we are not likely to see as much payoff/paydown for the rest of the year if that is going to be the case, which seems to be the prevailing thought. We do not anticipate any rates coming down anytime soon. Jon Glenn Arfstrom: Okay. Alright. Thank you very much. Appreciate it. J. Mariner Kemper: Thanks, Jon. Operator: Your next question comes from the line of Jared Shaw with Barclays. Your line is open. Jared David Shaw: Thank you. Good morning. J. Mariner Kemper: Morning, Jared. Jared David Shaw: Just looking at the fee income lines—you had some really good strength there this quarter. How should we think about the income for the year and for the second quarter, building off what we saw this quarter? J. Mariner Kemper: We do not give specific guidance on expectations for growth in fee income, other than to point backwards. We continue to expect the same kind of performance from the team, and the pipelines across all those businesses remain very strong, to include the two that drive it and have for some time, which would be fund services and corporate trust. We have been giving you a little color over the last couple years on the success we have had with our private investment group, and we expect to continue to see exits and successes periodically there as well. Without giving you specific guidance, expectations continue to be as strong as they have been. Pipelines are good, activity is strong, and we are taking share across the board in all those businesses. Jared David Shaw: At the time of the Heartland deal, you talked about the opportunity of corporate trust in some of those new markets. Are you seeing any activity there yet, or is that still more in the future as you build out those markets and capabilities? J. Mariner Kemper: The message intended with that is that corporate trust is a very local business, and it is a brand business. The brand extension—having offices and signs and visibility across California and other places, and places for lawyers to meet together in offices and things like that—is brand extension and pushes the business further. It is hard to point directly to Heartland specifically, but we know that the brand extension with those locations is helpful. We also did a lift out—you know, we talked about that last quarter—from Wilmington Trust in California. I would call it mostly brand extension. It helps. James D. Rine: This is James, Jared. As Mariner mentioned, we continue to add to the team in all markets, so we look for that to do nothing but grow. Jared David Shaw: Okay. Thanks. And then if I could just follow up on the deposits. Ram, you called out the impact to NIM from potential deposit mix shift and DDA growth. If we look at average DDAs versus end of period, it feels like there could be some good growth built in there. How should we think about DDA balances growing from here, or is there just a lot of quarter-end variability? J. Mariner Kemper: I will take that too. We try to guide you to think about averages rather than point in time because of the episodic nature of our institutional businesses and some of our larger corporate business—things such as dividends and tax payments that can happen from quarter to quarter. That is true, but also, as I mentioned a moment ago, picking up the Wilmington Trust team in California and adding team members across the country in our New York and LA offices in corporate trust, and the momentum we have with fund services, the addition of more clients in between those episodes allows the base to grow over time. The expectation, without knowing the exact timing, is that the DDA baseline grows over time due to the success and momentum we have in client acquisition that takes place in between those episodes. Jared David Shaw: Okay. Thanks. J. Mariner Kemper: Yep. Ram Shankar: Thanks, Jared. Operator: Your next question comes from the line of Brendan Nosal with Hovde Group. Your line is open. Brendan Nosal: Hey. Good morning, everybody. Hope you are doing well. Ram Shankar: Good morning. Brendan Nosal: Kicking off on capital, have you any early read on the updated capital rules overall, and then specifically, how it ties into how you think about $100 billion, and then you pair that alongside the increased activity we saw in the buyback this quarter? Ram Shankar: I will take this. On our preliminary read, it is a net positive for us—obviously a lot of relief from risk-weighted assets. We are still studying it—going from 100% to 95% on some of the commercial relationships and LTV-based assignments on risk for mortgages—and the negative is just the inclusion of AOCI. I still think it is a net positive for us in terms of what it means to our CET1 and total capital ratios. J. Mariner Kemper: I would just add that we are very efficient and accreting capital very quickly on top of all that. It is a beautiful position to be in. We are likely to have more flexibility with capital with all of the things that Ram just said, along with our ability to accrete and grow capital, which is going to give us flexibility as we look into getting closer to $100 billion. We feel well positioned. We also believe, because of the quality of our assets, we benefit from likely being able to support lower levels of capital than our peers anyway, long term. Brendan Nosal: Alright. That is fantastic. Maybe pivoting to a top-level question on the overall return profile. There has been a pretty meaningful step-up in ROA over the past couple of quarters. Things can move around period to period, but conceptually, are we at a level that you can more or less maintain going forward, or are there environmental pressures that kind of ease that somewhat? J. Mariner Kemper: We expect to continue to perform at that level. Ram Shankar: We do not give long-term guidance on our growth targets, but even if you exclude some of the purchase accounting things that go through our income statement, our performance has been increasing because of strong operating leverage, good balance sheet growth, and good margin trajectory. We feel pretty good about it. To add to your previous question on capital, we still have almost $600 million of pretax accretion left to take through our income statement for the next two to three years. That is roughly $6 of EPS and close to 100 basis points of capital, on top of the regular outperformance that we see in our legacy operations, before all the purchase accounting benefits. We are pretty excited. The denominator is growing at a fast clip, and that is why you saw what we did this quarter, including doing some buybacks before our quiet period ended. Obviously, we had $1.4 billion of loan growth, and you heard the comments about the pipeline looking pretty strong. Then we will be more active about looking at our dividend and other opportunities. I would also add, as a reminder, one of the reasons we did Heartland was to gain strength in our retail business. J. Mariner Kemper: We doubled our branch network and doubled our granular, low-cost deposits, and that is a really nice leverage point going forward for us. Our retail business was a bit more of a drag on those profitability metrics, and that has gotten a lot more efficient. We expect it to continue to do so as it grows. Brendan Nosal: Okay. Fantastic. Thanks for taking my questions. Ram Shankar: Thanks, Brendan. Operator: Your next question comes from the line of Casey Haire with Autonomous Research. Your line is open. Casey Haire: Great, thanks. Good morning, guys. I wanted to touch on the NIM outlook from the loan yield side of things. Where are new money yields versus that 6.52% level in the first quarter? Ram Shankar: If you look at our loan yields excluding accretion, we show that the loan yields are close to under 6% if you exclude the accretion benefit from loans. For the first quarter, our production yields are somewhere between 6% and 6.25%, so they are pretty accretive on new money coming in. Then there is the fixed asset repricing that happens within the loan portfolio as well. We have close to $3 billion of loans that have some 5% rates that are repricing higher in today’s environment. Casey Haire: Okay. Great, understand that the core will be impacted. And then apologies if I missed this on the expenses—very good discipline here in the first quarter. Just some color on what drove that $10 million of surprise versus your guidance, and with the guide being up in the second quarter, what are some of the drivers there? I think there were some seasonal roll-offs. J. Mariner Kemper: And, you know, with the guide being up in the second quarter, what are some of the drivers there? Because I think there were some seasonal roll-offs earlier in the year. Ram Shankar: Some of it was just timing of when we expected some of the marketing spend to happen, so that did not happen as I had anticipated in the first quarter when I gave my guidance. We also did a great job achieving expense saves from some of the contract terminations, so they happened sooner than expected, which was part of our $385 million to March guidance that I gave last quarter. The step-up in the second quarter is one more day and then the merit cycle that goes into effect in April for our associate base. Those are the two drivers that take us higher. We also had an expense credit of $3 million from our deferred comps. If you add that back, our quarter baseline is more like $378 million, and what I guided to is about $383 million, which steps up because of the merit cycle and one more day. Casey Haire: Gotcha. Thank you. Ram Shankar: Thanks. Operator: Your next question comes from the line of Janet Lee with TD Cowen. Your line is open. Janet Lee: Good morning. On deposits, I want to better understand the reason for the muted deposit growth in the quarter. I thought 1Q has seasonal public fund inflows. Even on an average basis on page 25, I see commercial balances decline, although other parts have been growing. Is this just timing or seasonality, or was there something else that attributes to somewhat muted deposit growth for the quarter? J. Mariner Kemper: Thanks. I tried to address that a moment ago. It is complex. We have many lines of business that make it harder to understand. We like to describe it so that you think about averages rather than point in time. We have a lot of episodic activity that goes through many of those business lines that you see on that page. Public funds have a seasonal drawdown in the quarter because of tax payments and such. The rest are more episodic, and that is why you have to think about averages. I also like to point to page 42 because you really need to think about what is happening to our deposits over time, not even just averages for a single quarter. We have a very long-term track record of adding clients. In between quarters, you can see tax payments and dividend payments and putting money to work—all those kinds of things that can bump things around. You should think about multiple linked quarters and year-over-year growth in what we are able to do as a company. We have an exceptional deposit-generating machine. There is nothing to read into at the end of the quarter; it is business as usual. Client count is good and growing. Ram Shankar: In a nutshell, we did not lose any business. Janet Lee: Great. Thanks for the color. You have already touched on total fees, and I appreciate all the color you gave on the private credit exposure on Slide 36. Does this mean that, at least from either deposit or fee perspective on the trust and security processing fees, you have been growing at a very strong pace? You are not seeing any disruption to that flow, and the trajectory of that line item should be continued growth since you are not seeing any outflows on AUA and the fee income side of the business. Is that fair? J. Mariner Kemper: Yes, that is absolutely correct. One of the things that is really important to note about this business for us is that, from time to time, investors will ask—there was a time when hedge funds were leading the way, and, as you are all aware, hedge funds became out of favor. During that same time, we got the same set of questions: what is going to happen to your assets under administration as the hedge fund business slides away? The answer is that private investing is still leading the way. In our business, as you go from hedge funds to private equity, and within private equity, intervals come out, then the popular vehicle becomes private credit, and then private credit has this conversation taking place. It does not mean all this money goes to public investing; it means it redistributes back through the other verticals within private investing. We are the beneficiary regardless, as that money moves around within the private investing universe. We have benefited handsomely over time regardless of which one of those verticals is accumulating capital at the time. Janet Lee: Got it. Thanks for all the color. J. Mariner Kemper: Thanks. Operator: Your next question comes from the line of Nathan Race with Piper Sandler. Your line is open. Nathan James Race: Morning, everyone. Thanks for taking my questions. Going back to the capital discussion—given you are generating a lot of capital internally and obviously eclipsed your CET1 target this quarter—given that capital’s ability is so strong, even with double-digit balance sheet growth, how are you thinking about using the buyback authorization as more of a continuous tool to manage excess capital? It has been more episodic in the past, but are you thinking about buybacks as a more consistent component to excess capital management? J. Mariner Kemper: We have a long-tested philosophy around that. As long as we are able to do what we have been able to do and expect to continue to do, the first and highest, best use of our capital is to put it into loans, and we are very successful at it. We do not see that fading away. We have an excellent team, a deep pipeline, long-tenured associates, and big new markets to pursue, having lots of success—really across the board. Wisconsin for us is on fire. Minneapolis has really turned on. California is doing great. New Mexico—I could go on and on. The new markets are really performing, and we are still early days in getting the benefit out of them. So first and foremost, loans. Then it is a combination of other capital uses based on lots of variables: how our currency is trading relative to others, what is going on in the economy. On M&A, we still think it makes sense for us to do tuck-in acquisitions that meet our test for low-cost, granular, under-levered deposits—well-run smaller banks that fit into markets we are already operating in. That is investing in the business, so that would probably be next. Then the next two on the list are going to be buybacks and dividends. We will be opportunistic on the buyback side, as we have been. On the dividend side, U.S. investors should expect—as long as we are performing—that you should see an increase in our dividend every year. We will first think about investing in our business, and then think about buybacks. Nathan James Race: Understood. That makes sense. Maybe a bigger-picture question: it seems like you are firing on all cylinders. Are there any segments or businesses where that is not working, where you are seeing opportunities for greater efficiency or operational improvement going forward? J. Mariner Kemper: Anybody who is not trying to leverage technology to make their business more efficient should have their heads examined. We are always looking at ways to operate better, and machine learning is being deployed across the whole organization to get smarter, better, faster, and bolder. AI is an overused term for being smart using technology to make your business better. We are looking for ways to do that all the time, and I think you will see us do that successfully going forward. Otherwise, it is making sure the salesforce has everything they need and we are staying out of the way, and letting our exceptional, tenured team get out there and build our business. We think we have a tremendous opportunity to take the feel of “local national”—from Illinois to California, from Milwaukee and the Twin Cities down to New Mexico and throughout Texas. We think we can be the go-to bank with the team that is in place and has deep pipelines. Nathan James Race: Great. I appreciate all the color. Thanks, Mariner. J. Mariner Kemper: Thanks, Nathan. Operator: Your next question comes from the line of Brian Wilczynski with Morgan Stanley. Your line is open. Brian Wilczynski: Hi, good morning. Ram Shankar: Morning, Brian. Brian Wilczynski: Just wanted to follow up on the core net interest margin guidance for the second quarter. Ram, you mentioned that new loan growth is accretive to core loan yields. You talked about the fixed-rate asset repricing. Can you elaborate on some of the puts and takes and any headwinds that keep core NIM stable in 2Q as opposed to up? Ram Shankar: It is the incremental cost of deposits relative to what we can make on the asset side. If you look at our cost of interest-bearing deposits, in the last quarter it was about 2.80%. We have, as Mariner said, a very diversified funding mix, and it depends on where it comes from—whether it comes from DDAs or some other verticals. Interest-bearing costs or deposit costs can vary from one quarter to another, depending on where it is coming from. There are no specific headwinds; it is the absence of the tailwinds we had with rate cuts. Our internal view is there might be one rate cut later this year—maybe not. So there are no more tailwinds from that standpoint that benefit our beta. We expect deposit costs to be stable and some accretion on the lending side because of new money yields and fixed assets repricing. J. Mariner Kemper: Stable, with the opportunity of outperformance on demand deposits. Again, I say opportunity—that is a possibility for us. Otherwise, it would be stable. Brian Wilczynski: Got it. And on the deposit side, you had really strong growth this quarter in the corporate trust deposits. Can you remind us of some of the drivers for that business? I know UMB has an aviation business and a relatively new CLO business. Can you talk about what is working there and the environment right now for corporate trust? J. Mariner Kemper: It sounds like you could list them—yes, exactly. The aviation business is hitting on all cylinders. Our CLO business is firing up really well on a national basis, so lots of opportunity there. Infrastructure spending is finally happening on a national basis, so our offices on the coasts have really started to pick up. We did this lift out, which we have talked about a couple of times on the call already, which is allowing for growth. It is a big list on the infrastructure side. It is across all those verticals. There are a couple of relatively new verticals as well. We are number two and number three in the country by number of issues now, and our coastal offices are relatively new, so I think there is a huge runway for what we are able to do in Orange County and New York—up and down the coasts. Brian Wilczynski: Got it. Really appreciate all the color and thank you for taking my questions. Ram Shankar: Thank you, Brian. Operator: Your next question comes from the line of Chris McGratty with KBW. Your line is open. Christopher Edward McGratty: Hello. Great morning. Ram Shankar: Morning, Chris. Christopher Edward McGratty: Ram, I appreciate the commitment to operating leverage this year. Thinking about the moving pieces over the medium term—you have the accretion rundown—but it feels like this model is capable of operating leverage for the foreseeable future. Any response to that? Ram Shankar: That is why—even last time—and Mariner said it this time as well: whether there are more private investment gains or less, whether there is more accretion or less, our job is to maintain positive operating leverage as we build scale. Some of our strategic pillars are about building scale in each of the markets. We are doing that very selectively. We are becoming more profitable as we grow into our size as well. This is not an environmental thing. We want to weather all economic environments and achieve positive operating leverage. That is how we judge ourselves. J. Mariner Kemper: We judge ourselves on operating leverage. Every dollar spent should have positive leverage. That is how we operate the business. Christopher Edward McGratty: As a follow-up, is there anything magic about the 50% efficiency ratio? You are kind of in the low fifties today. Balancing the need for investments, the benefits from AI, and that dynamic—is there anything magic about 50%? J. Mariner Kemper: Absolutely nothing magic about 50%. We feel like we are doing really well where we are, given the mix of business. Being at 47% where we are right now is a top-of-class number for just a net interest margin shop, and the fact that we are able to perform at 47% with all of our institutional businesses layered on top—we feel pretty good about that. So no, there is nothing magic about 50%. Thanks, Chris. Operator: Again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Brian Foran with Truist. Your line is open. Brian Foran: Hey. Good morning. Mariner, I appreciated you led with “anyone not using technology to get better needs to be examined.” I thought it was interesting you said AI is overused or overhyped. Can you expand a little bit on where you think doing AI for banks is a little too much? J. Mariner Kemper: It is not that banks are doing too much. The term is overused. At the end of the day, AI is the use of data to run your business better and make better decisions and move faster. It is not a new subject. TV and the financial press have made a big deal out of it, but it is the use of machine learning to get better, smarter, faster, and bolder—which is not new. I am not saying banks are doing too much or not enough. I am saying you should be doing it—leveraging faster computing and better data to make your business better. If you are not doing that, you should have your head examined. Brian Foran: Perfect. On M&A, as I am sure you are aware, there became this narrative last year that somehow you were on the list to do a big deal. I thought it was interesting you kept using the word “tuck-in.” Any other parameters you would give on what an ideal tuck-in deal looks like for you, and as an extension, if and when the $100 billion line finally goes up, does the definition of the size of a tuck-in change, or is it really independent of that move in regulation? J. Mariner Kemper: I am still surprised there was a narrative we were going to do some big deal. We would never give up control of our company, try to merge two management teams, give up half our board, and so on. We have a fantastic management team and a great strategy, and I have no need or desire to do that. The purpose of using the term “tuck-in” is to help define a deal that is not going to affect any of that—where we can tuck it in, it is still our management team, we do not have to give up part of the boardroom, and we do not have to try to merge two cultures. That is what tuck-in is supposed to mean. Our definitions are long used: a smaller deal that would be in-market or contiguous, where we can leverage our people, synergies, and brand. Really importantly for us would be granular, low-cost deposits that are under-levered. We do not want to do a deal where every next dollar we lend has to be from acquired deposits. We love the idea of an institution that is leverageable, that has deposits we can put to use, because we have the asset-generating machine and we do not want to put that under pressure. Those are the general themes. Brian Foran: That is helpful. Thank you so much. J. Mariner Kemper: Yep. Operator: I will now turn the call back over to management for closing remarks. J. Mariner Kemper: Thank you, everybody. As always, we appreciate your interest in our company and the time you spend to get to know us better. I hope that page 31 helped dispel some of the misguided understanding of what the private credit topic means to us—less than 1% of our loans, etc. We have a very long track record of lending the same way across every asset class, and you can see on pages 42 and 22 the intersection of growth and quality is what we like to define as rarified air that we live in. We have a long-tenured team and a great track record. We are very excited about what lies ahead, and we appreciate your interest. Kay Gregory: Thank you, Mariner. As always, if you have follow-up questions, you can reach us at (816) 860-7106. Thank you. Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, good morning, and welcome to the Teradyne First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I now like to turn the call over to Amy McAndrews, VP, Corporate Relations for Teradyne. Please go ahead. Amy McAndrews: Thank you, operator. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Greg Smith; and our CFO, Michelle Turner. Following our opening remarks, we'll provide details of our performance for the first quarter of 2026 and our outlook for the second quarter. The press release containing our first quarter results was issued last evening. We are providing slides as well as a copy of these prepared remarks on the Teradyne Investor website, that may be helpful in following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risks that could cause Teradyne's results to differ materially from management's current expectations. We caution listeners not to place undue reliance on any forward-looking statements included in this presentation. We encourage you to review the safe harbor statement contained in the slides accompanying this presentation as well as the risk factors described in our annual report on Form 10-K for the fiscal year ended December 31, 2025, on file with the SEC. Additionally, these forward-looking statements are made only as of today. During today's call, we will refer to non-GAAP financial measures. We have posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial measures, where available, on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology-focused investor conferences hosted by Bernstein, TD Cowen, Stifel and Bank of America. Our quiet period will begin at the close of business on June 12, 2026. Following Greg and Michelle's comments this morning, we'll open up the call for questions. This call is scheduled for 1 hour. Greg? Gregory Smith: Good morning, with revenue of approximately $1.3 billion and non-GAAP EPS of $2.56, Teradyne delivered record results in the first quarter of 2026. Our previous high watermark was in the consumer-driven mobile peak of Q2 of 2021. In Q1 of 2026, our revenue was $200 million or 18% higher than that previous record. This new record comes from durable AI demand drivers and the continuing acceleration of our wafer to AI data center strategy. This strategy is delivering demand across Teradyne's portfolio. In Q1, AI-related demand accounted for nearly 70% of our revenue, up from about 60% in Q4 of 2025. Our strategy continues to be anchored across 3 broad trends: verticalization, electrification and AI. Verticalization is the concentration of our business into extremely large vertically-integrated technology companies. The verticalization trend was cleared by 2024 and continues to accelerate. This includes companies like hyperscalers, but also huge AI ecosystem enablers like foundries, merchant compute, memory and networking companies. Many of these companies are customers of all 3 of our businesses: Semiconductor Test, Product Test and Robotics. And this product portfolio enables us to serve their needs from wafer to data center. While these massive customers are driving strong growth, it also means that the business is increasingly concentrated to these customers into a smaller number of very large ASIC and commercial device programs. This concentration also increases the risk that bottlenecks in other areas could shift demand for our products, which can lead to short-term demand peaks and valleys superimposed over long-term strong growth trend. In other words, it's lumpy growth. The electrification trend continues. In the auto industrial segment, 46% of our revenue came from data center devices in the first quarter, which historically has been dominated by automotive and industrial devices. It goes without saying, AI is the dominant force shaping our business. We think about the opportunity presented by AI as 3 superimposed waves, each building on the one before it. We are in the heart of the first wave, which focused on the build-out of general-purpose AI data center capacity. This was behind the massive increase in data center spend in 2025. In 2026, we are entering the second wave. While there is still huge investment in general-purpose AI data centers, these data centers are being augmented with compute silicon optimized for inference at scale. This wave will grow to a high run rate over the next few years. Still yet to come is the Edge AI physical AI wave. As the technologies for silicon packaging, memory and AI models improve, compelling use cases for AI at the edge will be emerging. Obvious examples of this are self-driving cars, robotics, PCs, wearables and smartphones. These waves are broad-based, and we expect them to stack on top of each other, driving significant ATE TAM growth over the full midterm. Because of Teradyne's wafer to data center strategy and our historic strength in mobile, automotive and industrial, we are well positioned to ride each of these waves as they arrive. Back in our January call, we shared that we expected robust double-digit year-over-year growth. We still expect that the compute TAM and revenue will grow significantly from an already strong 2025 base. We're seeing healthy engagement with both networking and VIP compute customers, and our pipeline of new design wins remains robust. Aligned with this momentum, I am pleased to share that we have received our first multi-system production test orders for merchant GPU in Q1. We expect these systems to ship, be installed and be in production in Q2. Customer engagement remains strong, and we are well positioned to capture further share as we bring up more devices on our platform. In automotive and industrial, we're seeing moderate but steady recovery in both TAM and revenue. There are signs of strength in automotive, primarily ADAS, and we're seeing increased demand for power going into AI data centers. As of now, mobile appears a bit weaker, with memory pricing and availability affecting end market demand, especially outside the iOS ecosystem. Memory test demand appears to be even stronger than our view in January, with AI compute demand for both HBM and DRAM continuing to act as an accelerator. We're also beginning to see increasing flash test demand driven by SSD. The overall memory market is on track for solid TAM growth for the year, and we expect to gain low single-digit share. In 2025, our IST group expanded its HDD customer base and entered the SLT compute market. Now in 2026, IST is on track to deliver against this expanded opportunity. We're seeing strength in HDD, driven by greater than 20% annual exabyte growth fueled by AI. This translates into longer test times per drive and a larger HDD TAM and revenue for Teradyne. In Robotics, we delivered our fourth consecutive quarter of sequential growth. This is particularly notable because Q4 is typically our strongest quarter and Q1 is typically down. We're seeing strong customer engagement across e-commerce, electronics manufacturing and semiconductor end markets. Robotics is a key part of our wafer to AI data center strategy, with robotic-assisted assembly test and data center operations. Our robots are being used in environmental sensing and data centers, and we recently demonstrated a complex physical AI work cell in partnership with Generalist as part of the recent NVIDIA GTC. In prior calls, we have often talked about the investments that we are making to capture growth opportunities coming from our wafer to data center strategy. In Q1, these investments have resulted in 2 significant new product introductions. The first is Photon 100, which is our platform for silicon photonics and co-packaged optics testing. The Photon 100 is based on our proven UltraFLEXplus tester and is bringing SiPho testing from lab to fab. I'll remind you that silicon photonics and co-packaged optics are in the very early stages of a ramp that will likely be substantial. There is uncertainty about the timing and the slope of this ramp, but as optical interconnections are increasingly used for scale out and then scale up networking, it is going to be a big chunk of the total networking TAM. As this market grows, we also expect to bring significantly more efficient test solutions online, so it would be a mistake to linearly extrapolate from today's test strategies and economics. That being said, we expect that this is a meaningful TAM expansion opportunity, which could reach $300 million to $700 million per year over the midterm. The second product introduction is Omnyx, which is a new production board test platform designed to address the unique set of test challenges for server boards and tray assemblies. This platform uses power, thermal, optical and TDR test capabilities from across all of Teradyne to enable earlier detection of defects that are plaguing the build-out of AI data centers. In addition, we continue to pursue inorganic opportunities to grow our business. Our MultiLane Test Products joint venture closed on April 8, and we believe this partnership will accelerate the development of high-speed I/O and data center interconnect test solutions, a critical test need as AI data centers transition from cable-based connections to back plane and mid-plan architectures. Additionally, we closed the acquisition of TestInsight 2 weeks ago. TestInsight is the leading provider of test development tools that are used with our testers and competing platforms. This acquisition strengthens Teradyne's design to test software capabilities, enabling us to build a virtual test environment, which will reduce time to market for complex AI and networking devices. In summary, Q1 2026 was a record quarter for Teradyne. We're executing our strategy, capitalizing on secular growth drivers and delivering value for our customers and shareholders. Our team, especially our operations team and manufacturing partners, went above and beyond to hit this ramp, and I'm grateful for their hard work and skill. We came into the second quarter with a lot of momentum and confidence that 2026 will be a strong growth year, and we are well on our way to achieving our target earnings model. With that, I'll turn the call over to Michelle. Michelle Turner: Thank you, Greg, and good morning, everyone. Today, I will cover our first quarter financial results and our second quarter 2026 outlook. Starting first with Q1. First quarter sales were $1.282 billion with non-GAAP EPS of $2.56, both above the high end of our guidance range. Total company sales were up 87% from first quarter last year and up 18% sequentially from last quarter. Non-GAAP earnings per share was up 241% from first quarter last year and up 42% sequentially from last quarter. This represents a record financial performance for the company, driven by all things AI across all 3 of our business groups. In the quarter, we continue to have 2 specifying customers and 1 purchasing customer greater than 10% of our revenue. Building on that, let's look a little deeper at revenue starting with Semi Test. Revenue was $1.1 billion, breaking the $1 billion threshold for the first time, up 26% sequentially from last quarter and over 100% year-over-year versus Q1 2025. The revenue breakdown within Semi Test was SoC at $882 million, memory at $203 million, and IST at $27 million. The key drivers were continued AI strength in compute segments and memory. At roughly 75%, compute is the largest portion of our SoC product revenue. This continues the evolution of our test portfolio from being mobile-centric shifting to AI dominant. Within auto and industrial, revenue nearly doubled sequentially from a low base last quarter, driven by power management demand increases for AI data center build-outs. Mobile revenue was roughly flat with fourth quarter 2025 and remains a muted impact to our overall results with the increasing importance of compute in our SoC portfolio. Aligned with our strong top line performance, operationally, we have more than doubled our UltraFLEXplus shipments over the last 9 months while sustaining our 12- to 16-week lead times. Our multisource strategy, primarily leveraging contract manufacturers, provides ultimate flexibility for our customers while ensuring capacity continuity in today's dynamic environment. Moving on to memory. Our memory business delivered another strong quarter of $203 million in revenue, relatively flat to our record last quarter, driven by robust HBM and DRAM test solution demand. We also successfully ramped the newest generation of our memory tester, Magnum 7. IST revenue of $27 million was relatively flat year-over-year, though we are seeing early indicators for potential growth, driven primarily by HDD in the second half and continuing into 2027. Product Test Group revenue was $80 million, up 8% year-over-year. Growth was led by sustained defense and aerospace demand and production board test. Robotics revenue was $91 million, up 32% year-over-year, representing our fourth sequential quarter of growth. Our one sales team approach is delivering results with revenue strength across end market verticals and e-commerce, electronics manufacturing and semiconductors, including in AI data centers. Shipments associated with our large e-commerce customer increased sequentially and AI revenue increased to 15% of the quarter's sales. Now moving down the P&L. A confluence of positive factors delivered record earnings results, including peak AI-driven volume, favorable product mix and nonrecurring onetime benefits. Gross margin for the quarter was 60.9%, up 370 basis points sequentially, driven by strong semi test volume and product mix and nonrecurring operational impacts. OpEx declined sequentially from last quarter and was favorable to guidance, due primarily to the timing of nonrecurring engineering. Non-GAAP operating income was $480 million, with an operating margin of 37.5%, both all-time financial records. Now moving on to capital allocation. Our capital allocation strategy remains consistent, and that is to maintain cash reserves to enable us to run the business and have dry powder for M&A. We ended the quarter with cash and investments of roughly $400 million. Working capital, predominantly in accounts receivable, increased in support of the revenue growth delivered in the quarter. Capital expenditures were flat year-over-year with the expectation that Q2 will increase, driven by continued investments in innovation and operations scaling. We paid $20 million in dividends in the quarter, and our share buybacks were de minimis. As Greg mentioned, we closed on 2 important inorganic asset opportunities this month. On April 8, we closed on our previously announced MultiLane Test Product joint venture. The results of this business will be consolidated into the Product Test group, and our EPS will reflect our share of the results of this business. On April 16, we closed on the acquisition of TestInsight business, furthering our wafer to AI data center product penetration. Combined, these 2 deals used roughly $165 million of cash in the second quarter, which we funded via our credit revolver. Looking ahead to our second quarter guidance. For the quarter, we expect revenue in the range of $1.15 billion to $1.25 billion and non-GAAP EPS of $1.86 to $2.15. Gross margins are expected to be in the range of 58% to 59%, normalized for peak volumes and onetime benefits. Operating expenses are expected to run at approximately 27% to 28% of second quarter sales. The non-GAAP operating profit rate is expected to be between 30% and 32%. Based on current customer order visibility, we continue to expect first half weighted revenue with approximately 55% to 60% of annual revenue expected in the first half. This expanded range from 3 months ago recognizes the continued strong demand signals we are hearing from our customers, while also balancing potential order lumpiness that could impact revenue timing across quarters or years. For the year, we have line of sight to about $50 million in revenue for merchant GPU, but our visibility into the second half is quite limited with increasing contributions over the midterm period. So in closing, our teams delivered exceptional financial results, reflecting strong execution and robust demand across our portfolio aligned with our wafer to data center strategy. We remain confident in the full year trajectory and our target model of $6 billion in revenue and $9.50 to $11 in non-GAAP EPS. I want to thank all of our Teradyne team members for their performance and operational discipline in delivering for our customers and shareholders. With that, we'll open the call for questions. Operator? Operator: [Operator Instructions] And we'll take our first question from Timothy Arcuri with UBS. Timothy Arcuri: Greg, I guess, my question is just on the back half of the year. So it's a bit of a disconnect. It sounds like the demand signals has anything gotten better over the past 3 months, but you're not raising guidance for the back half of the year. Is this -- this kind of came up on the -- on your competitor's call as well. So is this, to some degree, like factoring in some constraints that may be your downstream of your business? And I know you did talk about this, VIP stuff can be very lumpy. So maybe that's part of it. So if you can talk about that. Michelle Turner: Tim, it's Michelle. I'll start, and then Greg can add some specifics from a customer perspective. So let me start with where we're at today. Q1 was an exceptional quarter, a record quarter. You heard that throughout our script for the company. When you look at our Q2 guidance, it's equally strong. So revenue of $1.15 billion to $1.25 billion. This represents about 84% year-over-year growth at the midpoint after coming off of a really strong Q1 of 87% growth. So as a result of the strength in the first half, we have expanded our first half revenue range to 55% to 60%. So this is a change from January where we've given a point estimate of 60%. So when I think about the ranges, just to kind of round this, the low end of the range really reflects the potential for timing impact. So this is either lumpiness in terms of large customer ordering patterns or it could also be hiccups in the AI data center build out the ecosystem, if you will in terms of when our testers actually get accepted. So these dynamics, as you know, can impact revenue within the quarter or across your boundaries. And so that is part of the dynamic that's playing out in the second half. When I think about the high end of the range, this really reflects continued strength that we're seeing from a demand perspective across compute, networking and memory. And then the other element I would add to this is in terms of visibility. So we talked in our January call around improved visibility from a customer ordering perspective. That is consistent with where we're at today. So historically, this business has had about 13 weeks of visibility. Coming into this year, we improved that. We can now see into another quarter out, although not as strong as the current quarter. And so we still do have some undefined parts as we think about Q4. Gregory Smith: Yes. So -- and Tim, let me give you a little bit more color in terms of sort of how the first half, second half polarization breaks down by sort of group or technology. The part of our business that we believe is most first half weighted is VIP compute. And that's -- like we have pretty good visibility into the timing of programs associated with that and the specific customers that we have. We think that that's like -- it's really, really strong in the first half of the year, and the next wave of that for the next generation of that technology is early '27. It might start bleeding in or pulling into the end of 2026, but we really don't know about that. When you go from then to like networking, networking has started off very, very strong. And we think it's going to stay at a reasonably strong level through the year, but our visibility isn't as strong into the second half. And we've historically seen that sort of filling in more as time goes on. Like as you look beyond 2 quarters, you start to see that sort of -- that tending to go up, not down. So there's potential upside in the networking space. When you look at memory, that, I think, is actually going to end up being more back half weighted than front half weighted. So that's a counter thing. And the stronger that memory gets, the more we're going to be able to trend towards that 55% end of the range that we gave. And then if you look beyond the Semiconductor Test part of this -- well, actually in Semiconductor Test, just to sort of finish the story around auto and industrial. Right now, data center is hot, hot, hot in that segment, and we expect that to continue. What we're seeing and hearing from those customers is that the rest of their portfolio, that there are -- like there's reduced inventories and potential demand increases, but we haven't seen that translate into increased demand for capital equipment in the auto and industrial part of that beyond data center. So moving beyond that, getting into IST, we definitely think that's stronger second half than first half. But I mean we're talking about coming off of a base of $27 million in Q1. So there's a lot of upside to go before it really moves the needle at the enterprise level. Product Test similarly will be back-half weighted. But again, it's like a smaller percentage of the total. And typically, our second half is much stronger in Robotics than the first half, but we've started this year at a really good run rate. And so we -- like the signs are encouraging, but we've learned to be very careful about predicting what's going to happen beyond lead time in the Robotics space. So does that help a little bit? Timothy Arcuri: It does, Greg. Yes. I guess I just then wanted to ask you about the TAM for the year. So you didn't give us a TAM. I know Advantest is saying like low 9s for SoC and sort of low to mid-2s for memory, so kind of a total of like [ 11 5 ]. You've usually been pretty close to their number, a bit lower in memory and a bit higher in SoC. So is that total [ 11 5 ] for the year, is that like a reasonable TAM number for the year? Gregory Smith: So bearing in mind how far off both Teradyne and Advantest were about the 2025 TAM when it was April. So make that the big asterisk on this answer -- that like -- because a lot changed last year, and the TAM strengthened significantly from the April view through the full year view. Now for 2026, there's 3 -- like just at a logical level, there are 3 possible things. One is that people have overcorrected in terms of estimating what the TAM is, people have gotten the TAM exactly right or it could follow the same pattern that it followed in 2025. I would say that, like we are not talking about a TAM publicly because we feel really uncertain about which of those time lines we're living in. I don't think the numbers that Advantest gave are absurd, but I don't feel confident enough in our forecast to share them. Operator: We'll take our next question from C.J. Muse of Cantor Fitzgerald. Christopher Muse: I guess first question, and again, congrats on your first merchant GPU win. Curious how to think about the follow-through there? What kind of -- are the steps to try to ascertain a greater percentage penetration there? As well as how you're thinking about custom ASICs from here beyond your one very large customer? Gregory Smith: Yes. So first on GPU. What we've said previously, I think, is the way it is going to -- is tending to play out. That the first project is the hardest project because it involves qualifying the test platform and converting all of the underlying libraries that support the testing. So that part of this project is behind us, and we are into the phase where that initial qualifying part can go into production. The next phase is what you could call the fast follower phase. So we're going to begin working on projects that are earlier in their life cycle, and that we will be able to complete more quickly than the first qualification project. So those are projects that probably have a time line where we would be releasing into production late in this year. And so whether that capacity ramp starts to hit at the end of '26 or into '27 is an open question. And the thing that I want to caution is like the long-term view, over the midterm, we expect that a dual source customer is going to be managing share in that 30% to 70% range. It's going to take us a few years to get there because there are so many different part types, so many different SKUs that as an incumbent platform, there's a lot of flexibility about what -- like if you need capacity for a particular device, you know that you have the solution for it on the incumbent platform. So during the fast follower, we're really competing on the basis of differentiation of the platform and an ability to serve spot demand more quickly than our competition. So we're trying to be very responsive. We're trying to get as many SKUs converted over to our platform as possible. But I would expect it's going to take -- like it's going to take us a few years to get from low single digits in 2026 to sort of entering that 30% to 70% range over the midterm. Christopher Muse: Very helpful. And then maybe a question on gross margins. You're taking a downtick here. And historically, the business has not been fixed cost. It's been much more product cycle driven. So curious what is precisely driving that downtick in June and how should we be thinking about modeling the second half of the year? Gregory Smith: Hang on, like -- my colleagues have reminded me that I neglected the second half of your question about custom ASICs. So we'll take your gross margin question right after. I just want to hit the custom ASICs. So right now, there are 2 hyperscaler programs -- 2 compute hyperscaler programs that are at scale. If you include like Edge automotive, there are 3 hyperscalers that are at commercial scale and driving tons of volume for us or our competitor. We are actively competing for parts that have not yet ramped and also for dual-source status against the hyperscalers that have already ramped. And the timing for that would be more 2027 than 2026, but stay tuned for news of that as we go on. And I'll pass it over to Michelle for the gross margin commentary. Michelle Turner: Well, I think technically now, CJ has 3 questions now as a result of this, but we'll go with this. Gregory Smith: But that's my error. Michelle Turner: Yes. So from a gross margin perspective, we did have a really strong Q1. So 60.9%, again, another record for the company. And there were several favorable factors coming into play simultaneously that drove this. One was related to the AI demand. So really strong semi test volume, which was 87% of our overall portfolio within Q1. Along with that, we also had favorable product mix and some benefit from some nonrecurring operational benefits. So as you think about the shift from -- or the step down from Q1 into Q2, at the midpoint, that's about 240 basis points. About half of that is driven by the onetime nonrecurring kind of operational benefits that we had. And then you couple that with what we're seeing from a mix perspective within Q2, this is somewhat of a normalization. The one thing I will highlight, however, is when you look at first half, overall margins will be around 59.7%. This is at the low end of our target model range. And so I think it's important to kind of keep in context that you should expect to see our margins move around a bit. They are lumpy like our revenue. We typically will see up to 400 basis points within a year. However, when you look year-on-year, it's a much tighter range. It's within like 200 basis points. So some of this is noise just within the first half. That's how I would think about it from a modeling perspective. Operator: We'll take our next question from Mehdi Hosseini with SIG. Mehdi Hosseini: I also have 2. The first one has to do with how you have been managing quarterly guide? And your performance has actually been exceeding on a consistent basis. And with that as a background, my question to you is, are you seeing a consistent trend where late in a quarter, you get the rush order, you get the programs in line, and the last month of the quarter becomes the source of upside? Or is there something fundamentally different in the way you communicate with the Street? And I have a follow-up. Gregory Smith: I'll start. And Michelle, if you want to chime in with some additional color. When we sit down to do our guide, we try to give the very best view in terms of balancing the risks and opportunities that we see in the current quarter. And we are typically carrying some upside capacity that if we get quick turn orders, that we -- that -- like if we can help improve customer satisfaction by serving orders within lead time and we have the capacity to do it, we are going to do that. So in a strengthening demand environment we will tend to over-perform. At the same time, we, like everyone else, are working really hard to solve the supply chain issues that come from ramping capacity. And so there are supply chain risks that our operations team does a great job solving. But when we go into the quarter, we don't know that we have a solution for all of those. The other thing that I'll say at a like minor level is we are still being quite cautious about Robotics. That we are seeing much improved -- like improved predictability and improved growth from that unit. But we don't want to get ahead of ourselves in terms of -- assume that we are in like a bold new future there, we want to make sure that we really understand exactly what our funnel of opportunities looks like and our conversion rate. And like we're really happy about having 4 good on track quarters in a row, but we are still quite careful in terms of predicting like higher rates of growth against that business until we get a little bit further down the road. Michelle Turner: And the only other thing I would add to that, to Greg's point about the supply chain variability, that's not just within Teradyne but also with our customers. And so to the extent, for example, all the parts of a test cell are not coming together, they're not looking to take our testers and install them. There could be slips that happened within the quarter. And so that could be either upside or downside in terms of how it plays out within a particular week. And so you'll see this sitting in our receivables at the end of Q1, where we shipped a lot of units that originally, we have been told to kind of push out. So I think it's important to note that we're seeing variability not only on the order side, but also in terms of the supply chain from a customer perspective. Mehdi Hosseini: Got it. And then since the last earning conference call, agentic AI has become the new buzz word. And there are a number of existing and the new semiconductor companies that are trying to capitalize on tokenization and offer a new kind of a CPU. And my question to you is given the fact that historically, [ x86 ] has been more of a -- driving more of an in-house test solution, and now you have a diversification of a CPU because of agentic AI. Does that also add a new layer of opportunity for you? Was that already embedded in your longer-term forecast? Or is this something new and could potentially provide some upside? Gregory Smith: So I think of it more as providing potential upside than something that's in our plan. That we are testing primarily ARM-based CPUs for data center applications. I think we have active design-in opportunities that I expect to be able to convert in this space as well. I would add that in addition to sort of new demand for CPU in agentic, there's also a big trend towards this optimizing data centers for inference at scale. I talked about that a little bit in the prepared remarks, that if you look at what NVIDIA is doing to try to decreased time to first token on inference and other players are doing, I think we have reasonable exposure to those types of devices as well. So as things shift towards more inference and more agentic, then I think we have potential long-term upside. Operator: We'll take our next question from Shane Brett, Morgan Stanley. Shane Brett: My first question is on networking. Regarding CPO and silicon photonics, can you talk about where you stand in terms of share now? And how do you anticipate your share tracking? I'm asking as your competitor announced that they received their first high-volume AT order for silicon photonics. Gregory Smith: Thanks for the question. So our best guess, so far in 2026, that share is quite balanced between us and our competitor. And I think -- like the only difference is whether we're talking about single large orders or multiple smaller orders. But I think share is kind of balanced, and that's where we think things are right now. As -- but it's really early days that -- right now, there is -- there are very few end customers that are trying to ramp CPO into production. And the share split right now is mostly around which test insertion is being done by what companies. And so our strength is primarily in the -- in insertion [ 2 ], where the -- where you're actually connecting electrically to a compound of wafer on the top for electrical and looking at light down in the bottom. We are in the process of releasing solutions for that in production. And we are working with partners to do that. So it's really kind of a 4-way partnership involving foundry, end customer, ficonTEC and Teradyne. We're working that with a team in Taiwan, Israel, Germany, North America to bring this technology to production. We think that it's -- this is a very important market. And as -- like what -- the way we see this happening is that in '27, this is primarily going to be associated with scale-out kind of networking. The scale up networking is likely to be even higher volumed, but over a longer period of time like '28, '29. And we are going to be rapidly changing the efficiency of tests at all 4 insertions. And the balance of where things are going to be done across those foreign insertions is really going to be driven by the end economics. So if they are finding a lot of faults at a particular level, they will keep doing that test. If they have very high yields, then they will look to see if they can eliminate that. But I -- like personally, I think efficiency is going to go up by like a factor of 10 over the next couple of years. And despite the fact that, that efficiency is going to get that much higher, I think that this is still going to be $300 million to $700 million worth of equipment once you get a few years into this midterm. Shane Brett: That's really insightful. And for my follow-up, one of your auto industrial customers talked about a bit of a tester shortage on the earnings call. And while I was listening to that, my interpretation was, oh, there may be a fight among customers to get in the queue at Teradyne. Just where do we stand right now in terms of capacity and utilization? And how much capacity are we looking to expand over the next year or so? Gregory Smith: So if that customer is having trouble getting testers, they're obviously not buying them from Teradyne. That we are able to serve the demand that we have, our capacity has ramped rapidly, where we have multiple contract manufacturing partners that are enabling our production. So we were surprised by that. We -- for this particular end customer, we have a very good relationship. And for the parts of their business that we serve, we're able to deliver the testers that they need and the lead time that they needed. So I think this is another reason that more and more customers are really looking at supply chain resilience, all the way back to their test equipment capital supplier. And that kind of strategy isn't something that is just solved by increasing capacity that -- what customers really need is to be able to get the capacity that they need when they need it for the parts that they are ramping. And you don't know how that demand is going to overlap at as a supplier. So I think it's -- I think the trend in the future is that for high-volume devices, we're going to increasingly see this trend towards multiple sourcing of test equipment. And overall, I see that as a real positive for Teradyne. Operator: We'll take our next question from Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: I have 2 of them. First one, on the silicon photonics. Michelle or Greg, you spoke about the $300 million to $700 million opportunity. I understand it's midterm. How big is the market this year? Is it like tens of millions of dollars this year? And along the same path, is the high contact being acquired by a Chinese entity an issue? Is it a nonissue for you? And then I have a quick follow-up. Gregory Smith: Yes. So this year, we're probably looking at silicon photonics right around 100-ish, maybe a little bit less, maybe a little bit more. It's substantial, but it's pretty early days. With regards to ficonTEC, ficonTEC has been an independently operated unit of a Chinese corporation since 2021, I think. I mean, this is not a new thing. It is -- and our relationship with ficonTEC is with both the unit, which is in Germany and also the Chinese company that it's a part of RoboTechnik. We have a great relationship with the CEO there. And they are one of the absolute world-class providers of active alignment for silicon photonics assembly and for test. That there are a lot of hard things that you need to do when you're building silicon photonics. One of the most difficult is achieving alignment in the assembly process for electro-optic modules or for CPOs. And ficonTEC is a -- is like one of the world leaders in that technology, and they are working to build their business in semiconductor capital equipment, the test part of it. And that is something that is a high priority for us, high priority for them. And I think that the press reports that came out are like they've been refuted by ficonTEC, and we don't see any evidence on the ground that it's at all true. Sreekrishnan Sankarnarayanan: Great. That's very helpful. And a quick follow-up for Michelle. I know you gave some color on how to think about gross margins. But just visually thinking, as auto analog industrials cyclically starts rebounding, is it fair to assume that's a huge tailwind for your gross margin given those legacy eagle testers are pretty high margins? Michelle Turner: So I think the short answer is no. When you think about kind of our full year expectations and what's really going to influence the end results even over the midterm, right? So we've given a target model of 59% to 61%. We're sitting at 60.9% in Q1. We expect the first half to be about 59.7%. I still think that that's within the range. And auto -- and when you think about auto and industrial, it's not going to be the biggest swinger in terms of our overall margin portfolio. I'm just going to go back to just the tightness in our overall margins within 200 basis points year-on-year. So when you use the words like huge or significant, I'd probably react to that a little bit. I do think it can be somewhat of a tailwind. But just given the size of it to the overall portfolio, I would say no, in terms of the significance. Gregory Smith: Yes. I mean over the years, we've seen most of our product lines converging towards similar margins. And so it's -- I would not expect to see -- even if we saw us like a significant increase in the percentage of total revenue that's coming from auto and industrial, I don't think we'd see that as a big mover. Now the other thing to remember is that one of the things that goes into auto and industrial is ADAS. And so if you squint at an ADAS tester, it looks a hell of a lot like a VIP compute tester. So the -- just because things are aggregating into particular end markets, it doesn't necessarily reflect the platform that's being sold to serve it. Operator: We'll take our next question from Vivek Arya with Bank of America Securities. Vivek Arya: Greg, on the GPU engagement, when we look at the large customer, the demand is clearly increasing. The number of queues across training and inference is going up. So I'm curious, what is the gating factor to getting to that, let's say, whatever, 20%, 30% market share? What is your share assumed in your $6 billion target model? Gregory Smith: So let me start at the beginning. So the thing that is setting the time line to get to, say, 25% share of GPU is how efficiently we execute our fast follower strategy, how fast we can bring up test programs and test solutions for devices that are early enough in their life cycle that we capture a significant portion of the ramp. So that ultimately is the limitation. As time goes on, the ultimate phase of fast follower is something that I've referred to as tester agnostic development. So what many of our customers are talking about in this space is that they really want to develop their test solutions against a -- like think of it as like a virtual test system. And by flicking a switch in software that they can target that towards our platform or towards another platform. When we get to that, then we are going to be in a world where it's much more about the differentiation on throughput and performance and availability than incumbency. And I think that we have certain advantages around test coverage for elements of the device. I think we have some advantages in terms of platform reliability. I certainly think that we have some advantages in terms of responsiveness to demand. So -- and what we've seen -- like one of the reasons that we're -- that we feel like we know what we're talking about here is that this is basically the world that we live in, in high-performance memory. That -- we were later to market than our competitor when it came to HBM performance testing. But once we released a platform that delivered better economics and better performance, then we began to see significant share gains because the customer can choose which platform they're going to buy, and we were able to capture that. As the AI accelerator world migrates more towards this idea where there are solutions existent on both platforms, then we think that we can compete on being able to get them the capacity that they need and getting the most parts out of each test cell because at the end of the day, it's like the limitations are turning into things like floor space and number of probers and handlers that they can buy. So having very productive test equipment is a potent advantage. In terms of the -- the part of the $6 billion, I think that we are -- looking at -- I don't think we need to be much -- like we can get to this -- our model in the fast follower phase of this, where we're just doing specific part conversions. And I think we would only need kind of low double-digit share in order for us to hit our model. Vivek Arya: And from my follow up, I just wanted to get back to the visibility question. AI is over 70% of your sales. But when we look at any other semiconductor company involved AI, logic or networking or memory, right, even the semi cap front-end players, they all claim to have great visibility, not just for this year, consistent sequential growth and then visibility even in 2027. And I'm curious, why is that not translating into stronger visibility for the testing part right? Because you guys are an important part of that supply chain also. So how come everyone else has great visibility and confidence, but we are not hitting that right from the testing side as much? Gregory Smith: So I think that the point that Michelle made is really important, that the lead time for a tester is on the order of the same as the lead time for the actual wafer, not the wafer front-end equipment. And these are -- our customers are rapidly trying to build out capacity to be able to support all of the phases of production. And so where -- like at the end of the day, these customers are definitely leaning hard into produce -- into creating the front end capacity to increase the number of wafers that go through. But until they actually are seeing the wafers go through, they are holding back on the orders for the test equipment. I mean we definitely are working against a long-term plan around capacity expansion for our products. We have an idea of our -- think of it as like a strategic forecast that we're working against, but that's very, very different from the level of commitment that we get from our customers around what they'll buy and when. And since the -- like testers are sold for particular devices and particular device ramps. Those ramps can move significantly if you have an issue with -- like if it's an ASIC, if the first silicon doesn't work, then that can inject a 2 quarter delay in a ramp, that would have a meaningful effect on the timing of our growth. It wouldn't have a meaningful effect on the long-term growth that we'll achieve. So I think the front end is less lumpy, but growth in the front end inevitably leads to growth in the back end, it's just uncertain in the timing. Operator: We'll take our next question from Jim Schneider with Goldman Sachs. James Schneider: Relative to the CPO opportunity, I think you did a good job kind of outlining where you believe the market is going. Just kind of 2 follow-ups on that. One is, can you maybe level set us for where you expect your CPO revenue to land in terms of a range for this year, 2026? And then you talked about kind of a 4-way kind of tie-up for -- to pull off some of the second insertion solutions. Do you have any kind of plans or thoughts about how you might integrate that a little bit more under one roof in some way or another? Gregory Smith: So I don't think we're publicly disclosing our expectations for 2026 revenue, mainly because there's so much uncertainty about where in the test flow the investment will go. So will they lean harder into insertion 2 or insertion 1 or insertion 3. So there's a lot of noise on that data right now. So we're not trying to make a prediction. The 4-way partnership is actually -- that's kind of the way the world works normally. That if you think about non-CPO devices, there's a fabulous specifier. There's a foundry, there's an OSAT. There's a handler or prober provider, and there's a tester provider and there's a probe card provider. There's like -- there are a lot of -- there's a whole ecosystem that makes these test cells work. And we are a real strong advocate of this open ecosystem long term. We think that, that's what our customers want, and it's how we want to try and work. And we also want to make sure that all of the providers in this space, for probers, handlers, whatever, that they feel like we are being -- that we're treating people alike, that we're not showing favorites. So what we're really trying to do is we're trying to lean hard into helping fight contact, build their capability in the semiconductor test equipment space, but we're acknowledging that they are the world experts in active alignment. So they're a great company. They know what they're doing. We want to help stand them up to be a great member of this ecosystem versus trying to integrate them [indiscernible]. James Schneider: That's helpful. And then just as a follow-up for Michelle. Clearly, the growth and margins and everything else are kind of turning out very well, and it seems like you will indeed probably get to your model at some point. Just from a philosophical standpoint, from an OpEx perspective, to the extent you do tend to grow on a multiyear basis a lot stronger, would you tend to believe that you could actually underpunch the OpEx intensity? Or would you -- you plan to develop more OpEx resources to R&D over time? Michelle Turner: So the answer is yes. And so we've historically talked about growing OpEx at 50% of revenue, and we still believe in that model. We believe in investing back in the business. Particularly in today's environment as we think about the pain points in our kind of wafer to data center strategy, there's lots of opportunities for us to help our customers. So we're going to look for those opportunities to reinvest back in the business, which will impact OpEx. And when we think about the short term, however, in the current year, in such a hyper-growth mode, we wouldn't expect that same translation to play out within 2026, but definitely over the midterm and the longer term, that's the aspiration that we would be driving to. Gregory Smith: Yes. The only color that I'd add to that is there is such a high rate of technology change in this end market and so many interesting opportunities, like there is a ton of waste due to yield issues and quality escapes. It's kind of a perfect environment for a company that is delivering something to help other companies get to high quality. So we are -- like for a while, we were in a world where like the marginal utility of additional R&D spend was not that great. Like if you look back a few years. Now, we have just a really long list of great things that we can invest in that will drive long-term revenue growth. So we're going to do our very best to constrain the growth of our G&A. We're going to do the very best that we can to manage the growth of our sales and marketing so that most of that is customer-focused technical investments, and we're going to lean into R&D because it's a target-rich environment. Operator: This concludes our Q&A session. I'd like to now turn it back to our presenters for any additional or closing remarks. Gregory Smith: Thank you, operator. So thanks, everyone, for joining the call. We are really looking forward to Q2, another really strong quarter. And I just want to reiterate our thanks to the team around the performance for Q1. It was -- we're calling 2026 the year of execution. And we are like hitting on all cylinders, the team is doing really, really well, and we appreciate you having the interest in the company. Operator: Thank you. This concludes today's Teradyne First Quarter 2026 Earnings Call and Webcast. You may disconnect your lines at this time, and have a wonderful day.
Operator: Hello, and welcome to W. P. Carey Inc.'s First Quarter 2026 Earnings Conference Call. My name is Diego, and I will be your operator today. All lines have been placed on mute to prevent any background noise. Please note that today's event is being recorded. After today's prepared remarks, we will be taking questions via the phone line. Instructions on how to do so will be given at the appropriate time. I will now turn the program over to Peter Sands, Head of Investor Relations. Mr. Sands, please go ahead. Peter Sands: Good morning, everyone, and thank you for joining us for our 2026 First Quarter Earnings Call. Before we begin, I need to remind everyone that some of the statements made on this call are not historical facts and may be deemed forward-looking statements. Factors that could cause actual results to differ materially from W. P. Carey Inc.'s expectations are provided in our SEC filings. An online replay of this conference call will be made available in the Investor Relations section of our website at wpcarey.com; it will be archived for approximately one year, where you can also find copies of our investor presentations and other related materials. I will now turn the call over to W. P. Carey Inc.'s Chief Executive Officer, Jason E. Fox. Jason E. Fox: Thanks, Peter. Good morning, everyone. I am pleased to say we started the year with continued strong execution across the business, particularly in our investment activity and capital raising, building on the foundation we have established for attractive, sustainable growth. Given our performance to date, we are raising our full-year guidance for both investment volume and AFFO per share, reflecting the investments we have completed to date, the strength of our pipeline, and a more favorable outlook for estimated rent loss. This morning, I will briefly recap some of the highlights from the quarter, focusing on our investment activity. Toni Ann Sanzone, our CFO, will then take you through the details behind our results, balance sheet, and guidance. We are joined by Brooks G. Gordon, our Head of Asset Management, to help answer your questions. Starting with our investment activity, so far this year we have completed investments totaling approximately $680 million. Our pipeline remains very strong, with over $5 billion of deals currently at advanced stages, including the sale-leaseback of a large industrial portfolio in the final stages of closing. That gives us clear visibility into well over $1 billion of investments. Importantly, we continue to see strong momentum in our deal flow, with no noticeable impact on transaction activity to date from recent geopolitical tensions. Given our activity and outlook, we have raised our guidance range for full-year investment volume from $250 million to between $1.5 and $2 billion. Factoring in what we have already closed, our current pipeline, and the capital projects we have delivering this year results in an average cap rate of approximately 7.5%, and for the full year, we expect to remain around that level. We continue to transact across a range of cap rates, and the deals we have closed year to date have generally skewed toward the low end of our target range and below where our pipeline is pricing, with closed transactions averaging 7.2%. This largely reflects timing, as it includes some of what we expect to be our tightest cap rate deals over the first half of the year. I would also highlight that our investment activity to start the year has been mostly weighted towards Europe and Canada, where we secured lower cost debt during the quarter, including a two-tranche Eurobond offering at a 3.5% average coupon and a Canadian dollar term loan at just over 3%, helping maintain attractive spreads to our going-in cap rates. We also continue to originate deals with fixed rent bumps averaging in the high 2% range or with CPI-based rent escalations. As a result, we are still achieving average yields of around 9% over long lease terms. During the first quarter, we allocated the majority of our capital to warehouse and industrial properties, which accounted for approximately 60% of investment volume. Retail represented the remaining 40%, driven largely by the sale-leaseback we completed with Go Auto for a portfolio of auto dealerships with strong site-level coverage concentrated in the Greater Vancouver area. Go Auto is the second largest automotive dealership group in Canada and now ranks among W. P. Carey Inc.'s top 25 largest tenants by ABR. We completed four capital projects during the quarter, totaling $68 million, which are included in our year-to-date investment volume, and added a handful of small projects scheduled to deliver later this year. In total, we have 11 capital projects totaling approximately $280 million delivering over the next twelve months. These projects are generating cap rates incrementally higher than both our year-to-date investments and our full-year expectations, providing attractive risk-adjusted returns. As I have discussed in prior calls, these projects—particularly the expansions—frequently deliver above-market yields while also extending lease terms and enhancing the strategic importance of the assets involved. Given the size of our portfolio and our long history in this area, further supported by our recent Carey Tenant Solutions initiative, we believe we are well positioned to expand this highly attractive proprietary source of deal flow. Our internal growth also remains strong and continues to trend higher on new investments, and if inflationary pressures from higher energy prices persist, our portfolio is uniquely positioned to benefit, given the high proportion of ABR with rent escalations tied to CPI. Lastly, turning to our sources of capital, our investment activity continues to be supported by well-executed capital raising, driven by the debt issuance and forward equity sales we completed in February. In addition to further strengthening our balance sheet, these actions have effectively pre-funded our investment needs for 2026. We have also locked in attractive pricing and meaningfully reduced our exposure to potential further capital markets volatility this year. As a result, we are confident we can continue deploying capital throughout 2026. As a reminder, we also expect to generate around $300 million of retained cash flow this year, providing an additional source of equity capital. And while additional asset sales are not a core part of our funding strategy, we continue to have the flexibility to pursue additional accretive dispositions at attractive cap rates if needed. Let me pause there and hand the call over to Toni to discuss our results, balance sheet, and guidance in more detail. Toni Ann Sanzone: Thanks, Jason, and good morning, everyone. Starting with earnings, AFFO per share was $1.30 for the first quarter, which represents a $0.13, or 11.1%, increase compared to the first quarter of last year. Accretive investment activity continues to drive our year-over-year growth, having closed $2.8 billion of investments since the start of 2025 at accretive cap rates and healthy spreads to our funding sources. As we mentioned, given the pace and volume of our investment activity to start the year, as well as the strength of our pipeline, we have raised our expectations for both full-year investment volume and AFFO per share. As outlined in our earnings release, we have increased our investment volume guidance to a range of $1.5 to $2 billion, which together with lower estimated potential rent loss results in an aggregate $0.03 increase to our AFFO per share guidance at the midpoint. For 2026, we therefore currently expect AFFO per share to total between $5.16 and $5.26, implying 4.8% growth at the midpoint. Turning to our portfolio, starting with dispositions, first-quarter asset sales generated gross proceeds totaling $163 million. This included the sale of the 11 remaining operating self-storage properties in our portfolio for $75 million. With that, we have now completed our exit from operating self-storage, further simplifying our business, and generating aggregate proceeds of approximately $860 million at an average cap rate just below 6%, which we have recycled accretively into higher-yielding investments. Contractual same-store rent growth for the quarter was 2.4% year over year, with both fixed and CPI-linked rent escalations averaging 2.4%. For the full year, we continue to expect contractual same-store rent growth to average in the mid-2% range. We continue to achieve strong rent escalations on our new investments. About three quarters of our investment volume during the first quarter had leases with rent increases tied to CPI, while the other one quarter had fixed rent escalations averaging 2.8% annually. Comprehensive same-store rent growth for the quarter, which takes into account the impacts of re-leasing, rent collections, vacancies, and lease restructurings, was 1%, with the variance to contractual driven largely by the impact of vacancy during the quarter. Given the nature of this metric, comprehensive same-store rent growth can vary from period to period, often due to one-time items or properties moving in and out of the same-store pool. Historically, our comprehensive same-store rent growth has trailed contractual by approximately 100 basis points on average, and we believe that is a reasonable estimate for the portfolio over the long term. Portfolio occupancy at the end of the first quarter was 98.1%, up slightly from the fourth quarter, and is expected to improve further as we continue to re-tenant or dispose of vacant assets. Our portfolio continues to perform well, with no new material changes in credit throughout the portfolio so far this year. We have therefore lowered the potential rent loss assumption embedded in our AFFO guidance to between $8 million and $12 million, or about 50 to 75 basis points of ABR, down from our prior estimate of $10 million to $15 million. Based on what we see today, we would still characterize our revised assumption as conservative. Our first-quarter re-leasing activity resulted in the overall recapture of 103% of prior rents on 1.4% of portfolio ABR and added just over five years of weighted average lease term. Other lease-related income for the first quarter was $10.5 million, in line with our expectations, and includes termination income related to redevelopment work that commenced this quarter. Based on our current visibility, we expect other lease-related income for the second quarter to be in line with the first quarter, and to total in the low- to mid-$30 million range for the full year as we continue to proactively manage our portfolio. Non-reimbursed property expenses totaled $14.6 million for the quarter, which includes approximately $1.2 million of demolition costs related to redevelopment work as we discussed on our last call. We expect to incur additional demolition costs in the second quarter, which would increase non-reimbursed property expenses further before resuming to a more normalized run rate in the back half of the year. For the full year, we continue to expect non-reimbursed property expenses to total between $56 million and $60 million. G&A expense totaled $27.3 million for the first quarter, in line with our expectations, since the first quarter tends to be the highest of the year for G&A given the timing of payroll taxes. For the full year, we continue to expect G&A to total between $103 million and $106 million, with the second quarter resuming a more regular run rate. Moving to our balance sheet, we were very active in the capital markets during the first quarter, accessing close to $2 billion of capital across a variety of sources, taking proactive steps to further strengthen our balance sheet and ensure we are well positioned to fund our projected investment activity. In February, we issued €1 billion of senior unsecured notes, comprising two €500 million tranches, with coupon rates of 3.25% on a long five-year maturity and 3.75% on a long nine-year maturity. We executed during a particularly attractive window, with proceeds used to address our April Eurobond maturity, which we repaid in March, to retire a €215 million term loan, and to increase our overall liquidity to support externally driven growth. In March, we amended our credit agreement, replacing the euro term loan I just mentioned with a new Canadian dollar term loan at a current all-in rate of approximately 3.1%, with proceeds used to fund our Canadian investment activity. At the same time, we were able to improve our overall revolver pricing grid by five basis points at all levels, incrementally lowering our cost of debt. We also successfully executed in the equity markets during the quarter, selling 6.9 million shares on a forward basis, representing total gross proceeds of $497 million. This, combined with the forward equity we sold under our ATM program in 2025, gives us enough runway to execute investment volume above the top end of our current guidance range. At the end of the first quarter, we settled 3.45 million shares under forward sale agreements for net proceeds totaling $247 million, leaving us with 9.7 million shares remaining to be settled, representing anticipated net proceeds of $653 million as of March. Driven by our capital markets activity, we ended the first quarter with substantial liquidity totaling approximately $2.8 billion, including availability on our credit facility, cash on hand, and unsettled forward equity. Our remaining debt maturities this year are minimal, primarily comprising the $350 million of U.S. bonds we have maturing in October. The weighted average interest rate on our debt remains low at 3.1% for the first quarter, and is expected to remain in the low to mid-3% range for the full year after taking into account our recent bond issuances. Net debt to adjusted EBITDA ended the quarter at 5.3x, inclusive of unsettled forward equity. Excluding the impact of unsettled forward equity, net debt to adjusted EBITDA was 5.7x, down from 5.9x at year end, and well within our target range of mid- to high-5x. Lastly, on our dividend, in March, we increased our quarterly dividend 4.5% year over year to $0.93 per share, maintaining a healthy payout ratio of 72%. Based on our current stock price, that equates to an attractive annualized dividend yield of over 5%. We expect our dividend to continue to grow in line with our AFFO growth while maintaining a conservative payout ratio. And with that, I will hand the call back to Jason. Jason E. Fox: Thanks, Toni. In closing, we are pleased with our performance year to date, driven by the continued momentum in our investment activity, the strength of our pipeline, and our capital markets execution, all of which position us well to continue executing going forward. As we look ahead, we remain confident we are on track to deliver double-digit total shareholder returns again in 2026—and that is before any multiple expansion. Our projected earnings growth compares favorably across the net lease sector, and over time, we would expect that to be further reflected in our trading multiple. That concludes our prepared remarks. We will now open the call for questions. Operator: Thank you. At this time, we will take questions. If you would like to ask a question, simply press star then the number one on your telephone keypad. Our first question comes from Michael Goldsmith with UBS. Please state your question. Michael Goldsmith: Good morning. Thanks a lot for taking my questions. First, you have a third of the portfolio in Europe and continue to acquire there. Are you seeing any impact, or is there any worry that you have just given some of these global macro events, and also just the conflict in Iran? Is that having any impact on your portfolio in Europe? Jason E. Fox: No. I guess there is a little bit more potential for uncertainty in Europe, given higher energy prices there, but it has not impacted us. When you think about our portfolio, it is diversified. We mainly have very large companies that can ride through different cycles, and we have shown that in the past. So there are not big concerns there. We feel good about the portfolio. We have not seen anything yet. I think that is certainly something I can say definitively. Michael Goldsmith: Thanks for that, Jason. My follow-up question is, you said in the prepared remarks you have effectively pre-funded your investment needs for 2026. How are you thinking about funding going forward? Do you sit back and wait to see what comes to you and be opportunistic with your fundraising, or is this the time where you can be a little bit more aggressive, start to pre-fund 2027, and then if the volumes continue to pick up in 2026, it gives you the position to be more aggressive? Just trying to understand your thoughts in the funding environment and what is next there. Jason E. Fox: Yes. I mean, we are sitting on $650 million of forward equity right now that is left to be settled. We have lots of liquidity, as you pointed out. In terms of more equity, I would say if there are good opportunities to get ahead of our needs for 2027 and raise more equity, we will always consider that. We are certainly comfortable where we are today, and a lot of it will depend on the investment opportunity set and what that looks like. That is probably going to be the biggest driver, but bottom line is we really do not have any visibility needs right now, so we can be, I think your word was, opportunistic. Michael Goldsmith: Thank you very much. Good luck in the second quarter. Jason E. Fox: Thanks. Operator: Your next question comes from Jana Galan with Bank of America. Please state your question. Jana Galan: Good morning. Could you please provide any updates on the Carey Tenant Solutions platform? Jason E. Fox: Yes, sure. We talked about this in some detail on last quarter’s call. These are the types of construction projects that we have been doing for quite some time, dating back several decades. They include build-to-suits and redevelopments, and the reason why we have been more deliberate about talking about it is to make sure that people understand this is part of our business, and it is another part that we think we can grow. Part of the branding around it is to formalize it and be a little bit more holistic in our outreach to our tenants. If you look historically at what we have done, it has probably been around $200 million per year—this will vary from year to year, but that is a decent average—and we think that can perhaps get bigger. One of the benefits of being a large REIT like we are is we have built up a very capable in-house project management team, and that is a real competitive advantage. In our outreach to tenants, what we can offer them—various development services and other solutions—can lead to follow-on deals. Currently, we have about $280 million of projects in process, and about $180 million of that will complete this year. Beyond that, there is a really active pipeline of potential projects that we would expect to move along over the coming quarters. Jana Galan: Thank you. And then also, with the self-storage operating assets, this disposition is now completed. What additional assets are you targeting to meet your full-year disposition guidance? And any plans on the other five operating assets? Jason E. Fox: Brooks, you want to take that? Brooks G. Gordon: Sure. As Toni mentioned, we maintain a pretty flexible disposition strategy for the year this early in the year—a range between $250 million and $750 million—so we really value that flexibility. In terms of other operating assets, we have a few hotels and one student housing property that we are evaluating for dispositions, potentially in the back half of this year but also potentially into next year. It is something we are looking at, but again, we maintain a lot of flexibility from a liquidity and capital perspective, so the investment pipeline will help drive where we land in that range. Operator: Your next question comes from Anthony Paolone with JPMorgan. Please state your question. Anthony Paolone: Great. Thanks. Good morning. Can you talk about the investment pipeline and what the geographic skew looks like at the moment, and also the property type buckets—where you are seeing more or less—and just where the dispersion around that mid-7s cap rate resides? Jason E. Fox: Yes, sure. The pipeline remains strong. I mentioned earlier that it includes over a half-billion dollars of identified transactions, some of which are in advanced stages, and it includes one larger sale-leaseback of a sizable industrial portfolio in the U.S. that should close over the next couple of weeks. We also have around $180 million of capital projects that are scheduled to complete this year, so that is all part of the visibility into deal volume we have this year. In terms of geography, Europe continues to ramp. Of the deals closed year to date, about half were in Europe—a deal in Poland, Raben, was the largest—another 30% was in Canada, and the remainder was in the U.S. For Europe, we see a continuation of the increased activity that we started seeing in the second half of last year, but that does not mean the U.S. is slowing. The pipeline is roughly back in line with our ABR mix—about two thirds in the U.S. and one third in Europe right now. By property type, consistent theme for us, we continue to see interesting opportunities in industrial—both manufacturing and warehouse. Year to date about 60% were industrial, and two thirds of that were warehouse. We also saw a pickup in retail, largely driven by the Go Auto deal we talked about earlier. The pipeline is more heavily weighted towards industrial—probably 80% right now—but there are a lot of opportunities at the top of the funnel that will come in as well. Anthony Paolone: And then you all historically had a strong tie-in with private equity. Have some of the challenges on the private credit side had any implications on your deal pipeline, either making sale-leasebacks more attractive or generally having any impact on your tenant base? Jason E. Fox: Let me start on the deal impact. Our expectations are that sale-leasebacks could become a more interesting opportunity for some private equity-backed companies if there is a void with private capital to the extent underwriting or capital flows tighten up there. I would not say that is a theme we are seeing right now, but it is certainly a possibility that could emerge more. Brooks, I do not know if you are seeing anything within our portfolio related to private credit. Brooks G. Gordon: No, we have not seen really discernible specific impacts. It is something we will continue to watch, but that has not been a factor as of yet. Operator: Your next question comes from Smedes Rose with Citi. Please state your question. Smedes Rose: Hi. Thanks a lot. In the past, you have spoken about leaning into retail more—you obviously completed some in Canada this quarter. How do you think about the rent escalators in that segment versus maybe in other asset classes? Jason E. Fox: Yes, sure. There is a difference. Market standards for retail tend to be lighter bumps than what we are able to negotiate in industrial and warehouse. That makes sense. The warehouse market has grown substantially over the last couple of years in terms of rent growth, and a lot of the bumps we put into our leases are meant to be a proxy for market rent. The rents for warehouses or manufacturing plants for industrial companies tend not to be a big part of their cost inputs, whereas retail rent typically is their biggest expense, so there is more focus on that, and that is why historically you have seen flatter leases. Where we target—sub-investment-grade retail—bump structures are probably on average in the 1.5% to 2% range, compared to industrial where we are seeing more like 2.5%, 3%, or even above that. Once you get into investment-grade retail—which we view as the commodity segment of net lease and tend not to participate in all that much—those leases tend to be even flatter, and really, the only way to differentiate yourself when investing there is through pricing. So there are meaningful differences between the two in terms of bump structures. Smedes Rose: Thanks. And you mentioned some tighter cap rate spread deals you are looking at in 2026. Does that pertain to larger industrial portfolios, or is it more for one-off opportunities? Any commentary on pricing across larger deals versus smaller deals? Jason E. Fox: It is not related to larger or smaller deals. The reference to the tighter cap rates was to the deals we have closed year to date—about $680 million—blended towards the lower end of our target range at 7.2%. My expectation is that those will be some of the tighter cap rate deals we close this quarter. Those also, importantly, were mostly in Europe and Canada where our borrowing costs are meaningfully cheaper than in the U.S., so despite the lower cap rate, we did see attractive spreads. The other half of this is our pipeline, in addition to our capital investment projects delivering this year, are more in the upper end of our target range, which helps us blend to the mid-7s for the year. Overall it feels like cap rates have been relatively stable for the year despite macro volatility. Hard to predict what will happen in the second half, but because we transact across a wide range of cap rates, sometimes timing or mix will create some dispersion. I do not think it is any read-through to market trends or specific geographies or asset classes. Operator: Your next question comes from Ryan Caviola with Green Street Advisors. Please state your question. Ryan Caviola: Good morning. Thanks for taking my question. A quick one on onshoring. This trend should be a tailwind for the in-place industrial portfolio. Do you think those tailwinds will lead to more competition in bidding, with new buyers interested in industrial net lease, and will this lead to a continued focus on industrial acquisitions in Europe, or do you see it being an overall benefit for all buyers in that space? Jason E. Fox: I think it is the latter. To the extent there is more onshoring or reshoring, we stand to benefit substantially. We are one of the larger owners of industrial properties, especially manufacturing, and to the extent it increases demand on the types of buildings that we own, we think that is good for rent growth and for the criticality factor that we underwrite in the buildings that we own. Could it attract more competition? Perhaps. If a particular end of the market becomes more attractive, you could see some capital flows in there, but it is a big market, and I think the positives would outweigh any kind of increased competitive capital flows. Ryan Caviola: Thank you. And on the mix between new deals—embedding inflation-based increases in the lease versus focusing on higher fixed escalators—can you update us on where that stands and if this differs by country or industry? Jason E. Fox: Since the spike in inflation four or five years back, CPI-based leases have gotten to be a little more difficult to negotiate into new deals, particularly in the U.S. In 2025, about a quarter of our deals had CPI-linked increases. So far this year, it is actually the opposite—about three quarters of deals closed to date were CPI-based. That is a function of geography more than anything else. In Europe, it is customary to have inflation-based increases embedded, and year to date more of our deals have been in Europe. The Go Auto deal in Canada also has a CPI-based increase. We certainly value having that inflation hedge built into our portfolio. When we do not get inflation-based increases, the effects of higher inflation have still flowed through to our fixed increases, where historically our average fixed increase is closer to 2%, whereas the last three or four years we are probably 50 to 100 basis points above that on new deals with fixed increases. It is a good reminder of the differentiation of our portfolio compared to many of our net lease peers—we have substantial internal growth built into our model as opposed to just relying on spread investing and external growth. Operator: Your next question comes from Mitch Germain with Citizens Bank. Please state your question. Mitch Germain: Jason, to follow up on that topic, is it more standard to have a CPI-based lease in Europe versus what is acceptable here in the U.S.? Jason E. Fox: Yes, it is definitely more standard and customary in Europe. We have always made it part of our model to the extent we can in the U.S. We have been around for fifty-something years at this point, and a lot of this dates back to the 1980s—themes of trying to create an inflation hedge within a fixed-income-type stream that net lease can sometimes be—and we think we have done a good job of that. Mitch Germain: Got you. And clearly there is a lot of momentum in the business. Are you seeing some of the buyers that for the last couple of years have been on the sidelines reemerge? Is there any real change in the competitive balance within the investment sales markets? Jason E. Fox: The net lease market has always been competitive, especially in the U.S. There have been some new entrants over the last couple of years. Some of the big asset managers have acquired other platforms. One thing we have observed—and we have heard this from some bankers as well—is it does not necessarily mean there are incrementally new players in the business; many of them have just changed brands from being independent to being part of a big asset manager. Regardless, it does not feel like it has been impactful. Ultimately, the results speak for themselves as we continue to generate substantial deal volume at attractive pricing and spreads, irrespective of competition. Beyond pricing, we have a lot of competitive advantages. We have been doing this for a long time. Experience and execution really matter, especially when we are focused on more complex sale-leasebacks, and our track record and reputation in the market help differentiate us. It all seems manageable, and it is not showing up in the numbers. Operator: Your next question comes from Eric Borden with BMO Capital Markets. Please state your question. Eric Borden: Hey, good morning. Thanks for taking my question. I understand the spread between contractual and comprehensive growth can fluctuate from quarter to quarter, and over the long term the average spread has been around 100 basis points. What is your expectation for that spread for the remainder of the year, as it sounded like you may have some vacancies to address? Toni Ann Sanzone: Sure. I think you covered the highlights. On the contractual side, we are expecting around mid-2% growth from our contractual lease escalations. On the comprehensive side—again factoring in vacancies, probably the biggest impact we see over the course of this year—it does move around from quarter to quarter due to items like collecting rents or recovery of rent in any one period. The 100 basis points is a good round number we use as our historical average and is a good estimate over the long term. Factoring that in, we could see the range for this year being between 1%–2% on the comprehensive side, but it really does depend on how soon we address vacant asset dispositions and the timing of things like rent recoveries. Eric Borden: That is helpful. And Jason, going back to your comments around your well-capitalized European tenant base who can absorb oil shocks and supply chain volatility, do you have any exposure to less capitalized tenants or tenant categories with higher sensitivity to commodity price swings, and how are you underwriting or monitoring that risk today? Jason E. Fox: Brooks, do you want to take that? It is a broad question. Brooks G. Gordon: The key point is what Jason mentioned: broad diversification, long-term leases, and high criticality. We transact with businesses of all sizes, from the biggest in the world to smaller companies. The bulk of our tenants by a large margin are large, well-capitalized companies, and that remains true in Europe as well. Our overall view of an oil shock is it is a risk we need to monitor very closely. We have not thus far seen direct impact. It is something we will pay close attention to. Our portfolio is constructed intentionally to absorb shocks or headwinds, and we have seen that a number of times over the decades. We are confident in that, and diversification is really key. Operator: Your next question comes from Jim Kammert with Evercore ISI. Please state your question. Jim Kammert: Good morning. Thank you. Are you willing to provide a little bit of color in terms of financial data regarding, say, Raben and Go Auto? Both from their websites look to be pretty substantial companies, but I think they are both privately owned, if I am not mistaken. Can you provide a little financial color around the size and scope of those companies? Jason E. Fox: Yes. They are private companies, so we are under some restrictions in terms of talking about financial details. With Go Auto, we noted earlier that they are the second largest auto dealership platform in Canada. They are diversified across pretty much all the OEMs or brands, and they have had growth over many years at this point. I think sales for them are greater than $3 billion. I think Raben is also a large company. They are a Dutch company and one of the largest 3PL operators in Poland. I do not think we can talk about revenue or EBITDA, but they are one of the market leaders in the Poland market from a 3PL standpoint. Jim Kammert: That is helpful. And as a derivative of the first question, it seems like you have knocked out a growing list of $200 million-plus transactions—Lifetime last year, and we just talked about Raben and Go Auto. Is that just happenstance, or is there some message to read into that in terms of your investing efficiency and where you are spending your time on the external side? Jason E. Fox: I would say the majority of our deals typically fall within the $25 million to $100 million range. The average transaction is maybe around $50 million, perhaps a little bit bigger than that. But we do consistently see larger deals; they are part of our regular deal flow. In any given year, we would expect to bid on a number of larger sale-leasebacks—$200 million, $300 million, or even larger. You mentioned Go Auto and Raben, and last year, Life Time. We tend to complete several larger deals each year. We also have one larger sale-leaseback in the pipeline—an industrial deal in the U.S.—that should close over the next week or two. It is part of the deal flow, and one of the benefits of our scale is that we can do larger deals as a regular part of our business. Operator: Your next question comes from John Kilichowski with Wells Fargo. Please state your question. John Kilichowski: Hi, good morning. Thanks for taking my question. My first one is on the new credit loss guide. Last quarter you talked about there not being any specific items you were looking into. Is there anything now this quarter that you have some sense of as to where credit is going to turn out, or is the $8 million to $12 million number still more of an open-ended space for things that may come up in the rest of the year? Jason E. Fox: Toni, do you want to touch on the range and how that has changed? And then maybe, Brooks, you can give a little bit of color on credit watch. Toni Ann Sanzone: I would say it is more the latter. We have not seen any material credit change in the portfolio since the start of the year, amongst our watch list and more broadly. With four months of good rent collections behind us and our current view of the tenants, we felt comfortable bringing down the range. The range is still larger than our typical historical losses, but that is more about being prudent in this uncertain macro environment—ensuring we are covered in a number of scenarios—rather than anything we are seeing currently in the portfolio. Brooks G. Gordon: On credit watch generally, as Toni mentioned, it is pretty stable. We lowered the rent loss assumption range, which is the most direct tool we can offer you there. The watch list came down slightly as well. Some color: Hellweg remains the biggest exposure there—about 1% by ABR—and coming down quite quickly. We are on track to have that out of our top 25 around midyear. The only other tenant of note is Cornerstone, which is about 60 basis points of ABR. They are the largest exterior building products manufacturer—very large company, over $5 billion in revenue. They have been on watch. We expect they will restructure their balance sheet at some point; it is over-levered. But we own very critical real estate and do not expect any impact there. The rest of the credit watch list is really diversified and much smaller tenants. John Kilichowski: That is helpful. Thank you. Earlier, you gave some helpful color around some operating assets that you may be selling the rest of the year. Can you give some idea of the buckets of capital you are considering selling and the cap rates you think you could blend to for the rest of the year? Brooks G. Gordon: As I mentioned, it is difficult to pin down with precision because we are maintaining a lot of flexibility in the disposition plan. Roughly at the midpoint, you can view it as split into two buckets. The first is a noncore, accretive exit—primarily operating properties. The final tranche of storage was the biggest piece. We are evaluating one student housing property and several hotels for the second half. Too early to determine exact timing. A few other noncore opportunities, including that we exited post quarter our only remaining Asian asset at a very good price. That is your first bucket. The balance is risk mitigation and vacancy—transactions such as the former JOANN warehouse we sold, which we discussed last call—sold at a very attractive cap rate, mid-5s cap rate on the prior rent. Also, Hellweg assets we have been exiting and a few warehouse assets. From a pricing perspective, the first bucket would be mid-6s cap rate range, depending on what closes. The second bucket is harder to pin down at this point in the year, but considering there is some vacancy embedded, it is going to be a nice earnings tailwind in any event. Operator: Before we take the next question in queue, a reminder to ask a question, press star 1 on your phone now. We are also accepting additional questions from those who have already asked one. Next question comes from Greg McGinniss with Scotiabank. Please state your question. Greg McGinniss: Hey, good morning. Jason, how are you thinking about geographic diversity and density in certain countries in Europe? With Poland now your number one international exposure following the Raben acquisition, do you expect to see further increase in exposure there, or is there a limit at a country or regional level that you think is best for the portfolio? Jason E. Fox: There is no specific cap or maximum exposure, but we are certainly very mindful of diversification. At the same time, given our scale, it would take some meaningful, sizable transactions to really move the needle. We have been investing in Poland for over two decades, and it has become a core piece of the broader European net lease market. For those who do not follow Europe as closely, it is the sixth-largest economy in the EU, a top-20 economy globally, and one of the fastest growing in the EU. Projected growth is about 3.3% this year. It is an attractive market for us. The bulk of what we own there supports supply chains for large multinational companies—both manufacturing and logistics assets—that serve as a low-cost manufacturing and logistics hub into Western Europe. We will stay active there, but we are mindful that it has become about 5% of our portfolio. It is not a huge exposure, but we keep an eye on it. Greg McGinniss: Thanks for the color. With visibility into over a billion dollars of deals at this point of the year, do you see investment guidance as conservative, or is there some expectation for deals to slow into year-end? Jason E. Fox: We are confident we will continue generating higher deal volume throughout the year as we did last year. From a guidance perspective—we did this last year—we want to take a measured approach. Last year that led to a series of increases, and that is our preference going forward. Last quarter, our initial guidance was a starting point, and we just increased that by $50 million at the midpoint. As we progress through the year and get more visibility into the back half, we will refine that range and hopefully raise it further. We are off to a good start. You mentioned the billion dollars of visibility, which includes almost $700 million of closed investments to date. The elements are there for another strong year, and we will reflect that in our guidance as appropriate as the year progresses. Operator: Your next question comes from Jason Wayne with Barclays. Please state your question. Jason Wayne: Hi. Thanks for the question. Looking at the lease expiration schedule, quarter over quarter, lease expirations came down as a percentage of ABR this year and next year. How much of that is due to looking at upcoming maturities proactively versus just changes in the portfolio? Brooks G. Gordon: As you noted, we have been making a lot of progress on lease expirations. That cadence is pretty normal for us. The track record over the past ten or so years has been very good on rent recapture—around 100%—and very low TIs; you can see that flowing through our disclosure numbers. In other cases, we have noted a few assets where we are looking to re-lease, and we are working through those—that is part of it as well. From a lease expiration outlook perspective, 2026 is very manageable at about 1.8% by ABR. That is coming down quickly, and we are making good progress. We have a couple of nonrenewals expected in Q4. These are high-quality warehouses with low market rents, so we are optimistic we will be able to push rents higher on those, but those are towards the end of the year, so not impactful to 2026. In 2027, we have about 3.5% expiring. That has come down a little bit subsequently as well from some renewals we achieved post quarter. It is a manageable year. One item to note is the expiration of the final tranche of net-leased Marriotts in 2025—around $5 million of ABR. We will exit those in due course, but there is coverage there, so there is no earnings impact. That is something we will look to address in 2027. All in all, we are making good progress on lease expirations, and for assets with some nonrenewal, we are quite optimistic about our ability to push rent higher. Jason Wayne: Alright. Thank you all. Operator: At this time, I am not showing any further questions. I will now hand the call back to Mr. Sands. Peter Sands: Great. Thank you, and thank you, everyone, for your interest in W. P. Carey Inc. If there are additional questions, please call Investor Relations directly at (212) 492-1110. Operator: And that concludes today's call. You may now disconnect.
Operator: Greetings, and welcome to the Cognizant Q1 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] it's now my pleasure to turn the call over to Tyler Scott, Senior Vice President, Investor Relations. Tyler, please go ahead. Tyler Scott: Thank you, operator, and good morning, everyone. Welcome to Cognizant's First Quarter 2026 Earnings Call. I'm joined today by Ravi Kumar, Chief Executive Officer; and Jatin Dalal, Chief Financial Officer. By now, you should have received a copy of the earnings release and investor supplement. If you have not, copies are available on our website, cognizant.com. Before I begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for our investors. Reconciliations of non-GAAP financial measures where appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC. With that, over to you, Ravi. Ravi Kumar S: Thank you, Tyler. Good morning, everyone. Thank you for joining us. We delivered a solid first quarter with revenue growth in the upper half of our guidance range, expanded adjusting operating margin and strong bookings growth. I believe our work to become the world's permanent AI builder is resonating, demonstrated by our first quarter performance. Looking at the quarter's highlights. Revenue grew 3.9% year-over-year in constant currency, led by strong performance in North America and driven in part by the ramp of recently won large deals. From a segment standpoint, Financial Services grew more than 10% year-over-year in constant currency, driven by strong demand across banking and insurance clients. Q1 bookings grew 21% year-over-year. We signed 7 large deals with TCV of $100 million or greater, including 1 mega deal valued at more than $500 million. Importantly, we continue to drive profitable growth as adjusted operating margin expanded year-over-year for the fifth straight quarter. Adjusted EPS of about 14% year-over-year was ahead of revenue growth. And we just announced a definitive agreement to acquire [ Atria ], a global IT managed services provider and a specialist in AI infrastructure build-out with deep expertise in managing data center infrastructure, enterprise networks and digital workplace technology. Upon closing, we believe [indiscernible] will add a critical layer to our AI Builder technology stack. We achieved these results against a softening demand environment. Market conditions have become more complex since the start of the year, and we expect the impact from heightened macroeconomic uncertainty to persist in the near term. However, while clients are appropriately cautious about making large investments in this environment, they recognize AI's transformative potential and the value of strategic partners. This transformative potential is reforcing our industry's first principles, which underpin our evolving posture as an AI builder. The industry's first principles were born out of an enterprise reality. Technology was so transformational and complex that companies needed help with optimizing the use of technology to meet their business objectives. IT services companies emerged to solve these problems at scale and over time, helped create many of the greatest business architectures over the last 50 years. With AI, the fundamentals are shifting. Software is penetrating deeper into enterprises and our clients now expect more value and measurable outcomes. The old fundamentals are still relevant, but there must be reforge for a new reality. Cognizant has already embarked on this transition, which demands four significant shifts that redefine the role of IT services firms. First, we are evolving towards owning the full stack of capabilities required to design holistic bespoke AI systems from a system integrator to an AI build. Second, we are reimagining our talent moving away from the traditional pyramid towards interdisciplinary teams that operate at the intersection of domain operations and technology. Third, we are shifting our economics from labor base to outcome-based models that align our success directly with our clients. Our combined fixed price and transaction-based portfolio has continued to grow in proportion over the past 3 years, reflecting our ongoing focus on driving nonlinear revenue opportunities. And finally, we are evolving away from simply delivering projects to underwriting operational results for our clients at scale, taking full accountability for the business impact we create. Last quarter, I talked about the velocity gap the gap between massive AI infrastructure spend and the business value realization. And our Cognizant's mission is to be the AI builder who bridges this gap. Our AI builder stack is the connectivity tissue that translates our strategy into measurable client outcomes. It combines our proprietary methodologies and the science of context engineering with a curated ecosystem of strategic partners and our own differentiated platforms and IP. Our vision is to reimagine enterprise operations, rebuild workflows and break functional silos to unlock AI native ways of working. We aim to do this by bringing human effort and Agentic capital together in a managed governed and a client contextual delivery model. Some of our pioneering clients have started to progress from AI productivity to unlocking new experiences, products and services. Platforms are key to our AI builder stack. Fueling our platform strategies, our award-winning AI Labs, which was awarded 3 new patents, bringing its total number of patents to 65 in the U.S. and the 88 globally. Our AI lab continues to sense the future and partner closely with our clients, platforms and products group, and solutions teams to translate frontier research into industry relevant use cases. To complement our internal investments, we launched the Cognizant innovation network, a new corporate investment arm that will back early-stage AI start-ups. We plan to initially focus on investments in AI, data, cybersecurity and cloud technologies and portfolio companies will gain direct access to Cognizant's deep industrial expertise and its enterprise client base, creating a powerful ecosystem for mutual growth. We are progressing towards the AI builder vision through our 3-vector strategy. AI-led productivity, industrializing AI and identifying the enterprise. To date, we have well over 5,000 AI engagements across 3 vectors, up from approximately 4,000 exiting December. Beginning with Vector 1, we are addressing a multitrillion dollar opportunity of AI-led productivity across several value pools by helping clients, building classical software in new ways, accelerate software development, eliminate technical debt and modernizing legacy systems. Our differentiated approach to autonomous software is rooted in engineering-led productivity powered by leading strategic partnerships like Entropic Claude, Google Gemini, Microsoft [indiscernible] and copilot Davin and open AI codecs. This approach has enabled nearly 40% of our code to be AI assisted. Cognizant platforms play a critical role in scaling these productivity [ grains ] by accelerating software development with Flow source, reverse engineering legacy code using agent-based capabilities through Sky grade and automating incident management with neuro IT operations. A great example of our platform strategy at work is with one of the nation's largest health companies where we now underwrite the integrity of their claims process. Our AI solution automates the validation of over 54 million provider contract updates annually, directly reducing revenue leakage and solving a problem that was previously intractable at scale. Some of the early value pools in Vector 1 where we are seeing client momentum are related to legacy debt takeout, like mainframe modernization, SAPs for HANA migrations, autonomous software engineering, digital workplaces and autonomous infrastructure services. For example, we are working on a highly complex true blue field as for HANA transformation at a global scale, focused on modernizing the enterprise core for the North American global pharma leader. What really sets this project apart is our use of a customized AI accelerator that automates both business and IT data validation, replacing a fragmented manual process with a scalable audit ready and a robust solution significantly cutting validation time and effort. For a leading European telecom operator, Cognizant delivered an AI-powered Oracle cloud ERP transformation, unifying finance, procurement and supply chain on a single cloud-native platform, achieving 25% faster time to market and 40% faster deployment through agentic AI and automation. And with Daimler Truck, we will use Cognizant WorkNEXT to transform and modernize its global workplace services. Our multiyear partnership aims to leverage artificial intelligence and automation to enhance workplace operations across their global factories and offices. As our AI productivity capabilities mature, we are increasingly applying token metering at a project or an individual level to provide early insights into usage patents model management and optimization of infills costs. Vector 1 continues to be a primary driver of our large deal momentum. And as a result of the cost savings and shared productivity generated in Vector 1, we're starting to see increased velocity in Vector 2 and 3 opportunities. Let me share some examples. In Vector 2, as we integrate enterprise AI into enterprise landscapes, platforms provide the foundation to move AI from proof-of-concept into production at enterprise scale, managing the full agent life cycle with neuro AI engineering and context engineering. This spans several areas, including data engineering, AI, foundry, cybersecurity and integrating AI into the infrastructure and cloud stacks. As an example, with data engineering for a leading U.S. health care client, we deployed an AI-based data validation system to optimize the distribution of pharmaceutical shipments. The solution uses predictive models to validate data before dispatch reducing downstream errors in the logistics chain and improving reliability across its operations. One of the value pools we see in Vector 2 and a key element of our AI builder stack is context engineering. Cognizant's approach to contract engineering is to build native work graphs by going deeper into how humans work, make decisions and navigate exceptions in their daily business processes. We're also applying context engineering at a top wealth management firm with an advanced proof of concept where AI agents are being designed to work alongside financial advisers handling routine interactions and back office tasks so that financial advisers can focus on client-facing activities. Finally, in Vector 3, we are accelerating development of our AI native products to unlock new agentic labor pools across vertical and functional domains and into core operations. The value pools in Vector 3 are significantly expansive opportunities across business operations of enterprises to embed Agentic capital for productivity, experiences and new services. In health care, for example, we are developing agentic solutions that accelerate and improve the accuracy of prior authorizations to support better patient outcomes. Additionally, we are building on our TriZetto product portfolio in a strategic partnership with Palantir to advance an outcomes-based intelligence platform that embeds AI-driven decisioning directly into health care operations. We're also sensing a broad structural shift as AI moves beyond digital workflows to governing physical systems and environments and infrastructure. This is accelerating the convergence of physical AI agent AI and governed enterprise intelligence enabling autonomous operations across sectors. Cognizant is investing in the architecture platforms, partner ecosystem and industrial domain expertise for physical AI. Business operations-led offerings are central to this evolution. We're expanding AI-enabled services across sales, finance, marketing, service operations, horizontally and health care financial services and banking operations on the vertical stack. Examples include the recent launch of autonomous customer engagement with Google to support outcome-based human AI workforce models across industries and the combined value proposition of TriZetto and Palantir to identify health care operations. Across all 3 sectors as the importance of platforms grows, we are evolving our commercial models towards fixed and outcome-based pricing, enabling Cognizant to recognize the added value of assets, IP and accelerators that we bring. This is an important pillar of our first principles, shifting our economics to managed services and outcome-based models. Consistent with the shift, we delivered 2.5% and 5% increases in trailing 12-month revenue and adjusted operating margin per employee, respectively. We are beginning to see the emergence of AI infused rate cards where pricing reflects a blended model of human effort and digital effort with several clients, we are exposing tokenized rate cards that prices work along a continuum from fully human-led discovery to hybrid to increasingly autonomous agenetic delivery. This model is intended to turn our outcome-based economics into a true partnership that aligns value creation with shared results. Execution across the sector requires the right organizational structure and a powerful innovation and talent. This brings me back to another important element of our first principles, reimagining talent away from the traditional pyramid and towards interdisciplinary AI-augmented teams. To fuel the shift, we have launched an integrated AI skilling stack for our entire organization. It begins with our AI Builder career program, which maps every role at Cognizant to a future-ready AI family, job family with defined pathways and targeted learning plans aligned to how [indiscernible] evolving. This is powered by Cognizant and SkillSpring, our new AI native learning platform designed to redefine learning in the AI era and cultivate AI-ready talent at scale for our associates and our clients and progress is being tracked for each associate's personal AI fluency dashboard. A real-time context engineered view of AI readiness across various dimensions, including AI skills and proficiency, training and certification, AI tools and token uses innovation and project experience. To enable us to execute on these principles with the speed and the agility of the market demands, we are initiating a new program called Project LEAP. This program is designed to accelerate our transformation to the operating model of the future by funding investments in our AI capabilities and partnerships, integrated offerings and platforms, reshaping productivity and upskilling our workforce. By fostering a workforce that is AI-enabled and equipped with future-ready skills, we aim to create a more agile, scalable and cost-effective operating model. Even as we make these changes, we are continuing to invest in growth through acquiring new talent. We hired around 20,000 freshers in 2025 and plan to hire a greater number in 2026, providing a strong pipeline of future talent aligned to how work is evolving and shaping a broader pyramid with a shorter path to expertise. The LEAP program reinforces our commitment to be in the winner circle of revenue growth and supports our journey of expanding margins. To conclude, I want to leave you all with this. Our conviction in the long-term opportunity emerging with enterprise AI adoption has never been stronger. In our industry, the real work happens inside complex systems across legacy environments, regulated processes, global teams and mission-critical operations. Large enterprises do not transform overnight. The undeniably need trusted partners who understand their systems, context, risks and people. And that is the role we intend to play as an AI builder, bridging the gap to enterprise value. To win, we must move fast and stay agile, which is exactly why Project Leap is so critical. We are reforging our first principles, enabling an AI Era future operating model, equipping our go-to-market teams across the 3 vectors. Adopting new engagement models to deliver value to clients and adopting talent through a blend of digital and human effort. We remain confident the portfolio and capabilities we are assembling can drive sustained progress towards Winner Circle performance including top-tier growth, consistent margin expansion and EPS growth outpacing revenue growth. Before I turn the call over to Jatin, I want to thank our associates for their dedication, our clients for the continued trust and our shareholders for your confidence as we strengthen our foundation to create for durable long-term value. Jatin Dalal: Thank you, Ravi, and thank you all for joining us. As Ravi noted, our first quarter results demonstrate that our AI builder strategy is resonating in the market. In Q1, we delivered revenue growth in the upper half of our guidance range basis points of year-over-year adjusted margin expansion and adjusted diluted EPS growth of 14%. First quarter bookings growth of 21% was 1 of our strongest in recent history. This performance demonstrates our focus on execution and our ability to deliver value for the clients. As Ravi mentioned, the market remains complex but the dynamics are not universal and vary by industry. Financial Services is benefiting from robust investment cycles, while policy changes are creating regulatory uncertainty in key areas of health sciences. In production resources, trade policy uncertainty and supply chain disruptions remain realities. That said, broadly speaking, we believe the shifts we are seeing in client demand play to our strengths. And we remain confident in our position as a strategic partner to our clients as they navigate a complex macro environment and the rapid pace of AI innovation. Now moving on to the details of the quarter. In Q1, revenues of $5.4 billion grew 3.9% year-over-year in constant currency, driven by a ramp of large deals across our North America region and Financial Services segment, along with the strong performance in the U.K. We have seen increasing demand for our AI and analytics services. driven by AI readiness and innovation budgets. Growth also benefited from revenue from third-party products associated with our integrated offering strategy, and inorganic contribution from our 3 cloud acquisition. By segment, Financial Services led with over 10% year-over-year growth in constant currency balanced across banking, financial services and insurance customers. We saw both healthy discretionary spending and sustained large deal momentum driven by North America. Health Sciences performance remained resilient. Growth was negatively impacted by approximately 300 basis points year-over-year due to a lower revenue from third-party products associated with our integrated offering strategy. Excluding this impact, services in health sciences grew at a similar level to the company. Products and Resources was stable despite headwinds from macro geopolitical and trade policy uncertainty. We continue to see emerging client demand in areas such as predictive supply chains, agent commerce and hyper personalization. Use cases where AI has the opportunity to create real differentiation. Physical is an early stage but fast-moving category, and we are positioning ourselves to capture this opportunity as client adoptionaccelerates. Within communications, media and technology, our revenue with technology customers continues to grow. AI adoption is driving demand for engineering, modernization and platform services. In the comms and media sector, the environment has been more measured with added pressure from client-specific dynamics tied to strategic shifts at a large customer. In Q1, segment growth was driven by revenue from third-party products associated with our integrated offering strategy, which contributed approximately 10 percentage points of growth. Turning to bookings. We delivered another strong quarter of large field bookings. We signed 7 large deals, each with TCV of more than $100 million in Cuba, including 1 mega deal with TCV in excess of $500 million. On a trailing 12-month basis, bookings grew 11% and represented a book-to-bill of 1.4. Annual contract value was flat as deal duration increased in the quarter, reflecting large deal mix and continued softness in smaller discretionary projects. Our pipeline remains healthy and broad-based. We continue to see strong demand for cost takeout, vendor consolidation and AI-led services. Moving on to margins. Q1 gross margin decreased by 80 basis points year-over-year, reflecting impact of our integrated offering strategy and increased compensation cost. We remain very focused on driving gross margin improvements over time. This is an important objective of the project lead program. First quarter adjusted operating margin of 15.6% increased by 10 basis points year-over-year. Our ongoing focus on operational efficiency and benefits from the Indian rupee depreciation helped to more than offset the impact of our integrated offering strategy M&A investments and increased compensation costs. Now to additional details on EPS, cash flow and capital allocation. First quarter adjusted EPS was $1.40, up 14% year-over-year. DSO of 84 days increased 3 days sequentially and year-over-year. First quarter free cash flow was approximately $200 million, impacted by a larger bonus payout this year and in line with our expectations and typical Q1 seasonality. During the quarter, we returned about $600 million of capital to shareholders through share repurchases and dividends. We ended the quarter with cash and short-term investments of $1.5 billion or net cash of $949 million. Now turning to guidance. For the second quarter, we expect revenue to grow 3.2% to 4.7% year-over-year in constant currency. This includes approximately 150 basis points from our recently completed acquisitions, including a partial quarter contribution from Australia that we just announced. Our second quarter guidance includes a more cautious near-term view of discretionary spending based on recent global events and trends. Our full year revenue guidance is unchanged at 4% to 6.5% in constant currency. The macroeconomic environment remains dynamic, and our guidance reflects a range of outcomes. We expect large steel ramps and 2 full quarters of Astra contribution to be meaningful second half drivers. At the midpoint, we assume some improvement in discretionary spending in the second half of the year compared to our Q2 assumptions. Our strong bookings momentum, along with 1.4 book-to-bill ratio give us confidence that we are winning in the market. Our full year guidance assumes recently completed acquisitions will contribute approximately 150 basis points to revenue growth, reflecting contribution from both CreeCloud and Austria. Beyond this, our M&A pipeline remains healthy and active, and we see a number of interesting opportunities that are consistent with our AI builder strategy. As always, we'll be disciplined and deliberate but remain well positioned to act if the right opportunities emerge. Now a few more details on Project Leap. This is an important initiative to accelerate our path to a more agile and AI-enabled operating model of the future and improving our cost of delivery. The program is expected to deliver savings in 2026 of approximately $200 million to $300 million with a full year benefit in 2027. We anticipate approximately 2/3 of the savings generated by Project LEAP will be directly reinvested to support future growth across integrated offerings, AI capabilities and partnership and roughly 1/3 toward upscaling our workforce, all while maintaining an active and strategic M&A posture. The expected savings generated from the program, net of investments are enabling us to raise our 2026 adjusted operating margin guidance range to 16% to 16.2% and which represents 20 to 40 basis points of year-over-year expansion. This is on the top of 50 basis points of margin expansion we delivered in 2025 and in line with our long-term aspiration to expand margins. As part of this program, we expect to record costs of $230 million to $320 million, which substantially all incurred in 2026. This consists of $200 million to $270 million of employee severance and other personnel-related costs and $30 million to $50 million of other charges. This cost will be adjusted in our non-GAAP financial measures. As Ravi noted, we will hire more recent college graduates this year than last year. Our free cash flow conversion guidance for the full year remains 90% to 100% of net income. Tax rate guidance is unchanged at 25% to 26%. In our expected weighted average dilutive share count is approximately $473 million, down slightly from our prior estimate due to the pace of repurchases in Q1. This leads to EPS guidance of $5.63 to $5.77, representing 7% to 9% growth. For 2026, we still expect to return approximately $1.6 billion of capital to shareholders, including $1 billion towards share repurchases and the remainder towards our regular dividend.Finally, we continue to make progress and advance on our evaluation of potential primary offering and secondary listing in India. We remain committed to acting in the best interest of our shareholders and will provide updates as appropriate. To close, we are delivering on our commitment to stay in the winner circle. In Q1, we grew revenue at the top of our large cap peer set, posted our strongest booking growth in recent history, expanded adjusted operating margins and delivered double-digit earnings per share growth. While the macro environment remains uncertain, our momentum is clear, and we believe we are winning in the marketplace. With that, we'll open the call for your questions. Operator: [Operator Instructions] Our first question today is coming from Jason Kupferberg from Wells Fargo. Jason Kupferberg: So bookings, a clear highlight this quarter. Wonder to see if you had any color on how much of the bookings were new versus renewal, anything on ACV growth how that looked in the quarter? And just given the fact that there has been a little bit of softening on the discretionary side, it sounds like in certain verticals. I wanted to confirm, Jatin, if I heard you correctly, that the midpoint of the '26 guide now assumes a little bit of improvement in discretionary spending in the second half. Maybe you could just elaborate on that a little bit? And then I have a follow-up. Jatin Dalal: Yes. So Jim, we don't exactly break out new versus renewal. But this year -- I mean, for the quarter, it's been very healthy. And I would say the growth, especially of the large deals is driven by the newer opportunity in either existing customers or the new customers. Ravi Kumar S: In fact, just to add to Jatin, this is the second quarter in a row, we've had robust bookings. The new proportion is as healthy as it was in the past. In fact, the top 7 deals, which are more than $100 million, 1 mega deals, more than $500 million a 70% increase in TCV on the large deals. I think it's been a good quarter for bookings, 2 quarters in a row. This is probably the highest bookings growth we have seen since I've been on board 3 years ago, since 3 years. Jason Kupferberg: Okay. Okay. And there was some commentary from one of your large competitors last week talking about AI resulting in increased competition, more pass-through of productivity gains to clients. I mean, you guys have been talking about that pass-through and the AI assisted coding for a long time. But are you seeing competitors broadly engage in any additional level of contract pricing that you might characterize as a rational? Ravi Kumar S: Yes. [indiscernible] the way I see it is, unlike in the past, where pricing was determined by the unit price, which is billings equivalent. The race now is about the number of units and how well we could deliver with lower number of units for the same output for the same outcome. And that is based on how much productivity you can derive out of AI usage in your software development cycle. So we feel very confident because 40% of our software development cycle is assisted by AI. We have infused AI into our rate cards. So when we are up for a consolidation opportunity, we seem to be in the winner part because we are able to share the productivity and also keep it for ourselves. In fact, a bit to date is actually very healthy over the last 3 years, the means we have been working on. So we seem to have got this work rhythm of autonomous software engineering, as we call it, and we seem to be doing well. So I wouldn't -- I mean there is productivity sharing with clients, but you're going to see that as an opportunity to win more and you will see that as an opportunity to create more momentum for ourselves. So that's how we are seeing it. Now that's on the old stuff. On the new stuff, there is in Vector 2 and vector 3, as I call it. It is new work. We also see unlock of legacy modernization, which is not consolidation. It is actually net new business which kind of got locked because customers were not willing to pay that much to modernize the legacy. Now they're actually throwing that in the mix. And that is actually a business case of how much they spend to how much they could potentially spend using AI to modernize it. So while there is price pressure on it, I would say it's an opportunity not to look at labor costs. It's an opportunity to look at -- how much of the number of units you could optimize using AI. Jatin Dalal: Yes. And Jason, to your earlier question on the visibility of second half and how do we see our guidance range. Let me break it down. So definitely, the environment around us, the macro has significantly more uncertain than what it was in the beginning of February. And therefore, I mentioned in my opening remarks that there are a range of outcomes which are possible across the guidance range for the full year. What gives us confidence for the second half are essentially 2 things: the large deal wins that we have had in quarter 4 and in quarter 1, which continue to ramp up and will reach its full potential -- their full potential in starting June, July. And therefore, that's one lever. The second is acquisition like Estia will come full on stream from quarter 3 standpoint, it would be a partial revenue in quarter 2. So these are 2 additional sort of drivers for a stronger second half than assumption than what it is. As I mentioned, the midpoint does assume a little better discretionary environment than what we assume for quarter 2, which is sort of impacted by the current environment, but we remain confident as we walk through the rest of the year. And finally, we have had very strong bookings for quarter 1, which means we are mining in the marketplace even as in the uncertain environment, customers are choosing Cognizant as a partner of first preference. And that is what helping us continue to lead in this environment with the sense of Velocity and confidence. Ravi Kumar S: Also a lot of large deal transitions, which are happening now between quarter 4 and quarter 1 will start to unlock in quarter 2 and quarter 3. So this is literally production capacity already in there, we are not making the money we are incurring the cost. Now as the transitions get over, we start to accrue the dollars. So that's actually another tailwind to our journey in the second half. Operator: Our next question today is coming from Jim Schneider from Goldman Sachs. James Schneider: I was wondering if you could maybe kind of unpack the comments you made earlier, Ravi, around the token usage that you're seeing in terms of token metering and also some of the productivity or benefits you're starting to deliver. Just wanted to clarify 2 things. One is, are you seeing with the increased sort of productivity on units delivered to your customers. I would have thought that you would be seeing if you're keeping some of that benefit for yourself, a little bit better margin leverage as a result of that as you're getting some revenue growth? Or is that being masked by the start-up cost on longer-dated outsourcing deals you just kind of talked about in response to your last question. And then separately, I was wondering if you could maybe address how you expect sort of the token usage to sort of play out in terms of how you build customers? You talked about AI type rate cards -- but are token costs being directly billed through to clients today in terms of time and materials contracts. Ravi Kumar S: Great question. Great question, both of them. Now let me first get to the second one. Token metering is a reality, both at a project level and at an individual level. We have token metering for fixed price programs as well as for time and material. For fixed price programs, we have the opportunity to reduce the cost and keep the margin with us. For new deals we do this kind of links back to the first question, we actually have the opportunity to outpace the productivity we give to our clients and therefore, keep it with us. A bit to date over the last 3 years is very healthy. So I'm very excited about the fact that has leverage for margin accrual in the future. Of course, it has start setup costs, which we have to establish at the start. So there is an upfront cost attached to it, but there is downstream savings. On time and material, tokenized rate cards. We are starting to see a pattern. I'll give you 1 example. One of the rate cards. I am establishing, which is a template we're taking it to the street is A0 is completely human effort. A1 is effort, which is done by humans verified by AI. A2 is effort effort delivered by AI, verified by humans. A3 is autonomous digital labor. Now when clients do this, you could meet the capacity they have bought from a frontier motor company like Anthropic or open AI directly. In which case, we are responsible for the human effort and the clients are responsible for the digital effort. But clients have started to see that they are not able to optimize the digital efforts. So some clients are coming back and saying, you know what, why don't you take care of the human and the digital effort. You open the tap on compute, you open the tap on Ms. and you deliver the service, and we don't want to manage the economics. Already, we're talking about AI ops, AI FinOps. You manage the economics and digital labor or human level, it doesn't matter. In fact, 1 of our -- 1 of our research papers talks about a cognizant cognizant unit of measure, which we call it as -- it's equivalent to the function point measure, which is equivalent to what we do in digital labor. So effectively, this is evolving. We are ahead on the curve both to take the accountability of digital and human labor for ourselves or if clients want to take the accountability for themselves. So time and material comes in 2 forms. I could take care of digital labor and human labor. And I could take the sizing and the economics of digital labor and create throughput for our clients. This is something evolving and some clients are already proposing this. And on fixed price deals, of course, we want to share that productivity with our clients. So that's how we are seeing this. And it's not far off when we're going to see rate count for this rate card, which is digital and human label put together more mainstream. As we go forward. And that gives us an opportunity to actually deliver both human and digital labor through the books of Cognizant. We already have arrangements with the fronter model companies to do that. One is to take care of our developer community, which uses it, but also for client work, which we can deliver. Jatin Dalal: Jim, I'll quickly cover the question on gross margin. Essentially, we -- in Q1 was an investment mode a little bit on gross margin across 3 different dimensions. The first was surely, the investment in the bench. And if you see, we have grown sequentially in headcount, and we have grown year-over-year in headcount. And as we have continued to hire the fresh college radiates into the mix. We have invested a little bit of utilization. So that's 1 reason why gross margin is lower. The second, we spoke about this integrated offering. We -- every time when the industry sees a new element of service delivery coming to customers, they expect service provider like cognition to act as a system integrator. And to that extent, you see that you have a higher element cost as part of this integrated service offering that you have, and that has been slightly higher in quarter 1. And -- but that's an investment because you almost always see a significant follow-through revenue coming through services when you anchor yourself through that early offering. And third is the salary increase that we gave on first of November, so there is a 1-month impact sitting there. So a combination of these 3 factors have led to a slightly lower gross margin in -- in our earnings call as well as through the quarter, we spoke about the volatility that would probably see as a result of this investment in quarter 1, but we are confident that the number will continue to improve through the course of the rest of the year. the project ambition is to really drive significant cost savings through cost of delivery model. And that should also help the gross margin as we execute for the rest of the year. Operator: Next question today is coming from James Faucette from Morgan Stanley. James Faucette: Appreciate all the color and detail today on current conditions, et cetera. I'm wondering if you can talk a little bit about what you're seeing in terms of valuation and how you're thinking about the price of acquisitions that you're looking at, particularly as you seem to be looking to add incremental capabilities to the Cognizant base? And I'm just thinking about how we should think about your commitment to spend, what portion of free cash flow and the impact on the inorganic contribution on a go-forward basis? Ravi Kumar S: I mean I'm going to ask Jatin to add. This is a phenomenal time to create value from M&A in line with our reforged first principles, which is about having a platform player, managing business on outcomes versus effort and AI enabling our offerings. So if you put all of that together, we have some exceptional opportunities in the market. We also have the ability to anchor this on new pillars in the mix, which will give us expansive opportunities. So we are we are not doing this in a tactical way. We are doing this in a very strategic way of filling the boxes for being an AI builder. That's what our -- this is. Just to give you a sense, today, the 1 we announced does data data center build-out services, workplace services, AI infrastructure build out services and network services. So it's Atria is a phenomenal opportunity to anchor a complementary piece of work, which is which is attached to the infrastructure services where Cognizant is delivering very well. So where will we anchor this. We'll anchor this on platforms, on outcome-based models. In fact, Atria delivers work on per user basis, not on effort. I mean they do workplace services. They also do data center build-outs in an outcome-based model. So we think that's a unique opportunity. If there are platforms in the market, we're going to evaluate and look for it because the platform play will allow us to go through -- go to the outcome model, transaction-based pricing and outcome-based pricing. In and around set -- in and around TriZetto, we see a ton of opportunity. I mean, our TriZetto business now is growing much, much faster than what I saw in 2023 when I came on board. And it is highly profitable. And health care has a strong moat, a defensible mode. So we are actually we're actually looking for layering it around. In fact, one of the reasons why we partnered with Palantir is to create the opportunity to drive the health care payer control points for medical loss ratio performance and payment integrity and real-time cost intelligence and network performance and all of that. So we have specific areas where we think we want to do M&A, which will substantiate our endeavor to be a platform company and an outcomes-based company in the AI era. And we also believe it will uniquely give us an opportunity to create durability of our earnings. So that's how we are seeing it, and this is a good time for a value player. So we are continuing to -- we have a very healthy pipeline. We'll continue to evaluate value assets, which are available in each of these pillars I just spoke about. Jatin Dalal: And just from a capital allocation standpoint, you know we generated $2.5 billion of free cash flow. Last year, we returned close to $2 billion to shareholders and roughly $500 million, $600 million or $700 was invested into 3 clouds, which technically closed beginning of this year, but was announced in 2025 -- this year, again, $2.5 billion, we have committed $1.6 billion to be returned to the shareholders $1 billion by share buyback and $600 million or in dividends. Of which we have now used about $600 million from the remaining $1 billion for Asia. And we have, therefore, sort of fuel in the tank, and we have a very healthy balance sheet to leverage in a very attractive opportunity [indiscernible] James Faucette: That's great. And I just asked that you guys have been really front-footed, both in terms of like your own development. prioritizations and how you're trying to implement AI. And then I think your commentary just now on how you're looking at acquisitions and some of the benefits that they provide further bolsters that view. What types of customers are you seeing either generally or what kind of characteristics do they have that are willing to engage with you and kind of match your march forward right now? Where are you seeing the best traction? And where should we look for examples of success patterns? Ravi Kumar S: Yes. I would say -- I'll just highlight quick themes. Financial services is at double-digit growth, very, very excited about it. Not only are they doing Vector 1, they're innovating new products, new services. Vector 1 is more productivity led and are willing to experiment with us. In fact, 1 of the things I mentioned in my earnings script is about opportunity with management company to apply a genetic on their wealth advisers so that they could deliver more innovative products. So financial services is right up there. The second I would say is consolidation opportunities. Consolidation opportunities, I mean, every customer, every Fortune 500 Global 2000 company has a huge set of providers. This is a -- I mean, they have accumulated they've created a big network of providers over the last 25, 30 years. This is their opportunity to consolidate and get some productivity benefits. We are on the front of it, and we are winning a lot of it. So that is the second. The third I would say is unlock of -- the third value pool, I would say, is unlock technology debt. I have great momentum on mainframe modernization. Just to give you a sense, 1 line of mainframe code used to cost $10 to refactor to new age, say, new edge software it now costs $150. So we have a unique opportunity to unlock. And this opportunity didn't exist before because fiber knowledge was missing, there was cost, financial cost to modernize, and they were legacy skills were missing. Now all of that is out of the window. So if you unlock that, that is trillions of dollars. So we're seeing that as a good team. Then there is operations-led AI. I mean that's why my DPO business is close to double-digit growth because operations of enterprises are going to be embedded with this new software, which operations didn't have a chance -- and if I have to pick specific areas, customer service is the top area where we are seeing this. Employee Services is the second area we are seeing and then traditional areas like financial systems and legal systems. These are places where we historically didn't see a lot of classical software embedded. So we're starting to see that. One of the things I highlighted in my earnings script is physical AI. I mean it's a leap frog for traditional industries with physical manifestation to actually invest into digital enhancement of physical objects and we're seeing quite a bit of that. So I think we are at that inflection point now. to take productivity and create elasticity of consumption of software, classical software and use new software, which is written around the neural networks, to an expansive opportunity in enterprises and integrate the 2 and reinvent and reimagine businesses. I mean this is -- this is a fabulous opportunity for system integrators to be those builders. And I'm actually more optimistic than I was before on the opportunity in front of us. Operator: Our next question is coming from Tien-Tsin Huang from JPMorgan. Tien-Tsin Huang: Great. Just want to ask on Project LEAP, if that's okay, just the offensive or defensive nature of it? What prompted it, the scope of it and what outcomes we can expect in the short and midterm from Project LEAP. Ravi Kumar S: I'll kick off, and I'll get Jatin to add. I mean, we have a mental -- a frame of what our future operating model looks like, and I'm pretty confident that operating model is we are on the journey to get to the operating model, LEAP is to make sure that we get there fast. It's our opportunity to resize our pyramid with a broader parameter. That's why we're hiring more school graduates, more early careers. And short on the height of the pyramid so that you get to expertise much faster. That's our model. It is margin accretive because the more you brought on the pyramid the more you could deliver the services in a more AI native way, if I may. The second important thing is this allows us to invest into the platforms AI enabling the enterprise and tokenizing the enterprise, as I call it. It allows us to do that. So we have measured the savings. It is in the range of $200 million to $300 million this year, and this is partial because we are already in the middle of the year, and we have couple of months to complete this process and probably 3 to 4 months of impact. So it has a much higher impact next year in 2027. So not only are we rightsizing the pyramid. And remember, we're also seeing our future offerings are not effort-based, they're outcome-based, more and more. I mean, we'll see a mix of it in the transition. So when we get to that new operating model quicker, we are going to seize these opportunities faster and we'll be we'll be having a more optimized operating model. And we will have a kitty for investing into our future. So that we can seize the opportunities ahead of others. We also said in our Investor Day that we will have an expansive margin trajectory, which is what we intend to. I mean last year, 2025, we did 50 basis points in spite of the M&A and the investments -- this year, we have upped our margin guidance to 20 to 40 basis points increase from 10 to 30. So we are constantly on that trajectory to keep increasing our margins keep delivering productivity to our clients and be in the winner circle of growth. So this allows us to do all of this in a quicker, faster way. We get to that future operating model, which we have in [indiscernible] Operator: Our final question today is coming from Surinder Thind from Jefferies. Surinder Thind: Ravi, can you expand upon the last point of -- what is the benefit of showing margin improvement in the current environment relative to your ability to invest. Why not just maximize every dollar of spend maybe broaden the spend across what I would call more of a VC type strategy where you take more bets because the pace of change is accelerating -- and so as you try to build and adjust the model like. Ravi Kumar S: I think you're spot on. If you look at it, we're going to save $200 million to $300 million this year, which is just a few months. And you know in 2027, we have a much bigger opportunity. But we're investing back the rest of the money to generate growth opportunities and be agile enough in the market to generate more growth opportunities. So you're exactly right. So we're investing more into growth and we are contributing some into our expansive margins. So the idea of doing this is growth and be in the winner circle. Operator: Thank you. We've reached end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments. Ravi Kumar S: Thank you so much for listening to us. I mean we're very excited about our quarter 1 performance. Very excited about the bookings momentum we've had and the tailwind we have for the rest of the year and, of course, are anchored to the AI opportunity and getting their fast with the LEAP program and keeping our thesis of being in the winner circle from growth, expansive margins and EPS growth being higher than revenue growth. That's our endeavor, and this will allow us to create sustainable durable earnings for the future. Operator: Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, and thank you for standing by. Welcome to the H2O America 2026 Q1 Financial Results 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Jonathan Reeder. Please go ahead. Thank you, Siobhan. Jonathan Reeder: Welcome to the 2026 financial results conference call for H2O America. My name is Jonathan Reeder, and I am the Senior Director of Treasury and Investor Relations for H2O America. Presenting today will be Andrew Walters, Chair of the Board and Chief Executive Officer; Ann Kelly, Chief Financial Officer and Treasurer; and Bruce Hauk, President and Chief Operating Officer. For those who would like to follow along, slides accompanying our remarks are available on our website at h2o-america.com. Before we begin today, I would like to remind you that this presentation and related materials posted on our website may contain forward-looking statements. These statements are based on estimates and assumptions made by the company in light of its experience, historical trends, current conditions, and expected future results, as well as other factors that the company believes are appropriate under the circumstances. Many factors could cause the company's actual results and performance to differ materially from those expressed or implied by the forward-looking statements. For a description of some of the factors that could cause actual results to be different from statements in this presentation, we refer you to the financial results press release and to our most recent Forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission, copies of which may be obtained on our website. All forward-looking statements are made as of today and H2O America disclaims any duty to update or revise such statements. You will have an opportunity to ask questions at the end of the presentation. This webcast is being recorded, and an archive of the webcast will be available until July 29, 2026. You can access the press release and the webcast at H2O America's website. In addition, some of the information discussed today includes non-GAAP financial measures of adjusted net income and adjusted diluted earnings per share, which have not been calculated in accordance with generally accepted accounting principles in the United States, or GAAP. These non-GAAP financial measures should be considered as a supplement to the financial information prepared on a GAAP basis, rather than as an alternative with respect to GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the table in the appendix of our presentation. I will now turn the call over to Andrew. Andrew Walters: Welcome, everyone, and thank you for joining us today. We are pleased to provide you with an update on our strong first quarter 2026 results, during which we earned $0.49 per share on a GAAP diluted basis and $0.50 per share on an adjusted diluted basis. Our first quarter 2026 results were consistent with our internal expectations in support of our standalone 2026 EPS guidance of $3.08 to $3.18 per share. Before I ask Ann to discuss the quarterly results in more detail, I want to update everyone on the very successful equity raise that we executed in early March. Following our year-end 2025 update, and taking advantage of what we viewed as a receptive equity market, we decided to take the QuadVest acquisition-related equity risk off the table by coming to the market with a $550 million equity offering to fund not only the transaction, but also the $100 million to $125 million of equity needed for our 2026 San Juan capital budget. Our equity offering received an overwhelmingly positive response from investors, as it was more than five times oversubscribed and priced at a tight 2.6% discount. Due to the overwhelming demand and our desire to accommodate some very high-quality, long-term-oriented investors into our shareholder base, we upsized the issuance to $700 million including the greenshoe. The upsizing also served to address our forecasted equity needs through 2027. I believe the successful equity offering is a direct reflection of the hard work of all my partners here at H2O America and their dedication to providing our customers with high-quality, reliable service while executing on the financial goals that we have communicated to investors. At the same time, we recognize that our work is far from complete. We remain steadfast in our commitment to deliver on the 2026 to 2030 plan that we rolled out in February, including our increased long-term EPS CAGR target of 6% to 8%. The core element of the plan is our tried-and-true strategy of growing the business and creating shareholder value by making the much needed water infrastructure investments across the national footprint of our systems, while constructively engaging our key local stakeholders in a consensus-building process to provide timely regulatory recovery while maintaining customer affordability. As a reminder, our plan does not include any M&A opportunities beyond our two pending Texas acquisitions. On the regulatory front, our teams have been busy working to secure the necessary approvals to execute on our long-term plan. This includes leveraging infrastructure investment mechanisms and recoveries in Connecticut, Maine, and Texas, as well as making a PFAS remediation project recovery filing in Connecticut and California. In addition, a great deal of thought and effort has gone into preparing our general rate case filings in Connecticut and Maine. And of course, there was the filing of the QuadVest LP sales transfer merger application earlier in the year, and our focus continues to be on closing the transformative acquisition later this year and delivering on the anticipated accretion beginning in 2028. Bruce will provide more detailed updates on the QuadVest transaction as well as some of our key regulatory items later in the call. But now I will turn it over to Ann to provide details on our first quarter 2026 results and the key elements of our financial plan. Ann Kelly: Thank you, Andrew. Yesterday, after the market closed, we released our first quarter 2026 operating results. As Andrew mentioned, we are pleased to report first quarter 2026 diluted EPS of $0.49 and adjusted diluted EPS of $0.50. The results were consistent with our internal expectations and supportive of the financial guidance that we provided on our year-end 2025 update. Although we grew the underlying net income by roughly 15%, both our reported and adjusted diluted earnings per share were unchanged when compared to the 2025 results due to the higher share count as a result of leveraging our ATM program in 2025 and our equity issuance in early March. Moving to Slide 8, I would like to briefly discuss the key drivers resulting in the comparable year-over-year earnings per share. We realized a $0.41 per share increase due to higher revenue. Roughly half of it, or $0.20, was driven by rate relief received from general rate cases and infrastructure surcharges primarily in California, Connecticut, and Texas. There was also $0.11 of higher revenues for pass-through water supply costs that are offset in our water production expenses and do not impact our net income. In addition, higher usage, largely due to a hot, dry March across our California service territory, added $0.05. The revenue increase was partially offset by higher water production expenses of $0.20 attributable to $0.10 of higher water supply costs due to increases in average per-unit cost for purchased water and groundwater extraction, $0.09 from increases in water production balances in memorandum accounts primarily related to the full cost balancing account in California, and $0.08 from higher customer usage. These increases were partially offset by a $0.07 decrease in water production expense as a result of the increased availability of surface water. In addition, other operating expenses increased $0.18. The biggest item here was an $0.11 increase in depreciation and amortization for new utility plant placed in service, as well as an increase in maintenance, employee-related costs, and higher non-labor administrative and general expenses. The remaining drivers relate to $0.07 dilution, which I alluded to earlier, from the higher share count partially offset by $0.04 of net other benefits. As for taxes during the quarter, our effective income tax rate in Q1 2026 was approximately 15% versus 17% in 2025. The lower effective tax rate was primarily due to higher flow-through tax. Shifting from the first quarter results to our full-year 2026 and beyond expectations, the figures on the next few slides show that we are reiterating all aspects of the guidance that we rolled out near the end of February with our year-end 2025 update. During the first quarter of 2026, we invested $85 million into infrastructure improvement. This represents 18% of our full-year 2026 CapEx budget of $483 million, which does not include the impacts of closing QuadVest. While the 18% might seem low, it reflects the seasonality of our CapEx cycle, particularly during the winter months for our Connecticut and Maine operations. We are on track to deliver the full-year 2026 CapEx budget, as well as our plan to invest $2.7 billion of capital over the 2026 to 2030 period. Importantly, roughly 80% of the $2.7 billion capital plan qualifies for timely regulatory recovery either through California's three-year forward general rate case framework or through various infrastructure recovery mechanisms in Connecticut, Maine, and Texas. Our five-year capital investment plan, combined with our pending acquisition of QuadVest, is expected to translate into a 13% rate base CAGR off our year-end 2025 estimated rate base of $2.8 billion. As a reminder, these amounts represent our estimated rate base at year-end and not what was or will be recognized in rates by our state regulators in those particular years. We are laser-focused on not only delivering the rate base growth, but translating it into attractive earnings growth by minimizing regulatory lag and continually seeking ways to operate more efficiently in order to keep rates affordable while providing our customers with best-in-class service. The details on Slide 10 are consistent with what we provided in our year-end update. I will not go through them all, but I wanted to reiterate our plan to deliver a non-linear EPS CAGR over the 2026 to 2030 period at or above the top end of our 6% to 8% long-term organic EPS growth rate target, using our 2025 adjusted EPS of $2.99 as a base year. The ability to deliver growth at or above our 6% to 8% long-term sustainable rate is enabled by: one, the line of sight that we have on our five-year capital expenditure plan; two, the anticipated accretion from the pending QuadVest acquisition beginning in 2028 once the new rates from the consolidated Texas general rate case that we plan to file in early 2027 go into effect; and three, our expectation to continue to work constructively with key stakeholders in each of our states to achieve fair and timely regulatory outcomes. We remain excited about our five-year plan and long-term prospects and believe our team is fully capable of delivering on it. Turning to financing and credit on Slide 11, as Andrew discussed, we executed on the equity needed not only to fund our pending Texas acquisitions, but also our 2026 and 2027 base capital expenditures. We expect to stay out of the equity markets, including issuances through our program, through at least year-end 2027, as we have the ability to draw down on the $400 million forward agreement component of the March issuance over this period to fund our capital needs. We still expect to raise $100 million to $200 million of debt across the parent and Texas operating company levels to fund the QuadVest transaction, although we have more flexibility now regarding the timing given the upsized equity issuance. Our liquidity is strong to fund our daily operations. While we work towards closing QuadVest later this year, we utilized the cash received from the equity issuance to pay down our bank lines of credit, meaning the full $370 million is available, and we have invested the remainder of the proceeds into cash equivalents. In addition, our A- credit rating, which S&P affirmed earlier this month, affords us access to the capital needed to fund our longer-term investments. We expect our FFO-to-debt ratio to be in the 11% to 12% range through 2027, which is above S&P's 11% downgrade threshold. In 2028, we expect the ratio to be above 12%, and we will continue to delever throughout the rest of the plan through increased cash flows and the anticipated paydown of our 2029 HoldCo. With that, I will turn the call over to Bruce to provide some regulatory updates, including on our pending acquisition of QuadVest. Bruce Hauk: Thank you, Ann. Our regulatory teams have been busy to start the year. While the California team is gearing up for the 2028 to 2030 GRC filing that will be made in January 2027, earlier this month, we filed a request with the CPUC outside of the GRC process for approval and recovery of our planned Williams Station PFAS remediation project. The estimated capital cost of the ion exchange project is $176 million. If approved, SJWC would adjust rates via annual rate base filing offsets. This is similar to the recovery approach we took for our current AMI project that is expected to be completed around the end of this year. In Connecticut, we filed and received approval to implement annual revenue increases totaling a combined roughly $3.3 million under the WICA and WQTA mechanisms that went into effect on 04/01/2026. Also on April 1, we implemented our 2025 water revenue adjustment mechanism surcharge to reconcile revenues as authorized in CWC's most recent rate case. Notably, as a result of CWC achieving the PURA-prescribed performance metrics in our last GRC, the WRA surcharge provides recovery of certain amounts of compensation expenses. As most of you are aware, CWC filed a letter of intent on March 13 to file a GRC application within the next sixty days. The actual rate case will be filed in the weeks ahead, but per the letter, CWC plans to request an approximately $26 million increase in annual revenues before new rates become effective early 2027, as CWC seeks recovery of approximately $129 million of infrastructure investments made between its last rate case and 2026, as that investment is not reflected in current rates. Moving on to Maine on Slide 14, after getting approval of the stipulation and the rate unification proceeding in January, MWC filed its first consolidated risk application in late February requesting a $900 thousand increase. Earlier this month, MWC filed its first consolidated GRC filing requesting a $9.5 million increase in annual revenues to recover approximately $36 million of infrastructure investments that have been or are expected to be made in the state by 2026 and are not currently in rates. We expect the new rates to go into effect by 2027. Lastly, I would like to shift to Texas regulatory activity. We continue to work through the $5.1 million SICK mechanism application we filed in October, with an expected decision from the PUCT in 2026. We also continue to move the ball forward through the PUCT approval process for the two pending acquisitions. I am pleased to report that just last week, we filed a sales transfer merger, or STM, application for the Cibolo Valley wastewater plant and related collection system, which keeps us on track for an anticipated close of this transaction during 2026. In early 2027, after the close of the QuadVest and Cibolo Valley acquisitions, as well as the completion of our significant investments to bring an additional 6 thousand acre-feet of water annually into our existing system, Texas Water continues to expect to file a combined company general rate case with new rates effective in early 2028, so that these and other additions to Texas Water's rate base can be recognized in rates. I did want to point out that despite us making all of these significant and much needed capital investments in recent years across our service territories and seeking recognition of these investments from our regulators, our average bills are still below 1% of the median household income in each of our service territories. This is well below the EPA's recent study that reports water and wastewater bills are affordable if, when combined, they are less than 4.5% of median household income. Assuming a 50/50 split between water and wastewater, it would suggest below 2.25% for each is affordable. We believe this is a reasonable guideline depicting affordability and provides bill headroom for the recovery of our planned infrastructure investments going forward. Now for an update on QuadVest. The STM application for the regulated portion of the QuadVest transaction was filed in January and earlier this month it was deemed administratively complete. As outlined on Slide 15, the STM application requests approval of TWC's acquisition of the QuadVest LP assets and certification of the value of the ratemaking rate base, as determined in accordance with the Texas fair market value statute, at TWC's $483.6 million purchase price. TWC is in the process of issuing the required public notices and once proof of those notices is filed with the Commission, the PUCT's 120-day approval process will commence. That said, the 120-day time frame may be extended if Staff or the Office of Public Utility Counsel request a hearing and/or timeline extension. As such, we are updating our expected closing of the QuadVest acquisition from mid-2026 to sometime during the latter half of 2026. Meanwhile, we continue to see robust connection growth in the Houston-based QuadVest water and wastewater system, which now has more than 57 thousand 200 active connections as of 03/31/2026. This represents an impressive 5% increase in the first three months of 2026, after the active connection count increased 16% during 2025. As QuadVest’s under-contract and pending development pipeline converts into active connections, the pool of future connections continues to be replenished, extending the longevity of the growth profile. Specifically, during 2026, despite QuadVest converting 2 thousand 800 connections from the pipeline to active, the pipeline increased by 5 thousand connections. Of course, future connection growth will vary based on a number of conditions, so this is no guarantee of the future pace of growth. However, these results are in line with our range of expectations, and we believe solid growth will continue in the Greater Houston area, which is the second-fastest growing metropolitan area in the United States. The addition of QuadVest active customers plus the continued conversion of its contracted development backlog is the primary contributor that is expected to drive Texas from 8% of our consolidated customer base today to 26% by 2029. Between QuadVest and Cibolo Valley, we are very excited about our long-term growth potential in Texas. That concludes my regulatory updates, and I will now turn the call back over to Andrew. Andrew Walters: Thank you, Bruce. Before opening the call up to Q&A, I wanted to welcome Commissioner Patrick Rhode, whom Governor Abbott appointed a few weeks ago to fill the remaining vacancy on the Public Utility Commission of Texas, and take a minute to expand a bit on Bruce's remarks with respect to customer affordability. We know the concern remains top of mind with customers, regulators, and investors alike, especially as the recent uptick in energy prices due to the conflict in the Middle East has caused inflationary expectations to rise. Affordability is, and frankly always has been, a top priority for us, and we will continue to work constructively with our state regulatory partners as we look to balance affordability with the extensive investment required to replace aging infrastructure and treat emerging contaminants, all while providing safe, high-quality water and reliable service. As Bruce mentioned, as of year-end 2025, average bills were less than 1% of median household income across all four of our states, which is well below the EPA's suggested 2.25% affordability threshold. In addition, we offer affordability tariffs in California, Connecticut, and Maine, with hopes to introduce this benefit to our Texas customer base as part of our future rate proceeding. As always, we will continue to strive to run the business as efficiently as possible, as we recognize that every dollar of avoided operating expenses enables the recovery of $7 of capital investments with a neutral impact on customer bills. Anytime we can swap operating expenses for capital deployment, we will look to do it, as it is a win-win for customers and the company. With that, I will turn the call back over to the operator for questions. Operator: Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name and company name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of Alexis Kania of BTIG. Your line is now open. Alexis Kania: Good morning. Thanks for taking my question. I had two questions. First, as you think about the upcoming rate case process in Texas for QuadVest next year, I know it is early, but from a high level, how would you think about the affordability statistics you provided for your other jurisdictions and how they may end up looking on a run-rate basis for QuadVest? Andrew Walters: Sure. I will ask Bruce to take this. Bruce Hauk: Thank you very much, Alexis, and good morning. As it relates to the QuadVest rates, we have not disclosed the potential impact on rates, but have disclosed that it would be significant. There has been a lot of investment that needs to be made for reliability in the system, as you heard in my prepared remarks, and also the FMV transaction itself. We are engaged with all the stakeholders, customers, and the regulatory commission as well. We have to be creative and thoughtful in our preparations, and that will most likely be public in 2027 when we file. As Andrew mentioned in his comments, we are very focused on affordability, and our rate design will take that into consideration. We are going to be proposing a low-income tariff to address affordability issues in Texas, while being mindful of how to most appropriately bring those investments into rates and how we can do that in partnership with the commission. Alexis Kania: Great, that is helpful. And then maybe a question for Ann. As you talked about the balance sheet and the FFO-to-debt being in the 11% to 12% range for the next couple of years, given the cushion from the equity offering, is there a long-term FFO-to-debt target we should think about, and the thinking behind wanting to be sizably above whatever the downgrade threshold might be for your A rating? Ann Kelly: Thanks, Alexis. As we mentioned, we do plan to delever over the five-year plan, with the target being to get into the A flat rating, which is comparable to our competitors. Right now, S&P’s upgrade threshold is a 15% FFO-to-debt level, so we would need to be north of that. We expect to be there by the end of the five-year period. Moving to an A flat credit rating gives us flexibility. Overall, we are very committed to our A category rating, currently at A-, but building that up to an A flat gives us flexibility if we were to pursue an acquisition or other transactions in the future, to be able to do so while still maintaining the A category rating. Andrew Walters: Thank you, Alexis. Operator: Thank you. Our next question comes from the line of a Baird analyst. Your line is now open. Analyst: Andrew, Bruce, thank you so much. Excited to be joining your analyst community, and thank you for taking our questions. Two for me. First on QuadVest: could you talk about the final steps needed to close, any risks you see to the timeline, and whether any small deviations—thinking months—would pose any risk to your timing for potentially filing the Texas rate case application next year? Andrew Walters: I will have Bruce take that question. Thank you. Bruce Hauk: Thank you for the question. We are super excited about the major hurdle we most recently cleared, which was being deemed administratively sufficient. That step allows us to issue notice to customers of the acquisition and kicks off a process that allows us to set the 120-day procedural schedule with the commission. When we announced this acquisition, we filed notice for the FMV and then proceeded with filing over 7 thousand pages in the STM process, and to have had a roughly 60-day examination to be deemed administratively sufficient is a significant achievement. As things proceed, that moves us from a mid-2026 close to sometime in the latter half of 2026. All commissions are inundated with dockets—Texas is no exception—so we will work with the commission in partnership to prosecute the STM. We are on track for late 2026, barring significant exceptions in terms of delays that may come up in the process. So far, so good, and we are planning to close in the latter part of 2026, barring unforeseen issues from intervenors or commission staff timing due to their docket load. We are very happy with the process thus far and the engagement by the commission and staff. Andrew Walters: I think that is an important point to highlight. When anyone receives that volume of documents to review, they are not going to scrimp on their process. It just means they have to work very hard to get through it, and from our standpoint, we have nothing but gratitude for the hard work that the staff is putting into this. Analyst: That is super helpful, thank you both. One other if I could: the EPA has been talking more about regulating microplastics and other potentially harmful substances in drinking water. It took a couple of years to move forward on PFAS, so it is still early. Have you thought about whether treating for PFAS would also treat some of these other substances, or could this be a tailwind to increased capital deployment longer term? How should we think about this in the context of your planned capital deployments? Bruce Hauk: Thank you for that question. We are very engaged in the EPA process. To level set, the six constituents that are PFAS-regulated with MCLs—we are on track to make the improvements needed in Connecticut and California to achieve compliance. The new list of compounds is at an early stage, and the rulemaking process is lengthy. Our partnerships with the Water Research Foundation, EPA, and NAWC allow us to be a meaningful part of that process. As to whether ion exchange or GAC used for PFAS mitigation have ancillary benefits: absolutely. On microplastics, our Director of Water Quality based at our San Jose Water operation is conducting a pilot through the Water Research Foundation at our Montevina plant on microplastics to inform the science behind how to eliminate, treat, and remediate microplastics. We are very much in the research and participating in the process that will help our company and the industry as a whole as we work through rulemaking. Andrew Walters: It is good that Bruce highlights the team. We get the honor of telling the story, but the work done in the field is nothing short of amazing. Suzanne DeLorenzo, whom Bruce mentioned, is one of those amazing partners driving progress in our company and putting us at the forefront of issues that impact the entire industry, not just us. Analyst: Super helpful. Thanks for the time. I will pass it on. Operator: As a reminder, to ask a question, please press star 11 on your telephone. I am showing no further questions at this time. I would now like to turn it back over to Andrew Walters for any closing remarks. Andrew Walters: Thank you again for joining us today. H2O America proudly leverages our national platform to support our distinct local operations, all united by a shared mission: delivering reliable service and high-quality water to 1.6 million people across four states. Together, we protect what is precious. At the same time, we continue executing our growth strategy and delivering shareholder value, including our unwavering commitment to the dividend, which we have paid for more than eighty consecutive years and increased in each of the past fifty-eight. I am always available for follow-up, along with my partners, Ann and Bruce. We appreciate your interest in H2O America. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello everyone. Thank you for joining us and welcome to the CTS Corporation First Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. I will now hand the conference over to Kieran O'Sullivan. Kieran, please go ahead. Kieran O'Sullivan: Good morning, and thank you for joining us today. I am pleased to report a solid 2026 for CTS Corporation with diversified sales up double digits as we continue to execute our diversification strategy. We also saw strong bookings momentum in the industrial and medical markets. In transportation, we see stability in revenue with modest growth in the first quarter. Overall, with growth in key end markets and solid execution, we believe the company is well positioned to deliver on its strategic objectives. Ashish Agrawal, our CFO, will take us through the safe harbor statement and later through our financials. Pratik Trivedi, our COO, will provide an update on the progress in each of our end markets. Ashish? Ashish Agrawal: I would like to remind our listeners that this call contains forward-looking statements. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in the press release issued today, and more information can be found in the company's SEC filings. To the extent that today's discussion refers to any non-GAAP measures under Regulation G, the required explanations and reconciliations are available with today's earnings press release and the supplemental slide presentation which can be found in the Investors section of the CTS Corporation website. I will now turn the discussion back over to our CEO, Kieran O'Sullivan. Kieran O'Sullivan: Thank you, Ashish. We finished the first quarter with sales of $139 million, representing a solid 11% increase compared to 2025. Our diversified end markets were up 18%. Transportation sales grew 3%. Our book-to-bill ratio for the first quarter was 1.1, up 4% compared to 2025. Looking at bookings performance, industrial bookings were strong, driven by stabilized OEM demand and the recovery in distribution. Medical bookings showed robust growth driven by continued strength in diagnostics and therapeutic applications. In aerospace and defense, we continue to have a robust pipeline of opportunities even as bookings were down compared to last year, as funding on various programs is expected to improve in the second half. We added two new customers in the defense market. In transportation, we secured several new business awards including current sensing in Europe, and a larger award for foot controls with a European OEM in early April. We also added a new customer in the transportation market. Our operational execution was evident as we expanded gross margin by 250 basis points in the first quarter. We maintained strong cash flow generation, supporting our balanced capital allocation approach that includes strategic investments in growth and returning cash to shareholders. First quarter adjusted diluted earnings were $0.62 per share, up from $0.44 in 2025 as we continue to focus on driving profitable growth. Ashish will add further color on our financial performance later in today's call. Turning to the outlook for 2026, for our diversified end markets, demand is expected to be solid. In the medical market, we see continued momentum in therapeutics where we have expanded capacity. In aerospace and defense, revenue is expected to grow given our backlog and the normalization of government funding. Industrial OEM and distribution sales are expected to be solid. We continue to monitor the potential economic impact of the current geopolitical conflicts for the second half of the year. Longer term, we expect our material formulations, supported by three leading technologies and their derivatives, to continue to drive our growth in key high-quality end markets in line with our diversification strategy. Across transportation markets, production volumes are expected to be down given the current geopolitical uncertainties and the potential impact on the economy. Global light vehicle volumes from IHS were recently forecasted to soften. The North American light vehicle market is expected to be in the 15 million unit range. European production is forecasted to be in the 16 million to 17 million unit range. China volumes are expected to be in the 32 million unit range. We continue to monitor potential impact from the geopolitical situation, supply chain issues related to petroleum products, especially resin, and other components such as rare earth metals and semiconductors. We anticipate commercial vehicle demand to improve in the second half of the year. We are closely evaluating the Section 232 tariff changes and focusing on agility and adapting to cost and price adjustments in close collaboration with our customers and suppliers. Our strong balance sheet, healthy cash generation, and experienced teams provide us with the tools necessary to manage these headwinds while continuing to invest in growth opportunities and also advancing innovation. Our increasingly diversified business model continues to enhance our growth and quality of earnings. Assuming the continuation of current market conditions, for full year 2026, we are narrowing our sales guidance to the range of $560 million to $580 million and adjusted diluted EPS to be in the range of $2.35 to $2.45. Now I will turn it over to Pratik, who will walk us through the end market performance. Pratik? Pratik Trivedi: Thank you, Kieran. Our medical end market delivered strong performance in the first quarter with sales of $25 million, up 28% versus the prior year period, reflecting a sustained growth momentum across our medical portfolio, particularly in therapeutic applications where we see robust demand. Bookings in the quarter were up 18% compared to the prior year period. The book-to-bill ratio for the first quarter was 1.2, reflecting continued momentum in this market. We continue to see growth prospects in diagnostic imaging, aesthetics, and minimally invasive surgical systems where there is an increased demand for precision, reliability, and patient monitoring. Our precision sensors and transducers enable high-resolution imaging and precise energy delivery in applications, such as ultrasound and intravascular diagnostics, supporting early detection, better visualization, and more targeted patient treatments. In patient and medical equipment monitoring, our temperature and position sensors provide high accuracy and stability supporting reliable vital sign measurement and device performance over extended life cycles. Our therapeutic products enhance skin lifting and tightening through noninvasive aesthetic treatments that significantly improve patient experience over alternative procedures. During the first quarter, we had multiple wins across all regions for medical ultrasound and a large win for a noninvasive aesthetics application. Demand remains robust for ultrasound imaging and strong for therapeutic products. Knowing that our products support technologies used to save lives is central to our purpose in the medical market. These mission-critical healthcare applications demand uncompromising quality and reliability, reinforcing our commitment to continuous innovation and operational excellence. With an aging population and innovations in healthcare supported by CTS Corporation products, the medical market will continue to enhance our growth profile. Aerospace and defense sales for the first quarter were $17 million, up 11% compared to the previous year. Book-to-bill ratio was less than one. We expect defense bookings to pick up during the rest of the year. Our pipeline of new opportunities remains strong, with backlog levels supporting future growth. Undersea warfare and surveillance are critical elements of modern defense strategy, requiring advanced sensing technologies to detect, track, and classify increasingly quiet and sophisticated underwater threats. CTS Corporation supports this domain through high-performance piezoelectric sensors, transducers, and subsystems that convert acoustic signals into actionable intelligence. Our RF and EMC filters are mission-critical components in defense electronics, ensuring signal integrity and electromagnetic compatibility in secure communications, radar, missile control, and avionic systems. Our products also support unmanned systems and satellite platforms that rely on highly efficient, lightweight technologies to operate in extreme environments with limited power. During the quarter, we were awarded a significant underwater hull penetrator business win with a potential contract value of around $20 million over a five-year period. We also registered multiple wins in the quarter for naval sonar and filter applications with several customers. In the quarter, we added two new customers for RF filters specializing in providing secure communications, SATCOM connectivity, and anti-jamming applications. We are deeply engaged across multiple customer platforms and expect the government funding cycles to start to normalize in 2026 and the funds to flow through with the enactment of the full-year appropriations bill in February. Industrial end market performance remained strong, with first quarter sales of $37 million, representing 14% year-over-year growth and supporting the broader recovery trend underway since 2025. Bookings in the quarter were up 28% from the same period last year, reflecting stable growth from our OEM customers as well as distribution partners. The book-to-bill ratio was 1.29 compared to 1.15 in 2025. We were successful with multiple wins across a diverse range of industrial applications in the quarter, including distribution components, industrial printing, and flow meter applications where our products help in accurately measuring the flow of liquids and gases in industrial systems. We also saw solid momentum in temperature sensing with wins in heat pumps, pool and spa systems, and commercial appliances. These applications underscore our role in enabling more energy-efficient and optimized industrial systems. Industrial demand is expected to remain strong in 2026, supported by secular tailwinds including automation, connectivity, and digitization. At the same time, the push for higher energy efficiency and continued manufacturing automation is expanding the addressable opportunity for our advanced sensing technologies. Transportation sales in the first quarter at $60 million represent a 3% growth over the same period last year and a 7% sequential growth quarter over quarter, which appears to demonstrate early signs of stability. Qualification of our next-generation smart actuator across our customers' platforms is progressing, and we plan to implement further product enhancements later in 2026. Our new business wins in the quarter were a good mix of sensors and foot control solutions across a diverse set of customers. We added an accelerometer to our sensors product portfolio with an award from a North American OEM, supporting safety, dynamics control, ride comfort, and advanced driver assistance systems. We gained a new customer with our current sensing solution, where our products measure the flow of electrical current in vehicle systems to enable safe, efficient, and reliable operation. As vehicles become more electrified and software controlled, current sensing has become a core enabling technology across higher voltage platforms. In the quarter, we secured multiple wins across the foot controls portfolio with OEMs in China, Japan, Europe, and North America. Overall, we continue to strengthen our footwell presence while broadening our sensing portfolio with powertrain-agnostic capabilities that support multiple vehicle architectures. Total booked business was approximately 1.1 billion at the end of the quarter. Over the long term, electronic braking remains a compelling opportunity as ADAS, vehicle electrification, and autonomous capabilities continue to advance. Our products deliver meaningful cost and weight benefits, which are increasingly important for OEMs managing performance, efficiency, and affordability trade-offs. We remain confident in the long-term growth outlook for our footwell product along with our expanding sensor portfolio. Based on recent IHS forecasts, the global light vehicle market is expected to be slightly down for 2026. The commercial vehicle market is expected to grow based on rising freight rates, improving spot and contract pricing, and pre-buy related to emission regulation changes in 2027. Now I will turn it over to Ashish, who will walk us through the financials in detail. Ashish Agrawal: Thank you, Pratik. First quarter sales were $139 million, up 11% compared to 2025 and up 1% sequentially from 2025. Sales to diversified end markets increased 18% year over year, and sales to transportation customers were up 3%. Foreign currency changes impacted sales favorably by $3 million in the first quarter. Our adjusted gross margin was 39.5%, up 250 basis points compared to 2025 and up 40 basis points sequentially. The year-over-year improvement in gross margin was driven by operational improvements and the favorable impact of end market mix. Gross margin was also favorably impacted by 700 thousand due to foreign currency changes. We are monitoring the impact of Section 232 tariff changes on steel and aluminum, inflation in precious metals, and cost increases due to higher oil prices. Our teams are already working to mitigate these impacts and are partnering with customers and suppliers towards the goal of keeping the effect on our margins cost neutral. Our tax rate for the quarter was 20.7%, slightly better than expected due to the mix of earnings and certain discrete items. For the full year, we expect our tax rate to be in the range of 21% to 23%. Earnings per diluted share for the first quarter were $0.59 compared to $0.44 for the same period last year. Adjusted earnings for the first quarter were $0.62 per diluted share compared to $0.44 per diluted share for the same period last year. Moving to cash generation and the balance sheet, we generated $17 million in operating cash flow for 2026 year to date. Our cash balance was $91 million, and borrowings were $63 million from our credit facility at the end of Q1 2026. During the quarter, we purchased 177 thousand shares of CTS Corporation stock totaling approximately $9 million. In total, we returned $10 million to shareholders through dividends and share buybacks in 2026. We have another $82 million remaining under our current share repurchase program. We remain focused on strong cash generation and appropriate capital allocation. With a strong balance sheet, we continue to support organic growth, strategic acquisitions, and returning cash to shareholders. This concludes our prepared comments. We would like to open the line for questions at this time. Operator: We will now open the call for questions. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of John Franzreb with Sidoti & Co. Your line is open. Please go ahead. John Franzreb: Good morning, everyone, and congratulations on another great quarter. I would like to start with the quarter itself that we just completed. A couple really quick questions here. The revenue was better than I expected. I am just curious if any jobs revenue got pulled forward into the first quarter from the second? Did anything like that happen in the period? Kieran O'Sullivan: No, John. It was a really good quarter. Nothing pulled forward. John Franzreb: Got it. Got it. Well, then looking back at maybe some of these numbers, I am curious if the gross margin profile differential between some of the diversified end markets—I guess we can include the transportation end market—is it significant that we should really be cognizant of if, you know, medical is sizably better versus A&D? You know, how should we think about the puts and takes by end market? Ashish Agrawal: Yeah. John, in previous discussions, we have talked about our margin profile. In the diversified end markets, we have a much better margin profile compared to transportation. And as we have talked about, we have pretty good margins on the transportation side as well, but the diversified markets are better. Within the diversified markets, it is more, I would say, less evenly—it is not as widely spread. So medical is definitely the strongest end market in terms of margin profile, but we do well in pretty much all the diversified end markets. John Franzreb: Okay. So industrial is relatively close to medical, is what you are saying, Ashish? Ashish Agrawal: There is not a big variation in the margin profile among the diversified end markets. Medical is definitely the strongest one. Yes. John Franzreb: Okay. And the reason I am getting to all these questions here is I looked at the incremental operating contribution in the quarter, and it came to roughly 44% if I did the back-of-the-envelope math right. I thought that was rather astonishing. And looking at the revenue profile, to me, it kind of lent itself that medical was the primary driver. I just want to be sure if I was thinking about this properly, you know, thinking about incremental margin profile properly. I am wondering any thoughts about my conclusions here? Kieran O'Sullivan: No, John. I think the way to look at it is, as Ashish gave you the color on medical, the way to look at it is with our strategy, we have always said as we grow diversified markets, quality of the earnings will improve, and that is what you are seeing here. John Franzreb: Right. Right. Okay. Another quick question. It still looks like debt ticked up in the quarter. Why was that the case? Ashish Agrawal: So, John, in the first quarter, we typically have lower operating cash flow as we do incentive comp payments and those types of things. We also continued our buybacks in the first quarter. So the combination of those two things and a slightly higher CapEx than we normally expect, those are the key drivers. The debt was up by about $5 million. But compared to where we are overall, we are continuing to make good progress. We have almost fully paid down the borrowings from the SyQuest acquisition at this point. John Franzreb: Right. Right. Okay. I think I have monopolized the call enough. I am going to get back in the queue. Thank you, guys. Kieran O'Sullivan: Thanks, John. Operator: Your next question comes from the line of Hendi Susanto with Gabelli Funds. Your line is open. Please go ahead. Hendi Susanto: Good morning, Kieran, Ashish, and Pratik. Congrats on good results. My first question is you mentioned capacity expansion in medical, and I would like to get more color in terms of how much more, and if there are any statistics like up to how much sales you can take—that would be helpful. Pratik Trivedi: Sure. Thank you, Hendi, for the question. The capacity in our medical end market primarily refers to our aesthetics application. We have strong partnerships with some of the customers here where they give us a long-term forecast, and we are able to install capacity ahead of the demand. We continue to see strong momentum in this end market, and we are expecting double-digit growth year over year. Hendi Susanto: Double-digit growth in capacity or in sales? Pratik Trivedi: In sales, which means that we would need to have that capacity installed ahead of it. And we are not seeing any concerns in our capability to meet the demand profile that we are seeing in that space. Hendi Susanto: I see. And then, Ashish, I have a question on the gross margin. So there is some mix benefit, and the non-transportation or the diversified end market is a favorable tailwind. On the other hand, there is also the challenge of high oil prices and component costs. How sustainable is the strong gross margin that we are seeing in Q1? Should we expect some headwinds because of those challenges? Or do you anticipate that Q1 gross margin can serve as a baseline that is sustainable? Ashish Agrawal: Hendi, that is a good question. That is something that we look at very, very carefully. In addition to the topics that you mentioned, we also had a slight impact from favorable currency changes, which was about 700 thousand. Currency can go in multiple different directions, so we will just continue watching the markets for that. We are experiencing cost pressures related to precious metals that have been going on since late last year, and we have been working closely with our customers to manage through the impact of that with pricing changes and materials, those types of things. More recently, we are also seeing inflation related to oil-derived products like resin, epoxy, transportation costs, those types of things. We are expecting to see more cost pressures from late Q1 going into Q2, and our teams are already working with customers to manage through that, as well as with suppliers. So we will see some headwinds, but at the same time, we are very, very focused on making sure that we can make the impact cost neutral on our margins. There can be some timing differences which could impact margins in the short term, but we expect to be able to work through it as we have in the past several years. Hendi Susanto: Okay. And then may I ask more insight into the aerospace and defense expectations of funding? Various programs will improve in the second half. Booking will pick up. Considering the government fiscal calendar ending in September, how should we expect new bookings and new funding to materialize in sales? I assume there would be some lag. I do not know whether a Q4 starting point is somewhat a reasonable expectation. Pratik Trivedi: Yeah, Hendi, for the aerospace and defense end market and just looking at the broader macro trend, overall, defense spending will continue to remain elevated due to the current geopolitical unrest as well as investments in the infrastructure, primarily around the naval side of defense. What we are seeing right now is we are actively engaged in multiple platform discussions with a wide range of customers. However, what we experienced in the first quarter is a delay in government funding. But towards the end of the quarter, with the passage of the appropriations bill, we expect that funding pace to pick up in the second half of this year. The other point to note is that we usually also have a bit of lumpiness in terms of how we get the orders on the defense side. So you could potentially have a quarter where our book-to-bill might be less than one; however, then it makes it up in the remainder of the year. Hendi Susanto: Yep. And then last question for me. Any update on the smart actuator and potential change in allocation by the customer? Pratik Trivedi: Hendi, we continue to be on track with launching the revised version of the actuator with our customer, and we expect normalized modest growth in that particular product line for this year. Hendi Susanto: Okay. Got it. Thank you. Kieran O'Sullivan: Great. Thanks, Hendi. Thanks, Hendi. Operator: Your next question comes from the line of John Franzreb with Sidoti & Co. Your line is open. Please go ahead. John Franzreb: Yeah. I am actually curious about the growth that you saw in the transportation market in the first quarter. Firstly, were you surprised by that? Kieran O'Sullivan: John, I would say we were pleased with how we performed in the light vehicle demand and saw a little bit more positiveness in the commercial vehicle. We think, as Pratik said, that is going to extend into the second half of the year. John Franzreb: As I am sure you have seen, the commercial truck market has seen a strong bookings profile over the last few months. A lot of people are suggesting that the benefits from those order profiles are a second-half event. I am curious if that is how you see it playing out or if it affects you in any different way? Pratik Trivedi: No, we do see it playing out the same way, John. In the market right now, we are seeing cautious optimism here, primarily related to rising freight rates, improved pricing, and then we have, in the second half of the year, the pre-buy event due to EPA 2027. So we expect it to play out in a very similar manner. John Franzreb: Okay. So second half. Gotcha. So then the expectation for the market to be down for the full year—I am gathering that suggests you expect the global vehicle market to continue to weaken for the balance of the year. Is that also a fair assessment? Kieran O'Sullivan: John, what we would say on the light vehicle market is it is performing well so far. But in our prepared remarks, we said IHS had forecast some softness in the second half of the year. With the geopolitical situation, that is how we are thinking about it at the moment—some softness in light vehicle, strength on the commercial vehicle side—so balancing it out a little bit. John Franzreb: Got it. Got it. Okay. And one last question about capital allocation. You are buying back stock. As Ashish pointed out, you are paying down debt, albeit there were working capital needs in the first quarter. What is the outlook right now on the M&A side of the business? Are you in a period of consolidation and working on organic growth, or are you still looking at acquisitions? Can you discuss maybe the size of the markets that you are looking at? Kieran O'Sullivan: Yes, John. The key points for us from capital allocation, first of all, are supporting the organic growth investments, which we have some nice opportunities in, which Pratik touched on as well in medical; still pursuing strategic acquisitions to advance our diversification and quality of earnings—while we have nothing to report today, we are very active in that area; and then returning cash to shareholders is how we are approaching it. John Franzreb: Okay, Kieran. That is all I have. Thanks for taking the questions. Ashish Agrawal: Thank you, John. Operator: There are no further questions at this time. I will now turn the call back to Kieran O'Sullivan for closing remarks. Kieran O'Sullivan: Thank you. Thank you all for your time today. Diversification remains a strategic priority to drive growth and margin expansion. In addition, we are expanding in vehicle powertrain-agnostic solutions. We are guided by our Evolution 2030 strategic initiative to enhance our emphasis on growth, operational rigor, and employee engagement, while also giving back to the communities where we operate. We look forward to updating you on our second quarter 2026 results in July. This concludes our call. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Garmin Limited First Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. [Operator Instructions] I will now hand the conference over to Teri Seck, Director of Investor Relations. Teri, please go ahead. Teri Seck: Good morning. We'd like to welcome you to Garmin Limited's First Quarter 2026 Earnings Call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations site on the Internet at www.garmin.com/stock. An archive of the webcast and related transcript will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, segment growth rates, earnings, gross margins, operating margins, future dividends or share repurchases, market shares, product introductions, foreign currency, tariff impacts, future demand for our products and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur, and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Ltd. this morning are Cliff Pemble, President and Chief Executive Officer; and Doug Boessen, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pemble. Clifton Pemble: Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin achieved remarkable financial results during the first quarter of 2026 in a continuation of the positive trends we've been experiencing over the long term. Consolidated revenue increased 14% to $1.75 billion, which is a new first quarter record. We achieved double-digit growth rates in 3 segments, and we experienced strength in many product categories across the business, including wearables, which were a significant contributor to consolidated growth. Gross and operating margins expanded to 59.4% and 24.6%, respectively, resulting in record first quarter operating income of $432 million, up 30% year-over-year and pro forma EPS of $2.08, up 29% year-over-year. We're off to a great start in 2026, and we are very pleased with our results. As a reminder, the first quarter is typically the lowest seasonal quarter of our financial year. While the initial trends are encouraging, much of the year remains ahead. With this in mind and consistent with our typical practice, we are maintaining the guidance issued in February, and we'll provide updates as the year unfolds. Doug will discuss our financial results in greater detail in a few minutes, but first, I'll provide a few remarks on the performance of each business segment. Starting with fitness. Revenue increased 42% to $547 million, which is a new first quarter record, driven by broad-based growth across all product categories, led by strong demand for advanced wearables. The primary driver of our performance is higher unit volumes, resulting in meaningful market share gains. Gross and operating margins were 62% and 29% respectively, resulting in operating income of $158 million. During the quarter, we launched the Varia RearVue 820, our brightest and most powerful radar tail light for cyclists. We expanded on-device messaging for select wearables with a new Connect IQ app that allows customers to read, reply and react to WhatsApp messages right from their wrist. We also announced that select wearables can now integrate with the highly acclaimed Natural Cycles birth control and Cycle Tracking app, empowering women to better understand and manage their reproductive health. The Fitness segment has achieved outstanding performance over the long term, and we are very pleased with these results. As mentioned in February, we expect that the Fitness segment will be the strongest contributor to 2026 consolidated growth. Moving to Outdoor. Revenue decreased 5% to $418 million as we compared against a strong prior year quarter, which included the launch of the Instinct 3 smartwatch family. Fenix smartwatches performed well during the quarter, even considering the strong comparable from the prior year. Gross and operating margins were 67% and 28%, respectively, resulting in operating income of $119 million. During the quarter, we released the Approach G82 handheld GPS with a built-in launch monitor and the Approach J1, our first GPS watch specifically designed for junior golfers. The Approach J1 was created by Garmin Associates who through their own experiences, recognize that aspiring junior golfers also want tools designed specifically for them to learn the game and improve performance. I'm proud of the way that our teams lean on their own experiences to bring unique, highly differentiated products to market. Also during the quarter, we launched the zumo XT3, our newest and most advanced motorcycle-focused GPS device and the Catalyst 2, a compact device for motorsports that helps high-performance drivers achieve faster times on the track. Looking forward, we expect second quarter outdoor performance to be similar to that of Q1. We also expect to achieve stronger performance in the back half of the year due to the timing of product launches, resulting in improved full year growth when compared to 2025. Looking next at Aviation, revenue increased 18% to $264 million with growth contributions from both OEM and aftermarket product categories. Gross and operating margins were 75% and 27% respectively, resulting in operating income of $71 million. During the quarter, Daher unveiled their new TBM 980 single-engine turboprop aircraft featuring our G3000 PRIME avionics suite. Also, the Hondajet Elite II was certified by the FAA, becoming the first twin turbine business jet with Garmin Emergency Autoland technology. We are very pleased with the performance of aviation during the first quarter, and we expect to achieve solid growth throughout the remainder of the year. Turning to the Marine segment. Revenue increased 11% to $355 million with broad-based growth across multiple product categories. Gross and operating margins were 56% and 26%, respectively, resulting in operating income of $91 million. The year-over-year margin compression was primarily due to higher tariff costs. During the quarter, we launched a new 360-degree scanning sonar with Spy pole, allowing anglers to see a bird's eye view of fish and underwater structure in every direction. Also during the quarter, we launched the quatix 8 Pro, our purpose-built nautical smartwatch with inReach technology for 2-way satellite and cellular connectivity. Our Marine segment is off to a very good start, and we believe we are on track to achieve growth consistent with the prior year. And moving finally to the auto OEM segment. Revenue increased 1% to $170 million with growth primarily driven by infotainment programs. The segment operating loss narrowed to $6 million due to gross profit improvement and lower R&D expenses. We continue to achieve important milestones leading up to the launch of our next large-scale program with Mercedes-Benz, which we anticipate will drive significant growth starting in 2027 and beyond. As a reminder, we expect auto OEM revenue to decrease in 2026 as the BMW program has reached peak volumes and as certain legacy programs approach end of life. We also expect the operating loss to narrow compared to 2025, although we are not expecting the segment to be profitable on a GAAP basis for the full year. Wrapping up, we continue to outperform expectations in a business environment characterized by economic whiplash and geopolitical uncertainty. Even in these challenging circumstances, we believe that great products and customer service always win. As strong as our product line currently is, we are planning to launch even more new products throughout the year, including some that represent new categories for Garmin. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug? Douglas Boessen: Thanks, Cliff. Good morning, everyone. I'll begin by reviewing our first quarter financial results, provide comments on the balance sheet, cash flow statement and taxes. We posted revenue of $1.753 billion for the first quarter, representing a 14% increase year-over-year. Gross margin was 59.4%, a 180 basis point increase from the prior year quarter. The increase was primarily due to favorable foreign currency impacts. Also for your reference, [we do not record] any benefit or receivable related to any potential refund of previously paid tariffs. Operating expense as a percentage of sales was 34.8%, 110 basis point decrease. Operating income was $432 million, a 30% increase. Operating margin was 24.6%, a 290 basis point increase over the prior year quarter. Our GAAP EPS was $2.09, and pro forma EPS was $2.08. Next, we look at first quarter revenue by segment and geography. During the first quarter, we achieved double-digit growth in 3 of our 5 segments, led by the Fitness segment with 42% growth, followed by the Aviation segment with 18% growth, and Marine segment with 11% growth. By geography, we achieved growth in all 3 regions, led by 25% growth in APAC, followed by 15% growth in EMEA and 10% growth in Americas. EMEA and APAC regions benefited from favorable foreign currency impacts. Looking next at operating expenses. First quarter operating expense increased by $59 million or 11%. Research and development increased approximately $28 million. SG&A increased approximately $31 million compared to the prior year quarter. Both increases were primarily due to personnel-related expenses. A few highlights on the balance sheet, cash flow statement and taxes. We ended the quarter with cash and marketable securities of approximately $4.3 billion. Accounts receivable increased year-over-year due to strong sales, but decreased sequentially to $941 million following a seasonally strong fourth quarter. Inventory increased year-over-year and sequentially to approximately $1.9 billion. During the first quarter of 2026, we generated free cash flow of $469 million, a $9 million increase from the prior year quarter. Capital expenditures for the first quarter of 2026 were $67 million, approximately $27 million higher than the prior year quarter. During the first quarter of 2026, we paid dividends of approximately $174 million, purchased $40 million of company stock. At quarter end, we had approximately $491 million remaining share repurchase program, which is authorized through December 2028. For an effective tax rate of 14.3%, which is comparable to 14.5% in the prior year quarter. This concludes our formal remarks. Ben, can you please open the line for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Joseph Cardoso with JPMorgan. Joseph Cardoso: Maybe for my first question, can we just double-click on the performance, the strong performance in the quarter, both from a revenue and gross margin perspective. Cliff, it sounds like you're cautiously optimistic about the year despite kind of sticking to the typical full year guidance practice here. So maybe can you just touch on what is reinforcing that view, for example, how did demand momentum trend through the quarter and into 2Q to date? And then as you think about kind of the component cost and availability trends that we talked about last quarter, how did that trend through the quarter? And any change in view relative to your ability to navigate those dynamics versus 90 days ago? And then I have a follow-up. Clifton Pemble: Yes. Joe, I think, as I mentioned, we're very pleased with the initial results. Q1 does tend to be our lowest quarter. So we take it as a data point, but we definitely need to see more of the year unfold before we can really start to tweak what our 2026 results expectation will be. In terms of demand trends, they're consistent, continue to be very strong, like we saw in the prior year. Registration rates are continuing to be strong. We have not seen any impact from some of the recent developments in the Middle East and some of the conflict there when it comes to registration rates. In fact, some of them are the strongest that we've been experiencing in the near term. So no worries there for the near term. Component costs wise, I would say that right now, we are not experiencing that in our current results. But keep in mind that component costs come through our inventory on the balance sheet. So consequently, as costs change, we'll see some of those go up as the year unfolds. We do have significant safety stock of some components that are under pricing pressure. So I would expect that 2026 is still going to be somewhat muted, and we'll start to see some effect in 2027. Joseph Cardoso: Got it. Great color there, Cliff. And then maybe for my second one, and this is perhaps a bigger picture question. Over the last 6 months or so, we've seen a couple of private wearable companies complete successful funding rounds, disclose healthy revenue trends. And I think both are pursuing a somewhat different approach, both in terms of form factors and perhaps a more aggressive push into subscriptions or hardware-as-a-service models relative to incumbents like yourselves, so just given that, maybe just curious to hear your thoughts on how you're assessing the competitive implications just given that different approach being taken by these challengers. And maybe alternatively, do you see this as more of a market expanding dynamic potentially that could open the door for you to evolve how your own monetization approach is taken over time? Clifton Pemble: Yes. I would say that if there's anything that we've learned over the years is that customers want choices when it comes to devices, especially those that they wear. So that's what we're seeing, I think, in the market today is an expansion of options for people. And for us, again, we're -- we don't rule anything out. We're open to all kinds of devices and form factors in how we deploy our wearable sensor technology. So I would say that, again, we see this as expanded opportunity for everyone. And I would point out that our results also reflect the general increase in the market and awareness and use of wearable devices for both fitness activity as well as wellness monitoring. In terms of subscription-based models, I would remind everyone that we have been expanding our role in subscription-based services for our products. In the services that we offer for those with Garmin Connect Plus as well as other services that we have in segments across the business. And so it's an area of enhanced focus for us as well. Operator: Your next question comes from the line of Tim Long with Barclays. Tim? Alyssa Shreves: This is Alyssa Shreves, on for Tim Long. Just a few quick questions. It sounded like you said strong demand for advanced wearables in the quarter. What are you seeing in the lower tier of the portfolio? Is there anything kind of -- are you seeing a dispersion in customer trends between the 2? And then I have a follow-up. Clifton Pemble: Yes. So when we talk about advanced wearables, we're really talking about those wearables that have GPS and the ability to download applications and that kind of thing. And really across our wearable price bands, all of those products pretty much qualify in that category. It's really the very basic kind of wearable bands like our vivosmart line that aren't considered advanced wearables, but those are a small part of our portfolio. So within advanced wearables, we have many different price tiers from entry level on through to premium, and we're definitely seeing strong demand, both at the low end and the high end of those ranges. Alyssa Shreves: That's helpful. And then just a quick question on the GEOS. I know the commentary on the call about the FX with EMEA and APAC. But in the Americas business, is there anything to call out in the GEOS, anything you're seeing there in customer trends? Clifton Pemble: No, I don't think there's anything particular at this point to call out. There are a lot of dynamics in the geographies right now, the geopolitical spectrum. And so time will tell, but initial indications are that some of the initial kind of bumps that occur whenever there's a big change like that have evened out and people are starting to get back to kind of normal patterns. So right now, I would say we're encouraged by what we see. But again, it's a very dynamic environment. Operator: Your next question comes from the line of David MacGregor with Longbow Research. David S. MacGregor: I wanted to ask about the new product introduction because it seems as though there was maybe a stronger-than-normal new product quarter. I wonder if that's true. And if so, can you just talk about the impact on growth and margins from -- just strictly from new product launches? Clifton Pemble: I think we typically release somewhere around 100 new products a year, and we would expect that 2026 is in line with that, if not slightly stronger as we look at some new things. In terms of margin profiles, new products are the ones that come out and they're fresh design. So they have all the latest components and design optimizations that we do. And they also -- if they have new features and capabilities and segmentation in the market, we can typically bring them out at appropriate prices for their particular competitive landscape. So they can be a margin enhancer. But in general, we rely on new products to really drive revenue growth within the company. David S. MacGregor: Right. And just to clarify on that, do we see maybe a slightly larger proportion of the reported revenues being generated from new products versus what we might have otherwise seen in prior years? Clifton Pemble: No, I would say it's historically consistent with what we've seen. Again, we're very consistent with product introductions, which means that generally, our revenue mix from new products tends to be pretty similar from year-to-year. David S. MacGregor: Okay. Good. And just as a follow-up, I wonder, you talked about the auto OEM business and the transition between the BMW and the Mercedes programs. Can you just help us think through kind of the -- how you're thinking about the cadence of revenues in 2026 leading into the ramp of that Mercedes early 2027? Clifton Pemble: As we mentioned in the remarks, we expect that 2026 would be a slightly down year compared to previous year because of the ramp down of the BMW program, which is starting to -- its tail off cycle into phase out. And then 2027 should be a ramp-up year for the Mercedes program. David S. MacGregor: You were flat in this quarter. Do you expect to be flat in 2Q and then see that revenue gap become more visible? Or do we see that begin in 2Q? Clifton Pemble: Yes. I would say probably not able to share the specific dynamic of Q2 just yet. But again, for the whole year, we definitely expect the long-term forecast that we're receiving would result in a slightly down year for auto OEM in 2026. Operator: Your next question comes from the line of Ben Bollin with Cleveland Research. Benjamin Bollin: I wanted to start, could we discuss a little bit in aviation. Could you discuss what you're seeing with respect to demand around new deliveries versus the retrofit opportunities? And any thoughts on order volume with bonus depreciation and what that's doing to backlog? And then I have a follow-up. Clifton Pemble: I think the new deliveries are definitely a strong contributor to the growth, stronger than the aftermarket side, although both contributed to the growth. Aviation aircraft makers are sitting on high backlog still. And so consequently, their volumes and cadence tend to be -- tend to move slowly as they work through backlog, but their objective is not to clear out backlog. Their objective is to keep feeding backlog and to incrementally grow as well. So in general, we see it as a very healthy cadence in the OEM side of things and have not, at this point, heard of any indications that people are hesitating around the purchase of new aircraft. Benjamin Bollin: Okay. The other -- Cliff, you talked a little bit about thoughts on the commodity environment and how that looks this year and even into next. I guess bigger picture, how are you thinking about the overall balance sheet and working capital strategy with that backdrop? Has it changed? Any thoughts around working capital commits, more strategic procurement? Anything along those lines that you guys are thinking about that you can share? Douglas Boessen: Yes. As it relates to our balance sheet and inventory, we look at inventory really as a business tool for us. Depending upon the situation, we'll look at that to increase our safety stock for key components as such. And also, obviously, demand of our product, we have to take that into consideration. But it's really a key part of our overall operations is to make sure that we use that inventory appropriately to make sure we have products for when the customer needs it as well as to manage our full supply chain, including the commodities are out there. Operator: Your next question comes from the line of Erik Woodring with Morgan Stanley. Erik Woodring: Cliff, can we just get a very kind of high-level view from you on the state of the consumer, specifically the consumer that you guys kind of sell into? Just anything that is changing? I know you mentioned the Middle East conflict hasn't had any impact, but there's just a lot of kind of cross currents in the economy today. So I would just love your updated view on the state of the consumer. And maybe if you could tie into that. Just given your answer to that, maybe is there a specific segment or market where you maybe feel incrementally better about the year more than 90 days ago versus anywhere you feel maybe incrementally more cautious? Just if you could maybe tie those together and then a quick follow-up, please. Clifton Pemble: I would say that, Erik -- I would say that what we see of the consumer is pretty much the same as what we have seen over the past several quarters. There is a lot of public talk about how consumers are stressed. And certainly, we probably all have to believe that's true. At the same time, many of the banks and monitors of personal credit usage and spending seem to be very positive. People seem to be shaking off whatever their concerns are that they're voicing. For the customer base that we serve, we tend to serve those that place a high priority on their personal health and wellness as well as products for active lifestyles and mobility. And so we believe we're serving a customer base in a market that's probably a little more resilient than what the average reporting out there is. In terms of segments where we feel better or worse, I would say we're optimistic about all of them. I would say that if there's any area of concern when it comes to oil prices and conflict is that it can tend to give some of those markets like marine and aviation, a little more hesitancy as people think about fuel prices and investments there. The one thing I would think is a positive even in that backdrop is that the stock market and the financial markets have been very strong, and so that tends to offset any hesitation. So in general, it's a mixed bag, but I would say the environment and the scenario is really very good considering everything that's going on. Erik Woodring: Okay. That's super helpful. And then just as a quick follow-up. Cliff, you kind of alluded to leveraging your balance sheet in this commodity environment. Is the message that you're sending we will see costs going up in the second half and therefore, there will be some margin pressure, all else equal? Or given the illusion that costs or given that you're alluding to costs going up, how will you kind of protect margins with higher input costs? I just want to make sure I kind of understand the message as we go into the second half and in 2027. Clifton Pemble: Yes. As we mentioned, our -- we do have a lot of safety stock around some components that we've accumulated. And so the impact on our financials due to higher input costs at this point, we feel are well controlled in 2026, and we've included those in our outlook for our guidance. We're not at all starting to think about 2027 or issuing guidance from that but definitely people should expect that the higher input costs that are rolling their way through our inventory would start to appear more in 2027. So that's what we're seeing. I think for our business, definitely, the bill of materials is -- if you look at our margin structure, we have ways that we can offset some increases here and there with efficiencies in other areas. So we're going to work hard to protect those margins. It's not our goal to go backwards. But again, we are facing some headwinds because of the component environment. Operator: Your next question comes from the line of Ivan Feinseth with Tigress Financial Partners. Ivan Feinseth: Congratulations on another great quarter and a great start to the year. And for the number of new watches that you're making that incorporate, inReach and LTE functionality, what percentage of buyers are signing up for a subscription plan? Clifton Pemble: Yes. We don't break it out, but the obvious point of those devices with the connectivity hardware is to use the services. And one of our key differentiators as a company is especially the inReach service around messaging and SOS services. And so we feel like we have a strong differentiator there that gives a real why Garmin for those product lines. And so I would expect to see more of those kinds of products coming to market in the future. Ivan Feinseth: And then that including your family of apps, can you give like a big picture of how you see that growing your user base as they use like Messenger and Explore and those are integrated in more and more products? Clifton Pemble: We see people engaging with our apps across the broad spectrum. As you point out, there are several different app properties that we have that people rely on, such as Garmin Connect, of course, is kind of a baseline, but we also have the Golf app. We have Messenger. We have all kinds of apps across our business that interact with our devices. So we see strong engagement from our customers and good feedback from them. Ivan Feinseth: And then especially Messenger, as somebody gets a Garmin watch, they tend to connect with maybe friends that weren't using it, but you see the overall growth of Messenger being used that could be a big driver to more product adoption? Clifton Pemble: We see Messenger pulling in not only the Garmin device user that manages the device, but also their friends, which allows them to communicate and of course, gives us opportunity to expose more people to the Garmin brand. Ivan Feinseth: And then my second question is, how much more robust is the functionality that you provide on board to Mercedes compared to what you're providing to BMW? Clifton Pemble: Well, I think you're probably thinking maybe of content or ASP, but I would definitely say that it's a more complex unit and higher ASPs than what we saw with BMW because of its level of integration and also strong volumes. So we expect to see, again, Mercedes to be a strong contributor to scale starting in 2027. Operator: Your next call comes from the line of Jordan Lyonnais with Bank of America. Jordan Lyonnais: [ANA Aviation], could you give a sense of what the size is of the defense and government markets and if that contributed to the gains in the quarter? Clifton Pemble: Well, we tend to send -- sell our products on a commercial off-the-shelf basis to opportunities within government and military. There are some light customizations that we do. But in general, we're selling the same platforms that we sell across commercial as well. It's a smaller part of our overall business, but one that we view as a key opportunity. Operator: Your next question comes from the line of Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: Hoping to get your thoughts on some of the more recent changes in tariff policy and whether or not that's changed your view on the overall tariff impact this year versus last quarter? I think relatedly, maybe how are you thinking about the potential magnitude of refunds that you might be positioned to recoup over time? Douglas Boessen: Yes. Regarding tariffs, yes, first of all, regarding the gross margin, year-over-year, there was an unfavorable impact on tariffs this Q1 versus last year since the tariffs were not in effect for that period of time. As we think about the remainder of the year, we do expect there to be some tariff impact for the remainder of the year, basically at the current trends we're seeing. Obviously, that's evolving, but that's our current opinion. As it relates to the refunds, we have not recorded any receivable or benefit for those refunds at this point in time. We'll continue to evaluate that and record at the appropriate time and provide more details when we do record that receivable and benefit. Noah Zatzkin: Great. And then maybe just one on Marine, another strong quarter there. What are you guys seeing in terms of the underlying trends in the marine end market? And maybe just any color around what you -- what you think is helping to drive what I assume to be share gains there? That would be great. Clifton Pemble: I think for Marine, for us, we saw particular strength on deliveries to builders. So they definitely helped contribute to the growth that we have in the quarter, although the retail and the aftermarket was also a contributor. I think in general, we're starting to hear some of those customers start to express some worry given the current geopolitical situation. But I think a lot of times, that worry takes some time to filter through the market. So we're taking a wait-and-see approach on that. But in general, I would say that the overall market has been very strong, and we've had a very, very positive reaction to our new products, particularly the Spy pole and the 360 sonar. Operator: Your next question comes from the line of David MacGregor with Longbow Research. David S. MacGregor: Just a couple of cleanups. I guess on operating expenses, dollar expenses are up, but you're leveraging those increases very well. How should we think about the pace of incremental operating expense investment in '26 and '27 and also your ability to continue leveraging those investments at the operating line? Douglas Boessen: Yes. Regarding the operating expenses on a consolidated basis, for the full year, a percentage of sales, we expect operating expenses to be relatively consistent year-over-year. So a few things impacting our operating expenses. Obviously, the biggest driver there is personnel-related expenses, really the headcount, compensation as such, primarily in the R&D side of things just to fuel our innovation. But a couple of things also in the quarter, one of which was foreign currency that impacted our top line, they increased that, but also did increase some of our expenses there, too. Then also, we did have an acquisition of MYLAPS that anniversary this year also from that standpoint and they're annualized. So those are some factors in there. But we expect relatively consistent kind of pace in our operating expenses. David S. MacGregor: Flat year-over-year, I guess, is the guide. Douglas Boessen: Yes, consistent growth. David S. MacGregor: Right. And then secondly, just on distribution, are you seeing any meaningful change this quarter in the route to market? Any growth in distribution network to call out and how that may have influenced the reported margins? Clifton Pemble: I would say nothing specific to call out. We have very broad-based distribution across all kinds of retailers and distributors. And so I think the diversity of our go-to-market channels is probably richer for Garmin than any other company out there because of the broad base of markets we serve as well as the broad product categories that we have within each market. Operator: There are no further questions at this time. I will now turn the call back to Teri Seck for closing remarks. Teri, please go ahead. Teri Seck: Thank you all for joining us today. Doug and I are available for callbacks, and we hope you all have a great day. Bye. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Welltower First Quarter 2026 Earnings Conference Call and webcast. [Operator Instructions]. I would now like to turn the conference over to Matt McQueen, Chief Legal Officer and General Counsel. The floor is yours. Matthew McQueen: Thank you, and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. And with that, I'll hand the call over to Shankh for his remarks. Shankh Mitra: Thank you, Matt, and good morning, everyone. As usual, I'll review business trends and our capital allocation priorities and the team will follow the usual cadence. We started the year on a strong note with the business continuing to fire on all cylinders. While the heightened geopolitical tension and macroeconomic volatility dominated the headlines, our niche need-based and private pay rental housing business did not miss a beat. Driven by a combination of strong organic growth and acquisition activity, our total revenue for the quarter increased 38% year-over-year, while adjusted EBITDA was up 36%. Most importantly, we delivered another quarter of strong bottom line part share growth with FFO per share increasing 23% while we continue to deleverage our balance sheet and invest in people and systems. Our balance sheet provides us with substantial firepower and flexibility. These results exceed our already high expectation coming into the year, enabling us to raise the midpoint of our full year FFO per share guidance by $0.11 to $6.28. The pronounced mix shift of our portfolio resulting from a transformative 2025 capital allocation activity has already begun to manifest itself. During the first quarter of this year, we reported 16.4% total portfolio same-store net operating income growth, by far the highest in our history. This is largely a function of combined strength from a senior housing operating portfolio, which now comprises 74% of our same-store NOI, up from 57% first quarter of last year. This is the first time in history the annualized in-place NOI from our shop portfolio exceeded $3 billion. During the first quarter, U.S. outperformed from an occupancy perspective with nearly 400 basis points of year-over-year growth. On the other hand, Canada, with higher overall occupancy levels than U.S. and U.K., posted growth closer to 300 basis points, but generated RevPOR growth of 6%, giving you some perspective of the out of the possible as our overall portfolio leases up. Ultimately, all 3 regions made strong contributions, and we achieved nearly 10% organic revenue growth in the quarter. And the subdued expense growth driven by scaling and the Welltower Business System, same-store NOI growth increased 22%, marking 14th consecutive quarter in which sharp growth exceeded 20%. Drilling a bit further, the growth of RevPOR, the unit revenue continued to exceed ExpPOR or unit expenses by a wide margin resulting in another quarter of significant operating margin expansion of 320 basis points. Perhaps the most remarkable stat of the quarter was the circa 20% NOI growth gated by the communities with 95%-plus occupancy. While I consider our recent senior housing results to be somewhat satisfactory, I'm convinced that the best years of this business are squarely in front of us. With the total senior housing portfolio occupancy at 87%, there is significant capacity in the system for us to drive multiple years of outsized occupancy gains, along with continued pricing opportunity. And with the operating leverage inherent in our high fixed cost business, margin should continue to drift higher. But as we have talked about during our most recent calls, what we remain most excited about and our most meaningful opportunity to drive bottom line growth is through the expanded role that technology, data and innovation will play in our business with the ultimate goal of improving the experience of our customers and site level employees. The structural change driven by the Welltower business system should continue to impact virtually every revenue and expense line item driving the margins even higher. This digital transformation, which we are striving for, coupled with in-place above-market compensation and benefits for our site level employees, should result in lower turnover and lead happier customers. As I mentioned last quarter, Manga Grant is a clear example of how we are putting these ideas into action. As I've written extensively in my annual letter, which came out a few weeks ago, we have built a system of scaled economic share amongst all participant in the ecosystem. While shareholders will certainly benefit as we extend the duration of our growth, we want our operating partners, site level employees, residents and their families to benefit meaningfully as well. This is the only way to build and sustain a network effect in a complex adaptive system like ours. Turning to investment activity. Almost exactly a year after Liberation Day, the conflict in Middle East has led to another period of significant capital markets volatility creating a dynamic similar to that of last year. Recently, a spike in interest rates and gapping out of spreads has resulted in retrading of deals and various parties walking away from their new found love of senior housing. It is almost comical to see how predictable tourist capital's behavior can be. Many of our counterparties have seen this movie before and opted to bypass the theater and instead transacting with us directly in privately negotiated deals. However, some of the first-time sellers have learned the hard way that 5 to 6 months time line required to reach a signed definitive agreement in real estate is an eternity in today's world. We behave exactly how we always have: running a first-class business in a first-class way and never walking from a handshake. Over the last 60 days, we have been busier than ever, generating an incredible amount of activity, which Nikhil will describe to you shortly. But to provide some additional context, we completed $3.2 billion of investments during the quarter and have closed or under contract to close an additional $7.3 billion of investments. Our investment pipeline remains robust, visible and actionable in all 3 of our regions. In addition, often overlooked is our disposition activity which totaled nearly $3 billion in the quarter as we continue to rotate capital into opportunities, which we believe will both amplify and extend the revenue growth curve further into the future. Overall, we have completed $11 billion of dispositions since the beginning of 2025, which has meaningfully dilutive -- which has been meaningfully dilutive to our 2026 earnings per share. However, calling our portfolio of lower growth assets, we have meaningfully extended our growth curve in outer years. For example, the assets we acquired in fourth quarter of last year are expected to deliver 10x level of growth in 2026 than the assets we have sold. Not selling this unprecedented volume of assets would have been easier and frankly, more fun as 2026 FFO per share would have been meaningfully higher, but we always have and always will choose hard, over easy and long term over short term. We have a long and hard year of execution in front of us, but our team has never been more fired up as it is today. We shall see what the market gives us in this summer leasing season. With that, I'll pass it over to John. John Burkart: Thank you, and good morning, everyone. As Shankh mentioned, we are pleased with our start to the year having delivered the portfolio same-store NOI growth of 16.4%, the highest level in our company's recorded history. Once again, our results were driven by our senior housing operating portfolio, which delivered a 14th consecutive quarter in which the same-store NOI growth exceeded 20%. During the first quarter, portfolio year-over-year same-store revenue increased 9.5%, driven by a 370 basis points of occupancy gains and strong pricing power with RevPOR growth of 5%. Revenue growth was consistent across all 3 regions, led by the U.K. at 9.7%, followed by the U.S. at 9.5% and Canada at 9.2%. However, peeling back the onion, both the U.S. and U.K. reported occupancy growth of nearly 400 basis points and RevPOR growth just shy of 5%. On the other hand, as Shankh indicated, Canada reported occupancy growth of roughly 300 basis points, but RevPOR growth of nearly 6%. Ultimately, our goal is to provide a top quality customer experience and to be fairly paid for it. and that's showing up through a combination of occupancy and rate growth. Moving to expenses. We remain encouraged by the trends we are observing across most line items, but particularly with respect to labor, which is almost SHO expenses. This is best reflected by comp for or compensation per occupied room, which increased 20 basis points year-over-year, near the lowest level of growth in recorded history. As a result, expense per occupied room or ExpPOR was up just 40 basis points. This is largely a function of scaled economics in the business, whereby a growing number of communities are now either fully staffed or approaching those levels. As occupancy continues to grow, the need to add additional staff has moderated, leading to a meaningfully higher flow-through or incremental margins. In fact, during the quarter, we achieved a flow though margin of 64%, while our same-store NOI margin increased 320 basis points to 30.9%. As for the future, we believe that significant upside exists. The combination of our same-store communities at 95% occupancy, posting NOI growth of roughly 20% and approximately 45% of our same-store SHOP assets operating below 90% occupancy with the opportunity for materially increased revenue and NOI via occupancy gain creating potential for years of compounding per share growth ahead. While we take nothing for granted due to the operational intensity and persistent challenges which exist in the business, we are confident that through the efforts of our best-in-class operators and continued rollout of the Welltower business system across the portfolio, we will continue to drive outside levels of growth well into the future. It's still early in the year with the peak leasing season ahead, and we will see what the market gives us. But our goal remains consistent, partnering with our -- operating with our operators to deliver an exceptional resident employee experience. Our Welltower operations and asset management teams, including the Tech Quad, continue to make leaps, nonincremental steps on this front and remain committed to maintaining this momentum through a relentless focus on operational excellence. With that, I'll turn it over to Nikhil. Nikhil Chaudhri: Thanks, John, and good morning, everyone. Since our last call, the macroeconomic and geopolitical backdrop has once again introduced meaningful volatility into the capital markets. Escalating conflict in the Middle East, combined with renewed stress in private credit, has driven a more pronounced risk-off tone, evidenced by higher treasury yields, elevated volatility across risk assets and growing signs of strain within private lending markets. Credit spreads have widened in recent weeks. Redemption activity in certain semiliquid vehicles has increased and defaults have continued to trend higher. As Sean said, we have seen this movie before. In periods like this, when capital becomes less reliable and execution risk rises, our position strengthens. Our reputation as the highest quality counterparty backed by our incredible balance sheet becomes increasingly differentiated. Sellers place a premium on certainty of close, lenders become more selective. And when that happens, the opportunity set expands. That is exactly what we are seeing today. As a result, we have seen a meaningful increase in our investment activity. Our investment volume for the year now stands at $10.5 billion, an increase of $4.8 billion since our last call in February. During the first quarter, we closed 41 transactions totaling $3.2 billion. Of these, 37 were sourced off market, continuing to reflect the strength of our relationships and our origination platform. The majority of our acquisitions activity was highly granular, single-asset transactions where our teams operated as local sharpshooters supported by insights from our data science and machine learning platform, welltower.ai. These transactions added 37 communities and over 4,200 units to our seniors housing portfolio. On the disposition side, during the quarter, we completed the remaining $520 million of the previously announced $1.3 billion of dispositions in our Integra JV as well as an additional $1.3 billion of OM sales to Kayne Anderson. With $6.7 billion of sales now complete, we expect the remaining approximately $500 million to be completed during the second quarter. Turning to new activity. We have already closed on additional $4.2 billion of transactions in the second quarter, comprised primarily of our previously announced acquisition of Amica Senior Lifestyles in premium markets across the GTA and Vancouver. The incremental $3.1 billion of activity is comprised primarily of newer vintage seniors housing assets with roughly 95% sourced off market across a number of transactions. I'm also pleased to provide an update on our U.S. seniors housing equity fund. As I mentioned on our last call, we held our final LP close in the fourth quarter of 2025. Since then, consistent with the acceleration in activity in our balance sheet, the entire $2.5 billion of fund capital is now fully committed. While we were significantly oversubscribed, we made a deliberate decision to limit the size of the fund. Our focus was simple, raise the right amount of capital, not the maximum amount of capital. We also structured and are scheduled to deploy the fund in a way that avoids many of the common friction points for LPs. With 1.5 years still left in the investment period, capital is being put to work quickly and high conviction opportunity minimizing the typical J curve of returns. In addition, we have avoided the use of subscription lines to manufacture IRRs, remaining focused instead on driving real equity value creation over time. I'll leave you with a few thoughts. What we're seeing in the market right now is not new, but it is meaningful. Periods of volatility separate long-term capital from short-term tourists. In these moments, speed, conviction and underwriting and consistent execution aren't just advantages, they're differentiators. That's where we have focused our time. Our platform is built to identify opportunities at a very granular level, move with speed and engage directly with counterparties. We are disciplined in how we deploy capital, valuing assets based on in-place performance while keeping the value add from WBS for our shareholders. We remain price disciplined with unlevered IRRs and discounts to replacement costs being our guiding principles and with terms like accretion, notably absent from our investment committee conversations. Our focus on win-win outcomes and target pursuit of the truth rather than woven narratives, continues to drive our ability to source opportunities off-market and deploy capital thoughtfully, even in more uncertain environments. With that, I'll turn the call over to Tim to walk through our financial results. Tim McHugh: Thank you, Nikhil. My comments today will focus on our first quarter 2026 results, performance of our triple net investment segments, our capital activity, our balance sheet and liquidity update, and finally, an update to our full year 2026 outlook. Welltower reported first quarter net income attributable to common stockholders $1.02 per diluted share and normalized funds from operations of $1.47 per diluted share, representing 22.5% year-over-year growth. We also reported year-over-year total portfolio same-store NOI growth of 16.4% driven by 22.1% growth in our SHOP portfolio, which now makes up 74% of our same-store NOI. Now turning to the performance of our triple net properties in the quarter. In our seniors housing triple-net portfolio, same-store NOI increased 3.9% year-over-year and trailing 12-month EBITDA coverage was 1.23x. Next, same-store NOI in our long-term post-acute portfolio grew 2.6% year-over-year and trailing 12-month EBITDAR coverage is 1.32x. Moving on to capital activity. In the first quarter, we raised $4.4 billion in gross proceeds through dispositions and equity issuance, allowing us to fund $3.3 billion of investment activity and end the quarter with a net debt to adjusted EBITDA ratio of 2.73x, more than half a turn reduction from just a year ago. Subsequent to quarter end, we used free cash flow to pay off $700 million unsecured bond maturity in April, highlighting the strength of our balance sheet and the cash flow generating capacity of the portfolio. We ended the first quarter with $4.9 billion of cash on hand, which together with approximately $1.4 billion of incremental disposition activity, along with assumed debt and funding of transaction activity with OP units, positions us to fund roughly $7.3 billion of investment activity through the remainder of the year with a meaningful portion, again, expected to be sourced through capital recycling. Taken together, this net investment activity and continued cash flow growth from the in-place portfolio, our expected result in year-end net debt to adjusted EBITDA of approximately 3x, modestly below our prior expectations. Before turning to our guidance, I want to come back to a point I highlighted last quarter around how our portfolio transformation and what we describe as Welltower 3.0 is reshaping our growth profile. What we're seeing play out in the first quarter is a clear validation of the mix shift we spoke to, with Q1 marking the highest level of total portfolio same-store NOI growth we've delivered in company history. Importantly, that growth is anchored by the strength of our in-place portfolio. Our initial guidance last quarter already reflected a high level of year-over-year visible earnings growth. And our updated outlook this quarter demonstrates the continued momentum we're seeing in the ground. As we continue to increase our concentration in senior housing operating, we believe the Welltower 3.0 portfolio is positioned to deliver a meaningfully higher rate of sustainable compounding than its predecessor. Moving on to guidance. Last night, we updated our full year 2026 outlook for net income attributable to common stockholders of $3.24 to $3.38 per diluted share and normalized FFO of $6.21 to $6.35 per diluted share or $6.28 at the midpoint. Our normalized FFO guidance represents an $0.11 increase at the midpoint from our prior normalized FFO range. This increase is composed of a $0.03 increase from senior housing operating NOI, a $0.07 increase from investment and financing activity and a $0.01 increase from better-than-expected income tax and other with some offset from higher G&A expectations. Underlying this FFO guidance is an estimated total portfolio year-over-year same-store NOI growth of 12.25% to 16%, driven by subsegment growth of outpatient medical, 2% to 3%; long-term post-acute, 2% to 3%; senior housing triple net, 3% to 4%; and finally, senior housing operating growth of 16.5% to 21.5%. This is driven by the following midpoints of the respective ranges: Revenue growth of 9.2%, made up of RevPOR growth of 5% and year-over-year occupancy growth of 350 basis points and expense growth of 5.3%, equating to export growth of just below 1.3%. And with that, I will hand the call back over to Shankh. Shankh Mitra: Thank you, Tim. I would like to make 3 points before opening up the call. First, I want to take a moment to acknowledge the passing of David Simon, a true legendary figure, not just in real estate space, but all of corporate America. David was a visionary in every sense of the term, growing a small portfolio of regional malls into one of the most well-respected companies in the world. He was a legend, a true pioneer, recognizing the enduring value of highest-quality real estate where shoppers and retailers could come together in vibrant environments. And the Simon ecosystem thrived under his leadership. Just think of the long-term success of so many of America's great retailers, which would not have been possible without the setting that David created for them to grow and thrive. Of many of his qualities, one, I personally appreciated the most is that he was unapologetically himself. He spoke his mind with clarity and conviction and remained relentlessly focused on creating long-term value for his investors. The stellar returns Simon delivered for its shareholders under David leadership was no accident. He navigated the company through multiple recessions and structural changes in the industry via thoughtful countercyclical capital allocation, a focus on operational excellence and maintain utmost balance sheet discipline. He was unquestionably a stalworth and a true visionary, but also a friend, a mentor and a fellow Board member at Columbia. He was the one who encouraged me to take the lead from buy side to the corporate side, an advice, which I will never -- which I'll forever be grateful for. He leaves behind a legacy that extends far beyond the real estate sector, setting a standard for what great leadership looks like. Our deepest condolences to Simon family and those who are close to David. Second, roughly a year ago, we launched our private fund management business establishing a capital-light revenue stream and another avenue to drive POR share growth for existing investors. During the first quarter of this year, we identified another additional revenue through which to expand our capital-light business by unlocking from an existing balance sheet asset, the monetization of our data science platform. As many of you know, since 2016, through the efforts of multidisciplinary team of PHD computer scientists, engineers, statistician and mathematicians, we have pioneered the application of data science and machine learning in real estate investing. This was instrumental in driving over $80 billion of acquisition and disposition activity over the last 10 years. Given the modular and portable nature of the platform, we launched our first external partnership during the first quarter, licensing bespoke, supervised and unsupervised models to public storage and a leading global private equity firm. These models enabling the real-world application of AI by accelerating capital allocation decisions from 5 to 9 months to mere weeks and significantly increasing velocity to market. Ultimately, our mission is to scale real estate investing, which is historically was an unscalable business. More to come on this front in months and quarters ahead, but we have been incredibly busy since the announcement in March as many highly respected real estate, non-real estate and sovereign wealth funds have reached out to us to explore similar partnerships. Lastly, as I described in my annual letter, we have recently witnessed a surge of talent density that have -- we have been attracting to the company, particularly with respect to Tech quad. Following our ethos that hire A people we have been successfully attracting the highest caliber technology and data science professionals to execute our vision. Aiding our effort is what is called or rapidly spreading narrative around who is the next on the disruptive path of AI, which is releasing an extraordinary pool of talent into the market. This talent pool is increasingly focused on identifying businesses that cannot be replaced by AI, including sectors classified as halo or hard acid low obsolescence such as housing for rapid aging population. We are thrilled with the progress made by Tech Quad in reimagining our technology ecosystem to improve the resident and site level employee experience. Our newest addition to our team will only accelerate these efforts. Nonetheless, our biggest opportunity to drive POR share growth is through unlocking greater value for our existing assets with the most immediate and impactful way of being the implementation of Welltower Business System, our end-to-end operating platform across our senior housing portfolio. In a maximum growth, maximum gain wall, the fastest way to move the dial is to narrow the focus. Our relentless and manacle focus on the digital transformation of the business and dramatically improving customer and site level employee satisfaction will be the force multiplier on the attractive beta of our business. And with that, I'll open the call up for questions. Operator: [Operator Instructions]. Your first question comes from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Great. I just wanted to double-click on one of the comments you made on the 95% occupied portfolio and the same growing 20%. Wondering if we could sort of double-click and get some more color around whether RevPOR, ExpPOR margins mix anything that could be interesting? Shankh Mitra: Thanks, Ron. First, I clearly don't want you to run with that idea that that's what we are suggesting happen. But that is definitely something that I found in our data to be more surprising. A very significant part of our portfolio today is 95%-plus occupied, give or take, 50%. And that portfolio grew circa 20% net operating income, as I said. And for -- clearly, for a couple of reasons, obviously, you got pricing power increases as capacity comes down in the system. That happened -- that part of the portfolio had give or take 6%-plus RevPOR growth. And with the expenses, major execution on the expense side that John mentioned through our operators and the contribution from Welltower Business System, it just landed to be an extraordinary number. So we were very happy about it. We do think that, that sort of gives us confidence that will have double-digit NOI growth for a long time to come in our portfolio as the portfolio leases up, we'll see what market gives us as we sort of get through the next few years as the portfolio leases up. Operator: Your next question comes from John Kilichowski with Wells Fargo. William John Kilichowski: Shankh, you kind of hit on this at the end of your opening remarks, but could you talk more about the growth of the talent density and the data science platform given what you described as a halo sector? And how much this has accelerated the growth outlook of the business in your mind? And then if you could also maybe just talk to how investors should be thinking about the medium-term potential for earnings contribution from this business? Shankh Mitra: Yes. John, let me take the first -- second part first, and then I'll go to the first part. If you just think about it, we built this data science capability, machine learning capability over the last 10-plus years to deploy capital on our balance sheet, on our books. And then we realized recently from -- at the really encouragement from some of our largest sovereign wealth partners in our fund business, that there could be a much bigger sort of application of this, which you have seen our first partnership announcement. We're in the building mode of this business, where there's something substantial come out or not, we will see in the future, but I can tell you that since the announcement was made under early March on public storage as well as the other PE pharma, I mentioned. Our phones have been ringing up the hook. We have been exploring a lot of the opportunity with a lot of people. Real estate -- great real estate companies, many non-real estate companies such as banks and others, major sovereign wealth funds, which I mentioned to you at the first ones who actually told us that could be a significant opportunity of that nature. We'll see where it goes. Whether sort of what remains a true major force behind our capital allocation and everything else sort of becomes a fun project or we just sort of take this as a a whole new business, we'll see what happens, right? Going back to the first part of your question, I have ever heard of this concept of halo even, say, 90 days ago. I heard that, as you know, probably that I personally interview most of the people who comes to our organization. And I heard it increasingly from the talent that was coming through. And many of the businesses which are sort of impacted or people avoid that potentially impacted or frankly, a different level of talent pool I've never seen. And just in last -- since the last call, we have hired either data scientists or software engineers with the backgrounds that we look for, whether it's computer science or math, PhD, hired from the top quant funds, I never thought that will come and work for a real estate company let alone a senior living company. Or we started to see talent from people who are code breakers and 3 agencies. We're never -- 90 days ago, if you asked me, I would not have told you that we would attract talent from that kind of places. It's talent density is increasing. We are trying to explore problems that we never thought that we will -- obviously, we think about there's a granularity of those problems, right? One granularity is obvious is we talk about housing prices, for example, in real estate. Housing prices of what? Most industry uses housing prices, as a median house price in the ZIP code, right? We today use every housing prices in an entire area, okay? That's an interesting idea. How about you think about what you have hidden? Is there other hidden signals such as -- I'm going to make this up, the price of which futures, the impact of that in housing assets in Great Plains? I totally made that up as we're going through. But those that the hidden insight we want to discover and understand we -- and that kind of people are in the industry is kind of overall in the world, but not in our kinds of industry. And that's what we are trying to attract and see where we can take the business, right? We'll see what happens. But thank you for the question. Operator: Your next question comes from Michael Goldsmith with UBS. Michael Goldsmith: I'm here with Justin On the topic of capital allocation, Ventas recently acquired this portfolio. did you evaluate that opportunity? And maybe more broadly, you have the best cost of capital in this space. How do you think about accelerating accretive growth versus maintaining your discipline? Shankh Mitra: We don't -- Michael, we don't comment on other deals that our colleagues in the industry do. We did look at the portfolio, and we think that is a very high-quality portfolio that our colleagues are went us will do very well with. But I don't really want to get into it. When it was brought to us a few months ago, it was in a structure that was not something we find particularly, at that point, palatable. I've mentioned many, many times that we have problems with encumbrance on assets and when it was brought to us, there was an encumbrance of assets of existing operators and asset management and all of those kind of things, which I don't want to get to, but I think they're high-quality real estate and our colleagues at Ventas will do very well. On your other part of your questions is accelerating capital allocation. I want you to understand, this is what I wrote in my annual letter, which under a section called cognitive dissidence of acquisition volume. And I want you to understand that what we are trying not to do, we're not -- it's not a deal shop. That's why Welltower is different from our predecessor company. We want to allocate capital in a particular product market niche where we think we can add significant value. This is not a cost of capital business for us. We don't compete on cost of capital. We compete on ability on the data science side, on WBA side and a network of extraordinary operators who can drive higher value for customers and employees and for us and themselves. That's the model. So not everything -- if the goal was to do more, we would not be selling $12 billion of assets in the last 12 months, right? So -- and we are getting -- we're seeing everything like we always have, as Nikhil said, 90%, 95% of everything sort of we do comes to us off-market. And frankly speaking, that makes sense, right? Because we'll tell you as a seller within a day or 2 whether we want to transact and probably within 3 to 5 days, give or take, what will transact at what price we'll transact at. So fundamentally, as a seller, you have nothing to lose for by coming to us. And so that's how the business rolls, and we'll see what market gives us. If we never buy another asset or we go back to the period pre-COVID where we sold -- we're net sellers and we sold $16 billion of assets, we will be just fine. Our goal is to grow per-share value for existing investors not do deals. Operator: Your next question comes from Mike Mueller with JPMorgan. Michael Mueller: First, that was a nice David tribute. When I think assignment over time, one thing that stands out is David's ability to walk away from deals whether it was or the first shot at Can you talk about an example or 2 of steering clear from a big transaction that didn't sit well with you? Shankh Mitra: Yes. Thank you very much. I always think of -- I was e-mailing back and forth with him a couple of months ago. David was the one on the best and most exciting day of my buy-side career called me and said, "Your carrier has speak today, leave the industry and come join me on the dock side." And that's how this whole thing started rolling. I think many of you -- I think we have had the conversations over a period of time. He was an extraordinary leader. Extraordinary leader. And it was something I had admired. I knew him for a long time. We're in the Columbia Business School Board. It was just in -- I was in all with leadership skills, not just his financial success of total returns and all of those things. But one of the things, as you mentioned, look, we -- David able walk away from deals and many times he did it. Believe it or not, many times when you walk away from transaction and you do it in the right way so that you're not burning bridges, you tell people why you walked away you can still maintain the relationship. One of the largest transaction we have done in this company is the largest transaction we have done in this company is Barchester, Believe it or not, I walked away from that deal twice right? So we -- there are many -- I don't want to get into granular transaction. Every day of the week our team walks away from transactions, tell the counterparties why we walked away, whether we walk away because we don't like the product market fit, we walk away because we don't like the income rentals that I just mentioned or written extensively about. We're respectful to the marketplace in the industry. And we're direct, right? Nobody will tell you that we have ever said something we didn't do it. We are very direct to people. And then it's just -- we do a very small fraction of what we see. Nikhil, what do you think [indiscernible] Nikhil Chaudhri: Yes, 10%. Shankh Mitra: 10%-or-so. So by definition, we walk away from 90% of what we see. But sometimes something like Barchester, we walk away. And eventually, it happens when the time is right from a pricing standpoint or on a structure standpoint. But very, very good question, Michael. Thank you. Operator: Your next question comes from Michael Carroll with RBC Capital Markets. Michael Carroll: Shankh, I know that the WBS model continues to evolve, I mean, how beneficial are these new partnerships that you're creating with PSA and others to take WPS to the next level. I mean, I'm assuming that Welltower is getting access to more new data that they didn't have access to Bulfor. I guess, how beneficial could that be as you kind of refine those systems? Shankh Mitra: Mike, think about in our SHOP technology in 2 different -- completely different segment, which that's obviously the interconnect at some levels, which is one is our data science platform, which is focused on allocation of capital and finding granular opportunity and changing the velocity that exists in this business from months to days right? And that's one idea. The other idea is operational side of the business, which we call Welltower Business System, which we're building out, and I mentioned about Tech Quad and how Jeff and Tucker and Swagat and Logan and all these they are also taking that to a new level. Welltower Business System, which is the operational side of the business, is not something that we are collaborating with public storage. Public storage or people like that don't need our help to think about operationally how they should run the business. That industry is years ahead we're actually hiring from that industry who can help us to do it, right? On the other hand, our collaboration is on the data science side, which we have been at this for 10-plus years. And that's why we have changed the real estate investing business, where this latency of the system is 5 to 9 months and we have taken that today, right? So I don't want you to confuse the two and understand how -- where the collaborations are coming. We have given you many examples on our business update, the kind of problems that we are going after that people run people are coming to us. For example, obviously, real estate examples are easy, and you can see it on examples, whether that's multifamily, other types of asset classes. So storage, obviously, you mentioned, all other types of asset classes. But people are coming to us with problems that are location-type problems, but not necessarily specifically real estate problems. For example, a big bank has come to us and asked us whether we can help them on predicting whether most profitable next branch -- bank branches should be? These are the types of problems that we are exploring, and we'll see where we get to. But thank you for your question. Operator: Your next question comes from Jim Kammert with Evercore ISI. James Kammert: Shankh and team, is there a way to leverage the data science into other geographies beyond your core U.K., U.S. and Canada? Or are those markets structurally don't have private pay or other cultural issues that leave you unlikely to pursue in terms of external growth? Shankh Mitra: The short answer is, yes, it can be, in fact, on -- just for fun we're having this conversation with an investor -- a significant investor in Japan, and we built a model over 3 weeks, our guys did to show them like how to apply that in Japan, right? I know obviously, we don't have as much of a data and we haven't bought like gobs and gobs of data, but it is absolutely scalable across geographies and product types and beyond real estate product that I just mentioned. Operator: Your next question comes from Richard Anderson with Cantor Fitzgerald. Richard Anderson: So Shankh, you talked about doing the hard things, not the easy things and making decisions with that mindset. And I'm thinking as you're talking about data analytics and all these sort of tangential opportunities that sort of spin out of senior housing platform. And then I think about Amazon, which once upon a time sold books and now they're what they are today or Berkshire Hathaway, which was an insurance company and is what it is today. Do you have aspirations along those lines where senior housing -- because we can talk to our blue in the face about how great it is, and you guys are doing a fantastic job. But longer term, this is not going to always be a 20% growing type of industry. Are you thinking about senior housing as sort of a bed from which you grow other businesses outside of data centers or data analytics if you get my point, right, you become like a diversified vehicle. Is that kind of in your mind today? Shankh Mitra: No. Let me answer that question. We are not trying to go from senior living to other asset classes in real estate. In fact, we're doing exact opposite, right? We are selling out of all other asset -- other types of asset classes and focusing our balance sheet capital, our balance sheet capital, if you will, our book into 1 asset classes, which we think we have competitive advantage. However, if you think about we have built capabilities, right, such as this data business that we talked about could potentially become more than a platform that we use for an internal application, we'll see where we get to. We're not trying to become a diversified company. I do not believe diversification -- I do not believe in diversification. In fact, I believe diversification is the worst word that has been taught to investors, right? So if you think about -- you gave a Berkshire Hathaway example, if you think about -- look at Berkshire, you will see they've made the almost entirety of the return in 5 things -- 5 names, right? So you think about it as -- we believe in concentration. We genuinely believe that capabilities, you cannot be good at 5 different things. But your question is a much more nuanced one, which is we -- right or wrong, our whole idea 10-plus years ago was very much that we want to understand the truth. We noticed that the real estate business people talk in heuristics rule of thumb. And we wanted to know the truth, and that's what we found. I give an example, right? People use housing prices. Housing prices are what? Housing prices and average housing prices, mean housing prices, median housing prices, we're talking about a block group, we're talking about ZIP code. What are we talking about, right? So these are the things now I can complicate this problem many times over, right? You can think about it depending on product, how long people are willing to drive? You'll notice in real estate, people talked about distance as your competition not drive time. But again, without getting into too much of this conversation, we do believe that our job, that what we are trying to do is to optimize over the -- optimize the duration of the growth over a very long period of time. That's what we're trying to do. So today, a lot of that is obviously coming to the mix shift and everything, but we do believe that there are 2 other things that can potentially add pretty significantly. One is our asset-light businesses, which is fund management business, the data science business. And as you know that we are obviously the fees we are getting, obviously, that is a reflection of our data science business. So it's interconnected nature of it. And the other thing, Rich, is just something I want you to think about is what is the potential -- untapped potential of our balance sheet, right? So we are thinking about sort of years ahead of what this platform could look like. We're thinking how do we deliver a significant per-share growth opportunity for existing shareholders when things will not be as good in senior living, as you might say. But I do think that senior living as a business will remain our primary focus of the way to deploy our own balance sheet capital. Operator: Your next question comes from Vikram Malhotra with Mizuho. Vikram Malhotra: Shankh, I guess one other thing in your letter I really enjoyed is reading about the hummingbird and how they fly very differently and achieve lifted at a discount. So in that vein of sort of a different approach, just I guess 2 questions. One, going forward, is there something WBS or the team can do to sort of monitor reduce CapEx levels in senior housing, something that usually bites people where there's too much CapEx load? And then secondly, when you think about supply/demand, on the supply side, we still have not seen it start. Is there something different about your relationships or your markets which can limit supply perhaps longer than people perceive? Shankh Mitra: So second question was supply and the first question was CapEx and hummingbird. So the idea of hummingbird, I don't want to repeat it, I wrote extensively about it, you can read it and sounds like you have read it. The idea is continuous improvement of candles will not give you a light bulb or Henry Ford will tell you that you can improve horse carriages as long as you want, but you're not going to get a Model T, right? So you got to think about the business in a completely different way, which is reimagining what the entire value chain looks like. And if you sort of take our first principal approach to say, what are my goal is and you start from the customer, right? And solve, okay, how do I remove friction of customers and the people who the customers see as product, which is the site level employees, you can get very far. How far we will get to, we'll see in the future. And now let's talk if take the question of CapEx that you talked about, right? John gotten into this in details. The CapEx in this business because of the sort of short-term private equity type mentality, which I'm not actually denigrating private equity. If I got paid on short-term IRR, I would have done the same probably. But if you just think about it like people take a very piecemeal approach, right? One year you do roof because you have to then next year, you go back and do the gutters; the next year, you go back and fix your skylights and that's not how full cycle CapEx should work. On our particular -- if you look at our cash flow, you were obviously -- Vikram, you're seeing that CapEx is improving and it's improving for 2 reasons. One, CapEx is a concept that is not an idea that you should think about in terms of available or occupied room, you should think about all available room. Because if you think about you are doing, say, first impression, it is not going to be whether you have 40 people in the community or 400 people in the community, right? It will be on all the rooms. As the system is filling up, obviously, you are getting the scaling effort or as the NOI is going up, you're getting the scaling efforts. Second, CapEx today, 2 years ago, we didn't -- we obviously did all CapEx that was outsourced to operate us. Today, we have 200 people team, which works for us. And that team is working with our operators to figure out how to do CapEx the best, how to do lifestyle -- think about lifecycle cost and executing where the best sort of execution we can get. And that's just started to see that scaling effort over the last, say, 6 months. And I think you're going to see a lot more going forward. And what was the second question? Did I answer both of the questions? Yes. Supply -- so look, the fact of the matter is -- the supply currently is a very low start you are seeing. I would expect that -- I personally think about supply it's almost a Pavlovian response to participants in the market when we see the supply. It's sort of almost a third rail and people think supply equals to oversupply. Why that makes sense? Last decade, every unit of supply was oversupply because demand was flat. I think about supply and the impact of supply in terms of oversupply. You can see the demand growth and you can sort of think, okay, how long it takes to bring supply in the market. We have a slide on our presentation and that sort of walks you through. And you can see sort of what's the oversupply sort of can be. I personally think that supply will chase demand for a long period of time, just because what the demand growth looks like and the constraint of supply that is in. In our markets, in senior living 1 of the biggest constraint of supply on top of everything else that you can think about is availability of quality operators, right? That's a big constraint in the market. No bank will lend to you if you have a operators, especially after what they have gone through last cycle. And as you know, and this is something that you brought up Vikram, that I don't think we have people have asked us over the last 3 years. At the bottom of COVID, when we were the only people, only people who were actually allocating capital and leaning into senior living, we forged 25 to 30 long-term partnership with our operators, different developers, who were mostly exclusive or near exclusive in nature in our markets, which we believe will provide a governor on quality supply. And we'll see how this plays out. But thank you for your question. Operator: Your next question comes from Farrell Granath with Bank of America. Farrell Granath: I also wanted to touch on a comment that you made in your annual letter, where you highlighted several operational heroes. What was some of the best operational advice that took away from those organizations? And how are you applying and executing on that advice across the portfolio? Shankh Mitra: That's an interesting question. Farrell, some of the heroes we mentioned was not just operational, also capital allocation and culture and many other things. However, I will tell you, I personally believe and probably because of the influence of Charlie, one of the most well-run operational company in this country is a company called It's a private company, who's CEO -- long-term CEO, Peter Kauffman, has been a great friend and mentor of mine over a long period of time, and he's a true hardcore operator in the aerospace defense sector. So first, people will tell you, first thing is before you get advice from people, you need to understand the credibility of their advice. Lots of people have lots of advice in things that they have no expertise in. I routinely see people have never ran lemonade stand and have opinions on how multibillion-dollar company should be run. So that's sort of first you have to have a filtering mechanism to understand who has expertise. But beyond that, and the best operational advice that I actually got that operations can be meaningfully improved from systems and process and technology, but operations is not about any of those things. They can be enabler. Operations is all about people. So if you have -- if you're in L.A. and you have an hour, let me know, I'll help you go visit Peter and you will see what a well-run factory could look like and with all the focus of people. But anyway, thank you for the question. Operator: Your next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Just going back to an earlier question about the portfolio of assets that are 95%-plus occupied. I guess as we continue to understand as you put the possible, within the 6% RevPOR growth for those assets, you indicated the benefits of capacity coming down and just pricing power are street rate increases exceeding increases on in-place customers within this subset of assets? And are you also seeing a greater benefit from high ROI ancillary income opportunities? Shankh Mitra: Thank you so much. You were a little further from the mic, but if I understand your question was on the 95%-plus are we seeing even within the pricing, are we seeing greater opportunities off [indiscernible] So you hit on something extraordinarily important. I have a particular belief that just because you can doesn't mean you should. And this is something I'm boring you with reputation and details. Clearly, it sounds like you read my annual letter. There's a whole section on trade-offs that I would like you to go back to and will say in many places, in place customer rate increases could be meaningfully higher than what we are comfortable with, and I'm fine with that. I'm fine with that. So how do you -- if you are, if you say, okay, I'm not going to give customers 15%, 20% increases, how would the RevPOR will change? It will change because of the point you just made, right, which is not an existing customer increase, but it comes from the street rate. This is a fundamental negative mark-to-market in this business. because of the person who leaves versus the person who comes in, there's an acute difference between the 2. However, when you have in this kind of assets and its overall trading market when everybody else is full the street rate goes up and that's the impact you see in the overall RevPOR, right, which is a function of 3 different pricing, not just existing customer increases, increasing street rate. You picked up on something very important, and I think that will be a lot of driver as you sort of go forward in many, many of the markets. And ancillary opportunities such as a lot of the other such as community fees and others also play an impact on that as well. Operator: Your next question comes from Juan Sanabria with BMO Capital Markets. Juan Sanabria: I'm just curious if you could talk a little bit about market share and the opportunity that's still left to consolidate a fragmented industry recognizing that you guys have a very targeted approach, hoping you could help us understand how much is left to consolidate, if you will? There's been a little bit of political pushback in Canada, and there's overviews or reviews going on in the U.K. So in that context, just hoping you could help us understand how you think about the addressable market and the opportunities remaining? Shankh Mitra: Yes. Juan, so if you just take a step back and think about from a customer standpoint, roughly, give or take, call it, 7% to 8% or call it, 10%. Let's just do easy math, 10% of the people who can use our product, use our product. So 90% of the people fundamentally don't use the product who can use our product, right? So it's just a small portion of the -- of your customers use the product. Within that small portion, we're probably 7% of the industry. So we're a very small portion of even the existing product. And -- so our -- so from that standpoint, if you just think about it, a 7% of 10%, you can imagine, like were insignificant from a customer standpoint, right? They just that -- those are the numbers. Now having said that, if we're 7%, say, of the entire base of products, does that mean that our opportunity -- and as you mentioned that obviously, it's an extraordinarily fragmented industry. Does that mean that our -- and I think the average operator or owner operator as of like 10 communities or 1,000 units or something like that. It's a very, very small. Does that mean that 7% of the industry is our TAM is 15x.? The answer is no, right? Our TAM is probably -- we're very focused on -- even within senior living, we're very focused on the highest price point or the highest quality assets in the market, so very much of the very focused on the highest, highest end of this business. That product market niche is what we have made our bet on. And that probably is -- the TAM is probably 2x to 3x, not 15x. That's how we kind of think about it. We see what the opportunities are. As I've mentioned in previous questions and in my annual letter, we would be comfortable if we never bought another asset. So the goal is not asset aggregation, goal is to pick where you think you can add significant value, and I think our team is doing a pretty good job of. And we'll take the -- we'll go forward with that and see what market gives us. Operator: Your next question comes from Nick Yulico with Scotiabank. Nicholas Yulico: I wanted to ask on the investment side. This quarter, the loan funding was a little over 50% of the investments. So if you could just remind us sort of what the approach is there and where you're able to get -- what type of yield on that loan funding? And then also, if you could also break out of the $7.2 billion investments in April so far? What percentage of that is loan funding. Shankh Mitra: Let me start, Nikhil you go. First is, you were seeing that, Nick, just to remind you that remember, that when we did the transaction, we took back $1 billion-plus in participating pref, and that's what showed up in the loan book, right? So it's not really a loan, it's a participating loan. It's with an equity derivative attached to it, but that's what you're seeing. Rest of it, you can see -- think about it as a refill of the HC1 loan and other loans that got paid off. Some of it is just a bridge too hard of some of the assets and skilled nursing assets we sold. They will be gone as takes a long time, as you know. When that happens, they will be gone. But overall, that's the construct is that piece showed up. From your second part of your question, which is $7.2 billion. I do not recall, Nikhil, you might recall. Nikhil Chaudhri: I think the next specific question was what's closed in the second quarter. So of the $4.2 billion that's closed, as I said in my prepared remarks, Amica, which is north of $3 billion, is the vast majority of that. There might be 1 or 2 small loans, but it's been predominantly asset acquisitions. Shankh Mitra: So -- that's -- I think you asked about the pipeline as well. That is maybe also the same thing. It's all just in 1 quarter, that piece landed, and that's what it looks like it's elevated. As you look back in the whole year, you'll not see it. And as you said, there's a remaining $500 million of sales left as part of the transaction. So as that happens, of course, that will come with some additional participating pref funding. Operator: Your next question comes from Seth Bergey with Citigroup. Seth Bergey: I was hoping you could just touch on the transaction market more broadly. First, I guess, the impact of competition and then how prevalent is retrading deals walking away because of the capital markets? And then Shankh, I think you mentioned kind of time to close. And I was just curious, kind of well towers due diligence and time to close versus kind of the average for other buyers in the market? Nikhil Chaudhri: Yes. I think let's start with the competition piece. As I said in the prepared remarks, regardless of whatever period we look at transactions that have closed, the pipeline and I say this every single quarter as an update, that give or take our transaction activities between 90% to 95% off-market. And so by definition, in that regard, there is no competition. But what we've seen is over the last couple of years as more capital has come into senior living, previously, when we would say no to one of those off-market opportunities, it wouldn't get done. Now what you're seeing is, given that there's a more robust marketplace, if we say, no, more likely than not, somebody else to end up buying those assets. So that's certainly happening. Then your second question was about our speed. Well, I think as Shankh said earlier, it takes us a couple of days to within a very narrow range, have a view on what an asset should be priced thereafter in assuming there is a meeting of the minds, then it's the traditional diligence process, which involves site visits, finalizing business plans with operators, third parties, negotiating legal documents and we parallel path all of that, just given upfront, how much information we have from our data platform on what to expect from an asset. And so we can parallel path all of that, and it takes us roughly 30 days from when we first see something to close something. In comparison to the broader market process, Shankh wrote extensively in his last annual letter last year, a typical process takes 6 months from starting to think about, hey, we're going to sell something to get BOVs from a bunch of different advisers to then picking an adviser to then populating all the information and creating a really pretty offering memorandum to then negotiating NDAs, to then having a first round process, to then having a second round to the process, finally picking a winner and then most transactions occur in a way that you first negotiate a contract, then you have a 30- to 60-day diligence period where you find financing for the asset and eventually close on it. So 6 months is a long time, if you think about what macro looked like 6 months ago versus it does today, a lot changes. So -- and given that the price -- the buyer is not going hard until 30 days before closing, so 5 months into 6 months, there's a lot of uncertainty. And we have, in the last 2 months, seen a lot of transactions that we liked, but weren't comfortable with the pricing get away from us to then come back to us. So that's certainly happening, and it happens all the time. Shankh Mitra: I'll just add 2 more things, right? So we are -- one of the very few SHOP who actually go and visit every single assets that we buy. That is not -- predominantly, that is not a percentage of we visit every single asset that comes on our balance sheet and walk on average, 12 people from Welltower go walk assets, not just our investment team, our asset management team, structural engineers. So we go and do this every single asset, which is very important for you to understand. And just to take the second question is, from our standpoint, is the reputation is our currency of business. If we tell people going to do something, we do it. I might as well give people bad news upfront than try to drag them through the process and then 5 months later, I said these are the 5 different things. I didn't like the color of your nails, so it will be retreated, right? And that's sort of what happens in this business every day. That's very standard people accepted in real estate business to do, we just don't do that, right? We are always comfortable in the trade-off of short-term money versus long-term reputation that works out for us over a period of time. And hopefully, overall, our execution over the years will tell you that if you take a long-term approach, if you take a reputation approach, if you take an approach of running a first-class business in fast way, it generally works out for you. Operator: Your next question comes from Omotayo Okusanya with Deutsche Bank. Omotayo Okusanya: Shankh, I wanted to talk a little bit about just, again, the overall business model and again, the growth mode you're in, you definitely need a specific type of operator and SHOP to kind of realize your strategy. So I'm just curious, at this point, are you still seeing opportunities to bring more operators into the fold or does the strategy really become doubling down on the operators you have? And if that's the case, what becomes kind of the next level of incentive you can provide for your current operators to even have further better alignment? Is it stuff like the munger grants? Or kind of what else is kind of out there that can really kind of align the 2 to continue to kind of deliver the results you've been delivering? Shankh Mitra: Yes. Thank you very much. It's a very, very important question that we reflect on and debate and talk about -- look, we sort of think about this business as a complex adaptive system. And as we think about this business as a complex adaptive system, we have after years and years of thinking through this every line item we have sort of come to a point where we have a very good idea. If you just -- if you were sitting in it in one of our sort of conference room, with our one of our operating partners and our people. Again, you will not be able to say who works for Welltower, who works for this operator, they are all working very collaboratively and not trying to say this is your side, this is my side, and that's just not. That type of collaboration trust takes a long time to build, which we have built with a handful of our operating partners, and we're doubling down with them every day. Having said that, are there a couple of people that we have long respected over time that we want to do business with? The answer is yes. At the same time, you will see -- if your question is, are we in an expansion mode from a number of operators we do business with or we're in a sort of flat or we're shrinking? The answer is, unequivocally, our view is that we're shrinking, right? The number of people that we business with. That is in -- because we are doubling down with our existing partners, we have built these collaborations and we are not trying to be everything to every people, every product, every operator we have found the like-minded, a lot of like-minded operating partners, who are truly our partners. That's not sort of they take partnership very seriously. They are extraordinarily focused on excellence like we have. They want to treat their people right. They want to treat the residents right. They want -- they take reputation as the currency of business. And those are the type of cultural alignment, not just technological systems, money and everything, financials and everything has to work out. But the cultural element is the most important, and we are doubling down with them. And sometimes, we do find somebody like Amica that we tremendously respected over the time. And then when the stars align, and we go together and meeting of the mine happen. The same applies for Barchester. But generally speaking, our goal is to do more with our existing partners where the alignment has already happened. But it's an extraordinary question that we reflect on every day. Operator: Your next question comes from Michael Stroyeck with Green Street. Michael Stroyeck: I just wanted to go back to an earlier question on applying the data science platform to new geographies. Has the company underwritten any transactions in geographies outside of the U.S., U.K. or Canada? Or are there any additional countries that Welltower could be interested in entering down the line on balance sheet? Shankh Mitra: Yes, Michael, very, very good question. I'm glad that you asked the clarifying question. We have no desire to go to any other countries other than the 3 countries we are in from a capital perspective and balance sheet perspective. That comment was entirely on the capital light on the data science side. And obviously, we think that is imminently scalable across geographies, across asset classes. But from our standpoint, on a purely capital-light basis, we're trying to -- everything we are doing should tell we genuinely believe that in today's world, which is a maximum gain, maximum growth world, the fastest way to get to what we're trying to do is to narrow the focus, not extend the focus. Tim McHugh: Yes. And Michael, to directly answer your question, no, we have not underwritten anything, something we've even signed an NDA to get information beyond the 3 markets. Operator: That concludes the Q&A session of the conference call. Thank you for your participation. You may now disconnect, and have a wonderful rest of your day.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 Generac Holdings Inc. Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kris Rosemann, Director, Corporate Finance and Investor Relations. Please go ahead, sir. Kris Rosemann: Good morning, and welcome to our first quarter 2026 earnings call. I'd like to thank everyone for joining us this morning. With me today is Aaron Jagdfeld, President and Chief Executive Officer; and York Ragen, Chief Financial Officer. We will begin our call today by commenting on forward-looking statements. Certain statements made during this presentation as well as other information provided from time to time by Generac or its employees may contain forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Please see our earnings release or SEC filings for a list of words or expressions that identify such statements and the associated risk factors. In addition, we will make reference to certain non-GAAP measures during today's call. Additional information regarding these measures, including reconciliation to comparable U.S. GAAP measures, is available in our earnings release and SEC filings. I will now turn the call over to Aaron. Aaron P. Jagdfeld: Thanks, Kris. Good morning, everyone, and thank you for joining us today. Our first quarter results reflect a return to strong growth as net sales increased 12% year-over-year with healthy gross margin performance and robust operating leverage. Growth during the quarter was led by a 28% increase in our Commercial and Industrial segment sales primarily driven by continued momentum in the data center end market and the almond acquisition. First quarter adjusted EBITDA margin of 18.3% expanded significantly from the prior year and was stronger than anticipated, driven by strong execution, favorable sales mix and lower-than-expected input costs and operating expenses. Given our first quarter outperformance, the continued strength in our C&I segment, including an increase in projected global data center revenue, and the expected contribution from the acquisition of Enercon, we are raising our full year net sales and adjusted EBITDA margin outlook this morning. Now discussing our performance by segment in more detail. We're continuing to progress through the final stages of vendor approval with 2 hyperscale data center customers, and we are very confident that we'll be able to secure meaningful future volume commitments from these accounts. As previously disclosed, we received a nonbinding notice to proceed for approximately $600 million in 2027 deliveries with a certain hyperscale customer, and we have begun discussing site level specifications for these projects as we prepare to ramp our supply chain and production to meet this accelerating demand. We believe the successful navigation of these rigorous approval processes will solidify Generac as a top-tier global supplier of large megawatt diesel backup power generators in the years ahead. Importantly, we have also realized significant order activity from both new and existing data center customers, increasing our current backlog to more than $700 million, which does not include the anticipated impact of the notice of reset opportunity mentioned above and represents an increase of approximately $300 million since our fourth quarter update in mid-February. This backlog growth provides visibility through 2027 even before considering the significant expected contribution from other hyperscale related opportunities and ongoing momentum with nonhyperscale customers. As we prepare for meaningful growth in large megawatt generator shipments in the coming quarters, our new facility in Sussex, Wisconsin, remains on track to begin production in the second half of this year, supporting the expected increase in our domestic generator manufacturing and assembly capacity for these products to more than $1 billion by the fourth quarter. We believe this expanded footprint will allow us to capture an increasing share of the rapidly growing demand for backup power solutions from large data center customers. And together with our international C&I production base, provides us with unique global flexibility and scale to serve this market. Additionally, on April 1, we completed the previously announced acquisition of Enercon, a leading designer and manufacturer of generator enclosures and switchgear, -- this acquisition enhances our competitive positioning for large megawatt generators by giving us direct access to the design and manufacturing processes that are an important element of the bespoke content included with large megawatt generators. Additionally, our ability to invest in additional capacity for these highly customized genset packages will allow us to solve for a growing industry bottleneck and enable us to better control overall customer lead times for our products. By bringing these packaging capabilities in-house, we expect to expand our margin profile, further improving the profitability for products sold into the markets for these products, including data center applications. In addition, Enercon's expertise in other product categories such as switchgear and packaged electronics controls also enables our participation in interesting adjacent market opportunities, which we are currently evaluating as we fully integrate this business into our C&I segment. During the first quarter, shipments to our domestic industrial distributor channel increased from the prior year and project quoting activity remains solid to start the year. While product lead times for this channel have continued to normalize over the last several quarters, we expect modest growth for the full year, supported by stable near-term end market demand as well as our continuing investments in distribution that are helping to drive market share gains. Order rates from domestic telecom customers improved sequentially during the quarter, providing visibility to better than previously expected growth for the remainder of the year. Our telecom customers continue to invest in further hardening of their networks, as dependence on wireless communications increases and global tower and network hub counts are expected to continue to grow well into the future. Additionally, the evolving telecom and digital infrastructure landscape is expanding our opportunity set with new and existing customers. We are working to leverage our track record of highly engineered solutions, market expertise and customer relationships in traditional telecom applications to capitalize on these opportunities, including data center adjacent applications. Domestic mobile product shipments to both national and independent rental equipment customers exceeded our expectations during the quarter and increased at a strong rate from the prior year. The acquisition of Allmand in January contributed to the strong year-over-year growth and outperformed our prior expectations with respect to both sales and adjusted EBITDA contribution. Many of our rental customers have begun to invest in new equipment as part of a refleeting cycle, and this timely acquisition has both broadened our customer base for mobile products and provided us with additional capacity and flexibility within our domestic manufacturing footprint. Additionally, robust order rates from our existing national rental customers are contributing to our increased overall net sales outlook for 2026. International shipments also increased at a strong rate year-over-year, driven primarily by revenue from products sold to the data center end market, global shipments of our controlled solutions and the favorable impact from foreign currency. Sales increased across most regions, partially offset by softness in the Middle East and Latin American regions, resulting from geopolitical instability and trade policy uncertainty. With the strong start to the year, we are increasing our full year 2026 C&I segment net sales guidance as a result of the increased expectations across our data center, telecom and rental markets as well as contributions from the Enercon acquisition. This is partially offset by softness in certain international regions as previously mentioned. We now expect C&I segment net sales to increase in the mid- to high 20s percent range, which represents an increase from our prior guidance for growth in the low to mid-20s percent range for this segment. And now I'd like to provide an update on our residential segment for both the quarter and the year. At our Investor Day in March, we introduced Generac Home a new organizational structure within our residential segment that brings together our home standby, portable generator and energy technology teams into a single group. As our residential backup power and energy technology solutions are increasingly integrated, this combination enables us to better leverage synergies across our product development, supply chain, operations, sales and marketing and customer service capabilities. The unification of these teams will allow us to further streamline our software platforms to better serve our customers as well as accelerate the development of products and solutions to help homeowners solve for the increasingly -- increasing power reliance, resiliency and cost challenges they are facing. Importantly, the efficiencies resulting from this new structure reflect the continued recalibration of our clean energy operating expenses and are expected to enable cost savings that support our projected residential segment adjusted EBITDA margin expansion in the coming years. We've already begun to realize these benefits, as evidenced by the expansion of our residential segment EBITDA margins by nearly 500 basis points as compared to the prior year first quarter, driven largely by lower operating expenses in the current quarter. Looking at our first quarter residential segment results in more detail, home standby generator sales were approximately flat from the prior year with higher pricing offsetting lower volumes as compared to a strong prior year period that included the benefit from an active 2024 hurricane season. The current quarter's performance was slightly ahead of our expectations as we experienced stronger-than-anticipated demand following winter storm firm. This event and the related media coverage preceding it helped drive awareness for our products, resulting in strong year-over-year growth in home consultations for home standby generators and higher shipments of portable generators. However, despite the elevated outage activity from winter storm firm, overall power outage activity for the first quarter was approximately in line with the long-term baseline average. Activations or installations of home standby generators declined as expected from the first quarter of 2025, primarily driven by markets that were impacted by elevated hurricane activity in the second half of 2024. We expect activations will return to growth in the second half of this year, underpinned by our assumption for a return to a more normal baseline average power outage environment as compared to the exceptionally soft outage environment experienced in the second half of 2025. Our residential dealer network expanded further during the quarter and now includes more than 9,500 dealers, representing an increase of approximately 300 from the prior year. Continuing interest in the home standby category from these partners provides us with further confidence in the significant growth opportunity that remains for home standby generators as contractors continue to see value with their involvement in the category. Additionally, as we continue to integrate the teams within our new Generac home organization, we intend to also unify our distribution networks with the goal of providing homeowners and channel partners greater access to a wider range of home energy solutions with enhanced service and support capabilities. First quarter sales of our residential solar and storage solutions decreased from the prior year as expected following the successful completion of our Department of Energy program in Puerto Rico. Throughout the quarter, we continued to execute against our plan of ramping production of Power Micro, the first Generac branded microinverter product with a contract manufacturing partner here in the U.S. The Power Micro product offering is expected to deliver strong gross margin contribution as sales increase throughout the second half of 2026 and into 2027. The attractive margin profile for these products, together with our ongoing focus on operational efficiencies and within the new Generac home structure are expected to contribute to our longer-term residential segment margin expansion. A significant focus for the Generac home business is to market and sell our differentiated residential energy ecosystem with ecobee positioned as the energy management hub of the home. An important metric, Ecobee's connected home count grew to -- continued to grow in the quarter to more than 5 million homes with service attach rates further increasing and providing us with a growing high-margin recurring revenue stream to complement Ecobee's expanding hardware market share. Profitability continued to improve as well with Ecobee delivering its first positive adjusted EBITDA during the first quarter, which is normally a seasonally softer quarter for these products. We are expecting continued strong growth in Ecobee shipments for the full year 2026 and as a result, we believe the benefits of a scaling top line, together with a strong gross margin profile and disciplined operating expense investment will support continued improvement in profitability into the future. In closing this morning, our first quarter results and increased 2026 outlook provide an early look at the significant earnings growth potential of our business given the dramatic sales increase in our C&I segment, healthy gross margin performance and realization of strong operating leverage. Based on our continued progress in porting multiple hyperscale data center customers, combined with the improved competitive positioning and profitability resulting from the recent Enercon acquisition, our confidence in capturing a growing share of the generational growth opportunity in the data center market has only increased. Additionally, the megatrends of lower power quality and higher power prices remain firmly intact and continue to support long-term growth expectations for our Residential segment, highlighted by the $50-plus billion penetration opportunity that we believe exists for home standby generators. We remain guided by our powering a Smarter World enterprise strategy, and we believe that we are on the cusp of a special moment in the history of Generac as a result of the more balanced growth drivers we're experiencing across our entire business. With that, I'd now like to turn the call over to York to walk through some of the first quarter financial results. and our updated outlook in some more detail. York? York Ragen: Thanks, Aaron. Looking at first quarter 2026 results in more detail. Overall, consolidated net sales during the quarter increased 12% to $1.06 billion as compared to $942 million in the prior year first quarter. The net effect of acquisitions, divestitures and foreign currency an approximate 4% favorable impact on revenue growth during the quarter. Residential segment total sales increased approximately 1% to $552 million as compared to $549 million in the prior year. This sales increase was primarily driven by higher portable generator shipments due to winter storm Fern in January 2026. And partially offset by a decline in energy storage system sales due to the completion of our DOE Puerto Rico program. Home standby generator sales were approximately flat versus prior year as higher pricing was offset by lower volumes due to a strong prior year period that included the benefit from a substantial 2024 hurricane season. Commercial and Industrial segment total sales increased approximately 28% to $510 million from $399 million in the prior year quarter, including an approximate 10% net favorable impact from the combination of acquisitions, divestitures and foreign currency. Favorable FX and the Allmand, C&I mobile products acquisition contributed to this inorganic growth, partially offset by 2 small divestitures that closed during the quarter. The core total sales growth for the segment was primarily driven by revenue from products sold to global data center customers. In addition, increased shipments to our domestic industrial distributor and rental channels and higher sales of our control solutions to the global power generation market also contributed modestly to the C&I segment sales growth during the quarter. Consolidated gross profit margin was 38.7% compared to 39.5% in the prior year first quarter. The 0.8% decrease in gross margin was primarily driven by the higher mix of C&I sales in the quarter, partially offset by favorable price/cost realization. As compared to our prior expectations, we experienced better-than-expected sales of our higher margin home standby generators following winter storm Fern. This favorable sales mix, together with strong execution and lower-than-expected input costs, supported our first quarter gross margin outperformance relative to our previous guidance. Operating expenses increased $4.6 million or 2% compared to the first quarter of 2025. The increase was primarily driven by higher intangible amortization from the Allmand acquisition. Importantly, we were able to realize strong operating leverage on higher shipment volumes while also capitalizing on operational efficiencies by recalibrating our clean energy spending as part of our Generac Home reorganization. To that end, OpEx as a percent of sales, excluding intangible amortization expense, improved from 27.9% in Q1 of 2025 to 24.8% in Q1 of 2026. Overall adjusted EBITDA before deducting for noncontrolling interest, as defined in our earnings release, was $193 million or 18.3% of net sales in the first quarter as compared to $150 million or 15.9% of net sales in the prior year. As just discussed, the improved operating leverage on higher sales volumes coupled with reduced residential OpEx drove the significant increase in adjusted EBITDA margins versus prior year. Importantly, this represents strong outperformance compared to our prior expectations helping to contribute to our higher full year 2026 guidance that I will discuss shortly. Adjusted EBITDA for the Residential segment was $139 million or 25.1% of total residential sales as compared to $112 million in the prior year or 20.3%. This significant margin increase versus prior year was primarily driven by favorable price realization and operational efficiencies from the reorganization of Generac Home resulting in lower operating expenses, partially offset by higher costs from tariffs and commodity prices. Adjusted EBITDA for the Commercial and Industrial segment, before deducting for noncontrolling interest was $67 million or 13.0% of C&I total sales as compared to $45 million or 11.4% of total sales in the prior year. This margin increase was primarily driven by improved price cost realization, the favorable impact of the Allmand acquisition, and operating leverage on higher shipment volumes. Now switching back to our overall financial performance for the first quarter of 2016 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $73 million as compared to $44 million in the first quarter of '25. The current year includes a modest noncash loss from the net impact of 2 small divestitures that closed during the quarter as we continue to trend the portfolio of noncore assets. The prior year included a $10 million noncash loss to reflect the change in fair value of our Wallbox investment. GAAP income taxes during the current year first quarter were $23.6 million, or an effective tax rate of 24.4% as compared to $14.2 million or an effective tax rate of 24.3% for the prior year. Diluted net income per share for the company on a GAAP basis was $1.24 in the first quarter of 26% compared to $0.73 in the prior year. Adjusted net income for the company, as defined in our earnings release, was $106 million in the current year quarter or $1.80 per share. This compares to adjusted net income of $75 million in the prior year or $1.26 per share. Cash flow from operations was $119 million in the current year quarter as compared to $58 million in the prior year first quarter. And free cash flow, as defined in our earnings release, was $90 million as compared to $27 million in the same quarter last year. The strong increase in free cash flow was primarily driven by higher operating earnings and a lower use of cash for working capital as compared to the prior year. From a use of cash standpoint, we closed the Allmand acquisition in January 2026 by funding the $123 million purchase price in cash. Subsequent to March 31 quarter end, we closed the Enercon acquisition on April 1. We funded the $122 million initial purchase price with $77 million in cash and $45 million in stock. Total debt outstanding at the end of the quarter was $1.32 billion, resulting in a gross debt leverage ratio at the end of the first quarter of 1.7x on an as-reported basis, which is within our target gross debt leverage range of 1 to 2x adjusted EBITDA. With that, I will now provide further comments on our updated outlook for 2026. As disclosed in our earnings release this morning, we are raising our full year 2026 outlook for net sales and adjusted EBITDA given further momentum across certain C&I end markets, the acquisition of Enercon and our first quarter outperformance. As a result of these factors, we now expect consolidated net sales for the full year to increase at a mid- to high teens rate as compared to the prior year, which includes an approximate 2% favorable impact from the net effect of foreign currency, acquisitions and divestitures. This net sales update compares to our previous guidance of growth in the mid-teens percent range over the prior year. This increased net sales growth expectation is driven entirely by the C&I segment with net sales for this segment now projected to increase in the mid- to high 20% range compared to 2025, an increase from our previous range of low to mid-20% growth as disclosed at our Investor Day in March. Incremental sales from additional data center projects, higher shipments into our rental and telecom channels and the Enercon acquisition are all contributing to this updated guidance for C&I segment net sales. For the full year, significantly higher data center revenue is expected to be the main contributor to our C&I segment organic growth, while the net effect of foreign currency, the Allmand and Entercon acquisitions, and 2 small divestitures that closed in the first quarter of 2026, are anticipated to have an approximate 5% favorable impact versus prior year. Our Residential segment net sales guidance remains consistent and is still expected to increase in the 10% range compared to the prior year. Growth in home standby generators is expected to be the primary contributor to this net sales growth during the year, in particular in the second half of 2026 and given a relatively easier prior year comparison that included a very low power outage environment. Consistent with our historical approach, this guidance assumes a level of power outage in with the longer-term baseline average for the remainder of the year and does not assume the benefit of a major power outage event during the year. From a seasonal pacing perspective, we now expect first half sales to be approximately 45% weighted and sales in the second half approximately 55% weighted, resulting in second quarter consolidated net sales growth in the approximate 9% to 10% range, driven entirely by the C&I segment. Year-over-year net sales growth is expected to accelerate in the second half of the year, given expected continued data center strength and an easier prior year comparison for the residential segment that included very low power outage activity. Looking at our updated gross margin expectations for the full year 2026. We now expect gross margin percent to increase approximately 50 basis points from our previous expectations, resulting in full year 2026 gross margins in the 38.5% to 39.5% range. This improved gross margin outlook is driven primarily by our first quarter outperformance and and the margin accretive impact of the new Enercon acquisition. From a seasonality perspective, we now expect gross margins to be more level loaded throughout 2026. Importantly, this updated guidance excludes the future impact of any potential tariff recovery as a result of the recent Supreme Court ruling related to EPA tariffs. Additionally, our outlook assumes that the removal of the EPA tariffs will get fully offset by a new tariff framework made up of incremental section 122, 232 and 301 tariffs. As a result, and given that the trade policy landscape remains dynamic, our assumptions around overall tariff rates remain consistent with our prior guidance. Given the factors outlined in our net sales and gross margin update, we are increasing our guidance range for adjusted EBITDA margins to 18.5% to 19.5%. This compares to our previous guidance range of 18.0% to 19.0%. We expect second quarter adjusted EBITDA margins to increase modestly relative to second quarter 2025 levels in the 18% range before improving sequentially in the back half of the year, reaching approximately 20% in the fourth quarter of 2026. This sequential second half adjusted EBITDA margin improvement is projected to be driven primarily by stronger operating expense leverage on seasonally higher sales volumes in the second half of the year. As is our normal practice, we will also provide, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for the full year 2020. Importantly, to arrive at appropriate estimates for adjusted net income and adjusted earnings per share, add back items, add back items should be reflected net of tax using our expected effective tax rate. For full year 2026, our GAAP effective tax rate is expected to be between 24.5% to 25.0%. We now expect interest expense to be approximately $65 million for full year '26 down from $65 million to $69 million previously expected, assuming no additional term loan principal prepayments during the year. Lower borrowings during the year are the primary driver for this reduction in interest expense guidance. Our capital expenditures are still projected to be approximately 3.5% of our forecasted net sales for the year, slightly elevated from historical levels as we continue to invest in incremental capacity and execute other projects to support future growth expectations, particularly for C&I data center products. Depreciation expense is now forecast to be approximately $108 million to $112 million in 2026, an increase from $104 million to $108 million previously expected, primarily due to slightly higher CapEx guidance and recently closed acquisitions. GAAP intangible amortization expenses in 2026 is now expected to be approximately $112 million to $116 million during the year, up from $108 million to $112 million previously expected primarily due to updated assumptions around recently closed acquisitions. Stock compensation expense is still expected to be between $54 million to $58 million for the year. Consistent with prior guidance, operating and free cash flow generation is expected to be weighted toward the second half of the year in 2026, resulting in projected free cash flow generation of approximately $350 million for the full year 2026. Our full year weighted average diluted share count is still expected to be between 59.5 million and 60 million shares in 2026. And finally, this 2026 outlook does not reflect potential additional acquisitions, divestitures or share repurchases that could drive incremental shareholder value during the year. This concludes our prepared remarks. At this time, we'd like to open up the call for questions. Operator: [Operator Instructions]. Our first question comes from the line of Tommy Moll with Stephens. Thomas Moll: Aaron, you referenced the $600 million nonbonding notice to proceed, which was also discussed at the Investor Day. I'm just curious if you can share anything about how the product testing and pilots are going there. And then related, the accompanying service capabilities don't get a ton of air time. but you did mention it at the Investor Day. And I'm just curious, is that also potentially a gating factor here? Do you need to staff up a lot with Generac folks to enable those capabilities. Aaron P. Jagdfeld: Yes. Thanks, Tommy. So yes, the notice to proceed that we talked about at Investor Day and we mentioned again this morning, that's from one of the hyperscale customers that we continue to negotiate with and I would -- maybe the best way to characterize it, Tommy, is if this was a 100-yard dash. We're like 99 yards of the way done with the race. We've got one yard left. We're in the final stages with the final agreement. There's a process, it's a gauntlet. I mean, there's literally a hurdle for every step along the way here. But all of the everything from product quality to supply chain visits, our factory visits, the audits that they put us through internal and external. We continue to march through the process and we're passing all of those gates as we go. And we really are at the very last yard of this race, this 100-yard race. So we feel really good about it. And as such, we're into -- we mentioned this in the prepared remarks, we're into discussions about the specifics around certain sites, which sites would we see next year as part of that MTP, the notice to proceed, and we're preparing accordingly. On that point, maybe transition to the second part of your question was service. This is obviously an area that as we deploy equipment to these large project areas, we need to make sure we're appropriately staffed. I think one of the great things about our industrial distribution network is over the last 5 or 6 years, we've been in -- we've talked about the investments we've made there. Some of those investments have come in the form of acquisitions. And today, we own about 30% to 35% of of our industrial distribution network here in the U.S. And we continue to work with our partners on staffing to appropriate levels. to serve the market. I mean, obviously, the ability to react to any kind of service situation is critical. And again, I think we're -- we feel like we're in a really good spot there. given our own ownership and our appetite to continue to invest and hire people as needed as the sites get deployed. Operator: Our next question comes from the line of George Gianarikas with CGF. George Gianarikas: As you look to scale hyperscale demand, I mean, how are you derisking your engine supply chain. And what sort of multiyear capacity guarantees have you secured? And maybe more specifically, any exclusivity frameworks you have to ensure that the supply remains an advantage to Generac? Aaron P. Jagdfeld: Yes. Thanks, George. Obviously, an important question in this whole effort around data centers is supply chain based, right? And it's not just the engine, although the engine, of course, is is critical, but it's alternator supply, it's cooling package supply. It's the end packaging of the product, which we're -- with our Enercon acquisition that we closed on April 1, we're taking a big step forward there trying to solve for what is becoming a fast becoming a bottleneck in the industry around finished packaging. Even if we can get great lead times on the unpackaged product, it doesn't help us if the packaging phase is constrained. So that was a big part of the thesis, our calculus in acquiring Enercon, and we look to expand that operation as well pretty aggressively here so that we can control those lead times. With respect to engines, maybe directly to your question there, we have a multiyear agreement in place with our current engine supplier, our large diesel engine supplier. That agreement allows us to have exclusivity. Here in the U.S., there are a couple of small exceptions to some legacy customers there, but nothing that I would say any of those small customers are going to be able to get through the gauntlet, at least with hyperscale customers, we don't foresee that at all. Engine supply, we feel really good about our engine suppliers capacity and their ability to not only produce at the kind of scale that is going to be needed with the volumes that we're talking about with these hyperscale customers and non-hyperscale customers, but also their appetite to continue to invest and the footprint that they have, the global footprint they have and the ability to expand that footprint as needed. So we're talking to this -- the engine partner about potential production of these engines right here in the U.S. at this point. So it might even be something cohabitated with us on some kind of joint investment. We're not exactly sure at this stage. Right now, there's plenty of capacity in place. So we feel really good about that. And we're really working to solve kind of the next level of capacity constraints in supply chain around alternators, cooling packages. We're multi-sourcing those critical components as well. And we feel like the supply chain for those other critical components, if they don't already have the capacity added, they have really good plans to add it as we enter 2027 and beyond. So at this stage of the game, we feel like we're in pretty good shape. But it's -- supply chain is something that's not 100% inside of our control. So obviously, that's something we have to keep a close eye on. I'm very pleased, though, with our team's engagement there. It's an area of strength for Generac historically, just working with supply chain, developing deep partnerships focusing on capacity adds where needed and getting ahead of it. We don't wait to react. We try to be proactive. And so I feel like those -- we're covering those bases as well as we can today. And we're basically kind of coiling the spring here as we get ready to get into the fourth quarter, back half of this year and really into 2027 really driving to the next level with the data center products. Operator: Our next question comes from the line of Mike Halloran with Baird. Michael Halloran: So on the non-data center side of the C&I piece, maybe just talk us to what you're seeing from a sequential and then how the rest of the year should play out on the kind of core rental telecom and then traditional C&I type categories. And then related layer in how the new product categories from a power range that you're bringing to bear, how those are early receptivity of those products into those markets? Aaron P. Jagdfeld: Yes. Thanks, Mike. Yes, the balance of our -- the amazing thing is the balance of our C&I business is also -- it's -- as we indicated, over the last couple of quarters, we were starting to see signs of nice recovery or growth in telecom as an example, which really began in kind of in earnest in the fourth quarter of last year and has continued to pick up steam here in early 2026, really kind of outpacing expectations on order volume giving us good confidence as part of the guidance raise here for the balance of 2026 and the C&I segment is coming from telecom. The other area is rental. It's interesting, I kind of had an epiphany, it's probably not in the [ Pifany,] it's probably too strong I'm overstating. But driving by one of these data center construction sites, there's actually one going up right next door to our Beaver Dam, our new Beaver Dam manufacturing plant. And when I was kind of taking a drive through that last year, and it's right next door, I was struck by just how much of our mobile equipment and the type of equipment that we build is on that site in light towers, mobile generators, for temporary power, temporary lighting and temporary heat even in the cold Wisconsin winters to keep construction going and construction does go, it goes 24/7 on these sites. And so it's really no surprise that what we're seeing and hearing from our rental customers, starting with our national rental customers is that the refleeting cycle really has begun. And we've been waiting on it to begin about 18 months here. It's been -- we've kind of been on the backside of that, and it's starting to kick up. And fortuitously, we had been negotiating for the Allmand acquisition and we closed that deal on January 1 as we announced, and it's just the timing couldn't have been better. We've seen just a really nice response there. That business has outperformed on top line and bottom line. And the combination of that business, our business historically was focused on national rental account customers, which typically have a little bit lower gross margin profile because they're buying in bulk, whereas the almond business was really focused on the independent rental channel, so it was a great complementary fit for us from a distribution standpoint, and it also gave us some much needed capacity. They have a nice big factory in Nebraska. And so the combination of our factory here in Wisconsin and that factory in Nebraska give us some great capacity for serving what is a growing market. Our core C&I business, the industrial distributor business has been good. Our quote rates remain pretty strong. I would tell you, I'll remind you that as we've talked over the last really 4 or 5 quarters, we've been working down our backlog there and shortening up our lead times, and we've kind of caught those now, continue to grow, albeit not at the same rate we were growing previously for those core markets. And then I think maybe the last point of your question, Mike, was around these larger machines kind of taking those to market through our traditional channels, that's been very well received. The sales cycles are very long, especially in the traditional market. So we've only started to realize the first couple of orders coming through the pipeline here. But just this week, we had an engineering symposium conference in [indiscernible] with over 200 -- I think it was like 220 engineering firms represented and it's an opportunity for us to talk about the expanded product line. One of the shortcomings of Generac historically in the C&I markets, has been our product line stopped at 2 megawatts. So now having a product line that goes to 3.2, 3.25 megawatt and then we've got an expansion of that even further to 4-megawatt on the drawing board makes us a full-line provider and it really takes away any final excuses that specifying engineering firms may have had not to specify us by name, either because they were concerned that they couldn't just it have to put us on certain specs and not on all specs because we didn't have a full product range, that's been completely eliminated now. So really good receptivity there, and we're expecting big things out of that product range in our traditional markets in the years ahead. Operator: Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. David Tarantino: This is David Tarantino on for Jeff. Maybe switching to residential. Could you give us some color on the strength in margins here? It sounds like there was some favorable mix here. But could you parse out anything unique to this quarter? And maybe how sustainable this level of margin is moving forward? Aaron P. Jagdfeld: Yes. Maybe I'll start and then maybe York can chime in, too. The margin improvement there was pretty dramatic. It was 500 basis points of EBITDA margin expansion over the prior year. And a combination of 2 things. I mean, it was primarily driven, as we said in the prepared remarks, though, by just better cost control, I would say, as we have brought together our teams there under the Generac Home the on residential, on home business that we've referred to. It's really helped us leverage our team members more efficiently across that business. We built a world-class team in our Energy Technology business. And look, the market has shifted, right? It's -- it's moved based on policy, based on continued high -- persistently high interest rates and some other things that have been presented headwinds to that market. We believe that, that long term is still a good business opportunity as retail energy prices continue to rise. I mean there's no question that self-generation, self-storage, that cost containment for homeowners and businesses around electricity rates in particular, is that's going to become a headline story here. It's already moving into the headlines. So we like that business. But the reality of it is it's softer right now because of where the market's at. And so being able to leverage that team, this world-class team that we've built and moved that into our traditional residential business or what we refer to as consumer power around portable generators and home standby. It's been a great move. We've been able to get a lot out of that team -- we've been able to get some early wins here on cost containment. That's really the primary driver for a big chunk of that improvement in EBITDA margin, and you should expect to see that going forward, Dave. We also had some gross margin improvement there as well. And maybe I'll let York just maybe chime in a little bit around that. York Ragen: Yes. No, like you said, probably about 3% of that 5% improvement was the OpEx side that Aaron just talked about, the remainder is the gross margin improvement that we saw with residential. We still continue -- will -- we did -- our home standby shipments. We did see strong demand following winter storm Fern, a little bit of favorable mix there relative to prior year, but we still are seeing positive price cost here in the quarter for the residential segment. If you recall, so we rolled out pricing probably in more Q2 of last year as a result of higher input costs and tariffs. And then as we rolled out our next-gen home standby in the second half of last year, -- we -- with the added features to that product offering, we did roll out additional price with that new product offering as well. So the combination of the higher input costs and the rollout of the new model allowed us to roll out additional price. And we saw that reading through here probably more than the cost is coming up. So still favorable price cost on the residential side that we're pleased with. Operator: Our next question will come from the line of Brian Drab with William Blair. Brian Drab: I just wanted to ask about the standby business at the moment. I think I gathered that you said it was flat in the first quarter. And then I heard a comment that the second quarter growth would be driven entirely by C&I, but I think you're still modeling for the year. I don't know if you restated it today, but you're thinking like mid-teens growth for the standby business for the full year in '26. Is there a significant ramp in the second half that you're expecting? I know there's easy comps with the weather. But can you just talk about if there is a ramp and what drives that? York Ragen: I guess, things, sorry, Aaron, I'll start and then you can maybe follow, but the Winterstorm firm Fern did help some of the residential side in Q1, we're not modeling any -- I guess, we're just modeling baseline weather for Q2. But yes, normal seasonality would have the second half sequentially increasing first half, second half. That's just normal seasonality. And then when you're looking at year-over-year growth in the second half, there should be -- you should see significant home standby growth because we just didn't have a season in '25, second half '25. So basically, the 15% home standby growth that you're referring to or overall 10% for the residential segment will come in the second half for the most part. Aaron P. Jagdfeld: And a good chunk of that is there's price as well, but half the growth in 2026, Brian, is price. With the new product line we introduced the higher price there. So that's part of the equation. But as York said, that return to base that assumption that we returned to baseline normal outage kind of long-term outage environment is a big assumption for the second half. But we start off the year well. Winter storm Fern was a nice kick. We had a lot of -- we saw a lot of interest in terms of sales leads in Q1. We'll see what conversion looks like here as we get into Q2. It's kind of the first real test for us of our new pool our lead pool system. So we're modeling Q2 off of our historical close rates when we get an influx like that. So we'll see if that holds or if it's better, maybe it will be better. We're not sure yet at this point. We've got to watch the read through. But it's a good start to the year. And as York said, we feel like with the easy comps in the back half, that we're going to see growth. We see really nice growth in the second half with Home Standby particular. Operator: Our next question comes from the line of Stephen Gengaro with Stifel. Stephen Gengaro: Two kind of connected topics for me. The first is, how should we -- and I know you kind of gave the full year guide for the company. How should we think about sort of the C&I margin progression, given obviously the strong growth that we're seeing. And maybe attached to that. I know it's early, but based on what you're seeing in order fall and you talked about the nonbinding notice, do you think growth rates in that business can remain in the teens plus into '27? Aaron P. Jagdfeld: Yes, thanks, Stephen. Maybe I'll take the first -- or the second part of the question I let York kind of tackle the margin progression because there's some there's a lot of moving pieces in that, but a lot of that is coming from leverage that we're going to get on the OpEx line. But in terms of the -- just the growth rates there, obviously, we put some aggressive targets out there and long-term growth rates at the Investor Day, but -- and the growth rates here near term are even better just given the the incremental nature, right, like we're going from almost from 0 to the kind of the $700-plus million backlog that we've talked about, right, in converting that backlog over the course of this year and next, in particular, and then the hyperscale opportunities that haven't been reflected in that backlog. And the notice to proceed of $600 million is a good representation I think, of the kind of volumes that are -- the potential that's there in terms of growth rates. I think the answer to your question, Stephen, though, is somewhat highly linked though to the CapEx spending assumptions for for data center buildout. And so it really depends on where you kind of land on the spectrum here. And I will say this, and I think it's easy -- and you got to be really careful in situations like this because it's easy to talk yourself into all kinds of things. But every single conversation we have, and it's up and down the line, it's not just the data center customers themselves, but it's the developers, the other component suppliers that are feeding this. Obviously, here in Wisconsin, we have the benefit of having a few other companies that are also feeding the data center market with products as OEMs and so just kind of comparing notes, right, just sharing notes. It's -- I think most, if not all, of these, I guess, forecast -- this is going to be more than a multiyear run. And the kind of impact that AI is going to have on businesses and on kind of society at large, I think we're just at the very early innings of that and starting to see some of the power of this and what it can do. And as that takes root, the need for data center capacity is just going to be -- is just going to grow. And so we feel really good about our longer-term growth rates. And then maybe I'll kick it to York just on the margin progression. If there are any comments there, York you want to make. York Ragen: Yes. Just to follow up on the growth rate. So if you recall in our Investor Day back in March, we did have guide a 3-year CAGR for our C&I segment of low to mid-20% range. I think obviously, we've got some visibility to the 2027 numbers with that notice to proceed that Aaron talked about as well as the backlog that we -- the $700 million of backlog that we have that will spill some of that will spill into -- so we have at least clear visibility there and we're feeling good about the growth rate. The margin progression, you're obviously seeing it here in Q1. You're starting to see that. A couple of comments there is the Enercon acquisition, which really starts April 1, that's when that closed. That should actually -- with the vertical integration and the margin profile of that and getting the margin stack of that business on top of the margin -- the data center margins that we were guiding previously, that's actually going to give us about a 50 basis point lift to our -- to the C&I segment. EBITDA margins or gross margins. So that's good. And then again, as you grow low to mid-20% CAGR over the next 3 years, you start really leveraging the OpEx infrastructure that we're building to support the data center initiative and you should start seeing more mid- to high-teens EBITDA margins in the out years in that 2028 when you get out into 2028. So continued margin margin growth for C&I is expected as you grow dramatically on the top line. Operator: Our next question comes from the line of Praneeth Satish with Wells Fargo. Praneeth Satish: So the release in there, it references a potential multiyear hyperscale agreement. Is that referring to the same customer behind the $600 million notice to proceed that was discussed at the Investor Day, potentially extending that order. Are you signaling a separate hyperscale hyperscaler opportunity, just trying to get some more detail on the opportunity set? And then just very quickly, can you confirm whether you've included the impact of the new Section 232 rules on steel in the guidance? Aaron P. Jagdfeld: Yes. I'll take the first part of your question, and then I'll let York tackle the tariff assumptions. Yes, Praneeth, we're really -- we're in conversation with 2 hyperscale customers in particular. And both would be -- we would assume would present multiyear opportunities for us. The agreements themselves, there's kind of a master supply agreement. And then once you get past that, you're officially added to the approved vendor list and then they can cut POs. So -- and each customer has a different approach to that in terms of giving you a forecast. And then those POs that would be with that. But because the planning cycles are so long on these projects, and because lead times have been stretched in our industry anyway, our lead times may be shorter, but industry lead times are longer. Many of the planning cycles they're already looking at, in some cases, 2028, and beyond because the traditional supply base for these backup systems are constrained. And so the visibility we have -- right now, it's limited to 2027. We hope that, that -- we'll get better visibility to that as we kind of get through this final stage of negotiations with these 2 customers. The customer that we are working with that we've got the notice to proceed with is the customer that were closest to the finish line. But I would say the other customer is close behind. There's just a few more steps there that we have to work through. But both of them and the volume numbers that they've kind of talked to us about in preparing us for being able to be a supplier they're significant. And I think we're already turning our attention to what do we think about for the next leg of capacity growth because we're trying to accelerate our Sussex facility ramp here into Q3. We originally slated it as Q4, trying to pull that in, so that we've got an opportunity to maybe even do some of this in the fourth quarter. But we're going to need it's the old jaws phrase, we're going to need to be -- build a bigger boat. If we need a bigger boat if we're going to win both of these accounts because that's not in our our current capacity capability today, we would definitely have to add more. So -- and then I'll kick it to York on the tariff question. York Ragen: Yes. On the 232, obviously, with the EPA reciprocal tariffs getting overruled by the Supreme Court that would be a savings to us. But with the Section 122 at least temporarily in place. And then to your question, the 232 steel aluminum tariffs, the way we've modeled it is that we're assuming that that just offsets any EPA tariff savings. So it's not going to be detrimental to our run rate margins. Currently, as they're stated today, there's some benefit, but there's some uncertainty as to sort of what 232 tariffs will be in the second half, with 301 tariffs will be in the second half. So we've just assumed that in the outlook that we've presented today that we're just being consistent with the tariff rates from our previous guidance. So not any worse, not any better, which probably is a conservative view here. Operator: Our next question comes from the line of Christopher Glynn with Oppenheimer & Co. Christopher Glynn: Just wanted to go back to the residential margin upside. Curious clearly sounds like it came in ahead of your expectations wonder if that was the speed of the unification benefits or kind of the scope of the cost structure opportunity? It sounds like maybe those 3 percentage points OpEx maybe a way point and a point in time that you continue to build off of. And really just kind of trying to tie into the 50 basis points boost to the EBITDA margin guidance. It seems like what you delivered in the first quarter. Residential EBITDA margins is really considered pretty modestly in the full year guide, especially since first quarter is the seasonal mix low for residential. York Ragen: Yes. I mean I can I can start with that. Yes, so if you look -- if you factor in what do we factor in the updated margin guide, the extra 50 basis point improvement in gross margins. You're right, it's the outperformance in Q1. And then the margin accretion from the Enercon acquisition that I mentioned that will help impact improved margins for Industrial. We, for the most part, are holding everything else again, that tariff assumption that I just gave on the previous question. Obviously, the mix elements there, we've taken up with taking up C&I, you'd expect actually expect it to mix down, but there's a little bit of improvement that we've baked in to offset that. So we're basically holding Q2, Q3, Q4, outside of our margin profile, outside of those other the Q1 beat and the Enercon acquisition. Aaron P. Jagdfeld: Yes. And then maybe on the residential OpEx, Chris, just to put a finer point on that. I mean there's some really good things going on there. I mean unification has happened quickly. That was a process we began evaluating last year and really accelerated the combination as we got in here into 2026. And so there's clearly -- that is having an impact. I would also say we're on the backside of some of those new product introductions with the Power Micro, now getting into market ramping there. And then Power cell to also in the market. So some of the the hard core development work being done last year on those projects is tapering. And then on the software side, like everybody else, we are benefiting from the trends in coding around AI and just not needing the intensity of head count there to produce productivity is up dramatically. And that's certainly helpful. So I mean it's a combination of those areas that is helpful. And I think also as you look forward, kind of the other part of your question, I think it's a good jumping off point as we go into 2026 here. We do typically have expenses start to ramp as the season. When you go back to our core business around HSB, home standby and portables, There'll be some marketing ramp and whatnot as we -- as you would normally expect seasonally here. So the raw quantum of dollars will increase, but so does the top line as we've laid it out into the second half of the year. So we feel really good about this, though. I think the Generac 1 Home project. I'm not ready to call it a complete success at this point. I mean, there's still a lot of things we're working through to bring those teams together. But we like what we see so far, and we're getting a lot of leverage out of that combined entity. Operator: Our next question will come from the line of [ Julian Dominsmith ] with Jefferies. Unknown Analyst: This is Tanner James on for Julian. Maybe just a question on what you're seeing for pricing momentum for large diesel gen sets. You spoke to the lead time advantage relative to competitors. You're talking about additional capacity growth and investment. Just prospectively, how should we think about the sequential pricing ex tariffs here into the 27, 28, 29 time frame? Aaron P. Jagdfeld: Yes. Thanks, Tanner. It's a great question. And I'll preface my response by saying, when we laid out our original business case to go into the large megawatt gen set market, historical pricing levels, the ASPs of those machines were lower because we put our business case together in a much less constrained with a much less constrained backdrop of supply. And so as that's changed, and as you would expect, we've seen pricing improve. And that has improved the overall business case for those products. Even with data center customers who buy in large quantities where you would typically assume you'd have margin pressure. And the margins are lower kind of net -- on a net basis, relative to selling a similar machine into more of our legacy traditional market, but they're not dramatically lower. And they're dramatically better than historical margins in the product segment would have been. So we feel good about that. Speaking to the forward ASPs, I think everything that we look at today is that lead times are going to remain constrained for the next several years. And a lot of that is underpinned by continued engine supply constraints. So with our competitive set, they are adding capacity. They've announced those projects and those plans, but it's going to take time to get that online. I do think over time, that probably will find its baseline and normalize -- but at this stage of the game, we feel like there are also opportunities to increase our vertical integration and efficiencies. Again, back to the Enercon acquisition, a part of our calculus there is the opportunity to capture that value with the machine and the math is very good there. As you can imagine, it's not only the ASPs on the gen sets themselves, the bar gensets that have increased, but also the packaged ASPs have increased. And so the opportunity to capture some of that value and bring that through in our gross margins there. is very strong. And so we'll look at other areas as well. And I think as we improve our efficiency and we leverage our footprint here, we think there's probably some other opportunities there to to continue to improve margin on a go-forward basis, but that may be offset by ASP kind of normalizing or even coming down slightly, but we think those gross margins are going to hang in there for the foreseeable future. Operator: Our next question comes from the line of Vikram Bagri with Citi. Vikram Bagri: I have 2 questions, one on C&I and one on residential quick ones. Are you hearing air quality permits for diesel generators as a sort of like a gating factor or a reason for delay in final orders. You talked about potential for next leg of capacity growth, where do you see sort of like the gating factors in capacity growth? You've acquired Enercon, -- so that part is said, would it require any more M&A to expand capacity beyond what you have? And then on residential, you're seeing multiple benefits from at home and expense recalibration I was wondering if you've accelerated the ET energy transition breakeven time line at all, any update on that? Aaron P. Jagdfeld: Yes. Thanks, Vic. Yes. So the C&I question -- in terms of -- I think the question was diesel on permitting, air permitting around some of these bigger projects and I think all permitting, whether you're talking air or water or other things that's become more challenging as communities grapple with the impacts that data centers may have on air, on water, on energy, there are solutions there with respect specifically to diesel backup generators, the option of using a Tier 4 certified solution. There are after-treatment packages that can be added to those projects to further improve the emissions profile -- and in particular, there are some markets where that's required kind of best commercial best available technologies are required either because of the concentration of data centers in a particular market or just concerns around diesel particulate and emissions. So -- but again, there are -- we have projects that we're involved with, where we're discussing site certifications that would include aftertreatment and/or Tier 4 certified product. So there are ways around that. I don't -- we don't see that being -- that's not a showstopper put it that way. That's something that we can solve for. On the capacity question with C&I, that question -- as we look at the future here, we're already looking for ways to expand capacity. As I said before, we've got to be forward thinking here. And we've got to be thinking not about $1 billion in capacity. But $2 billion or $3 billion in capacity. What does that look like? How do we achieve that? Can we get more out of our existing footprint, the footprint inclusive of Sussex, inclusive of what we've acquired with Enercon, but beyond that, we're also looking at other facilities. And where would we cite those facilities? Do we have time to do a greenfield? Do we not? We can buy existing real estate? Can you buy existing companies? To your point, could some of that be solved through M&A. And so we're looking at all those things. Everything is on the table. And I think you will hear from us about those capacity adds as we go forward here and in particular, as we get through these negotiations with these hyperscalers and it becomes more real, we definitely have to take action. So you should see that coming. The residential question, again, I think as you reiterated the One Home project has gone well. We still love energy technology. We just -- the technologies themselves and where we're at in the cycle there, we've got a very competitive microinverter that's in market today, and we're starting to scale. So we're moving from our initial production tooling, which was more of an approved outline. Moving it to a scale line, that's here domestically. We're getting on ABLs for more customers there. We're starting to dabble with some prepaid lease products, so that we can take away additional constraints there. And the market is changing too rapidly. As you know, there's a lot going on here in terms of consolidation of distribution. There's changes in terms of focus with other OEMs that supply either inverter products or batteries into the market. Some of those pivots are the necessity of the current environment. But longer term, look, this is simple math. If electricity retail electricity prices continue to rise. And things like storage costs and electronics costs continue to come down, we're going to see strong demand for these products in the long run is clearly going to be a bumpy 2026 and into 2027, probably for these products in terms of market demand. But we feel we're very well positioned. And when we put that together with our home ecosystem that we're building out, which is differentiated, we feel like we're in a really good position there to capture opportunities and it's a unique market. I think it helps round out our residential segment quite well, and we're very excited about the future. We just have to get through this kind of air pocket in -- at least as it relates to energy technology here in the market over the next, I would say, next year, 1.5 years. York Ragen: And the breakeven time line remains intact for 2027. Aaron P. Jagdfeld: Absolutely. Have not moved on that. Operator: Our next question comes from the line of Keith Housum with Northcoast Research. Keith Housum: Just in terms of the telecom and the national rental trajectory for both of those companies. It appears, obviously, they're both on the upper swing here. Can you just remind us, are these more refresh opportunities or growth within these markets? And then traditionally, when you guys have had an upward cycle, how long do these cycles generally last? Aaron P. Jagdfeld: Yes. Thanks, Keith. Great question. I'll talk to telecom first. Telecom cycles usually go, they're multiyear. And actually, that cycle it tends to follow kind of project build-out. So a lot of it is new build of sites. There is retrofitting of existing sites still available as part of the opportunity with telecom. And this is mostly what's referred to in the industry as outside plant back up. So it's the towers that you'd see along highways, hillsides, things like that or -- and a lot of that is still around the 5G build-out that continues for many of the carriers we're the primary supplier to all the Tier 1 wireless carriers and have been for decades. We customize product for them. We have great response rates from a service standpoint. We're able to work with their engineering and operations teams to create bespoke solutions and then build those at scale. In all honesty, it's a lot like what these hyperscale opportunities are on the data center side, in terms of working with engineering teams and operations teams for bespoke solutions and then turning that into product at scale and then being able to provide the service and support to surround it. It's just obviously a lot bigger factor, form factor and a lot bigger dollars. But telecom is usually a multiyear run. We feel really good about that going forward, a lot of new build there. And then on the mobile side, that's a refleeting cycle, there is some new -- it's new equipment, but the cycle is they'll buy for a couple of years, and then they'll not buy for a year or 2 as they let the equipment kind of age out, they watch very closely their utilization rates, their rental rates, and then they watch the residual equipment value rates as well. And it's kind of -- it's basically math. A lot of the equipment companies -- the rental equipment companies have become very sophisticated in terms of the math that they run and the metrics that they watch. And so they kind of know when they need to kind of hit the gas on spending CapEx to re-fleet so that it's available for the market and where it's supported, obviously, by the metrics that they needed to be supported by. And those typically, those runs can be usually, again, a year or 2 on and generally maybe a year, 18 months off. That's kind of what we saw here in the latest run -- there can be other cycle factors there. I'd just point this out. In the past, we've seen energy cycles as domestic energy production increases that can increase the intensity of the rental market cycle. And we -- I think we're seeing a little bit of that right now. We'll see where that goes here over the next couple of quarters. But everything we're hearing is a lot of the refleeting cycle right now is just the age out of some of the equipment they've had in their fleets. And then obviously, demand is continuing to be pretty strong. Again, you can built around data center construction activity and other activity in the domestic energy production sector. Operator: And I'm showing no further questions at this time. And I would like to hand the conference back over to Chris Rosman for closing remarks. Kris Rosemann: We want to thank everyone for joining us this morning. We look forward to discussing our second quarter earnings results in late July. Thank you again, and goodbye. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Investors are starting to draw conclusions on what Powell's tenure has meant for Wall Street.
Federal Reserve Chair Jerome Powell answers questions following the FOMC's decision to leave policy rate unchanged.
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The biggest news out of the Fed meeting was that Mr. Powell plans to stay on as a governor after his term as chair ends May 15. He cited legal threats against the institution and warned that the central bank's independence was “at risk.” Powell did not say how long he would stay on as a governor, a position he can hold until January 2028.
Federal Reserve Chair Jerome Powell on Wednesday said he will stay on the Board of Governors for an indefinite period while a probe into the renovation of the central bank's headquarters continues.
Iran is running out of places to put its oil — and in just a few weeks, global crude supply could take another hit that few investors are prepared for.
FOMC voted eight to four to leave rates unchanged. Tom White noted the decision was not surprising pointing to ongoing global risks as key factors.
The April FOMC was billed as Fed Chair Jerome Powell's final meeting as the Federal Reserve Chair. In his final meeting as Fed Chair, Powell oversaw another policy decision that stated no changes to current benchmark interest rates.
The US Federal Reserve left interest rates unchanged on Wednesday, in line with market expectations, but policymakers showed an unusual split over the path ahead as the central bank signaled a slightly more dovish tone. Fed Chair Jerome Powell announced no change to the benchmark rate, while Governor Stephen Miran dissented in favor of an immediate quarter-point rate cut.