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Operator: Ladies and gentlemen, welcome to Avery Dennison Corporation's earnings conference call for the first quarter ended on 03/31/2026. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a Q&A session. At that time, if you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and enter the queue. As a reminder, this webcast is being recorded and will be available for replay on the Avery Dennison Corporation investor website. I would now like to turn the call over to William Gilchrist, Avery Dennison Corporation's Vice President of Investor Relations. Please go ahead, sir. William Gilchrist: Thank you, Lucas, and welcome to Avery Dennison Corporation’s first quarter 2026 earnings conference call. Please note that throughout today’s discussion, we will be making references to non-GAAP financial measures. Non-GAAP measures that we use are defined, qualified, and reconciled from GAAP on Schedules A4 to A8 for the financial statements accompanying today’s earnings release. I remind you that we will make certain predictive statements that reflect our current views and estimates about our future performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today’s earnings release. On the call today are Deon M. Stander, President and Chief Executive Officer, and Gregory S. Lovins, Senior Vice President and Chief Financial Officer. I will now turn the call over to Deon. Deon M. Stander: Thanks, Gilly, and hello, everyone. We delivered a strong start to 2026, with first quarter organic sales up 1%, driven by mid single-digit volume/mix growth, and adjusted EPS up 7% year over year. These results once again demonstrate the benefits of our diversified portfolio and our strong productivity and cost control management. Our performance this quarter was a clear display of our resilience, as stronger Materials Group results offset a softer Solutions Group performance. Growth in our base label materials business more than compensated for temporary softness in certain high value categories. As we have seen in past cycles, geopolitical uncertainty has triggered a significant shift in raw material inflation. While we do not know how long this inflationary pressure may last, we are responding proactively, implementing price increases and driving material reengineering where necessary to offset these pressures. Our history of successfully managing through inflation cycles gives us high confidence in our ability to protect our profits. Furthermore, our proven ability to manage security of supply to meet customer demand remains a distinct competitive advantage, helping to ensure we remain the partner of choice for our customers if supply chains were to tighten. We continue to take decisive actions to drive both earnings growth and business resiliency by leaning into our proven playbook. Firstly, our focus remains on investing in innovation and service-led differentiation to drive growth through share gains and expand new business opportunities. To this point, we recently signed an agreement to invest an incremental $75 million in Williard, a move that deepens our long-standing partnership and strengthens our enterprise-wide Intelligent Labels platform. This investment includes a dedicated joint go-to-market team to accelerate adoption across retail, food, and logistics. It also positions us as the preferred inlay commercial partner, leveraging our leadership in design and manufacturing to bring commercial scale to Williard’s complementary technology. Secondly, we are maintaining our commercial and operational agility by taking swift commercial, procurement, and cost actions to stay ahead of inflationary pressures. Thirdly, we are extending our scenario planning, a strength of ours, and driving greater productivity and disciplined cost management to protect our bottom line through a wide range of scenarios. Turning to our segment results. Materials Group delivered reported sales growth of 11% over the prior year. On an organic basis, sales grew approximately 2%, driven by mid single-digit volume and mix growth that was partially offset by deflation-related price reductions. The quarter’s performance once again highlighted the strength of this business. We saw strong growth in our base categories, which grew mid single digits and provided a critical offset to a quieter quarter for our high value categories, which were down low single digits. Within our high value platforms, Graphics and Reflectives declined mid single digits, and Performance Materials were down low single digits, reflecting a combination of difficult year-over-year comparisons, customer order timing, and softer auto end market sales. We anticipate these high value categories to return to growth as we go through the year. In label materials, we observed some customer prebuying during March that has persisted into April. While it is difficult to predict the exact amount and timing of the unwind, we currently expect this volume to largely unwind during the second half of Q2. Our teams remain focused on aligning production levels and cost structures with the shifting demand, utilizing our framework for managing stocking cycles. From a profit standpoint, adjusted EBITDA was up low double digits and margin up a 10 basis point increase compared to the prior year. This was a direct result of our team’s execution. We leveraged our operational rigor as well as contributions from raw material engineering initiatives. These efforts effectively countered the headwinds from a less favorable product mix and high employee-related costs, ensuring we grew the bottom line while continuing to serve our customers. In the Solutions Group, reported sales for the quarter decreased 3%, with sales down 1% on an organic basis. The quarter was defined by the steady performance of our high value categories, which grew low single digits and continue to serve as the long-term growth driver of this segment. Within the high value categories, VESCOM and Embellix both delivered solid mid single-digit growth, which was partially tempered by Intelligent Labels, which was down low single digits. In our base categories, sales were slightly worse than expected, down mid single digits. From a profitability perspective, adjusted EBITDA margin for the quarter was 16.4%, down 80 basis points compared to the prior year. While we realized clear benefits from operational efficiencies and a net benefit from pricing and raw material costs, these gains were more than offset by high employee-related costs, lower base category volumes, and our investments in future growth. We remain committed to these investments, as they are critical to ensuring innovation-led differentiation, which translates to strong long-term growth and margin expansion. Turning to our enterprise-wide Intelligent Labels platform. Sales were down low single digits compared to the prior year, a result that came slightly below our growth expectation. However, this headline number really reflects a tale of two different dynamics across our end markets. In our largest category, apparel and general retail, we saw encouraging performance. Despite the high hurdle of a pre-tariff comparison from 2025, sales were up low single digits. This growth was fueled by successful program expansions, demonstrating that adoption in apparel continues to expand. Conversely, we saw a more pronounced headwind in logistics, where sales were down low double digits. This is largely a reflection of softer logistics customer demand and managing inventory during this customer’s transition to an updated chip. We remain focused on the long-term adoption curve here, and as we navigate these varied market timings, we are continuing to position the platform for the retail and food rollouts we have planned for the back half of the year. Looking ahead, we continue to expect 2026 growth for our enterprise Intelligent Labels to outpace 2025, with performance more heavily weighted towards the second half of the year as major programs scale. In apparel and general retail, we expect to deliver full-year growth, while our food category is set for an inflection as our rollout with the largest U.S. grocery retailer across bakery, meat, and deli ramps up in the back half of the year. Finally, in logistics, we are lapping outsized volume and share in 2025 and proactively managing this by expanding pilots with new partners throughout 2026. Turning to our outlook for the second quarter. We anticipate earnings growth at the midpoint of our guidance range with organic sales growth of 0% to 2%. Our performance will once again be driven by the levers within our control: scaling our differentiated solutions in both our high value category and base businesses, accelerating pricing to offset increased raw material inflation, maintaining a relentless focus on productivity and cost management, and effectively deploying capital to drive earnings. In summary, our first quarter performance, as well as our ability to grow share and earnings, demonstrates our differentiation in a dynamic environment. We are focused on the underlying secular growth drivers that inform our strategy, as well as the business resiliency actions to manage through cyclical pressures and inflationary shifts with agility. The proactive actions we are taking to ensure supply chain resilience and accelerate innovation-led differentiation, evidenced by our deepened partnership with Williard, further strengthen our competitive moat. Our proven strategies, market-leading resilient businesses, agile teams, and disciplined capital allocation approach drive confidence to continue to deliver growth in 2026 and beyond. I want to extend my sincere gratitude to our global team for their focus on creating value for all our stakeholders, their agility, and their continued dedication to excellence. Over to you, Greg. Gregory S. Lovins: Thank you, Deon, and hello, everybody. In the first quarter, we delivered strong adjusted earnings per share of $2.47, up 7% compared to prior year. Earnings growth was driven by higher volume, productivity, and favorable foreign currency translation, partially offset by higher employee-related costs and targeted growth investments. As Deon mentioned, the quarter benefited from customer prebuys ahead of price increases, particularly in the last few weeks of March, which we estimate was an approximate $0.05 tailwind to earnings in the quarter. First quarter reported sales were up 7% over prior year, with organic sales up 1% as strong volume/mix was partially offset by deflation-related price reductions. Reported sales also benefited from approximately five points of growth from foreign currency translation and one point of growth from the Taylor Adhesives acquisition. Adjusted EBITDA margins were 16.4% in the quarter and comparable to prior year. We generated strong adjusted free cash flow of $104 million in the quarter, primarily driven by an improvement in working capital compared to prior year, as well as continued disciplined capital expenditures. And our balance sheet remains strong, with quarter-end net debt to adjusted EBITDA ratio of 2.4. Our capital allocation during the first quarter remained consistent with our established framework, and we returned $133 million to shareholders through a balanced combination of $72 million in dividends and $61 million in share repurchases, with the majority of the repurchases completed in March. These actions underscore our commitment to returning capital while preserving financial flexibility and balance sheet strength to define our capital allocation approach. Turning to the segment results for the quarter. Materials Group organic sales growth came in 2% higher year over year, as mid single-digit volume/mix growth was partially offset by low single-digit deflation-related price reductions. Organically, base categories grew mid single digits, more than offsetting high value categories, which were down low single digits. Turning to label materials, we believe we successfully gained share during the quarter while also benefiting from customer purchase timing ahead of price increases. From a regional perspective, volume/mix in North America was up mid single digits, while Europe delivered approximately 10% growth. In emerging markets, Asia Pacific also grew approximately 10%, and Latin America grew high single digits. Organic growth in our high value categories in Materials Group was down low single digits overall, with low single-digit growth in specialty and durable labels, which was more than offset by a mid single-digit decline in Graphics and Reflectives, and a low single-digit decline in Performance Materials, which includes our performance tapes and adhesives businesses. Regarding the Taylor Adhesives acquisition, the business continues to perform in line with our expectations. Materials Group adjusted EBITDA was up 12% compared to prior year, with margins up 10 basis points. The expansion reflects our continued strong execution on leveraging productivity, the net benefit of pricing and raw material cost, inclusive of material reengineering, and strong label volumes, partially offset by employee cost, mix, and investments. Regarding raw material cost, we experienced low single-digit year-over-year raw material deflation in the first quarter. That deflation shifted to inflation as we went through March. We saw impacts on commodities which are linked to petrochemical prices. Our teams are leveraging our proven playbook to navigate the inflation spike through strategic sourcing and the implementation of pricing. Overall, we are anticipating high single-digit sequential inflation in the second quarter. Shifting to Solutions Group. Organic sales were down 1%. High value categories grew low single digits; base categories declined mid single digits. This reflects continued softness in apparel demand as we lap a strong pre-tariff baseline in 01/2025, as well as ongoing inventory management from our customers. Within high value categories, VESCOM was up mid single digits, driven by the continued benefit from new program rollouts, and Embellix was up mid single digits, driven by both the World Cup and industry growth. Intelligent Labels fell low single digits on lower logistics, industry, and general retail. Solutions Group adjusted EBITDA margin was 16.4%, which was down 80 basis points year over year, continuing to benefit from our productivity focus and net pricing and raw material costs, but these were more than offset by higher employee-related costs, lower base category volumes, and ongoing growth investments. Turning to our outlook for the second quarter. We anticipate reported sales growth of 2% to 4%. This sales growth includes organic growth of 0% to 2%, approximately 1% from currency translation, and approximately 1% from the Taylor Adhesives acquisition. We expect adjusted earnings per share in the range of $2.43 to $2.53, representing approximately 3% growth year over year at the midpoint. This earnings growth is driven by benefits of productivity actions more than offsetting headwinds from wage inflation and growth investments; the anticipation of destocking, which is projected to impact label material volumes in the latter half of the second quarter; and the normalization of 2025 temporary savings, largely from incentive compensation expense; and a net benefit from combined currency, share count, interest, and tax. We have also outlined key contributing factors for our full year 2026, which are largely unchanged from our prior outlook, on slide nine of our supplemental materials. We continue to expect an approximate $0.25 EPS benefit from the combination of favorable currency, which largely benefited Q1, and a lower share count, partially offset by a higher adjusted tax rate and interest expense. We have increased our expectations for restructuring savings, anticipating greater than $55 million as we continue to lean into our productivity levers. And we remain committed to strong adjusted free cash flow, targeting roughly 100% conversion for the year with fixed and IT capital spending of approximately $260 million. Assuming current economic conditions persist, we anticipate sequential increases in earnings throughout the year, in line with our recent historical seasonal patterns and excluding the impacts of destocking from the prebuy timing. In summary, we delivered a strong start to the year, achieving adjusted EPS growth of 7% compared to prior year. These results reflect our ability to drive volume and productivity while navigating a dynamic environment. We are well positioned to offset the latest round of significant inflation by leveraging our procurement excellence and proven pricing discipline. We generated $104 million in adjusted free cash flow this quarter and returned $103 million to shareholders. We continue to operate within our disciplined capital allocation framework while maintaining a strong balance sheet. With that, we will now open up our call for your questions. Operator: Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please raise your hand now using star 1 on your telephone keypad. If your question has been answered and you would like to withdraw your registration, please press the pound key. To accommodate all participants, we ask that you please limit your question, and then return to the queue if you have additional questions. Please stand by as we compile the Q&A roster. Your first question comes from the line of Ghansham Panjabi from Robert W. Baird. Ghansham, please go ahead. Ghansham Panjabi: Thank you, operator. Morning, everybody. So on Intelligent Labels, how did that play out relative to your initial expectations for Q1? And also, has your view on 2026 core sales for this business changed just given the events over the past couple of months or so? Deon M. Stander: Hi, Ghansham. Q1 played out slightly lower than we had anticipated, mostly on the logistics volume that we saw both at the customer level and some changes as they were managing through inventory in preparation for a new chip they were having. While we have not given an outlook for the rest of the year, I still believe we are going to see growth through the whole of 2026 relative to 2025 overall, Ghansham. In particular, we are going to see the second half of the year when some of the new programs ramp, particularly in food. We talked about the Walmart ramp for us in the second half of the year. We also have a number of other apparel programs that were planned and a couple of new ones that are also coming along as well. Overall, while it is difficult to know how the second half of the year will play out from a macro perspective, I feel good about our ability to drive those new programs and have them roll out, and hence we will start to see an expansion in growth rate as we go through the year. Operator: Your next question comes from George Staphos from Bank of America Securities Incorporated. George, please go ahead. George Leon Staphos: Thanks very much. Hi, everyone. Good morning. Thanks for the details. I wanted to peer into the revenue bridge for the quarter. You said sales growth is put at 2% to 4%. Organic is 0% to 2%. We have one from FX and one from Taylor, so it suggests there is not a lot of impact, if we are not misreading this, from pricing. Can you talk about how the work you are doing to offset cost pressure will materialize in terms of pricing in Q2 and perhaps more in Q3 given lags? Relatedly, any common denominator in terms of the weakness in volume we saw in the high value categories in Materials? Thank you. Gregory S. Lovins: Thank you, George. I will start with the first question. I think you are talking about the second quarter outlook. We are seeing high single-digit sequential inflation in Q2. We are implementing price increases pretty much across the globe to manage through that, with low to mid single-digit price impacts, so we would expect, sequentially from Q1 to Q2, to offset that inflationary pressure. From a year-over-year perspective, we still have some carryover deflation, which is part of what drove pricing down, as I talked about in the first quarter—down low single digits in Q1 versus prior year—really driven by carryover pricing with the deflation that we were seeing last year. Some of that carryover price down offsets some of that price increase in the second quarter, but we would expect a slight overall net price increase in Q2 versus prior year. Deon M. Stander: The only other thing I would add is that historically, when we talked about price and inflation, we have seen about a quarter gap. As we have gone through the last few cycles, our ability to manage pricing, sourcing, and inflation is much improved, and we do not anticipate any real gap in the timing of how we manage inflation and the pricing we put through. In terms of your high value category question on Materials Group overall, there were some idiosyncratic reasons in the first quarter, particularly on Graphics and tapes, which were down largely due to the really strong comp in the first quarter of last year, some intra-quarter inventory dynamics with some distributors, and some end market sales softness reflected in our Graphics business. Our anticipation is that as we go through the year, we are going to see a return to growth for those categories and overall volume increase. Operator: Your next question comes from Jeff Zekauskas from JPMorgan. Jeff, please go ahead. Jeffrey John Zekauskas: Thanks very much. You are estimating flat earnings per share in the second quarter relative to the first quarter. Normally, the second quarter is seasonally stronger. I understand there is a little bit of prebuying and you called that out as being a nickel, but usually the seasonality is stronger than that. So is what is restraining second quarter earnings growth the timing of the raw material inflation that you will get back later? And then in the third quarter, you are usually seasonally weaker than you are in the second, but you will have growth in Intelligent Labels and a little bit more price. In the third quarter, are we beginning to go up or flat or down? Where do we stand? Gregory S. Lovins: Thanks, Jeff. On your first question, as I mentioned, we had about a nickel benefit of prebuy in Q1, which then comes out of the second quarter and creates really a $0.10 swing from the first quarter to the second quarter. Historically, we have had somewhere around $0.10 to $0.15, depending on the year, of sequential seasonal benefit, as you mentioned, largely offsetting that. Looking at other factors, I would say we have a very slight price/inflation lag impact, but that is largely offset by productivity increases as we move through the year as well. Overall, it is really the seasonal benefit offset by the prebuy impact that is largely driving that. For the rest of the year, as we mentioned, we do expect continued sequential earnings growth as we move through the year. Prebuy impacts, as you said, would lower Q2 and should be a benefit from Q2 to Q3. We expect continued improvements in high value category growth as we move through the back half of the year, continued earnings impacts from share buybacks, and continuing to drive productivity growth. We would expect to continue to see sequential improvements in earnings as we move through Q3 and Q4. Operator: Your next question comes from John McNulty from BMO Capital Markets. John, please go ahead. John Patrick McNulty: Good morning. Thanks for taking my question. Maybe just dig a little bit more into the IL business. Logistics was weak, it sounded like on two things: customer volumes and then the chip change. Presumably, the chip change is a temporary thing and you get that back. Can you help us think about how much of it was just from general weakness in volumes versus that chip shift? And then as a secondary related question, the investment that you just made in Williard—if you can give us some thoughts on how you can leverage that opportunity and how that maybe brings that business more meaningfully to you over time. Deon M. Stander: John, the majority of what we saw in logistics softness is down to end customer demand volumes, and I think you have seen that publicly announced today as well. There was some degree of impact on the chip timing, but it will largely be resolved by the time we get through the second quarter. On logistics, recall what we talked about in our last call: we drove outsized growth and share in 2025, and this year we are going to be lapping that. That growth and share came because a large number of our competitors were not able to service the account as anticipated, and we stepped in to provide support. Our planning and expectation is that it will normalize in time. We have yet to see that in the first quarter, but that is our planning and expectations at the moment. We are also expanding positive pilots in logistics with other logistics providers. Turning to Williard, I am really pleased with the investment in this complementary technology. They have been a partner of ours for a long time, and we are deepening that relationship, specifically with a joint go-to-market and our role in providing support as the largest manufacturer and designer from our scale and network. Williard is reliant on Bluetooth, so it is not RFID in the way that you think about it, and it is largely applicable when you think about condition monitoring—when items need sensing related to changes in temperature, humidity, and light. This is where the technology really comes to bear. We have always talked about having a portfolio of sensors that are applicable to each business case. Think about this being really applicable in food, pharmaceutical, and some logistics at case and pallet level where you need more of that condition sensing technology. Our view as we move forward is twofold. It opens up total addressable market further for our Intelligent Labels platform overall—we think that condition monitoring is probably another 75 billion units in the long term—and at the same time, it gives us a position of strength as we think about our breadth of solutions that we can provide in partnership to all of our customers moving forward. Operator: Your next question comes from the line of Joshua Spector from UBS. Josh, please go ahead. Joshua David Spector: Hi. Good morning. I wanted to just clarify two things. On the price/cost side, Greg, I think you talked about it being a slight negative in Q2. Is all the cost flowing through in Q2, or do you have something else to deal with in Q3 based on what we see today? And then in your answer to Jeff’s question earlier around your comments about sequential earnings growth through the year—you had the qualifier about historical earnings seasonality—but I heard you answer that you think earnings would be up in Q3, and then seasonally you are normally up in the fourth quarter. Is that the right way to think about it, or would you characterize it differently? Gregory S. Lovins: On price/cost, I mentioned a slight headwind in Q2 from timing. We are continuing to see inflation increase as we move here into April and early May, so we are continuing to do price increases. Some regions are seeing higher inflation than others and are even entering a second round of pricing action. There may be a slight headwind, but overall, pricing is pretty closely matching inflation as we go through the second quarter. There will be some carryover sequential inflation in Q3, so inflation that we are seeing somewhat in the middle of the second quarter will flow into the third quarter as well. We will see a little bit of sequential inflation impact then, as well as a sequential price benefit from Q2 to Q3. We are not giving second-half guidance, but our expectation is to continue to drive significant productivity—we increased our restructuring outlook as we gave in the slides today—continue to drive high value category growth, and continue to allocate capital to increase earnings. Our focus is on continuing to drive sequential improvement as we move through the quarters. Operator: Your next question comes from the line of John Dunigan from Jefferies. John, please go ahead. John Robert Dunigan: Thanks for all the details, Deon and Greg. Really appreciate it, and congrats on performing well in a pretty tough environment. I wanted to ask on the Intelligent Labels business—you talked about the headwind from the logistics share gains that you had last year, but I think you mentioned that you did not really see any of that giveback in Q1. How much should we pencil in for a headwind year over year here in 2026? Deon M. Stander: John, we are not forecasting the remainder of the year, but we are anticipating and planning for some of that outsized volume and share that we gained in 2025 to be lapped if things normalize. We are working to offset that with additional pilots we are expanding with some of our other logistics customers. The biggest part of our overall IL program during 2026 is going to be our food program as we roll out with Walmart during the second half of the year. Recall I said we thought it would be somewhere in the high single-digit to low double-digit equivalent value across a two-year period on our total 2025 IL revenue. We are still planning to see the start of that significant ramp during the second half of this year. Because of that announcement, we have also seen more inbound from other food retailers and food supply chain players who are interested in understanding how they can leverage the technology. I am encouraged by two pilots that are running—one in North America and one in Europe—with large grocery retailers, as well as a supply chain part of the direct-to-store delivery for one of our retail customers, which is a different use case. Overall, from a food perspective, we are seeing direct ramp, and then in apparel, we will continue to see new programs roll out—a couple that are already in flight and two that will start later in the second part of the year. The other piece that I am encouraged by is the traction we are seeing with innovation technology in this area. We spoke last year about the rollout with the Inditex Group based on our loss prevention and visibility solution. We now have a second customer, another footwear brand, that is starting to use that as we go into the second half of the year, so not just new customers, but extending technology to drive new use cases as well. Operator: Your next question comes from Mike Roxland from Truist Securities. Mike, please go ahead. Michael Andrew Roxland: Thank you, Deon, Greg, Gilly, for taking my questions. Deon, just to follow up on John’s question, it sounds like you are expecting or pretty confident in Intelligent Labels ramping in the back half of the year relative to the first half. To the extent you can comment, how do you think about the cadence of IL over the duration of the year? To hit your guide for 2026 in terms of growing beyond 2025, it implies some lofty growth which seems like it is going to be more 2H weighted than 1H weighted. And then, secondly, any update on your key logistics customer and the deployment internationally? Deon M. Stander: Mike, you are right. We are going to see a significant ramp in the second half of the year, and sequentially our run rate of growth will improve as we go from here through the second half of the year. That gets us to growth above 2025 by the time we exit the end of the year. As it relates to our logistics customer, we are continuing to work with them on the international expansion, and that is going relatively well according to plan. The second piece we are doing—you probably saw some commentary in the press—is that not only are we focused on the last-mile fulfillment centers where we have been very active over the last couple of years, but as they orientate to first mile—this is the shippers themselves, their own franchise stores, and other customers—we are involved in providing support in that regard as well. Ultimately, in logistics you are going to get a combination of business models: some will choose to focus on last mile first, others will focus on first mile. We are seeing that with two or three other logistics players as we go through some of the pilots as well. Operator: Next question comes from Matt Roberts from Raymond James. Please go ahead, Matt. Matthew Burke Roberts: Good morning, everyone. Thank you for the time. Deon, a couple times throughout the call you referenced the playbook for cost reduction and specifically for inflationary pressures. Given you all have a unique window into a wide range of end markets and into how your customers are thinking about pricing going forward, whether that is in food, apparel, or other categories, how are your customers looking to offset their own cost via price, and what impact do you expect that to have on the volume outlook going forward? You talked about extended scenario planning. How far are we from reaching a threshold of consumer elasticity, if you will, after years of price increases at retail? Deon M. Stander: Sure, Matt. Relative to our assumptions at the start of the year, it is clear that inflation will be higher than we had originally planned, and the economic indicators are lower than when we started the year. What is difficult for us is to estimate the impact, timing, and consequence of how that may play out in the second half. We are expanding our scenario plans and widening them further to make sure we are prepared for all eventualities in the volume environment that may or may not play out. The biggest part of why I feel confident in our earnings growth trajectory as we go through the year—just to reiterate—is because we are going to continue to accelerate productivity. You have seen we updated our restructuring to $55 million, with the largest part playing out in the second half of the year. We know our high value categories will continue to expand as we go through the year—not just because Materials Group had some idiosyncratic challenges in Q1 that will improve, but also because our IL growth will ramp in the second half. Finally, we have the impact of share count reduction that will help us in the second half as well. Looking at our end markets overall, it varies by region and within end markets. In our materials label business, customers in regions with stronger inflation have been more cautious; some have been doing prebuying—particularly in Europe, some in Asia, and a little emerging in North America. On the end market side, retailers and brands are thinking about consumer confidence. CPG volumes have been muted for the last couple of years, and encouragingly at the start of this year we have seen a couple of CPGs indicate they are seeing some volume growth. That could be a positive benefit for us despite inflation. In apparel, sentiment has been soft for a long time—it went through tariff challenges last year—and now apparel customers are thinking about what inflation may mean for end market demand; it is a discretionary purchase. That said, apparel imports continue to be very low; apparel inventory-to-sales ratios are at the lowest since 2021, and as we go through the year we may see some upside as things normalize. We continue to work with customers on back-to-school sourcing and ultimately into holiday. Our assumptions are that if we do not see any further deterioration in the macro environment from where it is now, we would anticipate sequential earnings growth as Greg called out as we go forward through the year. Operator: Your next question comes from Anthony Pettinari from Citi. Please go ahead, Anthony. Anthony James Pettinari: Good morning. Just following up on Intelligent Labels. Understanding the big ramp is in the second half of the year, was there anything notable in terms of the exit rate in the first quarter? Was that stronger or weaker? It seems like comps could get potentially easier in Q2. Did you see any acceleration in March or April? Deon M. Stander: Nothing that stood out dramatically, Anthony. In the second quarter, we should see easier comps on our apparel and general merchandise because, if you recall, tariffs really took hold in the second quarter of last year when we saw a negative outcome then as well. As I look at where we are now, our current run rates in April reflect on both businesses a continuation of what we saw during March overall. Apparel continues to be solid from what we can see initially, and for our materials business, particularly our labels business, we continue to see some of that elevated activity which Greg spoke about, and we are unwinding as we get through the second quarter. Operator: Your next question comes from Hillary Cacanando from Deutsche Bank Securities. Hillary, please go ahead. Hillary Cacanando: Hi. Thanks for taking my question. In terms of capital allocation, you bought back $61 million in shares this quarter. Given that your leverage is stable at 2.4 times, how should we think about the pace of buybacks for the remainder of the year, particularly balancing against your investment pipeline? Gregory S. Lovins: Thank you, Hillary. We continue to follow our playbook on share buybacks, taking a return-based approach using a grid. In a period where we see share price increase, we may pull back a bit on the pace; in a period like we saw in March where the share price decelerated, we increased our pace. The vast majority of our Q1 share buyback actually came in March, and April continued at a relatively similar pace. It will depend on how things play out through the year, and we will continue to take a return-based approach accordingly. Overall, we feel good about the capacity we have to continue investing in the business organically—CapEx and innovation-related investments—and investments like Williard to help increase our future growth rates, as well as looking at opportunities for both M&A and continuing share buybacks. We feel good about our capacity across all of those fronts and will continue to take a balanced, disciplined approach. Operator: Your next question comes from George Staphos from Bank of America Securities Incorporated. George, please go ahead. George Leon Staphos: Thanks very much for taking the follow-on. Two quick ones. First, can you elaborate further on how you are expanding the scenario planning? Is it just pulling more levers on the productivity and maybe ramping the buyback as the market has allowed you, or are there any other elements you can share in terms of how you are expanding the playbook? Secondly, in terms of prebuys—recognizing you are in business to serve your customers—what are you doing to prevent too much prebuying that gives you a bit more of a destocking that has to be managed into Q2 and perhaps into Q3? Deon M. Stander: Thanks, George. In terms of expanding our scenarios, you touched on major drivers. We look to understand where there are additional productivity opportunities for us in lower volume scenarios or, alternatively, if volume continues to grow. The other element is innovation: when we have new products or solutions in the pipeline, can we accelerate them to get to market quicker? Our teams are also focused on what it takes to continue to win and drive share with customers—both new and existing—through commercial excellence backed by innovation, quality, and service delivery. Those relationships present opportunities to increase our share of wallet. Typically, in more uncertain or inflationary environments, particularly if supply chains are challenged, we see migration back to market leaders because customers trust the security we provide, and that may represent another upside in terms of share gains. Gregory S. Lovins: I think some of that addresses the question on prebuy as well. There are two primary reasons that customers do prebuy: to ensure certainty of supply and to manage price increases they see coming in the market. Our global scale is a big competitive advantage when it comes to ensuring certainty of supply—leveraging our procurement excellence and sourcing strategy. We learned a lot from the challenges of 2021 and 2022, expanded our supplier and sourcing strategies, and feel good about our ability to ensure certainty of supply. That helps limit the impact of prebuys getting too large. What we are seeing here is a much lower scale than what we saw in 2021–2022, when we saw three or four quarters of inventory building before the destock happened in late 2022 and early 2023. Right now, it is about a month or so of inventory build. We are going to continue to manage that very closely and see how it plays out as we move through the quarter. Operator: Mr. Gilchrist, there are no further questions at this time. We will now turn the call back to you for any closing remarks. William Gilchrist: Thank you, Lucas. On behalf of everyone at Avery Dennison Corporation, I want to thank everyone for joining today’s call and for the continued interest in Avery Dennison Corporation. This concludes today’s conference call. Deon M. Stander: Thank you.
Operator: Good day, ladies and gentlemen, and thank you all for joining us for this Cincinnati Financial Corporation First Quarter 2026 Earnings Conference Call. Today's session is also being recorded. It is now my pleasure to turn the floor over to Investor Relations Officer, Dennis E. McDaniel. Welcome, Dennis. Dennis E. McDaniel: Hello. This is Dennis E. McDaniel at Cincinnati Financial Corporation. Thank you for joining us for our First Quarter 2026 Earnings Conference Call. Late yesterday, we issued a news release on our results along with our supplemental financial package including our quarter-end investment portfolio. To find copies of any of these documents, please visit our investor website, investors.synthin.com. The shortest route to the information is the quarterly results section near the middle of the investor overview page. On this call, you will first hear from president and chief executive officer, Stephen Michael Spray, and then from executive vice president and chief financial officer, Michael James Sewell. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses may be made by others in the room with us, including Executive Chairman Steve Johnston, chief investment officer Steven Soloria, Cincinnati Insurance’s chief claims officer, Mark Shambo, and senior vice president of corporate finance, Andy Schnell. Please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties, direct your attention to our news release and to our various filings with the SEC. Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules, and therefore is not reconciled to GAAP. Now I will turn the call over to Steve. Stephen Michael Spray: Good morning, and thank you for joining us today to hear more about our results. Performance for the first quarter of the year was good and included several aspects that demonstrated the success of our proven strategy and our ability to execute it. Both our insurance and investment operations performed quite well. Net income of $274 million for 2026 included recognition of $82 million on an after-tax basis for the decrease in fair value of equity securities still held. Non-GAAP operating income was strong at $330 million for the quarter compared with an operating loss of $37 million a year ago. The 95.6% first quarter 2026 property casualty combined ratio improved by 17.7 percentage points compared with first quarter last year, including a decrease of 14.2 points for catastrophe losses. We had an excellent 87.5% accident year 2026 combined ratio before catastrophe losses for the first quarter. Turning to premium growth, our consolidated property casualty net written premiums grew 7% for the quarter, including a favorable 2% effect from net reinstatement premiums recorded in first quarter 2025. Our strong financial position and sophisticated pricing and segmentation models allowed us to benefit from market disruption over the past few years. We stayed the course providing a stable market for our agents, in turn, growing at an accelerated pace. In fact, in just the last seven years, we have doubled the size of our consolidated property casualty net written premiums. As those market challenges shift, growth is slowing as our underwriters continue to emphasize pricing and risk segmentation on a policy-by-policy basis in their underwriting decisions. Estimated average renewal price increases for most lines of business during the first quarter were lower than 2025, but still at levels we believe were healthy. Commercial lines in total averaged increases near the high end of the low single-digit percentage range, and excess and surplus lines was again in the mid single-digit range. Our personal lines segment, including personal auto and homeowner, was in the high single-digit range. Our premium growth objectives are further supported by exceptional claim service and our deep relationships with best-in-class independent insurance agents. Next, I will comment on first quarter performance by insurance segment compared with a year ago. As we pursue profitable premium growth, we believe pricing discipline in a challenging market contributed to strong profitability this quarter. Commercial lines grew net written premiums 3% with a 98.6% combined ratio that increased by 6.7 percentage points, including 6.0 points from higher catastrophe losses. Personal lines grew net written premiums 15% driven by Cincinnati Private Client. The combined ratio for personal lines was 96.8%, 54.5 percentage points better than last year, including a decrease of 41.9 points from lower catastrophe losses. Excess and surplus lines grew net written premiums 8% and produced a very good combined ratio of 89.3%. Cincinnati Re and Cincinnati Global each continue to contribute to profitability and reflect our efforts to diversify risk and further improve income stability. Cincinnati Re’s first quarter 2026 net written premiums decreased by less than 1%. Its combined ratio was an outstanding 79.7%. Cincinnati Global’s combined ratio was also stellar at 78.7% along with premium growth of 31% as it continues to benefit from product expansion in recent years. Our life insurance subsidiary continued to deliver excellent results, including 24% net income growth. In addition, term life insurance earned premiums grew 7%. I will end my commentary with a summary of our primary measure of long-term financial performance, the value creation ratio. Our VCR was 0.2% for 2026. Net income before investment gains or losses for the quarter contributed 2.1%. Lower overall valuation of our investment portfolio and other items contributed negative 1.9%. Now I will turn it over to Chief Financial Officer Michael James Sewell for additional insights regarding our financial performance. Michael James Sewell: Thank you, Steve, and thanks to all of you for joining us today. We reported growth of 14% in investment income in 2026 driven by strong cash flow from insurance operations. Bond interest income grew 12% and net purchases of fixed-maturity securities totaled $624 million for the first three months of the year. The first quarter pretax average yield of 5.02% for the fixed-maturity portfolio was up 10 basis points compared with last year. The average pretax yield for the total of purchased taxable and tax-exempt bonds during the first quarter of this year was 5.37%. Dividend income was up 13%, including a $6 million special dividend received from one of our equity holdings. Net sales of equity securities totaled $54 million for the quarter. Valuation changes in aggregate for the first quarter were unfavorable for both our equity portfolio and our bond portfolio. Before tax effects, the net loss was $71 million for the equity portfolio and $220 million for the bond portfolio. At the end of the first quarter, the total investment portfolio net appreciated value was approximately $7.7 billion. The equity portfolio was in a net gain position of $8.1 billion while the fixed-maturity portfolio was in a net loss position of $4[inaudible] billion. Cash flow continued to benefit investment income growth. Cash flow from operating activities for the first three months of 2026 was $656 million, more than double a year ago. Regarding expense management, our first quarter 2026 property casualty underwriting expense ratio decreased by 0.6 percentage points, reflecting a favorable 0.7 points from the effect of net reinstatement premiums in the first quarter 2025. Turning to loss reserves, our approach remains consistent. We aim for net amounts in the upper half of the actuarially estimated range of net loss and loss expense reserves. As we do each quarter, we consider new information such as paid losses and case reserves, then we update estimated ultimate losses and loss expenses by accident year and line of business. For the first three months of 2026, our net addition to property casualty loss and loss expense reserves was $466 million, including $419 million for the IBNR portion. During the first quarter, we experienced $81 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 3.2 percentage points. On an all-lines basis by accident year, net favorable reserve development for the first three months of 2026 included favorable $72 million for 2025, favorable $25 million for 2024, and an unfavorable $16 million in aggregate for accident years prior to 2024. I will conclude my comments with first quarter capital management highlights. We paid $133 million in dividends to shareholders. We repurchased approximately 1.1 million shares at an average price per share of $164.93. We believe both our financial flexibility and our financial strength are in great shape. Parent company cash and marketable securities at quarter end was $5.6 billion. Debt to total capital remained under 10%. And our quarter-end book value was $101.60 per share, with nearly $16 billion of GAAP consolidated shareholders’ equity providing plenty of capacity for the profitable growth of our insurance operations. Now, I will turn the call back over to Steve. Stephen Michael Spray: Thanks, Mike. I think this quarter’s solid results demonstrate that we have the people and plans in place to keep building on our success regardless of market cycles and conditions. Our associates continue to answer the call for our agents and the communities they serve, developing deep relationships and informing smart underwriting decisions. Early in March, AM Best also expressed their confidence in our plans by affirming our A+ rating, citing our strong balance sheet and operating performance. If you would like to hear more about how we will continue to deliver value for policyholders, agents, associates, and shareholders, we invite you to join us for our annual meeting of shareholders this Saturday, May 2, at the Cincinnati Art Museum. You are also welcome to listen to our webcast of the meeting available at investors.synfin.com. As a reminder, with Mike and me today are Steve Johnston, Steven Soloria, Mark Chambeau, and Andy Schnell. Jim, please open the call for questions. Operator: We will now open the call for questions. Gentlemen, thank you for your remarks. And to our phone audience, at this time, if you would like to ask a question, simply press star followed by the digit one on your telephone keypad. Pressing star and 1 will place your line into a queue, and I will open your lines individually and you will be invited to direct your question. We will take our first question today from the line of Michael Wayne Phillips at Oppenheimer. Please go ahead. Michael Wayne Phillips: Yes. Thank you. Good morning, everybody. Thanks for the time. I guess, Steve, I want to dive a little more into the renewal price change in commercial. It seemed to decelerate a little more than maybe we have heard from others, but it is obviously hard to really accurately say on that. I guess your high end of low single digit, obviously it is impacted by your commercial property and comp. They are not a small piece of that segment. So maybe could you provide any comments on the pricing environment in your commercial casualty specifically, what that looks like today, and maybe how that compares to what you see as loss trends in commercial casualty? Stephen Michael Spray: Yeah, thanks. Good morning, Mike. Good to hear from you. The high end of the low single-digit range—just so you know—that is all in. That takes into account some of the impact that we get from our three-year policies. Specifically to casualty, and not bifurcating it down, but just all in on casualty, we are getting mid single-digit increases. I think more importantly, from my perspective, with shifting market cycles, our focus is on being a package writer, focused on policy-by-policy risk selection, terms and conditions, and then using the pricing tools that we have and segmenting the book. That is where we focus most of our efforts versus any straight average. The straight average just does not tell the story through any market cycle. But I think even now, as things are softening, it is even more crucial that our underwriters, working with agents, continue to deliver on that segmentation strategy. Michael Wayne Phillips: Okay, Steve. Thank you. I guess, switching over to personal, specifically the umbrella book. You have grown that nicely in the last couple of years. I think you are north of $200 million or so of premium—so small base. But can you just talk about your strategy there? How big do you want that to be, say, the next year or two? Does it get to a half billion in the next two years? And thoughts on the volatility of that business in terms of losses—so just thinking about how much you want to grow in the near term on that. Stephen Michael Spray: Yeah. Thanks, Mike. I have no specific guidance on how large we want to grow that umbrella. Again, in personal lines, as you know, we are a package writer, and so in many cases that umbrella comes along with that, probably even more so with our focus on private client. Those individuals—higher net worth folks—are desiring larger limits, and we have the balance sheet and the expertise. That has performed well for us. Legal system abuse in commercial lines has been well documented, and so it is something we pay attention to—certainly in personal lines, especially with umbrella and excess. But we feel good about where we are there, and we will continue to grow it. Michael Wayne Phillips: And then just one quick numbers question if I could. Mike, the $72 million on 2025 accident—I assume that is homeowners and property ones? Michael James Sewell: Repeat that again. Michael Wayne Phillips: Yeah. Mike, you mentioned the $72 million of favorable in 2025. I was just curious to make sure—was that homeowners and commercial property? Michael James Sewell: Yes. Michael Wayne Phillips: Okay. Cool. Thank you, guys. Stephen Michael Spray: Thank you, Mike. Operator: Our next question today will come from the line of Joshua David Shanker at Bank of America. Joshua David Shanker: Yes. Thank you for taking my question. But first, I just want to say, Dennis, on Dennis’ retirement, it is a big deal at Cincinnati Financial Corporation. I wish Dennis the best and he is just the best in the business, so I only have great things to say and think about him. So we are going to miss you, Dennis. Dennis E. McDaniel: Well, thank you, Josh, and the good thing is the team is ready to continue to execute. I am around for a few more months, but thank you. Joshua David Shanker: Well, so here are my questions. First of all, when I look at the growth rate of the homeowners business and I compare that to other personal and auto, I kind of think of a high net worth package as you want everything from the customer—or maybe I am wrong about that. You know, you sell a whole package. We want your cars. We want your toys. We want your art. Why is there such a difference in the growth rates? Are you looking for a property-only type of high net worth purchase, or what is the difference between the growth rates of the subgroups within personal lines? Stephen Michael Spray: Yeah. Thanks, Josh. You are all over it. We are a package writer both in middle market personal lines and in private client. We want to be an online solution for the policyholders. But you make a great point. I think one of the advantages that we have by being a premier carrier for our agents in middle market and high net worth is diversification that naturally comes with that business. High net worth—you are right—is more property driven. Homes are larger. There may be fewer vehicles, but high net worth generally is property driven, less auto. Middle market is the opposite—lower property, higher auto. And then, you did not ask this, but I will take it a step further: you get geographic diversification between middle market and high net worth as well. Middle market, in general, tends to be more in the center of the country; private client is more Northeast, West Coast, and Florida driven. Joshua David Shanker: When I look at the numbers—23% growth in the homeowners segment—but the new business production is down a lot. I assume most of that growth is really coming through rate these past couple of quarters. Can we bifurcate between how much rate you are asking and how much your appetite for unit growth has changed in the past six months? Stephen Michael Spray: Yeah, you are right. There are a lot of moving parts. One thing I would say I would go back to, Josh, is that last year we had reinstatement premiums in the homeowner line and that is making the comps different, so I would point you to that. With regards to the new business, after the loss last year in California, as we have discussed, we did an immediate after-action lessons learned. And so growth in California new business really slowed last year. It has kind of picked back up here in the first quarter, but not enough to overcome what came down there. We have still got a lot of rate working into the book. I think the biggest thing, though, Josh, to wrap it all up—again, a lot of moving parts—but if you look at 2024 and 2025, and we have talked a lot about this, they were historic hard-market years, especially for personal lines. So I think we are just really returning back to maybe a little bit more of a normal state. Joshua David Shanker: Is there a decline in the amount of new business, as measured by number of homes, that you are putting on in 1Q26 versus 1Q25 and 1Q24? Stephen Michael Spray: Yeah. In commercial lines, our policy counts are growing. In personal lines, the exposure units have been down a little bit. So to answer your question, yes, policy counts are down a bit. Joshua David Shanker: If you— No, no, you can continue. I think it is a good thing you were saying. Stephen Michael Spray: Which we think is a good thing. Stephen Michael Spray: We are getting more rate for less exposure. We think that bodes well. Joshua David Shanker: And then in California, when you are raising price, are you finding that you are retaining that customer—that the customer is happy to stay on that price—or is that causing a higher amount of churn? Stephen Michael Spray: There is competition back in California now. Just as a reminder there as well, Josh, all new homeowner business that we are writing today—and have been over the last several years—is on an excess and surplus lines basis. So the rates, I think over the last several years there, have been pretty stable. We feel they are adequate and we are comfortable with the pricing there, but we are seeing some additional competition come back into California for new business. Joshua David Shanker: Well, thank you very much for all the clarity. Stephen Michael Spray: Great questions, Josh. Thank you. Operator: Next, we will hear from Michael David Zaremski at BMO Capital Markets. Michael David Zaremski: Great, thanks. First question, shifting to capital management. We saw elevated share repurchase levels—I think the highest we have seen in a while. I can see that the capital currently versus historical, we can see top-line growth is running a bit lower as the market becomes more competitive. Maybe should we be run-rating this level of buybacks unless things change meaningfully on the valuation of the CINF stock? Michael James Sewell: Yes, Mike, this is Mike. It is a great question and thank you for it. It was probably, I will say, a little elevated for Q1 of this year. But is it unusual? No, it is not. We still have said that we are doing maintenance—maybe a little bit of maintenance plus. The last year that we did a little over 1 million shares in Q1 was back in 2020. So, six years ago, we did 2.5 million shares. But if I start to look at full years, we have done almost 1.1 million this year. Last year, we did 1.3 million, 1.1 before that. In 2022, we did 3.7 million. So I would say this is not unusual. I would call it maintenance plus. And we will see how things go the rest of the year and what we determine to do. Michael David Zaremski: Got it. Thanks for the clarification there. Maybe switching gears to the question I think we get the most on—back to the lawsuit/social inflation lines of business. We can see from your KPIs that the casualty has been favorable for the last five quarters, and the underlying in commercial auto, etc., seems to be improving a bit. Would you say you are getting over the hump of more rearview-mirror there, or is it still to be determined and you are making sure to be very careful on growth, using your analytics in those lines of business? Thanks. Stephen Michael Spray: Yeah, thanks, Mike. You are all over it. I would say it is both. We are confident in the pricing and the risk selection that we are seeing there. But I would also say we are not out of the woods as an industry, and specifically us, when it comes to social inflation—legal system abuse, as we prefer to call it. You are seeing some tort reform push around the country. We monitor that. APCIA, I think, does an excellent job on behalf of the industry. But I think there is still a tremendous amount of uncertainty around that. You can see it in our ex-cat accident year picks, both in commercial casualty and commercial auto. I think commercial auto is the epicenter. So I do not think we are over any hump, but I think we are prepared for what might come at us—based on our picks and, as you mentioned, the analytics, the way we are pricing risk-by-risk and doing risk selection. Michael David Zaremski: Got it. That is helpful. Then just lastly, stepping back, when we think about the overall competitive environment in commercial lines—and taking into account your risk selection analytics, etc.—is it fair, if we paint a broad brush, to say pricing power in commercial lines is still biased downwards versus kind of stable over the coming year, despite still material levels of social inflation impacting the broader industry? Stephen Michael Spray: Mike, I will not project forward for you. Where we are right now, I would say you cannot paint the whole book with a broad brush. We are definitely seeing pressure. The larger the premium, the larger the account, the more pressure there is there. Peel that back a little bit—it is even more so on commercial property. We are still seeing net rate, but as I mentioned to Michael earlier, the average really does not tell the story. It is looking at every single policy, on a risk-adjusted basis, and making decisions from there. Our underwriters—I cannot speak highly enough of how they are executing on that through all market cycles. And I think what makes it more efficient and effective is that they are dealing with the most professional agents in the business who can convey value. That is what we are looking for—long-term consistency, stability, and predictability. I would be remiss if I did not mention just how our underwriters and our agents are executing on that. Michael David Zaremski: And just lastly then, I know Cincinnati Financial Corporation has been proactively moving into the—larger account is not the right word; I do not want to compare you to Chubb or AIG—but bigger premium policy levels over many years now. Does that just mean maybe the hit rate could be a bit lower on the larger premium stuff if the current competitive environment sticks? Thanks. Stephen Michael Spray: Yes, Mike. Absolutely. And you are right. We have always written larger accounts for our agents, but we really decided to get deliberate about it and build out expertise within the last decade. We continue to grow that unit. Our agents are responding well to the expertise that we bring to the table across all disciplines there. But yes, as we are growing that, it might be putting a little bit more of an outsized pressure because not only are we not winning on some accounts based on our view of the risk, retention is struggling there a little bit too. Michael David Zaremski: Thank you. Stephen Michael Spray: Thank you, Mike. Operator: Jon Paul Newsome at Piper Sandler, you have our next question. Please go ahead. Jon Paul Newsome: I was wanting to go back to the reserve issues. There was a very small change in the past pre-2024. I presume that is pretty much all casualty at this point. Are we making a little bit of a statement or not? I do not want to read too much into $16 million, but about what is going on with casualty reserves there? Michael James Sewell: No, Paul. Let me state that again. In total, we had 3.2 points of favorable development; it was $81 million. So this is in total. $72 million of that favorable development was for accident year 2025. $25 million was favorable for 2024. And then the remaining $16 million unfavorable was across multiple years prior to that. So it is really spread across multiple accident years. I would say nothing is really popping out to me. Jon Paul Newsome: There was a statement in your 10-Q that was sort of a qualifier for the reiteration of your long-term combined ratio goals, something along the lines of there are several reasons why 2026 results might be below the long-term targets. Any color on that thought and what we should be thinking about in terms of what you are concerned about? Stephen Michael Spray: No, Paul. Nothing more to read into that. Our long-term target is still 92 to 98. We will continue to underwrite and price risk-by-risk. We are still writing the same mix of business—everything there is consistent. With the market putting more downward pressure on rate, I think it is just an acknowledgment that we will be prudent in our picks there. Jon Paul Newsome: Okay. Makes sense. Thanks, guys. Appreciate it. Stephen Michael Spray: Thank you, Paul. Operator: And a reminder to our phone audience that it is star and 1 if you have a question or even a follow-up. We will hear now from Meyer Shields at KBW. Meyer Shields: Great, thanks so much. I guess one question: you talked about the 108 agency appointments in the first quarter. I know that historically, Cincinnati Financial Corporation has been very demanding in terms of agency quality. Does that number have to slow down at any point in time? And maybe less big picture, I was hoping you could talk about which geographic regions are seeing the most appointments right now. Stephen Michael Spray: Yeah. Thanks, Meyer. The strategy as a company has always been to have as few agents as possible, but as many as necessary. You look at us on a relative basis to the industry and to our peers: I think we have about roughly 2,400 agency relationships operating out of 3,500-plus locations. We have always had a limited distribution model, and even adding three or four hundred agencies—or whatever it might be—in a year is still a relatively small number. But I think the most important point, and you make it, Meyer, is I feel like in my thirty-five years, one of the keys to our success is we have always done a great job of underwriting agencies. You point to that with the quality, and that is a big focus of ours—just making sure that we are aligned with these agencies, that they are professional, they are centers of influence in their community. We think that there are a lot more agencies across the country that meet those standards, and we will continue to appoint while keeping our standards high. To your question on various states, we feel like we can appoint agencies in any state and do well, but we do prioritize agency appointments in those states we feel like right now we have a better-than-average shot at good risk-adjusted returns. Meyer Shields: Okay. Great. That is very helpful. Another question: do either Cincinnati Global or Cincinnati Re have any exposure to the political violence, marine, or energy risks in the Middle East right now? Michael James Sewell: To answer that—and thanks for the question, Meyer—it is very little. There was a little bit more on the Cincinnati Re side, but it was $5 million. On the Cincinnati Global side, it was $1 million, and actually it was below $1 million. So very minor in total, but we will be watching that one day at a time. Meyer Shields: Okay. Perfect. Thank you so much. Operator: We have no further questions from our audience at this time. Mr. Spray, I am happy to turn the floor back to you, sir, for any additional or closing remarks that you have. Stephen Michael Spray: Thank you, Jim, and thank you all for joining us today. We look forward to speaking with you again on our second quarter call. Operator: Ladies and gentlemen, this does conclude today’s meeting, and we thank you all for your participation. You may now disconnect your lines and have a great day.
Operator: Good afternoon, and welcome to the Mondelez International First Quarter 2026 Earnings Question-and-Answer Session. [Operator Instructions] On today's call are Dirk Van de Put, Chairman and CEO; Luca Zaramella, COO and CFO; and Shep Dunlap, SVP of Investor Relations. Earlier this afternoon, the company posted a press release and prepared remarks, both of which are available on its website. During this call, the company will make forward-looking statements about performance. These statements are based on how the company sees things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in the company's 10-K, 10-Q and 8-K filings for more details on forward-looking statements. As the company discusses results today, unless noted as reported, it will be referencing non-GAAP financial measures, which adjust for certain items included in the company's GAAP results. In addition, the company provides year-over-year growth on a constant currency basis unless otherwise noted. You can find the comparable GAAP measures and GAAP to non-GAAP reconciliations within the company's earnings release and at the back of the slide presentation. Operator: We will now move to our first question. We'll take our first question from Andrew Lazar with Barclays. Andrew Lazar: Dirk, I was hoping you could walk us through a bit more around the key drivers and climate in emerging markets as well as where you're seeing improvement in some of the key developed markets. I think in the prepared remarks, you mentioned returning to volume share growth in European chocolate while in U.S. biscuit, I think there was a positive inflection in March. And both of these are areas where there's been more pressure and in large part, why some flexibility was built into guidance to start the year for fiscal '26? Dirk Van de Put: Andrew, yes, let me maybe start with the developed markets. We're pleased with our improving performance in the developed markets. It's in line, maybe even slightly better than our expectations. If I first look at Europe, consumer confidence there is stable, but it's fragile as you would expect from the Middle East conflict. Snacking value growth is holding up quite well, and the penetration of biscuits and chocolate categories, for instance, is holding up also. So we had a good start of the year. The retailer negotiations are generally complete, and they are in line with our planning. We had a very robust Easter season, which share improvements in several of our markets. Our Biscoff partnership continues to do really well. So happy with the European performance. Linked to that, chocolate in Australia and New Zealand had very strong growth, again, driven by strong Easter. Biscoff there is onto an incredible start, and we have some very strong share gains. The U.S., the consumer confidence there remains quite low. We expect it to further deteriorate as the Middle East conflict continues. Purchasing power is up, but the consumer remains very concerned about affordability, economic outlook and job security. Our main category, biscuits, the value is flattish. And where there is growth that's usually in the value club channels and in better-for-you and premium. We feel that we had a good first quarter with slightly positive net revenue growth in North America, driven by that momentum in the growth channels that I was saying. We gained some share in crackers led by strong performance of Ritz. And also our candy business is doing quite well as well as our North American ventures, particularly, Perfect Bar and Hu, they continue to grow well. Oreo was a little bit less, but we had a limited time offer this year that didn't perform as well as last year's, but we have strong plans in place to improve Oreo in the year to go. I think we will continue to see a gradual improvement of our North American business because we are increasing our brand reinvestments. We're trying to sharpen our PPA and hit the right price points as well as in Europe, of course. We have the growth channels and the new occasions, and we've got some strong good innovations that are in flight. So on developed markets, I would say, a good performance. Then emerging markets, we are very pleased with our performance in emerging markets. It remains very strong. It's about 40% of our business, as you know, we grew 6.3% in Q1. If I first go to the consumers, of our 4 key markets, the only place where the consumer is softer is in China, although it improved versus the last quarter, the confidence. And we remain positive that, that consumer confidence in China will continue to improve. We see a very positive confidence in India. And also Mexico and Brazil, we feel the consumer is in a good place. Of course, everywhere the consumer is quite cautious as it relates to the conflict and what that could mean for inflation and their energy cost. Snacking categories remain quite resilient across all those emerging markets, also in other geographies except on top of the top 4. Value growth is holding up really well, and particularly, biscuits and chocolates are doing quite well. So if I look at the results of our business, this will -- they were all driven by strong Easter. So overall, a 6.3% growth. Volume mix in emerging markets was up 0.5%. If I take Argentina out, it's almost 1% volume growth. China was mid-single digit. We had a strong Chinese New Year. Evirth, the acquisition there in cakes and pastries, high single-digit growth, and we continue to increase our distribution. India, we had a strong double-digit growth in Q1 in chocolate and in biscuits. There, we launched Biscoff in biscuits and our line is already sold out. So a very strong launch there, too. And then, of course, there was the GST change in India that is helping consumption in quite a way. Brazil, we have high single digit in Q1, a very strong execution across biscuits, chocolate and gum and candy. Mexico was flat in Q1. But overall, we feel good about our gum biscuits, chocolate and meals business, but we had some softness in our candy and powdered beverages there. We continue to see emerging markets as a sustainable growth engine, and we are quite optimistic for the long term. Our categories are still underpenetrated. We are reinvesting quite strongly this year. We have a long runway on distribution. We continue to build our global brands, and we can start doing some RGM in these markets. So we feel very good about the start in the emerging markets. That would be it, Andrew. Operator: We'll move on now to Peter Galbo with Bank of America. Peter Galbo: Dirk, there was a -- in the prepared remarks, you talked a lot about reinvestment. Obviously, a strong start to the year here, but there was a decision kind of made to reaffirm the guidance. Obviously, you mentioned some of the parameters around consumer confidence globally. But maybe you can just expand a little bit on, given the strong start to Q1, the decision to only reaffirm EPS, a little bit more around the reinvestment. And then I believe there's a line in the slides about strong earnings growth for 2027. Off the back of that, I know it's probably too early, but if there's any parameters you can put around that as well. Luca Zaramella: Thank you, Peter. I'll take the question, given it is on EPS and overall broader outlook, I presume. So look, we feel quite good about the start of the year. I think you saw the emerging market numbers. They are performing well. I would add maybe a little bit of color saying that the growth is really broad-based across categories and across geographies. Clearly encouraged by developed markets where having addressed some chocolate price gaps in Europe and having fine-tuned the promo strategy in the U.S. is yielding good results. And importantly, I think we have some new product launches that are performing well above all, we mentioned Biscoff. So look, I think it's fair to say we are ahead of expectation in Q1. But on the remainder of the year, while we continue to be cautiously optimistic, we need also to address some headwinds that we didn't have in our original forecast, particularly as they stem out of the Middle East crisis. The team is managing that situation quite well, finding alternative routes to produce our brands and to deliver our brands, but that is coming at an extra cost. And clearly, the oil cost albeit we are covered for the year is having a little bit of an impact on the profitability. So look, we were ahead. We are ahead. We are optimistic about the remainder of the year. We have the Middle East situation in terms of extra costs under control. But at this point in time, to be able to swallow it, we had to confirm guidance on the bottom line. Clearly, we are confident. But as I said also, quite a few times given there is quite a bit of momentum, particularly in emerging markets and in some brands, both in Europe and in the U.S., if EPS upside materializes, we would like -- most likely to invest it back in the business and really continue momentum ahead of clearly what we committed to, which is a strong 2027 EPS growth. Hopefully, that makes sense. Peter Galbo: Yes. And Luca, maybe just as a follow-up. You said you're through most of the European negotiations at this point kind of in line with expectations. Just -- maybe you can give us a little bit more color like where are you still left to go? Are there certain geographies that are wrapping up still just as we think about kind of goalposts getting through 2Q and wrapping up negotiations in Europe? Luca Zaramella: No, we are almost entirely done. We are talking about a couple of small customers here and there, but nothing really material. Importantly, we executed well in Easter, and we have promotions lined up for the remainder of the year. So we feel quite good that relationship with retailers in Europe is in good terms and in good territory in terms of the remainder of the year. Operator: We'll move on to Megan Clapp with Morgan Stanley. Megan Christine Alexander: Maybe we could pick up there on Europe. And Luca or Dirk, maybe you could just talk a little bit about what you're seeing in the competitive environment today? Clearly, it's been a big focus. You talked about when we were sitting here 2 months ago, some questions as to how the competitive environment could evolve given the volatility in cocoa. So just maybe you could give us an update on what you're seeing in the competitive environment and how you're kind of thinking about the rest of the year? Dirk Van de Put: Yes, yes. Thank you, Megan. So like I said, overall, so far, things are going well in Europe. There were some questions as we entered the year, how the customer negotiations would go. I think at this stage, yes, cocoa has improved, but most of the industry is still covered for the year. And we will still have to see what the main crop is going to bring us in cocoa. So at this stage, customer negotiations have gone, as we said quite well. We had a very strong Easter campaign, which includes the U.K., we have that success with Biscoff I was talking about. We have Toblerone, [indiscernible] is doing well. So overall, I would say our business in the chocolate category is off to a good start in Europe. And that, I think, has sort of calm down the situation a little bit. We don't see any movements in price happening at the moment. I believe that everybody understands that we have to wait and see what's going to happen here to cocoa in the second half of the year. And that at this stage, since the chocolate market is doing quite well, that everybody is quite pleased with what's going on. For our business itself, like I said, very strong Easter. Our share trends are improving. Our base business -- if I take Easter out turned from a share loss into slightly positive over the last month, our volume trends are improving sequentially. That was originally driven -- the volume trends were influenced by, of course, elasticities, which still continued in this year. We also did a lot of downsizing, and we had a plant outage last year. So we're starting to lap that. And we are focused on execution for the rest of the year, but we feel good about '26 and particularly about '27. We will continue to do strong activations. We are significantly stepping up investment in working media and our brands. We're doing PPA. We have reset a number of price points, which were off in certain markets, and we're starting to see a positive effect from that. And we continue to make sure that we do strong activations to draw consumers in the category. So overall, I would say we feel good about where the chocolate market is, where the reaction of the clients and the competition has been, and we expect that the year will continue quite strongly. Megan Christine Alexander: Great. That's really helpful. And then maybe just a related follow-up. You said we kind of have to wait and see what's going to happen for cocoa in the second half of the year. Prices obviously fell pretty quickly at the beginning of the year, but seem to have kind of stabilized in a range. So as you look at kind of the cocoa market and the dynamics, what's your kind of assessment of cocoa as we sit here today? Luca Zaramella: Yes. I think the -- nothing has really fundamentally changed. The mid-crop was quite positive. We are encouraged by what we see as it relates to next year crop as well. I think you know that supply, particularly out of Latin America and other places that are not the Ivory Coast of Ghana, the supply is quite positive. So I feel that from a fundamental standpoint, nothing has really changed. There is an effect that has happened over the last few months, I would say, since cocoa hit one of the lowest levels in 2, 3 years. And it is the fact that the industry overall has gone a little bit longer. In fact, if we look at the average coverage of the industry at this point in time, it exceeds around about 10 months, which is the highest we have seen in a while. And so to say that what you saw in terms of price increases in the cocoa market compared to the lowest levels that we saw earlier this year, it has been due to the fact that the industry has been going longer. So fundamentally, nothing has changed. We believe 2,500, which is the level we see at this moment is a much better representation of what supply and demand would say. And look, I think most likely, we will be headed for another year of surplus in terms of supply and demand, you saw the grinding numbers. They were a little bit better than anticipated, but still negative. And particularly in Europe, demand of cocoa is quite subdued. So I feel overall 2,500 is a fair representation and potentially there might be a little bit of a lower level lying ahead. Operator: We'll move next to David Palmer with Evercore ISI. David Palmer: Great. Just wanted to follow up on Europe. More on the consumer and what you're seeing by market out there, organic sales down only 0.5% or so. And you talked in your prepared remarks about how volume would improve -- volume trends would improve through the year. And some of that makes sense given the comparisons, but it sounds pretty constructive. Are you seeing -- what are you seeing from a price elasticity standpoint out there? You talked about a fragile consumer, but at the same time, it doesn't seem like you're seeing much slippage so far. So anything you're really watching out there from a market perspective, where maybe you're seeing a little bit more trade down here or there? Anything you're watching? And I have a quick follow-up. Dirk Van de Put: Yes. At this stage, I would say we don't see anything in the consumer that would be something that preoccupies us in their sales or in their buying patterns. But we know from the fact that the Middle East conflict will affect energy prices, which are very sensitive in Europe, that's one -- the one thing to watch. I think the aftereffects of the Middle Eastern conflict, if it continues, is going to show in many areas like fertilizers, packaging, oil prices and so on. And the consumer will start to feel that probably with increased inflation. So they're aware of that. They've seen these sort of situations. So that's what I meant when I said it's very fragile in the sense that they are vigilant. But so far, I would say from a category's perspective, there's nothing there that we feel is starting to show that there's a slowdown or something like that. No, like I said, we feel pretty good about how particularly chocolate has been behaving in the first quarter of the year. David Palmer: And then gross margins were better than what we had thought. We were thinking there might be something like $350 million in inventory phasing drag to the quarter, and gross margins were down only 270 basis points. So I don't know if we were thinking about that inventory phasing right, correctly in the quarter, but how should we be thinking about gross margins going forward? Luca Zaramella: So yes, the headwind for the quarter is around about $350 million, a little bit more than that. So we got it right and we guided you to the right number. I mean, as we said, excluding downsizing, volume mix was slightly positive. So there was leverage into the P&L. We had some upside in specific countries that are quite profitable. China in the quarter, for instance, grew 5%, and that's a quite profitable business. And so there was a little bit of additional leverage coming into the P&L. The supply chain folks are doing quite an amazing job between procurement and manufacturing. We are delivering year-on-year benefits to the P&L. So whether it was the usual high-performance supply chains of Latin America and EMEA, we added quite a bit of upside even in places like North America this quarter. So all in all, I think between the volume mix, us pricing in line with expectations, costs coming a little bit better due to productivity. I mean all of that resulted in the upside. Now that upside would have resulted in a benefit to the year, quite frankly. But at this point in time, as I said, there is a little bit of cost headwind coming out of the Middle East situation. We are well covered for oil and packaging costs for the remainder of the year. And quite frankly, also into 2027, but some regulated market do not allow us to do anything in terms of protecting ourselves, and that's the cost headwind that will materialize in the remainder of the year, for which we have to account and that's where we decided to guide for clear EPS in line with what we said the last time. We have also unlocked additional investments in a couple of places. As we look around, we see that there are things that work extremely well that are gaining momentum, and we still believe there is upside in there. So that's where we decided to invest more in A&C and other things. Operator: We'll now move on to Michael Lavery with Piper Sandler. Michael Lavery: Could you just maybe elaborate a little bit on your innovation strategy? And it seems like now with COVID in the rearview and the supply disruptions that kind of changed some of the thinking of that for a few years, it's a focus again. Can you maybe point to where you've got a particular focus or maybe key consumer insights that are considerations and just how you're thinking about that? Dirk Van de Put: Yes, yes. So yes, after COVID, where there was a lot of in-home consumption and then the beginning of the higher inflationary period where the consumer was still sitting on a lot of savings. We are now into a situation, as we all know where the consumer is a lot more anxious about how and where they are spending their money. Their basket is not going up. So we believe that the way to approach that is, in the first place, you need to hit the right price points on your core range. And that has become quite important, be it with chocolate in Europe or with biscuits in the U.S. you need to make sure that you are where the consumer really can afford you. So that's a big focus that we have at the moment. Then in-store activations, big activations around teams that consumers really are interested in are also very important. And then the third one is to present them with innovations that stand out and that are really breaking through the normal mold. So we've been doing this for a while, but I would say we're seeing some of the traction coming from that. So we've been focused on doing a lot of bigger and fewer bets, particularly improvement platforms. So if you think about innovation in the company, there is what I would call the base renovation of our products, like improving the normal mass of chocolate or the biscuits, launching new flavors, doing PPA, getting the seasonals right. But on top of that, we are trying to come with some new news in the different categories. And at this stage, we feel that we have a number of launches that are starting to do really well for us. So if I go through the big subjects that we have there, of course, there's first -- the well-being acceleration that we're seeing, and that's really on two fronts for us. First of all, there is the whole protein fiber, which we are working on. So we got Perfect Bar, really doing well with the protein range. Builders bar in the Clif range doing quite well. We are now also having a Builders bar with low sugar and a Perfect Bar with 20 grams of protein. So that's an important part of our innovation. At the same time, we are launching a number of products within our global brands like Oreo that go into sort of added benefits like gluten-free or zero added sugar, which is -- gluten-free is doing well in the U.S. Zero added sugar is doing well in China and has been launched in U.S. So that's I would call the well-being acceleration. Then there is, of course, cakes and pastries, where we've done a number of acquisitions but we are also launching products under our brands in cakes and pastries. So in Europe, the Milka Croissant is really off to a very strong start, and we're expanding that geographically. We've taken 7Days, the acquisition we did in Europe, and we launched it in Brazil. And then we've launched cakes under Oreo in China and in the U.S. and that is doing -- both are doing quite well for us. The third big area where we are trying to innovate is in premium and indulgent chocolate. Our 2 go-tos -- or we have 3 axes there. One is Toblerone. We are really developing Toblerone into our premium brand around the world. We are upgrading with unique innovations and very hard to get innovations under the main range, but also the Pralines are really starting to take off for us, the Toblerone Pralines. Then second big act there is in premium under our normal brands, we're launching this range called Cadbury & More, which is an indulgent range under Cadbury in the U.K. and in Australia. And then we've got that also under Milka called Milka MAX in Europe, which has been in the market for a while and is doing quite well. And then in the U.S., we have a vegan brand, Hu. Also a premium chocolate brand, and that is starting to show some real traction for us and growing quite fast at this stage. So those are the 3 initiatives in premium chocolate for us. And then I would say the last one that we really are very happy with is the whole partnership that we have with Biscoff. I've explained this a few times, this will be really quite big for them and for us in the coming years. We're off to a very strong start. As you know, we launched Biscoff biscuits in certain emerging markets. And we launched also our chocolate range, which has Biscoff cream or Biscoff crumbs into our chocolate. And so that collaboration will keep on expanding over the years, and I expect that we will come up with a few more in the coming years. So those are the sort of the four areas that I would highlight as our main innovation focus at the moment. We're also doing a lot in munching and on the go. So we launched Ritz Drizzled, and Ritz Bits is doing quite well also. So we think that's also an interesting innovation axis for us. Those would be the ones I mentioned, but we're very pleased with how these innovations are behaving at the moment. Operator: We'll now move on to Robert Moskow with TD Cowen. Robert Moskow: Dirk, I was hoping you could reconcile for me your comment about the consumer in the U.S. I think you said you expect consumer spending to weaken or confidence to weaken because of the impact of the Middle East war. But I think you also said that you expect your own North American business to continue to improve during the year. I think consensus has North America flat for the year. Do you think North America can get back to like a normal kind of low single-digit growth this year? Dirk Van de Put: Yes. Let me talk a little bit about the consumer and then let Luca talk a little bit about our business within that consumer context. So I think consumption in the U.S. for a number of reasons will remain subdued in general. I think the consumer is quite concerned about their financial situation. Most food categories and snacking categories remain soft in general, I would say. We can look at the basket -- the shopping basket, which has not increased in dollar value for 3 years now. But at the same time, the items in that basket have gone quite up in price. And so consumers need to take more conscious decisions. We see shift where higher income consumers, yes, buy premium products as the K-shaped economy. But then we also see lower income consumers really focused on lower unit prices and being very selective when and what exactly they buy. We see the channel shifts that we talked about from food and mass to value, club and online. For instance, Walmart, the value channel and Costco saw biscuits grow over 4% versus the total U.S. biscuit market, which was only 0.3% up. So I would say, yes, the consumer, to my opinion, will remain quite anxious. I think as the conflict continues and they see the effect of oil prices, and they will start to see in some of the other things they buy, I believe that, that is not going to help with the overall consumer confidence. But that doesn't mean that our business is not going to continue to improve, but I'll let Luca talk about that. Luca Zaramella: Yes. So look, I think the comments of Dirk, they are mostly related, I would say, to category dynamics and some of the snacking categories. And quite frankly, we haven't projected for the remainder of the year a better category number. Having said that, you're going to see a volume and revenue inflection as we go into the second part of the year in the U.S. There are already quite a few things that are working well. We are very pleased with the share of savory. We are gaining quite a bit of share, remarkably through Ritz. And some of the platforms that Dirk was referring to, namely Bits and Drizzled. But not only that, it is a really Fresh stack and some propositions in Ritz that are delivering quite nice share growth. We are extremely pleased with the performance of Sour Patch Kids. It is a brand that most likely for the year is going to grow double digit, and we have still plenty of opportunities and Chews has been an amazing innovation that is incremental. And importantly, the sales team is executing very well in channels that are growing fast, namely Club, but also, I would say, value. And so you are going to see a sequential improvement of the U.S. market specifically, particularly as we continue to execute well in the areas I've talked about. It is certainly a share gain plan because -- at this point in time, we don't see really the category improving much. I would also say that the ventures are delivering material growth. Besides the examples Dirk gave you, we are very pleased with Tate's, which is gaining share. And then as we said, the bars, including Clif, are really delivering share growth. And for instance, [ Ritz ] bar continues to grow close to double digits. So there are quite a few things that we feel are working well. We are investing in those. And I guess you're going to see volume and revenue turning around positively for the remainder of the year in the North American business. I omitted to talk about Canada, which in the big scheme of things, maybe is not the biggest, but they had a terrific Q1 as well. So hopeful that Canada will continue growing as well. Operator: We'll move next to John Baumgartner with Mizuho Securities. John Baumgartner: Wondering if you could elaborate a little bit on the supply chain program in North America biscuits that was touched on at CAGNY. I'm curious, over the past 10, 15 years, you've already consolidated manufacturing. You had the big modernization at the time of the spin-off from Kraft. What -- I guess, what does this new modernization entail resulting growth opportunities, route to market changes from here? How do we think about the opportunities there? Luca Zaramella: Yes. No, thank you for the question. I would start by saying that around about 60% of the network we have in the U.S. is really state-of-the-art. So the overwhelming majority of the network is in good shape. It is a competitive advantage. I think you know most likely the amount of profit we generate in the U.S. and the cash that we generate in the U.S. And I believe the competitive advantage we have besides DSD is really part of the network. So we feel quite good about that. Having said that, some plants in the U.S. still run on high waste, still run on the level of productivity that is below expectations. And so we will have to bring this network up to speed. We have come to terms that some of the plants will have to deal with much simpler lines as opposed to having complex state-of-the-art lines. And so we will play to the strength of the plant. And importantly, we have proven lines of business that are at the moment manufactured through co-manufacturers, and we want to bring those in-house. So those are proven volume platform things that really work well from a consumer standpoint. And reality is by bringing them in-house, we will save quite a bit of money. We will invest in some packaging capabilities. One of the things that we are realizing is that consumers are shifting through channels to different pack sizes. So if you want to compete in clubs, you need to have specific format types, if you want to have an appeal to certain consumers, you need to invest in what we call multipacks, which are mixed packs of our cookies and crackers. And some of these, we don't have in-house at the moment, and the supply chain is fairly inefficient and quite rigid. And so we will invest in flexibility, bringing in-house some of these propositions. Finally, one of the things that we're going to touch is the DSD network, which, at this point in time, relies upon, I would say, 4, 5 distribution centers, but 55 branches that allow us to reach the point of sale that we service, in general, I would say, 2, 3 times a week at least. And by automating those centers and by creating automation and AI fulfillment centers, we'll be able to achieve the point of sales in a much faster way and importantly, to reduce our stock and reduce cost in those branches. So that's really the idea. Dirk Van de Put: I think we can leave it at this for the time being. Thank you again for connecting. I hope we explained that the quarter was pretty good. We're looking forward to the rest of the year. And -- if you have any other questions, our IR team is available to help you out. Thank you. Luca Zaramella: Thank you, everyone. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good morning. And welcome to the FirstSun Capital Bancorp First Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct 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. Also, as a reminder, this call may be recorded. I would now like to turn the call over to Ed Jacques, director of investor relations and business development. You may begin. Ed Jacques: Thank you, and good morning. I am joined today by Neal Arnold, our chief executive officer and president, Robert Cafera, our chief financial officer, and Jennifer Norris, our chief credit officer. We will start the call with some brief remarks to highlight commentary around our first quarter results and the recent First Foundation acquisition before moving into questions. Our comments will reference the earnings release and earnings presentation which you will find on our website under the Investor Relations section. During this call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our earnings presentation and in our earnings release. During this call, we will also make remarks about future expectations, plans, and prospects for the company that constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. Please refer to our earnings presentation as well as our annual report on Form 10-Ks and our other SEC filings for a further discussion of the company's risk factors and other important information regarding our forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement except as required by law. I will now turn the call over to Neal Arnold. Neal Arnold: Thank you, Ed, and good morning. Thank you for joining us. It is a busy time right now at FirstSun Capital Bancorp as we have just recently closed the acquisition of First Foundation. All of our teams are hard at work on the integration of these businesses. We are seeing some great examples of teamwork throughout our business lines on the sales side as well as across our staff teams, so I am very encouraged by the progress we have made so far, and Robert will talk about that. I would like to start with some comments on our performance and some comments with regard to the First Foundation acquisition. We are pleased with the momentum we saw in our business to start this year. We believe our relationship-focused diversified business model, and being in some of the largest fast-growing markets in the country, continues to be an important driver to our overall performance. For the quarter, we had adjusted net income of $23.7 million, representing adjusted diluted earnings per share of $0.84 and adjusted ROA of 1.14%. We saw very robust loan growth of over 16% annualized in the quarter, as well as continued expansion of our net interest margin to a strong 4.25%, and we also saw solid revenue mix on the noninterest income side representing 24.7% of total revenue. On the asset quality side, we had higher provision, as I am sure you all saw, in the quarter due to a combination of factors: first of all, some portfolio downgrades as well as strong loan growth. Loan balances increased by approximately $267 million in the first quarter. We did see two loan charge-offs; we are seeing some deterioration in value realization in the event of loss. But the significant loan growth we saw in the first quarter materially impacted our higher provision expense. As we have noted before, in addition to traditional return measurements, part of our recurring performance monitoring focuses on what we call our credit-adjusted NIM, and we believe our performance there continues to remain strong. Turning to our recently completed First Foundation acquisition, as I mentioned, we are seeing some great energy across the teams since the deal closed on April 1, 2026. The sharing of information and knowledge across the combined branch teams, across the legacy First Foundation wealth advisory business, and our commercial and residential teams is already driving new business opportunity. I believe this teamwork will drive even greater long-term benefits to our future performance. As I have said from the beginning of this transaction, our focus is on derisking the acquired balance sheet through a repositioning strategy that will allow us to unlock the core franchise and capitalize on the great market opportunities in the newly acquired footprint, particularly in Southern California and in the deposit-rich markets of Southwest Florida. Our second quarter emphasis is on completing the post-acquisition balance sheet repositioning, and we believe we are well underway in execution. I will let Robert cover some of the details there. Our third quarter emphasis is on completing our main application system conversions and unlocking the rest of the additional cost synergies that are included in that. We believe the acquisition represents a significant step forward in the continued growth and evolution of this franchise. The combination enhances our presence in attractive high-growth markets and it further expands our regional footprint and gives us greater scale across our core businesses. Strategically, the expanded branch network will strengthen our ability to serve clients locally while enhancing our deposit-gathering capabilities and overall relationship density. In addition, the transaction significantly expands our wealth platform, which will allow us to deliver a more comprehensive suite of advisory and investment solutions to a broader client base. Taken together, we believe these benefits enhance our long-term growth profile and improve the revenue diversification and strengthen the durability of this franchise so that we drive sustainable long-term value for shareholders. Our near-term focus remains on disciplined execution of our acquisition-related activities and completing the balance sheet repositioning we talked about, successfully executing our system conversion, and realizing the identified cost synergies. As we move through this year, we are confident our execution will drive improved profitability, a stronger funding portfolio, and great long-term shareholder value. Overall, I am really proud of the hard work all of the teams have been underway on and excited by the momentum across our extended footprint and the opportunities that lie ahead. I will now pass the call over to Robert for some further color on our financial results as well as some of the integration activities underway. Robert Cafera: Thank you, Neal. Starting with our first quarter performance, on the balance sheet side for the first quarter, and on a spot end balance basis, we achieved healthy loan growth of over 16% annualized, primarily in the C&I portfolio as we continued to see success across the high-growth markets in our footprint. We saw our line utilization increase by 4% from the end of last year. Just as a reminder, recall that our line utilization was down 3% at the end of last year, so that piece is really just a function of timing. New loan fundings totaled $528 million in the first quarter, up 47% from the fourth quarter and 32% from the first quarter of last year. Loan growth was heavier on the back end of the quarter, so while average balances in Q1 saw a lesser growth rate, we see a nice tailwind here heading into Q2 from an NII perspective. I would also note that our pipelines remain pretty robust as we begin to move through the second quarter. On the deposit side, on both an average balance and period-end basis, our overall deposit balances were down slightly. Aside from general seasonality pressure that exists in the first quarter every year within a few segments in our deposit customer base, one specific component driving the decline in deposits was on the brokered deposit side, where balances declined by approximately $60 million. From a product mix perspective, you will see the negative influence to balances from the decline in brokered within the CD category as balances were down there in total, mitigated somewhat by average balance growth in interest-bearing demand and money market accounts. Turning to the P&L side, we are quite pleased with the first quarter net interest margin, which ended at a strong 4.25%, up 7 bps from the fourth quarter. This is now 14 consecutive quarters we have enjoyed a net interest margin above 4%. The NIM expansion was largely driven by improved funding costs, with interest-bearing deposit costs down 14 basis points compared to the prior quarter. All in all, we are very pleased with our margin performance and the corresponding 11% year-over-year net interest income growth. We believe this is a testament to our continued focus on relationship depth across our client base. On the service fee revenue side, we saw a really nice start to the year with noninterest income to total revenue of 24.7%. While noninterest income in total was up slightly compared to Q4, we saw approximately 25% growth over the first quarter of last year, with continued strong performance in our mortgage business. We also saw continued growth in our treasury service fee revenues in Q1, which continue to be a growth engine for us. Our total adjusted noninterest expense in the first quarter, excluding merger-related expenses, was up from the fourth quarter by approximately $2.8 million, primarily related to increases in salary and employee benefits. Our employee base increased in the first quarter as we continue to invest in our sales force. We do continue to see great opportunity in Texas and Southern California from a growth opportunity perspective. We also saw a bump, sequentially speaking, in the annual payroll tax and retirement account contribution, which resets in the first quarter every year. We also saw an increase in overall medical insurance costs. On the asset quality side, provision expense for the first quarter was $8.3 million and our allowance for credit losses as a percentage of loans was 1.2%, a decrease of 7 bps from Q4. As Neal noted, our provision expense for this quarter was due to a combination of net portfolio downgrades and our strong loan growth. We took a charge-off on a telecom loan that we had partially reserved for last year and we took a charge-off on an auto finance lender loan that we had fully reserved for last year, both of which were part of our charge-off expectations for 2026. These two loans drove the bulk of the $10.5 million in net charge-offs, or 63 basis points on an annualized basis. Overall, we are not seeing broad-based credit issues across any particular geography in our footprint or sector within our portfolio. However, we have seen a relatively consistent level of nonperformance in the portfolio as a whole, with an average level of nonperformers around 1% of the loan portfolio over the last year, although that level did come down slightly to 86 basis points at the end of the first quarter. I will just underscore what Neal noted earlier, and that is the significant level of loan growth we saw did result in incremental loan loss provisioning for us in the first quarter. Our overall level of credit-adjusted NIM, which we referenced on page 15 in our earnings presentation deck, came down slightly as well, but is still above peer averages. On the capital side, we continue to strengthen our position as we ended the first quarter with our TBV per share improving by $0.74 to $38.57. Next, I will turn to a few comments on the First Foundation acquisition. As Neal noted, there is a lot of momentum on the business side, and all of our integration activities are well underway. Our macro objective again is to derisk the acquired balance sheet and transform the business to look more like FirstSun Capital Bancorp. I will start with an overview on our balance sheet repositioning activities, and I will note that we have some details in the earnings presentation on this topic on page 20. At the end of the first quarter, before the transaction closed, First Foundation had already made significant progress on the loan downsizing, successfully reducing balances by approximately $1 billion, or 44% of the planned $2.3 billion in total loan downsizing. We are now actively working on the remaining $1.3 billion in total loan downsizing, and based on our ongoing work with certain counterparties there, we expect to be completed by the end of the second quarter. Even after the remaining planned repositioning activities are complete in the second quarter, we expect to continue to remix the acquired loan portfolio and specifically expect to continue to bring down the multifamily balances as they naturally hit their scheduled repricing dates over the next several years. We have approximately $310 million in scheduled repricing in the acquired multifamily portfolio over the remainder of 2026 and another approximately $400 million in 2027. Our focus here will be on keeping true relationships rather than where it is simply a credit-only situation. To us, credit-only is not a true relationship, and this is where we want to derisk the portfolio. Additionally, while our initial targeted balance reduction in the SNC portfolio is complete, we also expect to strategically continue to reduce the non-relationship balances in this portfolio on a go-forward basis, again with an emphasis on cultivating true relationships that have deposits and connections into our service revenue businesses like treasury management and wealth advisory services. Also, we expect to bring down the overall investor CRE concentration level to below 250% of capital by the end of the second quarter. As a reminder, while the legacy FirstSun Capital Bancorp investor CRE concentration level was less than 120% at the end of the first quarter, the loans acquired from First Foundation did result in that level increasing significantly post acquisition. As to the other components of our repositioning work, in the month of April, we completed all of the downsizing in the securities portfolio and have already meaningfully exited some of the higher-cost funding, including all of the acquired FHLB term advances totaling $1.4 billion. Similarly, we expect we will utilize the proceeds from all the remaining second quarter repositioning on the asset side to exit funding targeted in Q2, including our initial targeted brokered deposit balance exits. I will note that, similar to our continued remix plans on the loan side, we also plan to continue to bring down the brokered deposit balances as those remaining maturities occur in future quarters. We do expect we will be on target to bring down the overall wholesale funding ratio to approximately 10% by the end of the second quarter. As a reminder, while the legacy FirstSun Capital Bancorp wholesale funding ratio was only approximately 6% at the end of the first quarter, the acquired funding mix at First Foundation did result in the level of wholesale funding increasing significantly post acquisition. We are very pleased with our progress to date on all of our repositioning work and we believe we will hit our targets by the end of the second quarter. Our most significant application system conversion is scheduled for late September 2026. So while we have already begun to realize cost synergies post closing, and I would say we will be at roughly 65% phased in for the cost synergies at the end of the second quarter, we will not reach a fully phased state until the end of this year. That is largely related to the timing for our largest system conversion in September and another separate system conversion on the wealth business side scheduled for Q4. On the cost save side, once we are fully phased in, based on all our preliminary work to date, we believe the overall level of fair value marks may come down a bit as compared to our expectations at the time we announced the transaction in October. While this means we could see a lesser level of TBV dilution, perhaps by a couple percentage points, we expect it will also translate into a lesser level of interest rate mark accretion in the go-forward P&L. We also believe we will see a slightly higher CET1 ratio compared to our expectations at the time we announced the transaction in October, and expect we will have capacity for some nearer-term share repurchases. Specifically, as noted in our earnings presentation deck, we are expecting CET1 in the 11% range post repositioning, which compares favorably to the 10.5% we referenced when we announced the deal back in October. Finally, I thought I would make a couple references to our 2026 full year financial outlook, which we have updated to reflect the acquisition and includes preliminary estimates of purchase accounting adjustments and expectations related to the balance sheet repositioning. You will see our 2026 outlook in the earnings presentation on page 21. On the balance sheet side for loans, given our continued focus on the remix of acquired balances, we expect balances to be relatively stable to post-reposition and post-mark balances through the end of the year and then expect to return to a balanced growth mode. While we expect healthy new loan origination levels this year, as I previously noted, we also expect to continue to remix the acquired First Foundation loan portfolio. This means we will have additional balance runoff and leads to our view of relatively stable balances in comparison to the post-reposition and post-mark starting point considering the acquisition. For deposits, given our continued focus on the remix of acquired balances, we expect balances to be relatively stable to post-reposition and post-mark balances through the end of the year and then expect to return to a balanced growth mode. On the NIM side, in addition to our strong legacy FirstSun Capital Bancorp NIM run rate, our repositioning work and the impact from purchase accounting will have a significant favorable impact to the most recent First Foundation first quarter NIM of 1.07%. We expect our full year 2026 net interest margin to be in the mid-3.80s range; however, for the next couple quarters, we expect to see a drop as we complete the downsizing in Q2 and as we work to further remix the acquired base in Q3, with the fourth quarter NIM expected to elevate into the 3.90s performance range. In terms of revenue mix, we expect our level of noninterest income to total revenue to decline into the lower twenties range. In terms of adjusted efficiency ratio, which excludes merger-related expenses, we expect to operate in the mid- to lower-sixties range for the next couple quarters and then drop to an approximate 60% level in the fourth quarter. In terms of net charge-offs to average loans, we expect levels to end the year in the mid-twenties in basis points, albeit on a higher average balance base post acquisition. Overall, we are very pleased with the progress we have made with respect to the acquisition to date. We believe the combined earnings profile will quickly take the shape of what you have become accustomed to from legacy FirstSun Capital Bancorp. I will now turn the call back to the moderator to open the line for questions. Operator: Thank you. We will now open the call for questions. Your line will remain open for follow-up questions. 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 Wood Lay with KBW. Wood Lay, your line is open. Please go ahead. Wood Lay: Hey, good morning, guys. To start on the size of the balance sheet, and as you mentioned, tangible book value dilution with the deal is coming a little bit better than expected because the marks are lower, but that could have a slight impact on EPS as well. But it also looks like, you know, the repositioning is ahead of schedule, and it is about a billion more than what was initially laid out at the merger announcement. How do you expect the smaller balance sheet to impact that $5.24 EPS run rate that you initially laid out at deal announcement? Robert Cafera: Morning, Wood Lay. Thank you. So, yes, we do see a little bit more in repositioning as we outlined on slide 20 in the earnings deck. That is largely related to, or entirely related to, I should say, a short-term leverage strategy that the First Foundation team deployed for the pendency period. So that is what is driving that. It was entirely wholesale deposit funded, and so that is, if you will, the reconciliation between the original $3.4 billion and what you see on slide 20 there of $4.4 billion. In terms of our expectations on an after-repositioning balance perspective, they are largely unchanged because that was an incremental leveraging on the balance sheet that was deployed post announcement. So, if you will, the balance sheet base, our expectations are largely unchanged from announcement as we look at 2026. We do see a lot of healthy opportunity and expect healthy origination in the core C&I space, and we expect that will be met with some incremental remix and balance runoff as we continue to work through and get the overall concentration levels down from the acquired balance sheet. We do, as you referenced, see some slight improvement in the TBV dilution as a result of where marks are coming in as we are looking at those here preliminarily now in the second quarter. We put some guidance on slide 21 in terms of the level of loan interest rate accretion for 2026. It is relatively comparable to what you saw in the investor deck back in October, or the announcement deck back in October. And that relative comparability extends into 2027 as well. So we feel pretty good about that $5-plus level as you look forward to 2027 that was referenced in the October announcement deck. Wood Lay: That is extremely helpful. I appreciate you walking through the moving pieces there. Maybe just thinking about the net interest margin, I appreciate the glide path you provided for 2026. But as we think about longer term, there are still some remix initiatives going on behind the scenes. Do you think the NIM is higher in 2027 as that remix occurs, improving off that 4Q expected base in the 3.90s range? Robert Cafera: Yes, as I had mentioned for the fourth quarter of 2026 and as we referenced in the deck on slide 21, we expect 4Q to be in the 3.90s range. As you look forward into 2027, I would expect a little bit of an uptick from that level, but it is going to be in that same neighborhood. We feel pretty good about that as a run rate as we extend out looking over the near-term horizon here, end of fourth quarter 2026 and for 2027. Wood Lay: Got it. Maybe just the last for me. You sounded a little more incrementally positive on buybacks and being active there. CET1 is coming slightly above where you laid out. Just thoughts on where you would like to keep CET1 for the pro forma company. Any target you are thinking of? Robert Cafera: Fair question. We have looked at an 11% level for CET1. I think we have referenced that in the past, and that is a level that internally, in our conversations with our board, we have said is a targeted level for CET1. And as you referenced, we do see the capacity for some near-term share repurchase activity. Those are always active conversations within our boardroom and will continue to be. But we feel really good about our capital positioning. Wood Lay: Alright. I appreciate you taking my questions. Operator: Thank you, Wood. Your next question comes from the line of Michael Rose with Raymond James. Michael, your line is open. Please go ahead. Michael Rose: Hey, good morning, guys. Thanks for taking my questions. Maybe just following up on some of the loan growth commentary that you provided. It sounds like there is going to be some ongoing remixing as we get beyond the second quarter into the third and fourth, but is that largely complete by the time you get to the end of the year? And then with, you know, some of the personnel shifts and changes that I think will happen on the First Foundation side, and ongoing hiring efforts, how should we think about the pro forma intermediate- to longer-term growth rate for the company beyond this year as some of those remixing activities run their course? Neal Arnold: Morning. I guess what I would say, Michael, is that the loan growth we had in the first quarter was surprising to us. Both Southern California and Texas are leading the way and we are seeing that across some of those markets. The remix that we are going to have going on is a multiyear one as we see maturities on the multifamily portfolio. Some of those we will keep as they become deposit clients; some of those will run off. The more loan growth we have on the C&I side, I would say the asset yield step-up will happen. The other thing I am pretty bullish on is the focus on core deposits across our franchise. The deposit teams have already kicked off their campaign, and we could see a material impact as we continue to improve the mix on the funding side. Obviously, getting rid of wholesale was the immediate priority, but I would say just remixing the core deposit work—Robert and the teams have been hard at it. Robert, I will let you add to that color. Robert Cafera: Just to underscore what Neal was referencing there, Michael, and back to one of the remarks I made in the prepared section, there is scheduled repricing in that multifamily portfolio here not only in 2026 but also in 2027 at somewhat elevated levels. So that is, if you will, a bit of a headwind from a growth perspective, but again it is all part of our overall strategy on bringing concentration levels down as we have talked about, and it will mute the overall growth in 2026 to that relatively stable level that we have referenced. There is roughly another $400 million in repricing scheduled, and as Neal referenced, our objective is to get deposit penetration within that base and convert to core relationships. That is what the team will be hard at work at. As we cast forward into 2027, I referenced returning to a growth mode. We certainly see more of a growth mode as we look out into 2027 and beyond. Michael Rose: Okay, that is helpful. I will not try and pin you down for a percentage in 2027. Maybe if we can switch to credit. I appreciate the reminder and the color on those two credits that were kind of the bulk of the charge-offs this quarter. Obviously, the guidance implies a pretty big step down in the combined charge-off rate as we move forward. You have been pretty clear that given the C&I mix and how it is higher than peers and the average size of your loans being a little bit higher, credit is going to be, on a ratio basis, somewhat lumpy. What gives you confidence that you can operate in that ~20 bps range not only this year but as we move forward as growth reaccelerates? Robert Cafera: You are right, Michael. Given our heavier C&I mix, we do see credit coming in some lumpy fashion at times. We have had the onesie-twosie as we look back over the course of the first quarter in 2026 and back into 2025. One of the things that we intently focus on, of course, is the overall return level within the business and the underlying economics that we are delivering. One of those metrics that we do point to is that credit-adjusted NIM level. Given we are in a heavy C&I business, credit spreads that we are operating with are obviously different than a CRE-heavy bank mix—i.e., we are 300-plus spreads, as opposed to 200–225 kind of spreads. We realize that the credit profile on the C&I side will lead to some lumpiness at times. As the teams work hard constantly on our portfolio, we are not seeing broad-based structural issues in a sector or in a geography within the portfolio. It is just one-off isolated instances—this past quarter a telecom company, an auto finance lender. Both of those we had spoken about and referenced in the prior year, and we are seeing some elevated loss realization levels there on those exits. But it is the overall performance in the business—being able to continue to operate strongly from an overall return perspective, that credit-adjusted return perspective—and the absence of any deep broad-based issues across the portfolio. We have been operating around the 1% NPA level, actually down in Q1 to 86 bps. The first quarter on an annualized basis looks a little elevated because we did take those couple charges in the first quarter. They were all part of what we saw coming at us for fiscal 2026. The point of realization became Q1 for both of those. Hopefully that gives you a sense for how we are looking at the business and what we are seeing that leads us to our guidance around that mid-twenties level on charge-off performance. Neal Arnold: Michael, I would just add we have never liked losing money, but the hard part with C&I is we do not have an industry concentration, and we are not seeing it out of any one sector or one geography. So it makes it hard to forecast. If I could plan for events, I would certainly rather not have charge-offs in our biggest loan quarter. It is what it is, and we do not take it lightly. We are provisioning on the front end for some extraordinary loan growth, and we will still continue to say we want more C&I opportunity because on a risk-adjusted NIM, it is the best thing we can do. Michael Rose: Totally get it. I appreciate all the color. Maybe just last one for me. If I go back to the slide deck from when you announced the deal, you talked about a 1.45% pro forma ROA and about a 13.5% ROTCE. Understanding some of the marks and the rate landscape have certainly changed, any updates to those targets? I know you talked about the tangible book value being a little bit less; I would expect there would be some change there. Any updates there? And if we were to exclude the impacts of expected accretion in 2027, what could those levels look like? Robert Cafera: As you look at returns in the business and in comparison to what we referenced in the announcement deck, given the lesser level of TBV dilution and the linkage on the mark side, there is some lesser level of accretion—not materially, as I mentioned a little bit ago—relative to our expectations on a bottom-line EPS perspective in 2027. We do think we are still in that $5 neighborhood for 2027. Returns as you look at next year will certainly be increasing over 2026 levels. I would say coming down a little bit in relation to what was in the announcement deck, but certainly above the most recent return levels that we delivered in fiscal 2025 in the low 1.20s on the ROA side. On the capital side, we will continue to look at the right mix of capital given our overall target levels, coming out a little favorably on that side and having a more near-term capacity for some possible repurchase activity, which can certainly impact favorably the return on tangible capital levels as well. Neal Arnold: The only thing I might add is I like the flexibility of the new combined balance sheet—that we have both the floating-rate growth in C&I and the term nature of the multifamily. On prepay and otherwise, I would not trade our balance sheet for anyone out there. Operator: Your next call comes from the line of Matt Olney with Stephens. Matt, your line is open. Please go ahead. Matt Olney: Thanks, and good morning, everybody. Going back to the repositioning efforts in recent weeks, it sounds like you are getting some pretty good pricing versus original expectations on the loan dispositions. Anything you can disclose or any color you can give us as far as the Shared National Credits or the multifamily efforts as far as pricing versus original expectations? Robert Cafera: I would say on the SNC side—very successful performance there. The initial targets on the SNC side First Foundation completed all of the strategic exits actually prior to 03/31, so real strong performance on the SNC side. On the multifamily side, we are very favorably pleased with our discussions so far, and we continue to work with counterparties on all the remaining loan sales that we believe will conclude and complete here in the second quarter. We are very pleased with what we have been talking about and what we think we will ultimately realize there, maybe slightly better than our original targets, but very, very pleased. Matt Olney: Thanks for that, Robert. And then on the expense side, any more color on expenses at the combined company that we will see in the near term? I think we can see the disclosure for First Foundation expenses and, obviously, FirstSun Capital Bancorp. Should we just add these two together initially before we recognize some of these cost savings? Or is there anything more nuanced in the run rate of either side that you want to disclose as we think about our estimates? Robert Cafera: Thank you for the question, Matt. You are right. As you look at First Foundation in the first quarter, it was, call it, a $56 million kind of run-rate level. If, to your point, you just add that with FirstSun Capital Bancorp and apply some cost saves—as I mentioned, we think we will be at about a 65% level on cost saves in the second quarter—we are well on our way in total on cost saves and actually expect to be slightly above our original targets there. The original target was 35% of the First Foundation core expense base, so if you just apply that math, that should give you a pretty close approximation for where we would see Q2–Q3, consistent with our expectations on efficiency being in the mid-60s for the next couple quarters and then dropping into the lower 60s in the fourth quarter. Matt Olney: Okay, appreciate that, Robert. And just to follow up on your last point there, I think we talked about that efficiency ratio getting to the 58% range when full cost saves are recognized, and I understand we do not quite see that in the fourth quarter given the timing of conversion. Do you still see that efficiency ratio moving to the 58% range in 2027? Robert Cafera: We do. If we are in the low 60s in Q4, as you look forward and go back to the October announcement looking at 2027 run rates, we do see improvement over that low 60s in the fourth quarter to get to around that neighborhood. So, yes, we feel real good about our overall projections from an efficiency ratio standpoint. Operator: Thank you. Your next call comes from the line of Matthew Clark with Piper Sandler. Matthew, your line is open. Please go ahead. Matthew Clark: Thanks. Good morning, everyone. I want to start on slide 20—the First Foundation deposits. On the right side, they are running off another $2 billion, so call it $6.75 billion after that. How much of that $6.75 billion do you anticipate to be noninterest bearing, just knowing that some of that might be ECR related? Robert Cafera: Fair question. In terms of the total mix of the portfolio on a go-forward basis, I would probably see, what would that be, low 20s. If you look at where our mix is on a noninterest-bearing to total base standpoint, we are between 20–25%, probably closer to maybe 23%. If you look go-forward, post acquisition, post repositioning, we will still be in the 20s, but that is going to drop a couple percentage points. Matthew Clark: Okay. And then on the margin here in the near term, I think your guide includes the 4.25% you just put up in the first quarter. That would suggest a decent step down in the margin here in 2Q. Any thoughts around the cadence of the margin to get to that 3.90% in the fourth quarter? Do we step down to like a 3.70% here in 2Q and build back? Robert Cafera: Fair question. As you look at the overall guidance for a mid-3.80s on the year and a Q4 in the 3.90s, how do you get there in the math for Q2 and Q3? You are going to see 3.60s–3.70s stepping from Q2 into Q3 before you get to the 3.90 neighborhood in Q4. Matthew Clark: Okay. And then if you were to strip out the Fed rate cut, what would that do to your margin guidance? Robert Cafera: It would have a nominal impact on the margin guidance—a basis point or two. Matthew Clark: And then just on the net charge-off guidance of the mid-20s, again, it assumes that pretty big step down, maybe to 20 basis points going forward. I am assuming that is partly because you are marking First Foundation’s balance sheet—so a lot of the portfolio will not have the losses there just because it has been marked up front. Is that fair and consistent with what you are thinking? Robert Cafera: We are marking the First Foundation balance sheet. Under the new guidance, the credit mark is now in ACL. So if ultimately we do see a loan that we have fully reserved for in purchase accounting, it is fully reserved for in that ACL line. If we see something on the First Foundation side, it will still roll through charge-off even though it will have no P&L impact, just to be precise on mechanics. So it could end up in a charge-off percentage base in 2026. But yes, relative to the 63 basis points in Q1, we see a step down. Those two credits in Q1 were part of our expectations for full 2026. The point of realization became Q1 for both of those. We see a step down in activity over the course of the next three quarters to get to that overall mid-20s for the full year. Matthew Clark: How much did those two credits contribute to the $10.6 million net charge-offs this quarter? Robert Cafera: More than $10 million. When I say bulk, it truly is bulk. Operator: There are no further questions at this time. I will now turn the call over to Neal Arnold for closing remarks. Neal Arnold: Thank you. We appreciate you all joining the call this morning and your continued interest in FirstSun Capital Bancorp. Thanks for the day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and welcome to the Hope Bancorp, Inc. 2026 First Quarter Earnings Conference Call. All participants will be in a listen-only mode. Please signal an operator by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch tone phone. To withdraw your question, you may press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Maxime Olivan, Investor Relations Manager. Thank you, and over to you. Maxime Olivan: Thank you. Good morning, everyone, and thank you for joining us for the Hope Bancorp, Inc. investor conference call for 2026. As usual, we will be using a slide presentation to accompany our discussion this morning, which is available on the Presentations page of our Investor Relations website. Beginning on Slide two, let me start with a brief statement regarding forward-looking remarks. The call today contains forward-looking projections regarding the future financial performance of the company and future events. Forward-looking statements are not guarantees of future performance. Actual outcomes and results may differ materially. Hope Bancorp, Inc. assumes no obligation to revise any forward-looking projections that may be made on today's call. In addition, some of the information referenced during this call today includes non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to the company's filings with the SEC as well as the Safe Harbor statements in our press release issued this morning. Presenting from management today will be Kevin Kim, Hope Bancorp, Inc. Chairman, President, and CEO, and Julianna Balicka, Hope Bancorp, Inc. Executive Vice President and Chief Financial Officer. Peter Koh, Bank of Hope President and Chief Operating Officer, is also here with us as usual and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin? Kevin Kim: Thank you, Maxime. Good morning, everyone, and thank you for joining us today. Our first quarter 2026 results reflected strong year-over-year growth in net income, revenue, loans, and deposits, driven by organic growth and the strategic benefits of the Territorial Bancorp acquisition. Quarter over quarter, our pre-provision net revenue grew, supported by improved efficiency and continued progress in lowering our cost of deposits. Beginning with Slide three, you will find a brief overview of our results. Net income for 2026 totaled $30 million, up 40% year over year from $21 million in the prior year period. Quarter over quarter, net income decreased from $34 million, reflecting higher provision for credit losses and income taxes, partially offset by growth in pre-provision net revenue. Pre-provision net revenue for the first quarter totaled $47 million, up 43% year over year from $33 million and up 1% quarter over quarter from $46 million. The provision for credit losses increased in the 2026 first quarter, primarily reflecting higher net charge-offs due to the successful resolution of problem loans. This quarter, criticized loans decreased $26 million, or 7%, from the prior quarter. The effective tax rate was higher in 2026 as the 2025 fourth quarter tax provision benefited from true-up items. On 03/31/2026, we announced the accretive acquisition of the Commercial Banking unit of SMBC Manubank, which we will refer to as Manubank throughout this call. We expect the transaction to close in 2026, subject to regulatory approvals and satisfaction of other customary closing conditions. We are very excited about this transaction, which aligns with our key priorities of building our commercial banking capabilities, expanding our reach among middle market and multinational clients, and growing our core deposit franchise. We believe Manubank will deepen our presence in the greater Los Angeles market and add a highly complementary commercial banking platform, including diversified middle market lending, franchise finance, and specialty deposit verticals such as trust and estate banking. The pending transaction will bring a unique opportunity to combine SMBC Manubank's Japanese banking division with our established Korean subsidiary banking group, creating a differentiated, scaled platform to serve Asian multinational businesses operating in the United States. From a financial perspective, the pending acquisition is expected to add approximately $2.5 billion in commercial and industrial and commercial real estate loans, and $2.7 billion in deposits, of which only approximately 3% are CDs and which we anticipate will contribute a lower overall cost of deposits. We project this transaction to be meaningfully accretive to earnings in 2027, strengthen our recurring core earnings power, and improve our profitability, including returns on equity, through an efficient deployment of capital without the issuance of new shares. In addition, we will establish a collaboration and partnership agreement with SMBC, which is expected to create meaningful opportunities to expand our services to a broader global multicultural customer base. Overall, this is a highly attractive transaction that we believe will support our progress toward achieving our strategic objectives. Moving on to Slide four, during the quarter, we returned capital through a repurchase of approximately 604 thousand common shares totaling $7 million and representing about 0.5% of total shares outstanding. We have $29 million of remaining capacity under our existing authorization, which we intend to deploy opportunistically. Our Board of Directors declared a quarterly common stock dividend of $0.14 per share, payable on or around 05/22/2026 to stockholders of record as of 05/08/2026. Under the terms of the definitive agreement, the pending Manubank acquisition will be settled in an all-cash transaction and is expected to result in a net cash benefit to Hope Bancorp, Inc. On this slide, you can see our optimized pro forma capital ratios, and we are anticipating a tangible book value earn-back period of approximately two years. The pro forma tangible book value dilution would come from the creation of the core deposit intangible and the net impact to equity from balance sheet marks and acquisition-related charges. Continuing to Slide five, loan balances were essentially stable linked quarter. At 03/31/2026, gross loans totaled $14.74 billion compared with $14.79 billion in the prior quarter. Year over year, gross loans increased 10% from $13.34 billion at 03/31/2025, reflecting the impact of the Territorial acquisition and organic residential mortgage growth. As we enter the second quarter, our loan pipelines are strong and building, reflecting improving production trends and increased activity across our markets. On the deposit side, deposits were $15.73 billion at 03/31/2026, growing 1% quarter over quarter. Non-maturity interest-bearing deposits were up 3%, and noninterest-bearing demand deposits were up 0.5%. Higher-cost CDs were intentionally run off. Year over year, deposits increased 9%, primarily due to the Territorial Bancorp acquisition. With that, I will ask Julianna to provide additional details on our financial performance for the first quarter. Julianna? Julianna Balicka: Thank you, Kevin, and good morning, everyone. Beginning on Slide six, our net interest income totaled $124 million for 2026, up 23% from 2025 and a decrease of 3% from the prior quarter. Quarter over quarter, the decrease in net interest income reflected the impact of a lower day count in the first quarter and a modest decrease of 0.4% in average earning assets, in which average loans were up but other earning assets declined. The first quarter 2026 net interest margin was 2.90%, unchanged quarter over quarter. The impact from decreased loan yields was more than offset by lower deposit costs. Year over year, our net interest margin expanded 36 basis points from 2025. The increase was primarily driven by improvements in our funding costs. The cost of our average interest-bearing deposits decreased 77 basis points to 3.37% in 2026, down from 4.14% in 2025, equivalent to a deposit beta of over 100% relative to the decline in the federal funds target rate over the same period. The full impact of the Fed funds target rate cuts is still benefiting us with the continued repricing of time deposits. In the first quarter of 2026, we originated time deposits at a blended rate of 3.62%, down from a blended rate of 3.99% on our maturing CDs. On Slide seven, we present the quarterly trends in our average loan and deposit balances and our weighted average yields and costs. Onto Slide eight, we summarize our noninterest income. For 2026, noninterest income totaled $17 million, down $1 million compared with $18 million in the prior quarter and up $1 million compared with $16 million for 2025. The quarter-over-quarter decrease in noninterest income was primarily due to less gains on the sale of investment securities and lower customer-level swap fee income, the latter of which reflected less underlying transaction activity in the first quarter. During 2026, we sold $53 million of SBA loans compared with $46 million sold in 2025. Accordingly, we recognized SBA gains on sale of $3 million for 2026, up approximately $700 thousand from 2025. Moving on to noninterest expense on Slide nine, our noninterest expense totaled $94 million in 2026, down from $99 million in 2025. The sequential quarter decrease reflected continued expense management discipline. Year over year, noninterest expense increased from $84 million in 2025, primarily due to the inclusion of Territorial's operating expenses. The efficiency ratio for 2026 improved to 67%, down from 68.2% in the prior quarter and down from 72% in the year-ago quarter, demonstrating continued positive operating leverage alongside disciplined expense management. Next, on to Slide 10, I will review our asset quality, which has continued to steadily improve and reflected a quarter-over-quarter reduction in nonperforming loans. This was primarily driven by successful resolutions of problem loans. At 03/31/2026, criticized loans totaled $325 million, down 7% quarter over quarter and down 28% year over year. The sequential quarter improvement included a 23% reduction in special mention loans and a 2% reduction in classified loans. The criticized loan ratio improved to 2.22% of total loans at 03/31/2026, down from 2.39% at 12/31/2025 and down from 3.36% at 03/31/2025. Net charge-offs were $11 million for the 2026 first quarter, or annualized 29 basis points of average loans, compared with 10 basis points annualized for the prior quarter and 25 basis points annualized for the year-ago quarter. Reflecting the linked quarter change in net charge-offs, the 2026 first quarter provision for credit losses was $9 million, up from $7 million for the 2025 fourth quarter. The allowance for credit losses totaled $155 million and the coverage ratio was 1.06% at 03/31/2026, compared with $157 million and a coverage ratio of 1.07% at 12/31/2025. With that, let me turn the call back to Kevin. Kevin Kim: Thank you, Julianna. Moving on to the outlook, on Slide 11 we present our updated management outlook for the full year 2026, including the preliminary impact of the pending Manubank transaction, which we expect to close in 2026, subject to regulatory approvals and satisfaction of other customary closing conditions. Accordingly, we expect loan growth of over 20% between 12/31/2025 and 12/31/2026, reflecting the impact of the Manubank transaction and organic growth. Relative to our assumptions at the beginning of the year, we are moderating CRE loan growth ahead of the transaction close to manage pro forma loan concentration. Our current pipelines are strong and building, and we anticipate commercial and residential mortgage loan growth will continue to be robust in 2026. We anticipate year-over-year total revenue growth to be at the higher end of our 15% to 20% range for the full year of 2026, assuming one quarter of contribution from the pending Manubank transaction. The incremental revenue from Manubank would be partially offset by the impact from the aforementioned slower commercial real estate loan growth. We assume no Fed funds target rate cuts in 2026. We anticipate unchanged pre-provision net revenue growth, excluding notable items, at a range of 25% to 30% for the full year 2026. This includes a quarter's worth of impact of Manubank's operating expenses. We anticipate the benefits of cost savings from the Manubank transaction will begin from 2027. Accordingly, we project the Manubank transaction to be meaningfully accretive to 2027 earnings. We continue to assume a steady asset quality backdrop and a full-year effective tax rate between 25% and 26% in 2026. With that, operator, please open up the call for questions. Operator: Thank you. We will now begin the question-and-answer session. To ask a question, you may press star and then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before asking the question. Participants are requested to please restrict your questions to two per participant. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. At this time, we will pause momentarily to assemble our roster. From the line of Gary Tenner from D.A. Davidson, please go ahead. Gary Tenner: Thanks. Good morning. I wanted to ask about the repurchase activity in the quarter. Could you characterize the forward appetite here and whether you have an updated target payout ratio or target capital levels we should be thinking about? Kevin Kim: That will depend on cash flow generation and growth opportunities. We will continue to evaluate opportunistic repurchases within that framework. We still have capacity under our share repurchase authorization, and we already purchased $7 million of shares since it was refreshed last quarter. So that is where we stand today, and we do regularly review our capital allocation priorities. So the use of capital to repurchase our shares will be opportunistic. Gary Tenner: Okay. Appreciate that. And then, Julianna, can you provide the purchase accounting benefit for the quarter? Julianna Balicka: Not material. Gary Tenner: Not materially different than last quarter, or just in dollars not material? Julianna Balicka: Not materially different quarter over quarter. About similar. It is $4 million. Gary Tenner: Okay. Julianna Balicka: Thank you. I believe I have answered this question in prior quarters. It might have been even your question. With the Territorial transaction, the residential mortgage loans are long-dated loans. It is a long-term portfolio. So the purchase accounting benefit is going to be a steady benefit each quarter for a number of years, as opposed to when you do a commercial loan acquisition where it is a much shorter weighted average life of the portfolio, so there is much more fluctuation to purchase accounting benefit. Gary Tenner: I appreciate that. I just wanted to confirm the number. Thank you. Operator: We have the next question from the line of Matthew Clark from Piper Sandler. Please go ahead. Matthew Clark: Hey, good morning everyone. Thanks for the questions. I want to start on the expense run rate. Some pretty good improvement here from the fourth quarter. Just want to get a sense for whether that is sustainable and what a normalized run rate might be here in the first quarter. Julianna Balicka: Thank you, Matt. This quarter, you saw some good expense management, and I would say I will go back to our comments about expense for the full year of 2026 relative to last quarter, when we made comments around the fourth quarter as a jump-up point for a run rate. The first quarter was a good quarter with some good control, but I would anticipate that as our production strengthens and our revenue growth strengthens throughout the year, the expenses will tick up from there. But overall, we will stay within the original comments that we made for you last quarter regarding full-year growth that we talked about. Matthew Clark: Got it. Okay. And then are you opting out of the CECL double count with the acquisition? Julianna Balicka: We are still going to evaluate. Matthew Clark: Okay. Okay. And then just the spot rate on deposits, if you have it, and I know there is going to be an incremental benefit from CD repricing, but just thoughts on deposit cost outlook with the Fed on hold? Julianna Balicka: Sorry. Could you repeat the second part of your question? Matthew Clark: Just the deposit cost outlook with the Fed on hold and competitive pricing on the CD side. Julianna Balicka: Right. Our CDs are continuing to reprice, as we quoted in our script about how much pickup we are getting each quarter. So when we look at our deposit cost outlook for the rest of the year, each quarter we see about 5 to 7 basis points of interest-bearing deposit cost reduction, just from the mathematics. Matthew Clark: Yep. Got it. Thank you. Just getting fresh on the CECL double count. Julianna Balicka: In our 10-K and 10-Q, you would have seen that we already adopted the ASU for the Territorial transaction. Matthew Clark: Okay. Thanks again. Operator: Thank you. Participants, if you have a question, please press star and then 1. We have the next question on the line of Kelly Motta from KBW. Please go ahead. Kelly Motta: Thanks for the question. Maybe to kick it off with loan growth, your guidance implies some pullback in commercial real estate with an eye to manage those concentrations. Can you provide any color into Q1 being down a little bit? I am wondering if that was in anticipation of signing this deal, what you were seeing in terms of payoffs, and, kind of strategically moving forward, your organic outlook for resi and commercial as you manage ahead? Julianna Balicka: For our outlook, looking forward on a full-year basis, I would expect our organic loan growth to be mid-single digits, and it would come from C&I and residential mortgage, C&I of course being the higher-percentage loan grower. And I would expect flat CRE balances. Kelly Motta: Okay. That is pretty helpful. And can you remind us your pro forma CRE concentrations for SMBC Manubank? Julianna Balicka: It will be something in that 320% range, depending on where the final balances land. Kelly Motta: Got it. That is helpful. And then just a point of clarification on your guidance. I believe you said that you have about a quarter of SMBC Manubank, like a quarter’s worth of results. I know the close is in the second half of the year. Could you just provide what was baked into the guidance in terms of timing—earlier in the second half of the year versus the end? I just want to make sure I am modeling that appropriately. Julianna Balicka: Nothing more complicated than just plugging in a close at the midpoint of the second half of the year for simple arithmetic. The close will come when it comes in the second half of the year. Obviously, we would like to close earlier than later, but for the pure mathematics of an outlook, we are using mid–second half. Kelly Motta: Got it. That is helpful. Maybe last question for me. Net charge-offs were up a little bit, although you did have improvement in NPAs and, I believe, criticized. Can you provide any color and overview as to what you are seeing in the book and anything you are incrementally watching more? Thank you. Peter Koh: Sure. Net charge-offs, I think, are a little elevated this quarter. It is up and down a little bit, but still within the reasonable range that we have been expecting, and a lot of these represent previously identified credit concerns that we are cleaning up right now. Overall, we feel very good about asset quality. You see continuing improvement in asset quality trends. NPLs were down, and criticized assets have been coming down sequentially quarter over quarter. So overall, I think we are in good shape in terms of credit. Kelly Motta: Great. Thank you so much. Operator: We have the next question from the line of Timothy Coffey from Brean Capital. Please go ahead. Timothy Coffey: Thank you. Good morning, everybody. Julianna, what were the new loan yields—the yields on the new loans in the quarter? Julianna Balicka: The yields on the new loans were approximately 6.4%. Timothy Coffey: And then kind of on the organic margin, I think the conventional thinking was that we would see expansion going into the back half of this year. Is that still a reasonable expectation? Julianna Balicka: If the Fed funds stays flat and we continue to have improvement in our cost of deposits from the repricing of CDs, and if interest rates stay flat for loan yields, all else equal, then you would see margin expansion because the earning asset side would not come down with rate cuts. In fact, it would benefit because the back book of our low-yielding CRE loans would continue to mature and reprice to market rates, and we are continuing to improve our cost of funds. Timothy Coffey: Great. The rest of my questions have been asked and answered. Thank you. Operator: That was the last question. I would like to turn the conference back over to management for any closing comments. Kevin Kim: Thank you. In summary, with our continued progress across our key strategic priorities and the addition of a compelling strategic transaction, we believe we are well positioned to continue building momentum and delivering long-term value for our stockholders. In closing, I would also like to thank our colleagues for their ongoing dedication and commitment, which remain critical to the execution of our strategy and the strength of our organization. Thank you all again for joining us today, and we look forward to speaking with you next quarter. Bye, everyone. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the COPT Defense Properties First Quarter 2026 Results Conference Call. As a reminder, today's call is being recorded. At this time, I will turn the call over to Venkat Kommineni, COPT Defense Properties' Vice President of Investor Relations. Mr. Kommineni, please go ahead. Venkat Kommineni: Thank you, Dee. Good afternoon, and welcome to COPT Defense Properties' conference call to discuss first quarter results. With me today are Stephen E. Budorick, President and CEO; Britt Snider, Executive Vice President and COO; and Anthony Mifsud, Executive Vice President and CFO. Reconciliations of GAAP and non-GAAP financial measures that management discusses are available on our website, the results press release and presentation, and in our supplemental information package. As a reminder, forward-looking statements made during today's call are subject to risks and uncertainties, which are discussed in our SEC filings. Actual events and results can differ materially from forward-looking statements and the company does not undertake a duty to update them. Stephen? Stephen E. Budorick: Good afternoon, and thank you for joining us. We are off to a solid start in 2026, and all aspects of the business are on track to achieve our objectives for the year. Based on our strong results in 2025 and our outlook for 2026, in February we recommended, and our Board approved, an increase in our annual dividend of $0.06 per share, or 4.9%, marking our fourth consecutive year of dividend increases. Since 2022, our dividend has increased 16.4% and our FFO per share has increased 15.3%, demonstrating our attractive total return investment profile, all while maintaining a conservative AFFO payout ratio below 65% and continuing to have the capacity to self-fund the equity required for external investments. For the first quarter, FFO per share was $0.69, which is $0.01 above the midpoint of guidance and represents a 6.2% year-over-year increase. Same-property cash NOI increased 5.4% year-over-year, driven in part by a 70-basis-point increase in our average occupancy. We executed 1.2 million square feet of renewal leasing and achieved a 91% retention rate. This included the full renewal of our nearly 1 million square foot campus leased to the U.S. government near Lackland Air Force Base in San Antonio. These renewals address a significant portion of our 2026 maturity risk, reducing our expiring annualized rental revenue from 21% at the beginning of the year to 11%. We executed 92 thousand square feet of vacancy leasing; we are right on track to meet our full-year target of 400 thousand square feet. We executed 384 thousand square feet of investment leasing, which consists of two previously announced full-building leases at National Business Park. Year to date, we have committed nearly $250 million of capital to new investments consisting of 620 Guardian Way, which is a fully leased build-to-suit project at National Business Park, and two new investments totaling nearly $100 million. Based on these strong results, we are elevating forward guidance metrics, and Anthony will provide additional details in his section. Regarding these two new investments: first, we committed $55 million to a 150 thousand square foot development project at Redstone Gateway, which sits inside the fence within our secure parcel on Redstone Arsenal. This investment creates Anti-Terrorism/Force Protection (ATFP)-compliant inventory for the United States government in advance of expected requirements. We are currently seeing demand for multiple government missions experiencing growth related to missile defense and space activities, which in aggregate exceeds the capacity of the building. Second, we committed roughly $43 million to the acquisition of 17 acres of land in a ground lease in the Westfields submarket in Chantilly, Virginia. The ground lease has very attractive long-term economics and is supported by two highly strategic, 100% leased office buildings known as Mission Ridge. These buildings are occupied by the FBI's technology division, including their cyber group, and two leading defense contractors who are among our top 20 defense IT tenants. This transaction provides us with essentially perpetual control of a strategic land parcel in one of our priority submarkets in which we currently have a dominant market share, and importantly, a senior position in the capital structure, which should lead to an opportunity to acquire the leasehold interest at attractive terms sometime in the future. Recall, last quarter we acquired Stonegate One in this same Westfields submarket, which was a $40 million purchase of a 140 thousand square foot building that is fully leased to a top 20 U.S. defense contractor. As shown on Slide 15 of our flipbook, Stonegate and Mission Ridge are located within a half mile of each other in the same rich ecosystem of defense contractors supporting the adjacent U.S. government demand drivers. In March, we were very pleased to receive the news that Moody's upgraded our investment grade rating by one level to Baa2 with a stable outlook. Over the past five years, we have issued $1.8 billion of unsecured debt in four separate offerings. We achieved strong pricing in each of those transactions with a weighted average credit spread of 120 basis points and a maturity of nearly nine years. Clearly, our fixed income investors recognize the inherent strength of our strategy and our portfolio, and we are pleased to receive that recognition from Moody's as well. We are one of only three office REITs with a Baa2 rating, which we believe acknowledges our proven performance over the last six years, which encompassed the global COVID pandemic, a significant increase in both inflation and interest rates, along with factors that led to the highest U.S. office national vacancy rate in over 40 years. Turning to the defense budget, earlier this month, President Trump submitted the FY 2027 budget, which the administration describes as a historic paradigm shift for investment in our national security infrastructure. The top-line figure for the defense budget request is a record $1.5 trillion, which is nearly a 45% increase year over year, and it is comprised of a base budget of $1.1 trillion and anticipated reconciliation funding of $350 billion. Our business is really driven off the proposed base budget of $1.1 trillion, which has been described by House Armed Services Committee Chairman Mike Rogers as the new baseline. The FY 2027 proposed budget represents nearly a 30% increase over last year and nearly a 50% increase over the last five years. The defense base budget request includes a $16 billion increase for intelligence, or 14%, which is the largest year-over-year increase in over 20 years; a $4 billion increase for DoD cyber funding, or 25%, which is the largest increase in the history of DoD cyber funding; and an additional $18 billion for Golden Dome, which brings appropriations and requests to date for this program to roughly $40 billion of the $185 billion total. $21 billion was appropriated for Golden Dome in FY 2026. Only a small portion of this amount has actually been awarded to date, which bodes well for emerging demand through the end of the year, and there is still more than $160 billion yet to be appropriated. This current and anticipated funding should provide a long runway of tenant demand that will develop and support the Golden Dome initiative in the coming years, as there is typically a 12 to 18 month lag time between appropriations and lease executions. The FY 2027 defense budget is a continuation of a 12-year trend of growth in defense spending and represents one of the few areas of public policy that garners strong bipartisan support. The country's significant investment in the priority missions which our locations support should result in a favorable demand backdrop for our portfolio over the near and medium term and provide additional opportunities for external growth. With that, I will turn the call over to Britt. Britt Snider: Thank you, Stephen. We finished the quarter with strong occupancy at 94.4% in the total portfolio and 95.6% in the defense IT portfolio. Year over year, occupancy increased in both portfolios by 80 basis points and 30 basis points, respectively. During the first quarter, we executed 92 thousand square feet of vacancy leasing, nearly 70% of which is tied to cyber activity. Year to date, we have signed 152 thousand square feet of vacancy leasing, which equates to 38% of our full-year target of 400 thousand square feet. We have approximately 115 thousand square feet of prospects in advanced negotiations, which we define as over 90% likely to execute. Taken together, we have over 265 thousand square feet of leases either executed or in advanced negotiations, which amounts to two-thirds of our full-year target. In April, we leased the remaining floor at 8100 Rideout Road in Huntsville to a top 20 U.S. defense contractor. This lease doubles the tenant's footprint in the building to over 50 thousand square feet and brings the property to 100% leased. Twenty-three of the 24 operating buildings in our Redstone Gateway park are now 100% leased, bringing this nearly 2.5 million square foot campus to 99.6% leased, with only one 10 thousand square foot suite of availability. Also in April, we signed a 12 thousand square foot expansion lease at Franklin Center in Columbia Gateway with a top 10 U.S. defense contractor. This lease increases the tenant's footprint in the building to 60 thousand square feet, and we are tracking 155 thousand square feet of prospects on the remaining 55 thousand square feet of availability. Turning to renewal leasing, we executed 1.2 million square feet in the quarter, with tenant retention of 91%, cash rent spreads up 3.8%, and GAAP rent spreads up 12%. Our quarterly volume was driven by the full renewal of our U.S. government campus near Lackland Air Force Base in San Antonio, which totaled 953 thousand square feet and accounted for over 40% of our annualized rental revenue expiring in 2026 at the beginning of the year. Cash rent spreads on the San Antonio renewals increased 4.2% with annual rent bumps of 3%. Once we include these four large lease renewals in San Antonio, our track record for retention on leases in excess of 50 thousand square feet becomes even more impressive. For large leases that expire between mid-2024 and year-end 2026, we have renewed nearly 3 million square feet with a retention rate of 97%. We have eight leases remaining totaling 950 thousand square feet, all with the U.S. government. We expect 100% retention on these leases, with executions anticipated in 2027. Additionally, since we started providing this disclosure nearly four years ago, we have renewed over 5 million square feet of large leases, a retention rate of over 97%. Moving on to development, we commenced two projects in the first quarter and our active pipeline now totals over 1 million square feet at 73% pre-leased and amounts to over $500 million in capital commitments. Each of these seven projects is on schedule and on budget, and five of the seven are 100% pre-leased. The two developments with available space are both inventory buildings in Huntsville: one inside the fence targeting government tenancy, and one outside the fence for defense contractors. We commenced construction of 410 Goss Road in the first quarter, which is designed for the government inside the fence, and we are tracking demand that exceeds the availability in the building from multiple missions, all of which require secure facilities that are ATFP compliant. We achieved substantial completion of 8500 Advanced Gateway earlier this month, which is outside the fence and is currently 20% leased to a defense contractor. We are finalizing a lease for a full floor, which we expect to execute imminently that will increase the lease rate to 40%, and we are working on another deal for two full floors, which would increase the lease rate to over 80%. We have already planned the next inventory building, RG 6300, and expect to commence development once we approach that 80% threshold. Our development leasing pipeline, which we define as opportunities we consider 50% likely to win or better within two years or less, currently stands at nearly 1 million square feet. Beyond that, we are tracking an additional 600 thousand square feet of potential development opportunities. With that, I will hand it over to Anthony. Anthony Mifsud: Thank you, Britt. We reported first quarter FFO per share of $0.69, which was $0.01 above the midpoint of guidance and represents a 6.2% increase year over year. The quarter benefited from the earlier-than-budgeted commencement of several leases, strong renewal leasing, the timing of certain R&M projects, and unbudgeted real estate tax refunds from continued successful assessment appeals. These favorable items were partially offset by higher-than-forecasted net winter weather-related expenses. Same-property cash NOI increased 5.4% year over year, driven by the burn-off of free rent on development and acquisition leases commenced in prior years and a 70-basis-point increase in same-property average occupancy. We received $2 million less of nonrecurring real estate tax refunds in 2026, which muted this quarter's strong growth by approximately 200 basis points. Same-property occupancy ended the quarter at 94.2%, which is a 60-basis-point increase over the year and was driven by a 500-basis-point increase in the Other segment. With respect to capital transactions, on March 16, we repaid our $400 million bond, which carried an interest rate of 2.25%. Recall that we prefunded the capital for this maturity roughly seven months ago, when we issued $400 million of five-year unsecured notes at 4.5% at a sector-leading credit spread of 95 basis points. The increased interest on this $400 million of debt results in $0.09 of higher financing costs in 2026. We have no significant near-term refinancing risk, as our next bond maturity is not until 2028. As Stephen mentioned, Moody's upgraded our investment grade credit rating in March to Baa2. In its press release, Moody's highlighted the strong operating performance of our specialized office portfolio, our solid EBITDA-to-interest expense ratio, and income growth from assets under development. I would like to give special recognition to our team who worked diligently to achieve this important milestone, which represents the culmination of years of effort and outreach. We appreciate that Moody's recognizes the strength and specialized nature of our strategy, platform, portfolio, and tenants. With respect to guidance, we increased the midpoint for several items. We increased the midpoint of FFO per share guidance by $0.01 to $2.76, which is driven by the contribution from both the outperformance during the quarter and the Mission Ridge land acquisition, partially offset by the accounting treatment for the dilution from our exchangeable notes. We increased the midpoint of same-property cash NOI growth by 50 basis points to 3% due to stronger renewal leasing and unanticipated real estate tax refunds. We increased the midpoint of tenant retention guidance by 250 basis points to 82.5%. We increased the midpoint of capital committed to new investment guidance by $40 million to $290 million due to the Mission Ridge land acquisition. Finally, we are establishing second quarter guidance for FFO per share in a range of $0.68 to $0.70. With that, I will turn the call back to Stephen. Stephen E. Budorick: In closing, we are off to a great start to the year, with leasing volume right on track with the full-year plan. We delivered FFO per share growth of 6.2% year over year, marking our 23rd consecutive quarter of year-over-year growth. We increased the midpoint of 2026 guidance for four key metrics. We increased the dividend again in the first quarter by 4.9% and have increased it over 16% over the last four years. We committed nearly $250 million of capital to three new investments year to date, and since the beginning of 2025, the strength of our strategy has resulted in over $500 million of capital commitments to new investments consisting of eight projects in five different markets. Eighty percent of the dollar value is for 100% pre-leased projects, and 20% of the dollar value is creating much-needed inventory to meet the demand we are seeing from both the U.S. government and defense contractors in parks where we have little to no availability. These investments, combined with the expected additional opportunities from the substantial increase in the proposed defense budget, will support the continued track record of growth we have delivered in NOI and shareholder value. With that, operator, please open the call for questions. Operator: Thank you, Mr. Budorick. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from Seth Bergey of Citi. Your line is open. Seth Bergey: Hey, thanks for taking my question. You have a slide in the flipbook on the long-term growth rate of about a 4.5% FFO per share CAGR. With the increase in defense spending, is that how you think about the long-term earnings power, or do you see a path to that accelerating as defense spending increases and the development pipeline continues to mature? Stephen E. Budorick: Sure. The slide you are referring to demonstrates the 4.5% growth rate we have compounded at for the last seven or eight years. Looking forward, this year our growth is a little muted because of the $0.09 of additional interest expense Anthony referred to in his comments, so we expect to get somewhere around 1.5% of growth. Looking forward, we generally expect we can return to the growth path that we have experienced recently, and, hypothetically, there could be upside to that from the increase in defense spending. I remind you that the bill has not even been passed and appropriated yet, so it is aspirational, but it certainly supports the continued trend we refer to over the last 12 years of increases in investment, which will be good for our business and potentially lead to a better outlook. Seth Bergey: Great. And then with the acquisition, that is the second acquisition you have made in that submarket. Are there any other types of buildings or ground leases that you are looking at in that market? And as the business improves and defense spending increases, are you seeing any changes to other players in this space? Stephen E. Budorick: To the first question, if you look at the aerial on Slide 15, you will see that market is, as we described it, a rich ecosystem of defense contractors supporting the local missions, and we own about 28% of that market now. There are certainly buildings that have great tenants with characteristics that would be compatible with us that, under the right price or terms, we would be very interested in buying. There are none currently available, but it is certainly one of the top three markets we have staked out, and we keep a pretty sharp eye on opportunities there. As to other players and increased competition, nothing meaningful that I could talk about. There are several investment groups that are considerably smaller that like to invest in Northern Virginia in similar assets, and I think their interest will remain high as it has been in the past, but I cannot say that I identify any new entrants. Operator: Thank you. Our next question comes from Steve Sakwa of Evercore ISI. Your line is open. Steve Sakwa: Yes, thanks. Good afternoon. Stephen, are you thinking about the development pipeline and development starts any differently today, given all of the positive backdrop and tailwinds you talked about? Are you willing in some of the submarkets to have a little bit more spec product? And is the tenancy changing given some of the new entrants into the defense contracting business? Stephen E. Budorick: We are not yet ready to start accumulating more inventory than we traditionally have, but we are certainly, for the last year and increasingly so, putting ourselves in a posture to move extremely quickly by redesigning and, in some cases, addressing land conditions in advance of the opportunity to cut our delivery timeframe. To the extent that demand ramps up, particularly in Huntsville where we expect it to ramp up to support Golden Dome, we are prepared to move more aggressively, but we need to see that demand materialize a little more formally than it has been. Steve Sakwa: Got it. And as you think about vacancy leasing, maybe talk about where the focal points are and the prospects for driving occupancy even higher from current levels. Britt Snider: In terms of prospects, in Northern Virginia we have been able to push some cash rents on recent deals, which is a good sign. The growth in cyber funding in the PW corridor is an area where we are starting to see more activity after a quieter period, and the funding is being allocated to missions we support in our buildings, including the cyber mission force. Those are two areas—Northern Virginia and the PW corridor—where we are going to see heightened vacancy leasing. We have certainly seen it in Columbia Gateway at the beginning of this year. We do not have any vacancy to lease in Huntsville; we are down to our last suite. Operator: Thank you. Our next question comes from Blaine Heck of Wells Fargo. Your line is open. Blaine Heck: Great, thanks. The FY 2027 budget request at roughly $1.5 trillion is clearly a major positive. Stephen, assuming that goes through, given that the increase is so substantial, do you think your tenant base will need to start leasing a bit earlier and get out ahead of the funds coming in, or do you think the normal 12 to 18 month lag still holds? Stephen E. Budorick: Remember, you need to break that $1.5 trillion down into $350 billion that is anticipated to be a reconciliation appropriation, and if you break that down, that is really going for things that would not affect leases in our portfolio—such as increased inventory, munitions, shipbuilding. The almost 30% increase in the base budget certainly should affect our tenant base and hypothetically could influence their need for space. But again, it is too early; it has not been passed or appropriated. And then once it is appropriated, it has to flow through to the contractors. I think the 12 to 18 months is still going to hold. Blaine Heck: Very helpful. We noticed your potential future opportunities in the development pipeline came down by about 400 thousand square feet from last quarter. Was there any specific driver behind that reduction? Any projects that might have fallen out of that bucket? Stephen E. Budorick: We harvested some with deals that we announced last quarter, and we made a decision on one particular mission to reduce the possibility of future demand because they look pretty committed to a MILCON solution. Operator: Thank you. Our next question comes from Thomas Catherwood of BTIG. Your line is open. Thomas Catherwood: Thank you. Good afternoon, everybody. Going back to leasing, Britt, in the past you have talked about dialing back on tenant improvements and free rent, and that has shown up in the numbers. Two questions: how much growth are you getting on a net effective basis now, and as availabilities get tighter, how much more can you pull back on concessions? Britt Snider: On NER, it is something we are very focused on for every deal. I do not have the exact percentage, but we have had an enhanced focus over the past couple of years. In certain markets, especially Northern Virginia, we have been able to pull back on concessions more than in the past. For tenants needing mission-critical space, they are willing to contribute more dollars to build out and upgrade their SCIFs, whereas we are staying generally at the same level, if not pulling back, and certainly in free rent we are really trying to pull back. Thomas Catherwood: Would you say that is low single digits or high single digits on a net basis? Britt Snider: Probably mid-single digits growth rate. Stephen E. Budorick: Yes, that is about right. Thomas Catherwood: Perfect. And Stephen, traditionally we thought of COPT Defense Properties with a focus on defense intelligence markets, and you have shied away from markets more focused on defense manufacturing or deployment. With the push to modernize defense capabilities, those lines seem to be blurring. Is that fair, and is that driving you to look at other markets you had not looked at before? Stephen E. Budorick: If we are going to bridge into the realm of defense we have not traditionally served, it would be in conjunction with one of our tenants in a specific opportunity to support them with third-party capital. We have had conversations in the past with some of our tenants to move to other markets; we have not yet made that decision. I cannot say that is accelerating now, but on an individual basis we consider it. Operator: Thank you. Our next question comes from Richard Anderson of Cantor Fitzgerald. Your line is open. Richard Anderson: Thanks. Good afternoon. Speaking of other markets, what about Des Moines? What is the latest there as you look to build out data center shells? Britt Snider: Data center shells in that market? It is going to be a great corn crop this year. Stephen E. Budorick: No real update. We are at an impasse on power. We are waiting for the power situation to materialize. We told you in prior calls that to move forward today, the economic terms were too burdensome. We elected to step aside, let others lead in that market, and wait for the power company to adjust to the elevated demand for power for data in the market. We continue to see this as three to four years out. Richard Anderson: As far as Huntsville, you mentioned 99.6% leased, 10 thousand square feet available in a single suite. That campus has the potential to be twice the size. With all that Golden Dome activity, what is the chance you could have the high-class problem of not having enough space? Stephen E. Budorick: That is a long runway away. We have at least 2.5, really more like 3 million square feet of capacity. To the extent that we have that great news and we are absorbing it, recall that our partner, in essence, is the U.S. government. We lease land from them. It is an extraordinarily large parcel of property in the U.S.—the Redstone Arsenal—and we believe, in light of that kind of success, we can find a way to expand our enhanced use lease and continue to support the growth of the missions on the Arsenal. That is the least of my concerns. Richard Anderson: On vacancy leasing, you are tracking 400 thousand square feet. In past years, you blew away your vacancy leasing targets. You are tracking in line now. Is that because the more you get occupied, the harder it is to execute on vacancy leasing? Should we not expect the 400 thousand target to go up meaningfully this year? Stephen E. Budorick: Generally, that is fair. As our properties get as full as they are, it becomes more difficult to have inventory that matches exact emerging demand. We have done a good job continuing to attack it. We do get some space back, even with our extraordinary retention, that we can bring to market. The wildcard is whether we can make some hay with our other assets where we have more vacancy. We like to set a target and beat it, so we plan to do our best to beat the 400 thousand square foot goal, but we are comfortable we are going to make it. Richard Anderson: One last one. On the defense budget, given its size, is it reasonable to assume it will take longer to pass, or because it is bipartisan, might you get to a final budget pretty soon after October 1? Stephen E. Budorick: That is tough to handicap. We seem to find ourselves in new circumstances continually trying to get things appropriated and funded. I would think it is going to be difficult, not because it does not have bipartisan support, but because we have some adversarial objectives in the overall direction of the country, and it seems like anything is a potential bargaining chip, as we are seeing right now with the Department of Homeland Security unfunded at a point in time where we absolutely need the funding for so many reasons. Anyway, anything is possible. Operator: Thank you. Our next question comes from Dylan Brzezinski of Green Street. Your line is open. Dylan Brzezinski: Hi, guys. Most of my questions have been asked, but since you called out potential for vacancy leasing to accelerate in the PW corridor and Northern Virginia, it looks like Navy Support remains the most underleased in the portfolio, albeit still at a high level. What are the vacancy leasing prospects there? Britt Snider: It is a much smaller portfolio for us, but in Navy Support we are seeing some improvements, especially in the Pax River area. There is a lot of autonomous vehicle and drone work happening there, so there has been some pickup. With our buildings next to the D.C. Navy Yard at Maritime Plaza, those have also seen quite a bit of activity and significant increases in occupancy over the past year. There is a lot of activity at the D.C. Navy Yard and contractor support there is critical. Pax River and the D.C. Maritime Plaza are two areas where we are seeing real prospect activity increase. Dylan Brzezinski: And on acquisitions, any noticeable pickup, or is it still one-off opportunities? Stephen E. Budorick: We are currently not looking at anything, and it continues to be one-off. Remember, we have a very focused investment strategy. In the broader market there is more activity, but within the small set of assets we would invest in, there is nothing currently we are tracking. Operator: Thank you. As a reminder, if you have a question, please press 11. Our next question comes from Anthony Paolone of JPMorgan. Your line is open. Anthony Paolone: Yes, thanks. Good afternoon. You touched on this a little bit, but that 1 million square foot development leasing pipeline for what is basically about 180 thousand square feet you have—how much of that pipeline is for that specific space versus requirements you might consider for incremental starts? And to the extent you do not accommodate them, where do these folks tend to go? Stephen E. Budorick: Many of the items in that development pipeline anticipate new projects. I would say 25% to 30% are for things we are actually building currently. Some is overflow for the next set of buildings that would follow. It is more about where the demand is and ensuring we have inventory ready when it is time to move forward. Anthony Paolone: Second, on the regional office portfolio, it is small and not much expires this year, but looking out the next couple of years, expirations start to get heavier. Any updated thoughts on how to mitigate that or the risk of that getting in the way of growth at the core? Britt Snider: The team is already starting to address some of those expirations over the next several years with tenants, and they are working on transactions to pull those forward and get them done early to mitigate the risk. We want to ensure that our headline remains where it belongs, which is in our defense IT portfolio, and not on any blips within the other portfolio. Operator: Thank you. Our next question comes from Steve Sakwa of Evercore ISI. Your line is open. Steve Sakwa: Just one quick follow-up. Stephen, you have talked about selling some of the non-core office assets at the right time. We have seen some successful new developments in Washington, D.C., at exceptionally high rents. Does that make 2100 L Street a more viable disposition candidate today? Stephen E. Budorick: Those benchmark rents support an increased expectation of value for the asset. They have been driven by a relatively small component of demand—very well-funded tenants that want true trophy space in a market that does not have any available. I do not think the investment cash flow has quite picked up enough where it would make sense to market that. I do not think we are that far away. Certainly, I think that opportunity comes quicker than we will see, say, in Baltimore or Tysons Corner. Operator: Thank you. I will now turn the call back to Mr. Budorick for closing remarks. Stephen E. Budorick: Thank you for joining our call today. We are in the office, so please coordinate with Venkat if you have a follow-up question you would like to discuss. Thanks again. Operator: Thank you for your participation today in the COPT Defense Properties First Quarter 2026 Results Conference Call. This concludes the presentation, and you may now disconnect. Unknown Speaker: Good day.
Operator: Welcome to Sysco's Third Quarter Fiscal Year 2026 Conference Call. As a reminder, today's call is being recorded. We will begin with opening remarks and introductions. I would like to turn the call over to Kevin Kim, Vice President of Investor Relations. Please go ahead. Kevin Kim: Good morning, everyone, and welcome to Sysco's Third Quarter Fiscal Year 2026 Earnings Call. On today's call, we have Kevin Hourican, our Chair and CEO; and Brandon Sewell, our Interim CFO. Before we begin, please note that statements made during this presentation that state the company's or management's intentions, beliefs, expectations or predictions of the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, and actual results could differ in a material manner. Additional information about factors that could cause results to differ from those in the forward-looking statements is contained in the company's SEC filings. This includes, but is not limited to, risk factors contained in our annual report on Form 10-K for the year ended June 28, 2025, subsequent SEC filings and in the news release issued earlier this morning. A copy of these materials can be found in the Investors section at sysco.com. Non-GAAP financial measures are included in our comments today and in our presentation slides. The reconciliation of these non-GAAP measures to the corresponding GAAP measures is included at the end of the presentation slides and can be found in the Investors section of our website. During the discussion today, unless otherwise stated, all results are compared to the same quarter in the prior year. [Operator Instructions] At this time, I'd like to turn the call over to Kevin Hourican. Kevin Hourican: Good morning, everyone, and thank you for joining us today. I'm pleased to report that Sysco delivered strong results in the third quarter of fiscal 2026. Our results were enabled by improving case volume trends, strengthening gross margin performance and disciplined operational execution. We delivered our progress improvement in a continued choppy macro environment. Given our positive momentum, we remain confident in our expectations for full year adjusted EPS to be at the high end of our annual guidance range of $4.50 to $4.60. Most notably, we delivered 3.3% local volume growth in our U.S. business, a 210 basis point improvement versus the prior quarter and our strongest quarter local volume growth in 3 years. We have clear momentum in our local business, and we have confidence that we will continue to post strong local results in Q4 and into fiscal 2027. While our primary focus for today's call will be the underlying strength of our core business, we will also discuss the strategic rationale surrounding our entry into the cash-and-carry space with our recently announced planned acquisition of Jetro Restaurant Depot. After my remarks, Brandon will highlight our financial outcomes and share his thoughts on the financial merits of the Jetro Restaurant Depot transaction. Before I begin, I would like to formally introduce our Interim Chief Financial Officer, Brandon Sewell. Although Brandon may be a new name to many listening to the call today, he has been an important senior leader within Sysco for the past 12 years. Most recently, Brandon served as CFO of Sysco's largest segment, our U.S. Foodservice business. Prior to the U.S. CFO role, Brandon held several senior leadership roles across the organization spanning global financial planning and analysis, merchandising and supply chain. He will work closely with our executive leadership team to ensure continuity and disciplined execution of Sysco's financial strategy as we conduct a full search for a permanent CFO across internal and external channels. As I've shared with many of you over the recent weeks, Brandon is a very strong candidate for the permanent role. In the meantime, we are thankful and appreciative to have his expertise and leadership as a steadying hand and expert in our business. Brandon, thank you for your leadership. Let's jump into our business results, starting on Slide #4. From a top line perspective, Sysco delivered nearly $21 billion of total revenue, a growth rate of 4.7% versus the prior year. These revenue results reflect positive and accelerating case growth across our local, specialty, national and international business units. From a bottom line perspective, we delivered adjusted earnings per share of $0.94, which was in line with our expectations and inclusive of the previously discussed $63 million headwind related to lapping lower incentive compensation in the prior year, reflecting an approximate impact of $0.10 per share. Our revenue growth was fueled by improving volume trends across our business, but most notably by our USFS local case volume. Overall foot traffic to restaurants remains challenged, and Sysco is improving our performance due to selling initiatives within our direct control. Gross profit was up 6.5% year-over-year, and when excluding the $63 million in incentive compensation headwind, our operating income and operating income margin would have expanded on a year-over-year basis, while our adjusted EPS would have expanded to be in line with or slightly better than our long-term earnings growth algorithm. Looking at our underlying momentum in this way gives Brandon, our leadership team and me the confidence in the trajectory of our core business. We are encouraged by our results overall as our teams delivered strong volume growth in a soft restaurant traffic environment. Per Black Box, traffic to restaurants was down approximately 1.9% in the quarter. Sysco's improved performance is being generated by increased sales colleague retention and increased colleague productivity. Our sales colleagues delivered our fourth consecutive quarter of improvement in new customer win rates. We are able to take share and grow profitably even in a market with soft overall conditions due to our sales colleague training initiatives and sales enablement tools that are increasing colleague productivity. Specifically, AI360 is improving new colleague onboarding, and it is helping colleagues of all tenures increase their selling effectiveness. When coupled with our customer growth programs like Sysco Your Way and Perks 2.0, Sysco was improving how we serve our customers. Our progress in local volume can be clearly seen on Slide 8 in our presentation. Looking ahead in our fourth quarter, we expect to deliver at least 2.5% of local volume growth. To be clear, posting a volume growth of 2.5% in our fourth quarter would equate to a 120 basis point improvement versus Q3 on a 2-year stack basis, a clear continued acceleration in overall business outcomes. Importantly, we are now growing our local business faster than our overall business, which is very helpful to the overall operating margins of the company. Turning the page to our national contract business. During our third quarter, our national business generated case volume growth of 1.4%. We delivered strong growth in our health care, travel and hospitality, and foodservice management businesses. The positive growth from these businesses was partially offset by softness in our national restaurant segment. The declining foot traffic to restaurants per Black Box has disproportionately affected our national chain restaurant customers and can be seen in our results as volume with these customers was down year-over-year. For the fourth quarter, we expect case volume growth for national contract customers to improve versus Q3, driven by continued strength in our nonrestaurant business and onboarding of net new customer wins in the national restaurant customer business. Turning to our International segment. We are very pleased with the performance being delivered by our International team. The momentum in our International business was fueled by every International geography. To that end, local case growth in our International segment was up 3.8% in the quarter. This growth is being generated by expanded supply chain capacity, increased availability of Sysco Brand and merchandise, increased sales headcount and easier-to-use technology. This strong demand, coupled with disciplined expense management, delivered adjusted operating income growth of nearly 13%. Impressively, this represents the tenth consecutive quarter of double-digit operating income growth and highlights the continued strength of Sysco International as a growth engine within the company. Before turning the call over to Brandon, I want to highlight some of the key points tied to our previously announced agreement to acquire Jetro Restaurant Depot, the leading cash-and-carry foodservice supplier in the United States, as well as provide a brief update on the recent performance of that business. The acquisition of Restaurant Depot is a bold new chapter of profitable growth for Sysco, one that creates a combined company that is expected to grow faster, be more profitable and return more value to shareholders than a stand-alone Sysco. Most importantly, we will increase our ability to help save restaurants money with a more efficient buying program and by expanding Restaurant Depot's low-cost leader format to 125-plus net new geographies over time. Our 2 companies are better together, and our end customers will benefit. The cash-and-carry channel is large, growing and resilient, with an approximately $60 billion to $70 billion total addressable market. Restaurant Depot is the leader in the channel with a best-in-class format that serves smaller customers that are seeking value, freshness and convenience. Restaurants tend to choose which channel they prefer first, and they select a business partner within their channel. Customers seeking savings and the ability to pay with cash or a credit card find the Restaurant Depot one-stop shopping environment very compelling. Sysco serves a larger customer that is seeking delivery and the support of an in-person sales colleague. These customers desire the convenience of delivery and the high-trust service that comes with our dedicated and well-trained sales force. Our sales consultants provide restaurant advice, culinary suggestions and even menu price optimization suggestions. The minimal overlap between these 2 customer types creates clear separation between the 2 channels. With that said, our new company will be able to serve more restaurant operators, reach more purchasing occasions, and provide savings to more customers when we are a combined entity. From a financial perspective, Sysco will gain access to a large, resilient and growing new channel customers that is entirely local. I'd like to spend some time sharing initial examples of our 2 companies will be better together: increasing enterprise profitability and improving how we serve local customers. The first benefit is in purchasing efficiency. We will deliver $250 million of net cost synergies through the transaction. I want to be very clear that we do not intend to reduce headcount at either company as a result of the transaction. The cost synergies will come from buying products and services more cost effectively than we do today. By combining our volumes, we can be more efficient for Sysco and for our supplier community. As a result, we will buy better. We are extremely confident in our ability to deliver against this cost reduction target. The second benefit will be generated through revenue synergies across 2 companies. As I said in the deal announcement, revenue synergies beyond opening new stores are not included in the accretion targets of the deal model. But first, let me address the new store opening opportunity. We have completed a thorough analysis of the geographic white space opportunity for new Restaurant Depot locations, and we are very confident in our ability to open 5 to 6 net new stores per year for the next 25 years. Or stated differently, we are extremely confident that the core U.S. market can easily accommodate 125 net new Restaurant Depot locations over time. Many of these locations can be served directly by Restaurant Depot's effective and efficient supply chain, and select new store locations will be enabled by leveraging Sysco's vast inbound supply chain capabilities. By opening 125 net new Restaurant Depot locations, we will bring the low-cost leader format of restaurant supplies to more customers, saving tens of thousands of restaurants money, and we will create thousands of new jobs in the process. The opening of these 5 to 6 new stores per year is included in our modeled assumptions to support Restaurant Depot's core revenue growth. Beyond opening new stores, I would like to highlight additional vectors of growth enabled by our combination. The upside from these concepts is not included in the accretion figures that we have shared with you. The first example is cross-selling each other's expansive product assortments. Restaurant Depot has a compelling opening price point product line that has been developed across decades. There are many Sysco delivery customers that would like to buy these products, and they would like to have them delivered on their existing Sysco order. For instance, a customer could be buying premium protein and premium produce, but they are less particular on select frozen products. Offering these delivery customers a lower price tier of merchandise would equate to incremental cases on existing deliveries. Those that know this industry well understand that the most profitable case is the incremental case added to an existing delivery. To avoid trade-down cannibalization, we can target customers with personalized offers and provide those offers to customers who are not buying from within a given product category. Next up is an even bigger idea. Sysco's primary delivery customer receives approximately 2 deliveries per week. Running a restaurant is a dynamic business, and our customers often run out of products between their Sysco deliveries. Sysco today does not have a cost-effective solution to meet those spur-of-the-moment needs. And as a result, our customers are forced to take action on their own and oftentimes are buying items across a wide array of retail options. By partnering with Restaurant Depot, Sysco's sales colleagues will be better able to solve the needed now customer scenario. Concepts like click-and-collect or same-day delivery from Restaurant Depot locations will be a tool in our sales teams arsenal to meet these customers' needs. As we continue to open new stores, the Restaurant Depot store location will become an increasingly convenient asset to be leveraged. One more example is how Sysco can help Restaurant Depot customers. As small customers find success in their business, they oftentimes open a second or a third location. By partnering with Sysco, Restaurant Depot can provide these growing customers seamless engagement across the 2 purchasing channels, delivery from Sysco when they want it and cost savings at the store when they have time to shop for themselves. We will develop a loyalty program that rewards our customers, big and small, for the incremental purchases that they make across our multichannel format. Buy more, save more. It will be simple to understand and we will reward customers for purchasing growth regardless of channel. By combining Sysco and Restaurant Depot, our business will be able to provide the type of service a customer is looking for when they need it, at a price point they desire to pay. Together, we will become a nationwide omnichannel food service provider that grows our business profitably. This transaction meaningfully expands our penetration of the local customer segment, the most profitable segment in Foodservice. Restaurant Depot's business is 100% local. The acquisition is expected to increase Sysco's local revenue by 1.5x, increasing our enterprise margins. Lastly, as I mentioned on the announcement call, cash-and-carry is a very resilient channel. During every economic downturn, cash-and-carry has taken share from the overall market. Why? Because restaurant operators seek to save money in those times, and Restaurant Depot is their 100% best way to save money while getting everything they need in a one-stop shopping environment. Gaining access to cash-and-carry increases Sysco's profitability and resilience. Any transaction of this size does come with integration risks, risks that we will carefully manage through a talented Integration Management Office. Most importantly, Restaurant Depot will be run as a stand-alone segment within broader Sysco. It will continue to be run by Richard Kirschner, its longtime CEO, and Richard's existing and talented leadership team. They will make all key decisions on how the cash-and-carry business will be run. There will be limited technology integration as Restaurant Depot was a retail storage business. There's no need for us to rip and replace key enterprise software that successfully runs Restaurant Depot today. From a culture perspective, our 2 companies are excited for how we can work together and engage on what I call pull, not push, growth opportunities. Sysco will help Restaurant Depot on topics where we can help, like opening new store locations, and Restaurant Depot will most certainly be able to help Sysco better serve that needed-now customer purchasing occasion. As I said in my introduction, the new company will grow sales faster, be more profitable and will return more value to our shareholders than a standalone Sysco. As Brandon will explain in a few moments, the deal is immediately accretive and is in the top quartile of deals from a year 1 and year 2 earnings accretion perspective. In a moment, Brandon will explain our commitment to quickly reduce our debt level. In summary, this transaction is good for our shareholders in the short, medium and longer-term time horizons. Looking ahead, we understand that investors want to learn about Restaurant Depot, including how Restaurant Depot is performing. We expect the deal to close by approximately Q3 of fiscal 2027. Between now and then, we will provide periodic updates on the performance of Restaurant Depot. To that end, we have been advised by Restaurant Depot that in their most recently completed calendar quarter, their volume growth was approximately 4% and their operating margins were in line with expectations. In closing, I want to reiterate that we are encouraged by the strong results of our core business. Our leadership team is committed to delivering at least 2.5% local case growth in the fourth quarter and adjusted EPS results at the high end of our annual guidance range. We will continue to deliver strong results as we prepare to create a bold new chapter of growth with Restaurant Depot as a part of the broader Sysco family. With that, I'd now like to turn the call over to Brandon. Brandon, over to you. Brandon Sewell: Thank you, Kevin. I'm honored to be in this role and genuinely excited to get to work. Many of you know that I worked closely with Kevin and the IR team here for many years, and look forward to connecting with our analysts and shareholders going forward. Importantly, our priorities have not changed. We are focused on executing our strategy, maintaining the financial discipline that has defined Sysco for years and continuing to deliver value for our shareholders. I'm proud of the operational momentum in our USFS segment where I was most recently CFO. I understand the importance of strong, consistent delivery of financial results, and going forward, I'm excited to add value to Sysco through the lead finance role. We have substantially improved our local case performance over the past year and know how important this KPI is to our shareholders. We plan to maintain the positive momentum in our underlying business at Sysco. In addition, we expect to successfully execute the Restaurant Depot transaction, maintain a laser-like focus on cash optimization ahead of the anticipated closing date, and then rapidly and deliberately delever our balance sheet by at least 1 turn over the first 2 years post acquisition, as seen on Slide 19. As part of our acquisition debt structure, we have built in $3 billion of term loans and $1 billion of upcoming debt maturities to ensure ample prepayable debt that will facilitate this deleveraging. This is our commitment, and we are confident in our ability to achieve it. With that, let me turn to the quarter. Our Q3 results included sales growth of 4.7%, an accelerated rate of volume improvement, continued margin management and adjusted EPS that was in line with previously communicated expectations of $0.94. Importantly, our largest and most profitable USFS segment delivered a step-up in top line growth and, as previously communicated, grew adjusted operating income by 5.1%. Additionally, free cash flow grew 19% year-to-date. We expect strong year-over-year growth for the full year, positioning us well in our cash optimization efforts. As Kevin highlighted, we're experiencing the benefits from structural improvements, especially as retention and productivity of our sales force continues to improve. With 1 quarter left to go, we plan to finish strong, and we remain confident in delivering our FY '26 guidance. Q3 benefited from continued tailwinds from our strategic sourcing initiatives, contributing to 6.5% gross profit growth and 31 basis points of gross margin expansion year-over-year. This performance also reflects favorable mix benefits, with stronger volume from local customers and sequentially improved mix from Sysco Brand penetration rates. Specific to local volumes, our stabilized sales colleague retention and incremental productivity improvements helped drive sequential volume growth across local and national customers. Importantly, our supply chain continued to deliver productivity improvements and performed at an exceptional level, anchored by improved fill rates and order accuracy and improved safety performance. Additionally, warehouse productivity across our supply chain is nearing 2019 levels, and we expect further positive momentum going forward. Turning to International. This segment remains a great example of the power of the Sysco playbook. The positive momentum over the past few years continued in Q3, with sales growth of 12.4%, including local case growth of 3.8%, gross profit growth of 14.6% and adjusted operating income growth of 12.5%. Our strategy is driving results with this quarter marking our tenth consecutive quarter of delivering double-digit improvements in adjusted operating income. Now let's discuss our performance and the financial drivers for the quarter. Starting on Slide 13, for the third quarter, our enterprise sales grew 4.7%, driven by growth across all segments. Total U.S. Foodservice volumes increased 2.3%, while local volume increased 3.3% in the quarter. This marked our strongest rate of local case performance since Q1 of 2023. Additionally, SYGMA results this quarter were solid, reflecting 2.5% sales growth and 5.9% operating income growth, reflecting increased strength in our supply chain operations. Sysco produced $3.8 billion in gross profit, up 6.5%, gross margin expansion of 31 basis points to 18.6%, and improved gross profit per case performance. This notable margin expansion reflects the impact of our strategic sourcing efforts, sequential improvement in Sysco Brand, driven by customer mix, incremental progress in our value tier offerings and effective management of product cost inflation across our category baskets. During the quarter, inflation rates for the enterprise were approximately 2.8%, and in USPL were approximately 0.5%. These rates moderated slightly on a sequential basis, which we believe will help with product affordability across the industry. Overall, adjusted operating expenses were $3 billion for the quarter or 14.8% of sales, a 51 basis point increase from the prior year, reflecting the lapping of $63 million in incentive compensation from the third quarter of the prior year and planned investments in sales headcount in higher growth areas of the business [ with ] fleet and building expansions. This is an important point. The incentive compensation lap negatively impacted adjusted operating expense growth by approximately 240 basis points, and adjusted EPS growth by approximately 1,100 basis points on a year-over-year basis. Corporate adjusted expenses were up 31.1% from the prior year, primarily driven by the previously disclosed incentive compensation from last year. Overall, adjusted operating income was $768 million for the quarter. For the quarter, adjusted EBITDA of $970 million was up 0.1% versus the prior year. Let's now turn to our balance sheet and cash flow. Our investment-grade balance sheet remains robust and reflects a healthy financial profile. We ended the quarter at 2.80x net debt leverage ratio. Turning to our cash flow year-to-date, our free cash flow was $1.1 billion, up 19%, highlighting strong quality of earnings and reflecting both typical seasonality and timing of CapEx. Before we turn to guidance, I would like to briefly recap the financial details of the planned Restaurant Depot acquisition. As Kevin highlighted, we recognize Restaurant Depot as a best-in-class financial asset and are very excited about the transaction. In calendar year 2025, the business generated approximately $16 billion in revenue and $2 billion in EBITDA at a 13% margin, significantly above foodservice industry averages. This strong margin profile reflects the compelling concentration around Restaurant Depot's local customers, which show very little overlap with existing Sysco customers. The company's CapEx is less than 1% of sales. which includes both maintenance and growth CapEx. As seen on Slide 10, unlevered free cash flow is approximately $1.9 billion, with high conversion due to its profile of having negative net working capital and limited CapEx. To put that in perspective, this is a business that generates substantial cash with very little reinvestment required to sustain it. That profile is rare, and it is exactly the kind of asset that strengthens the balance sheet over time. On a pro forma basis, the combination increases Sysco's revenue by approximately 20%, adjusted EBITDA by approximately 45% and free cash flow by approximately 55%. The EBITDA margin of the combined company would expand by approximately 150 basis points, to 6.7%, inclusive of annualized net cost synergies, and meaningfully widen our gap versus our peers. From an accretion standpoint, we expect mid to high single-digit EPS accretion in year 1 and low to mid-teens in year 2. We have confidence in line of sight into the $250 million in annualized net cost synergies, which achieved full ramp by year 3. Additionally, the only revenue synergies modeled are from the expected annual store opening plan of 5 to 6 net new stores per year, which is in line with the company's historical growth. By year 4, the combined business is expected to generate more than $2 billion in incremental annual free cash flow. This level of cash generation would fundamentally expand our future capital allocation flexibility, accelerate our balance sheet deleveraging, support dividend growth, enable share repurchases and create capacity for future M&A without requiring new debt. The transaction is valued at $29.1 billion and will be funded through a combination of cash and approximately 91.5 million shares of Sysco stock. In preparation for this transaction, we are preserving cash levels by suspending share repurchase and remaining disciplined with capital expenditures. We will be prepared for the post-close period where we expect net leverage to be approximately 4.5 turns. We're committed to rapid deleveraging, reducing net leverage to approximately 3.5 turns within the first 24 months. After that, we see a glide path over time to return to 2.75 turns net leverage. Now let's turn back to expectations for the remainder of the year. We are pleased to reiterate our expectations for FY '26 adjusted EPS guidance. We continue to expect full year 2026 EPS to be at the high end of our prior range of $4.50 to $4.60. Keep in mind that this continues to include an approximate $100 million headwind from lapping lower incentive compensation in fiscal 2025, an impact of roughly $0.16 per share. Excluding the negative impact of the incentive compensation on 2026, our outlook for adjusted EPS growth in FY '26 will deliver at the high end of approximately 5% to 7%, which is in line with our long-term growth algorithm. Notably, we are reiterating our guidance for adjusted EPS even after suspending our anticipated share repurchase plans of approximately $800 million for the remainder of the year. For added context, our approximate $800 million of share repurchase would be worth approximately $0.10 to adjusted EPS on an annualized basis. Our guidance also includes continued expectations for net sales growth of approximately 3% to 5%, to approximately $84 billion to $85 billion, driven by inflation of approximately 2%, volume growth and contributions from M&A from earlier in the year. Specific to volumes, we expect to deliver year-over-year local case growth of at least 2.5% in Q4. We have visibility to the financial contribution from Sysco-specific initiatives, and this positive momentum in local represents a step-up on a 2-year stacked basis compared to Q3 of approximately 120 basis points. As it relates to corporate expenses, we've identified an action against $60 million of run rate cost savings through organization-wide spending optimization and efficiency activities. This is an incremental update. The savings will begin in Q4, with carryover benefits across 3 quarters of FY '27. This benefit to Q4 is already included in our guidance range and helps offset the impact of our previously disclosed lower share repurchase plans for the year. We remain comfortable delivering adjusted EPS at the high end of our range. For Q4, our current view is for adjusted EPS to be approximately $1.51. This includes the carryover impact from the incentive compensation specific to Q4 of $11 million, as outlined on Slide 20. We are proud of our strong track record of dividend growth and value our dividend aristocrat status. For FY '26, we remain on target for shareholder returns of approximately $1 billion in dividends planned for the year. On a per share basis, our payout in FY '26 equate to an approximate 6% increase year-over-year. Looking ahead to FY '27, our Board of Directors recently approved a $0.01 increase to our dividend, bringing our quarterly dividend on a go-forward basis to $0.55 per share. Now turning to a few other modeling items. For Q4, we expect adjusted interest expense of approximately $175 million to $180 million, which ties to $690 million for the year; adjusted other expense of approximately $10 million, which ties to $55 million for the year; a tax rate of approximately 24%, which ties to 23% to 23.5% for the year; and adjusted depreciation and amortization of approximately $210 million, which ties to approximately $820 million for the year. Looking ahead, we are confident in our position and remain focused on leveraging our strength as the industry leader to drive customer growth while continuing to create value for our shareholders. With that, I will turn the call back to Kevin for closing remarks. Kevin Hourican: Thank you, Brandon. Q3 was a quarter displaying momentum and progress at Sysco. We are confident that our progress will continue, and we plan to deliver local case growth of at least 2.5% in Q4, which reflects continued sequential momentum on a 2-year stack basis relative to Q3. We are excited for the progress that we are making and we are committed to strong execution in Q4 as we deliver on our outlook. We're incredibly excited about the planned addition of Restaurant Depot to the Sysco family and look forward to sharing additional information over the course of the year. I would like to thank all Sysco colleagues for their dedication to our customers and for the strong progress that we are making as a team. I appreciate you all very much. With that, operator, we're now ready for questions. Operator: [Operator Instructions] We'll take our first question from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: Great. Kevin, the first question is just on the Restaurant Depot acquisition. It seems like investors appear cautious, contrary to your enthusiasm. It looks like maybe it's creating a near-term stock price overhang. So I'm wondering if you can just share what investor feedback you've gotten in terms of the primary drivers of that concern. I think you noted integration risk, but just wondering what else you've heard and whether you believe any of such is justified. I'd hate for a deal that doesn't close for 12 months to remain an overhang when it does seem like the underlying fundamentals appear to have actually reached a positive inflection. So any color you could share on that would be great, and then I had one follow-up. Kevin Hourican: Okay. Jeff, first, let me just say, congratulations to you on your retirement, 25 years of coverage in restaurant distribution is a long time, and we appreciate your diligence and your good questions. Let me start with your first question and then we'll come back to you for your follow-up. What we've heard from investors are 2 things: Thing one, Restaurant Depot was an unknown entity being the fact that it was a privately held company. Its size, its profitability, its makeup, its durability of success is not something that investors have had visibility to. And then thing two, purchase price of $29.1 billion tied to an unknown entity surprised some folks. What we've heard from investors over the past 3 weeks, as Brandon and I, and Kevin Kim, have done a roadshow, is the more they get to know the asset of Restaurant Depot, the more excited they are about the acquisition. In fact, our plan in the month of May, Kevin Kim will provide color and feedback to investors about this, is to invite investors to tour with us, including a management presentation, introducing some of the key leaders from Restaurant Depot. What we are confident is that more investors learn about Restaurant Depot, the more they're going to like it. As I mentioned on our call, it is a very large total addressable market, cash-and-carry, a profitable market, one that is resilient during all economic conditions. And it gains Sysco access to that channel through the industry leader in that space. They've grown their profits, Restaurant Depot, with 30 consecutive years. They've grown their revenue in 28 out of 30 years, and their business is 100% local. Increases Sysco's profit. It increases our rate of growth. It will increase our overall profitability. And the deal's day 1 accretive, year 1 accretive, year 2 accretive, and we believe strongly that it will increase our total shareholder return. Today on the call, I provided some incremental color, and that is Restaurant Depot is off to a good start. And they're on a calendar year basis, so their Q1 calendar was a good quarter, 4% volume growth with profit in line with expectations. So we understand the concerns that have been raised relative to the debt. Brandon, maybe I'll toss to you to talk about our confidence in our ability to delever quickly. Brandon Sewell: Yes, absolutely. Thanks for the question, Jeff. So we have suspended our share repurchases in preparation for the acquisition. On day 1 of NewCo, we'll be at about 4.5 turns debt to EBITDA. And we have detailed plans to reduce that down to 3.5 turns in 24 months. I will add too that we have cushion built in for a rainy day. That also means that when we execute our plan and don't need that cushion, there is opportunity to accelerate. We're fully confident, we have the commitment from the Board and the entire leadership team, to do so. Kevin Hourican: Jeff, back to you for your follow-up. Jeffrey Bernstein: Great. The follow-up is just on the restaurant trends. The U.S. local garnering all the attention, 3.3%, a very nice acceleration on a 1-year basis. It seems like that's continuing the trend in recent quarters. On a 2-year basis, it was a modest deceleration. Wondering how you think about the underlying fundamental momentum, whether you place greater credibility on the 1 or 2-year? I know you mentioned the 2-year acceleration for the upcoming fiscal fourth quarter. I only ask that because it does seem like, most recently, we've had some more cautious commentary from restaurants, the largest pizza player yesterday talked about consumer confidence at lows and inflation pressure in consumer spending and competition on the rise. It seems like more headwinds for the industry. So I'm wondering kind of your assessment of how you assess your underlying 2-year or 1-year trend, and whether you feel good about the outlook considering the more cautious industry perspective? And by the way, thank you very much for your congratulatory comments. Very much appreciate it. Kevin Hourican: Jeff, good questions. They both matter. One year, 2 year both matter. Let me just quickly reiterate some of the stats. From a traffic perspective, Q2 into Q3 improved by 90 basis points. Sysco's performance in that exact same quarter improved by 210 basis points. And those are both on a 1-year basis quarter-over-quarter. So our rate of improvement relative to the overall market was 120 basis points better than the overall market, which is confidence and proof that the progress that we're making is from actions within our control. We are confident that we can deliver increased performance and improvement in Q4, which is why today we reiterated 2.5% volume growth for our Q4, which, as was called out, is an acceleration on a 2-year stack basis of 120 basis points. We don't need the macro to improve for Sysco to be able to deliver that outcome. And the reason is becoming from our sales colleague retention improvement, sales colleague productivity improvements. We've launched new selling tools, which are increasing our colleagues selling effectiveness, AI360 as an example. And our customer-facing programs like Sysco Your Way and Perks are continuing to resonate with our customers and perform. The overall macro $4 gas, Jeff, where we're seeing that in our business the most is national chain restaurants. And as I said in my prepared remarks, we're seeing declines year-over-year in national chain restaurants. And those are some of the prints that you're hearing about in public quarterly earnings. We're pleased with the performance in the local sector, specifically those mom-and-pop restaurants. There are a large number of customers not served by Sysco. And we can grow our business and grow our business profitably even in a macro that is choppy. My last comment is our [ non-commercial ] business, within our contract sales, continues to perform at a high level. The foodservice management, health care, travel and hospitality and education specifically. We're seeing volume growth in those sectors and we expect for an increase in our national volumes in Q4, mostly driven from those sectors. We do not anticipate same-store sales improvement from our national chain restaurants, and we have some new customer wins are onboarding in Q4 that will provide a bit of a tailwind to our CMU or corporate contract volume. Brandon, is there anything you'd want to add? Brandon Sewell: Yes. Just on a 2-year stack from Q2 to Q3, Sysco would have improved by about 60 basis points. And then Q3 into Q4, as we called out in the prepared remarks, it's about 120 basis points. So we see sequential improvement both on a 1-year and a 2-year stack. Operator: Our next question comes from John Heinbockel with Guggenheim. John Heinbockel: Kevin, 2 quick things. One, can you touch on the composition of net new account wins, right? Because that's probably growing a little faster -- local, growing a little faster than the 3.3%. And I'm curious, have the losses, the account losses, have they now completely normalized to where they were a couple of years ago? Or is that still an opportunity? And then lastly, you touched on the new business in national. How aggressive are you attacking that given the strength now in local? And how choosy are you being when you think about the profitability of those accounts? Kevin Hourican: John, very good questions. As you know, we track new loss and penetration across all customer types. Those are the 3 metrics that matter. In the most recent quarter, we saw a continued acceleration in our new, that is multiples of multiples of consecutive quarters of acceleration of new. So we're continuing to see progress in new, mostly fueled and driven by increased sales consultant headcount or boots on the ground within sales. We are seeing improvement in loss, consistent, steady improvement in loss. There's still room for improvement there. We have an internal goal of of a loss target that we are marching towards with continued improvement. We want to maintain our success in new and we want to continue to attack customer loss. And as our sales colleague retention improves, as our productivity of colleagues improves, as we're in front of our customers more frequently and more often in using tools like AI360 to sell better and serve better, we are confident that we can improve still the loss rate. What we're really pleased about is penetration. We had our strongest penetration performance in Q3 in a long time, and that too is a direct factor of selling effectiveness. What AI360 does for our sales colleagues more than anything is the power of data and intelligence to know what we can be selling, what we should be selling and what should be on Sysco's truck. And it preauthorizes deals for that sales colleague to be able to offer to that customer to get cases that should be on our truck, on our truck. And as you well know, that is the most profitable case, is that incremental truck case to an existing stop being made to a customer. So we're seeing really solid performance in pen, and obviously, it's the aggregate of new loss in pen that equals the 3.3% volume growth that we just delivered, and we're confident in our ability to continue to make progress as we head into 2027. On the national side of the ledger, as you know, we're very disciplined in our pricing approach. We have a Pricing Council that Brandon I and our Head of National Sales, Greg Keller, lead together where we make very disciplined intentional choices. We do not relax our guardrails for profitability when we're targeting net new business. The wins that we are making are happening because of our nationwide scale, in many times, our international scale, our ability to help those concepts grow outside of the United States, and the technology that we have deployed to national customers to make it easier for them to do business. So the wins that we have posted are because of our capabilities, not because of lowering margin profile. Operator: Our next question comes from Alex Slagle with Jefferies. Alexander Slagle: I just wanted to ask for a little more color on the local volumes. If you could provide any updates on the cadence. I know last year, there was a big acceleration in March and April, and sort of a lot of noise just with external dynamics. Just maybe if we could get a sense for the trend into fiscal 4Q that kind of leads to that 2.5% local case outlook and your confidence there? Kevin Hourican: Okay. Alex, I'll start this question and then toss to Brandon for additional color that he would have. I think I've been pretty clear on Q3, so I don't think I'm going to belabor that point. Your incremental part of your question was on how's April and how are we starting out in Q4. So if I could, I'll address that. April is an interesting month always because of the movement of Easter and it has an impact on the month on a week-over-week basis. With that said, April's performance was in line with our expectations. And therefore, we are on track to deliver against our at least 2.5% local volume growth in Q4, which as we've said a couple of times on this morning's call is an acceleration of 120 basis points on a 2-year stack basis. Brandon, what else would you like to say about Q4? Brandon Sewell: Yes. And the only thing I would say is, in Q3, 2 other things to call out is I always look at our geographies and we had consistent results across all of our geographies on AI360 as to what gives us confidence for that volume growth and the penetration to continue. I was on a recent ride-along with an SC and said, why do you use it? And he said, "It saves me time, makes me more money and identify products my customers are looking for." We see the usage of AI360 increasing, both in amounts of times per day and number of SC. So the tool is working and it gives us confidence. And we saw that, to Kevin's point, in April. Operator: Our next question will come from Sara Senatore with Bank of America. Sara Senatore: A question about Restaurant Depot and then a quick clarification on the mix shift from local and national. So you mentioned $250 million in net cost synergies. I just wanted to make sure I understand what that net means. Is the goal to reinvest some of the costs into lower prices for customers? Presumably, maybe there's -- that's where some of the synergies come in on the revenue side. And then the $250 million is what you'll let flow through the bottom line? Or just trying to understand what sort of that net means and how it will be split between investors and customers. Brandon Sewell: Yes, I'll take this one, Sara. The $250 million net, but what we mean by net is we do have to invest in Restaurant Depot to make it a public company, things like SOX compliance, cybersecurity, et cetera. And that's really the net portion. The other component -- the other components of $250 million of cost synergies are really mostly merchandising synergies. So it is taking the products that we buy today, comparing them across Restaurant Depot and across Sysco, and working with our suppliers to get increased merchandising benefits. So we've done that process through a clean room environment and a third party. We're highly confident in the number. The -- if you look in the deal model, it only ramps up to a full $250 million in year 3. So we're confident really on 2 fronts. One is the timing of it. We could execute it earlier in the process. And two, we have a significant cushion on the cost synergies. We significantly haircut it, and we're confident in that $250 million number. Kevin Hourican: And just to hit the nail on the head, the $250 million is what would drop to the bottom line. To the point that Brandon just made, when we over deliver against that purchasing target, we have an opportunity to share in that benefit with customers. We will share in that benefit with the customers in a very responsible, prudent way. But the $250 million can be put into the models as it relates to improved profitability of the combined NewCo. And just how we bring value to customers is the following. We're going to open net new Restaurant Depot doors, I said net 125 new doors. As we do that as a combined entity, we're bringing the low-cost leader, the one-stop shop way in place that restaurants can save money to more communities. That will save tens of thousands of restaurants more money. The other way we're going to save customers' money is by bringing Restaurant Depot's industry-leading value tier assortment into the Sysco assortment on Sysco's delivery trucks, which can enable a customer to be able to buy those products on their existing Sysco delivery. We've received a lot of questions about, well, isn't that cannibalization? I want to be really clear about this point. We have a very sophisticated personalization tool on our website and in AI360, and we will target those value tier products to those customers who are not buying that given category at all. So example, they're not buying frozen shrimp. We know the reason why is because our price point is too high with our Sysco Classic product, as an example only. And Restaurant Depot has a really terrific opening price point in frozen shrimp that we can gain access to in a cost-effective way. So that would be incremental business. But the $250 million would drop to the bottom line. And Sara, you had a second question. So back to you for your follow-up. Sara Senatore: Yes, and that's very helpful. I appreciate it. So to the extent there's upside to some of these savings, like you said, you could share them with customers, perhaps sharper on prices. And then the follow-up was just on the national restaurants. I just want to clarify, so you said [ volumes ] were down. Is that sort of in line with the industry? Or was there any kind of market share or gain -- share loss or gain that was going on there? I know you're looking to bring in new customers. But just trying to understand, as I think through improvement in local, to what extent has that been offset on perhaps -- on perhaps share loss in national? Kevin Hourican: Yes. It's not from share loss in national. It's comp store sales to existing national customers, consistent with traffic declines that are being experienced in the industry. Our improvement in Q4 is the retention of the customers we currently have, plus we will have onboarding of net new wins that were signed -- these are contracts that were signed previously. National is a long lead sales cycle, these contracts take a long time to negotiate. So we know the start ship dates or ship dates happening in April and May and in June, and that is all obviously included in our forecast, included in our guidance for Q4. Operator: Our next question will come from Edward Kelly with Wells Fargo. Edward Kelly: I wanted to just follow up on Restaurant Depot. Kevin, you talked about volumes up 4%. You get 1%, 1.5%, I guess, or so in new stores and some inflation. So I'm just curious, comps seem like they're probably up mid-3s. I want to confirm that. And then there's been a negative building narrative out there around underinvestment in the business, capital and labor and then around sustainability of margins. Can you just speak to these concerns and how you got comfort around the overall sustainability of the margin of this business? Kevin Hourican: Two great questions. Just as it relates to R&D in this period between sign and close, there's limited disclosure of reporting that were enabled at this time to be able to communicate. What we have is direct advisement from RD, and this is the color that I can share, is volume and overall profitability. So volume up 4% and profitability on track for the quarter. And those are 2 solid prints. 4% volume growth is a solid print, and it's coming with expected rates of profitability. So off to a good start in their Q1 and it's the type of color that we will provide throughout the rest of the year. And as the deal closes, obviously, we can get into much more metrics and in much more details on the composition of the P&L. To the second part of your question, Ed, as it relates to some of the statements that have made or comments that are made about RD, I'd like to give investors the confidence that we have on the sustainability of the profitability of RD. Let's first start with CapEx. There's perhaps a perception that underinvestment has occurred. We have detailed studied that particular topic. And as Brandon has called out, we have capital that is deployed at Sysco that isn't necessary in the RD model. Trucks, trailers, one of our largest capital investments is in our fleet. Restaurant Depot does not have a fleet. So that type of investment that Sysco has is not relevant for them. Specific to the stores themselves, we hired a third-party firm to do detailed assessments of literally every single location. Think about when you're selling your house and you get an inspection report. We have one of those reports for every single store. So we know exactly the conditions of the roofs, the parking lots. The most expensive part of the store is actually the chilling equipment for the freezers and the coolers. And the stores are in good shape. Restaurant Depot is a frugal, disciplined company who invests appropriately for what purpose of their store is. And I want to be clear, their stores are no-frills shopping environments. And this is on purpose. Think about like when you walk into a Home Depot and what that store looks like. It's not a fancy store. It's a fit-for-purpose store. So they don't invest in cosmetic things. They invest in price, they invest in the customer to have value be the lead story. And there is sufficient capital in the business to support the going-forward concern of the stores, and there's sufficient capital in the business, Brandon, as you called out, to open the 5 to 6 stores per year. There is more than ample capital being deployed. I've been asked a bunch of questions, well, would you do optimization? Could you do tests? Could you look at more investments in stores to see the return? Of course, we can do those things, and we will. But those would only be upside to the forecast. We would only invest if it had a strong return. And what we know for factual statements and representations, 30 years of profit growth, that Restaurant Depot is the tale of the tape. It's the proof that's in the pudding. And they've grown their revenue 28 out of 30 years. And their durability and consistency of their performance is significant and very impressive. So we are confident in the CapEx as a percent of sales being appropriate. The second question we've gotten a lot is the operating margins themselves, the 13%. I'll start and then, Brandon, I'm going to ask you to add your color on compare-and-contrast to our local business. It is durable. It has been produced and delivered year after year that 13% range. And the why is the tremendous efficiency of their box. They're full truckload from suppliers straight to their store that is a warehouse. The product gets unloaded, put away in reserve rack, brought down to a customer pick location. And they have obviously colleagues at the register to help with checkout. The customer does the rest of the work. The restaurant or owner does the rest of the work. They're doing the pick to pack the ship, the delivery to the restaurant, the unload. And because they are able to take all of that cost out of their system, they're able to hit price points that are 15% to 20% cheaper than delivery and able to do so at that rate of profitability. And they've been doing it consistently for years. They're very good at procurement. They have an excellent buying program led by a very tenured and experienced team that will be joining Sysco as part of our going-forward team. And we're confident in the ability to contain and sustain that profit rate. Brandon, what would you say about the 13%? Brandon Sewell: Yes. These customers who are going to Restaurant Depot are value-seeking customers. There are no salespeople and there are no trucks, as Kevin called out. The other piece of this is, in the Sysco view, our EBITDA is in the mid-single-digit range, but that includes large, medium and small customers. So if you look at Restaurant Depot, it is all small customers. And that small customer profile is in line with what we see within Sysco and our small customers. So it is in line with what our expectations would be. And we see that consistently as we look back to Kevin's earlier point in the Restaurant Depot profile. Kevin Hourican: So the third -- so we covered CapEx, we covered operating profit. The third, Ed, I think you may have mentioned, is staffing, labor and those orders, are they under-investing in the stores. We believe an appropriate level of payroll is being deployed in the stores. And that's also easily testable. If we just adding increased labor in select stores and there's an increase in the revenue flow-through, and that's a profitable investment, of course, those are the types of things that we would do. What we know is Richard and his team run a great business. They run a terrific P&L. And they're very disciplined operators and they've been doing it for decades. Operator: Our final question will come from John Ivankoe with JPMorgan. John Ivankoe: So the question is on declining private label sales as a percentage of broadline in U.S. Foods year-over-year, if we can kind of isolate the cause of that. And I did want to kind of look at the bigger picture in terms of how you plan on looking at private label between Sysco, Restaurant Depot, Jetro, between the 2 of you, I count at least 5 different private label efforts or kind of brands -- [ web brands ] that kind of represent brands, if you will, between the 2. So can we come to market maybe as Costco was done or a Walmart has done, some other types of food retailers and really kind of consolidate or professionalize or even be known for your sub-brands specifically and do a lot of cross-marketing between the Restaurant Depot and Sysco businesses? Kevin Hourican: John, these are good questions. I'll start with the first and acknowledge the point that Sysco Brand cases down year-over-year. We have begun to see progress with Sysco Brand. The decline in mix to last year did improve from Q2 into Q3. The progress was most strong in the smallest of customers, the 1 to 2-door operators. And why I call that out is that's the customer type where our SC, sales consultant, has the most impact, that SC who's there every week talking about our product, talking about Sysco Brand. During Q3 specifically, we launched Swap & Save a part of AI360. So now our SCs are equipped in the palm of their hand as they walk into that restaurant with suggestions to convert to Sysco Brand that do 3 things. it has to do 3 things for it to be prompted. It has to save big customer money. It has to help make the SCs more money. And also, of course, it makes Sysco more money. It has to hit all 3. And when it hits all 3, our SCs are excited about it because they make more money and they know they're saving the customer money as well. So we just launched this capability. We call it Swap & Save. It is in our tool, AI360, that Brandon said, is getting increased usage and utilization week-over-week, month-over-month. And we're seeing it show up in progress improvement, and we expect in our Q4 to see an acceleration in our performance, especially in local with Sysco Brand. So more to come, John, on that progress. It's steady as she goes. And as you know because I've talked about in prior calls, we have work to do on our assortment within Sysco Brand to improve our opening price point tier, and that's something that we will accelerate with Restaurant Depot. So which is a good segue to your question about brand rationalization and what the future looks like. I do want to be clear, we have 4 billion-dollar private label brands. So these are not small businesses. Actually, there's 5 billion-dollar-plus brands that we have within Sysco assortment. We have Sysco Reliance, which is our opening price point. We have Sysco Classic, which is the middle tier. And Sysco Premium, which is, as it sounds, the higher-tier product. So good, better, best. We have those 3. We have Select Others for things like produce and protein, but we don't need to cover that at this point. Your main question is like the core workhorse of the business. We have those 3 brands. Restaurant Depot has their own private label program. We'll talk to our customers first, like what do they need, what are they seeking, the type of label. We're not going to be in any hurry to add the Sysco name inside the Restaurant Depot box. We don't want to convey any message in that regard, other than the store is about saving the customer money. We will not be raising prices at Restaurant Depot's locations. I just want to be clear about that. But John, where we know we will have benefit is many of our same manufacturers are producing these products. And as Brandon talked about, he worked in this industry at a supplier, we can give that supplier a longer production run of the same product. Even if the box switches out to a different label 70% through the run, that is an easy switch for that producer that manufacturer on our behalf to do because they don't have to clean the production line in between producing for A and B. So we'll let the customer give us feedback on the actual labels on the box. What we know is that our private label teams can work collaboratively, we can fill assortment gaps on the opening price point side, specifically at Sysco. And there are some places in the Restaurant Depot store where they don't have private label at all today that we know Sysco can help them in that regard over time. Produce would be an example of that. So John, thank you for your question. Operator: That concludes our question-and-answer session. I will now turn the call back over to Kevin Kim, Vice President of Investor Relations, for closing remarks. Kevin Kim: Great. Thank you, everybody, for joining us today and your continued interest in Sysco. If you have any follow-up questions, please do not hesitate to reach out to the Investor Relations team here in Houston. Thank you very much. Bye. Operator: This concludes today's program. Thank you for your participation, and you may disconnect at any time.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 NOV Inc. Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question, please press star one one on your telephone. You will then hear an automated message advising your hand is raised. Please be advised, today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Amie D'Ambrosio, Director of Investor Relations. Please go ahead. Amie D'Ambrosio: Welcome, everyone, to NOV Inc.'s First Quarter 2026 Earnings Conference Call. With me today are Jose A. Bayardo, our Chairman, President and CEO, and Rodney C. Reed, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today’s comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the first quarter of 2026, NOV Inc. reported revenues of $2.05 billion and net income of $19 million, or $0.05 per fully diluted share. Our use of the term EBITDA throughout this morning’s call corresponds with the term EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Jose. Jose A. Bayardo: Thank you, Amie. Good morning, everyone, and thank you for joining us. The first quarter of 2026 unfolded against a rapidly changing backdrop due to the conflict in the Middle East, and I would like to start by thanking our team, particularly those in the region, for keeping each other safe while doing everything possible to support our customers in a very chaotic environment. Despite the disruption, NOV Inc. achieved its lowest ever total recordable incident rate and lost time incident rate during the quarter. As I mentioned on our last call, HSE performance reflects pride, accountability and ownership in operations, which translates into higher quality, reduced downtime and better service for our customers. The actions of our people and the results they achieved demonstrate how deeply these values are embedded in our culture. Turning to our financial results, NOV Inc. generated revenue of $2.05 billion and adjusted EBITDA of $177 million during the first quarter of 2026. As previously disclosed, we estimate that the conflict in the Middle East negatively impacted revenue by approximately $54 million and EBITDA by $32 million. Bookings in our Energy Equipment segment for the quarter totaled $520 million; while this resulted in a book-to-bill of 80%, orders improved by $83 million year over year and represented our strongest first quarter order intake since 2019. We also had strong bookings in our fiberglass and drill pipe businesses within our Energy Products and Services segment where we do not report book-to-bill and backlog figures. As the conflict escalated during the quarter, the most pronounced impacts were felt across our capital equipment and aftermarket operations, where the movement of goods, access to customer sites and overall logistics became increasingly constrained, significantly affecting quarter-end deliveries. Our service and rental businesses, particularly those supporting land-based operations, experienced substantially less disruption. For our capital equipment businesses, the primary challenges were associated with shipping finished equipment into and out of the region. As shipments were rerouted through alternate ports, transit times were extended and freight costs increased materially. In addition, safety concerns and access limitations prevented customers from visiting facilities or project sites to participate in typical factory acceptance testing and inspections for manufactured equipment and goods, resulting in delayed delivery schedules. Supply chain constraints became more pronounced as we progressed through the month of March. We experienced delays in receiving raw materials and critical components, and the unpredictability of logistics introduced additional costs and complexity. These disruptions impacted manufacturing throughput, thereby reducing absorption and contributing to higher costs. In our aftermarket operations, the challenges were somewhat different but equally impactful. We experienced difficulties getting spare parts into the region, while safety concerns affected customers’ willingness to pick up or accept orders. At the same time, customer activity was curtailed and certain projects were suspended, deferring demand for parts and limiting service and repair activity. Offshore projects, in particular, faced disruptions and rig-related slowdowns. Together, these factors created meaningful disruption in the final month of the quarter. Importantly, much of this impact was timing-related and, in many cases, deliveries have now occurred and others have been delayed rather than canceled. Freight costs increased significantly during the quarter, at times by as much as three to four times normal levels, and combined with lower manufacturing absorption contributed to higher operating costs. Outside of the affected region, our businesses performed well and in line with expectations. We remain focused on improving operational efficiency in what continues to be an inflationary environment that may be further pressured by the ongoing supply chain disruptions and knock-on effects to the petrochemical complex. We will cover second quarter guidance, which assumes conditions in the Middle East remain consistent with where they are today—meaning the ceasefire holds, but the Strait remains closed, which continues to constrain logistics and increase both the time and cost of doing business. While that is our current assumption, the situation remains extremely fluid. Logistics have improved since the height of the conflict; the trade routes are more complex, more costly and carry higher risk of delays. While we cannot predict how conditions will evolve, our supply chain and operations teams have significant experience managing through disruption, and they are taking action to mitigate risk and serve our customers. Our operations in the Middle East serve not only as a regional hub but also support customers across both Eastern and Western Hemispheres. One of the actions we are taking is to reroute manufacturing for customers outside the region to facilities elsewhere in our global network. While this helps mitigate risk, it may not necessarily improve delivery times and adds additional cost. No one can predict when the conflict will end, so we cannot reliably forecast the second half of the year. What we can say is the market is increasingly primed for a recovery, and if the conflict ended and the Strait reopened in the near term, we could still conceivably achieve our prior expectation of full year 2026 results that are broadly in line with 2025. With that context, let me now step back and talk about what we are seeing more broadly in the market. Coming into the year, the prevailing view was that the global oil market was oversupplied by 2 million to 3 million barrels per day. This was driven by a wave of non-OPEC production growth from projects sanctioned during the COVID period, combined with the unwinding of OPEC+ production curtailments. As a result, we expected 2026 would be another challenging year as the industry worked through the supply overhang. Against that backdrop, in North America, operators were expected to remain disciplined and focused on maintaining production levels efficiently while returning capital to shareholders. In the Middle East, activity was expected to gradually improve, supported by the reactivation of suspended rigs in Saudi Arabia and continued momentum in the UAE, Kuwait and Oman. Offshore momentum was expected to build steadily, with an increasing need for long-cycle deepwater developments offsetting plateauing short-cycle North American supply as the primary source of incremental production in the coming years. That was the setup just a few months ago. Today, the world looks dramatically different and the market outlook has shifted materially. The conflict in the Middle East has resulted in approximately 10 million barrels per day of shut-in production and damaged key energy infrastructure, shifting the market from a modest surplus to a meaningful deficit and requiring drawdowns of strategic reserves worldwide. While there is no clear timeline for when trade flows will normalize or when production can fully return, it is increasingly clear that even after the conflict is resolved, the market will remain undersupplied for an extended period of time and will require a significant increase in investment. One industry analysis suggests that approximately 10 thousand wells across the region are currently offline, with up to 3 thousand requiring meaningful intervention to return to normal operations and roughly 1 thousand potentially requiring major workovers or recompletions following extended shut-ins. Not all this production may return; depending on the duration of the disruption, there is the potential for permanent capacity loss ranging from approximately 500 thousand to as much as 2.5 million barrels per day. Restoring this production will require meaningful activity beginning with intervention and workover operations, followed by incremental drilling to replace lost capacity. In addition, depleted strategic reserves will need to be refilled, and energy security concerns are likely to reinforce the need for exploration, development and production capacity. Many countries are likely to expand or build new reserves over time, creating an additional source of demand. At the same time, reserve lives have declined meaningfully during the last decade, and current conditions likely serve as an additional catalyst for operators to replenish and increase reserves, reinforcing the need for increased exploration and development activity. While the conflict has clearly created near-term disruption, we believe it will also accelerate and amplify a meaningful new recovery cycle. The work required to restore production alone will drive elevated levels of activity over multiple quarters and potentially longer depending on how conditions evolve. However, the implications extend well beyond the Middle East. We believe the combination of supply disruption, tighter market conditions and a renewed focus on energy security will increase urgency for investment across the industry—not only to restore production but also to secure reliable and diversified sources of supply. For much of the past decade, the industry has operated with constrained investment, limited exploration and reduced greenfield development. The industry became highly efficient and focused on doing more with less; as a result, reinvestment in assets declined and attrition occurred across the global equipment base. Even prior to the conflict, we saw areas where we expected that a modest increase in activity would require a disproportionate increase in investment in the service complex. However, with the prevailing view just a few months ago, it appeared that the industry would have time to gradually increase investment over the coming years as markets rebalanced. That is no longer the case, and for NOV Inc., this change is particularly meaningful. As a provider of capital equipment and technologies used to drill, complete and produce oil and gas, our business is directly tied to the level of investment across the industry. After years of underinvestment, the industry is not starting from a position of excess capacity. Demand will not inflect overnight. The events of the past two months have accelerated and amplified the need for investment, and we are beginning to see early indications of this in our customer conversations. In North America, operators remain disciplined, but some are accelerating plans to complete drilled but uncompleted wells that they had previously planned to defer, while others are backing away from plans to release rigs and some will add rigs. The North American service complex is already tight, having experienced significant attrition and the export of excess equipment to international markets. While pricing will need to improve before service providers and drilling contractors materially increase capital spending, the conditions for that to occur are increasingly falling into place. In international land markets, investment had already begun to increase, driven by the emergence of unconventional development and a growing focus on energy security. As mentioned, a healthy amount of the equipment supporting this growth has come from underutilized assets in North America, but the availability of these underutilized assets has largely been exhausted, meaning new-build equipment will be required for higher levels of activity. Once conditions normalize in the Middle East, we expect a meaningful increase in activity associated with restoring curtailed production, followed by a resumption of longer-term development programs, including unconventional resource development. We also expect continued growth in other international markets including Argentina, where our revenue increased 14% year over year, and Venezuela, where we have already seen a step change in demand for our progressive cavity pumps and are now fielding an increasing number of customer inquiries for additional tools and equipment. In offshore markets, we continue to see the early stages of a sustained upcycle, supported by improved project economics driven by standardization, industrialization and technology. These factors have materially lowered breakeven costs, making long-cycle offshore developments increasingly competitive and positioning them as key sources of incremental supply. We have seen steady growth in demand for offshore production-related equipment, and we expect—and are preparing for—that trend to accelerate. Consistent with that view and our focus on leaning into high-return growth opportunities, we recently approved a $200 million expansion for our subsea flexible pipe manufacturing facility in Brazil. This investment is intended to address what we believe is a developing capacity shortfall in the industry as offshore activity increases. Bookings for our offshore production-related equipment remained healthy in the first quarter, supported by a large subsea flexible pipe order for Brazil and a large FEED study associated with a complex harsh environment FPSO, reflective of increasing confidence in the long-term market outlook. In offshore drilling, our customers are seeing an increasing pace of contracting activity, along with a meaningful increase in the duration of those new contracts. We now expect the number of drillships under contract in 2027 to reach the highest level since 2015. Higher levels of future activity drive reactivations and upgrades, such as a large reactivation project we recently received for a rig going to the North Sea, and drive additional recurring spare part sales. While offshore project timelines are longer and more complex, we believe the outlook for increased activity has become even more compelling. Energy security concerns are increasing the urgency to advance offshore developments, which offer scale, longevity and better economics. Additionally, we are seeing operators beginning to increase exploration budgets and accelerate development activity, including brownfield expansions that leverage existing infrastructure to efficiently increase production. And our pipeline of opportunities is expanding, consistent with improving industry forecasts for new project FIDs. As a result, we expect an acceleration in deepwater investment project activity over the coming years. Looking ahead, while near-term conditions remain fluid, the broader setup is becoming increasingly constructive. We remain focused on disciplined execution, improving operational efficiency, expanding margins and delivering for our customers as we navigate a dynamic environment. The near term will continue to be influenced by the situation in the Middle East; however, when conditions stabilize, we expect delayed activity to resume and underlying demand trends to become more evident. The industry is entering a period of increased activity and reinvestment to restore production, rebuild capacity and meet future demand. NOV Inc. is extremely well positioned for this environment. Our global footprint, intentional and diverse portfolio and strong market positions will provide meaningful earnings leverage to improving market conditions over time. With that, I will turn the call over to Rodney. Rodney C. Reed: Thank you, Jose. Consolidated revenue for the quarter was $2.05 billion, a decrease of 2% year over year. Net income was $19 million, or $0.05 per fully diluted share. Operating profit was $47 million, which included $37 million in other items, primarily related to a non-cash stock compensation charge, severance and facility closures. Adjusted operating profit was $85 million, or 4% of sales, and adjusted EBITDA totaled $177 million, or 9% of sales. The conflict in the Middle East resulted in delayed shipments of capital equipment and spare parts and increased operating costs through higher freight expenses and less absorption at our manufacturing facilities, impacting our first quarter revenue and EBITDA by an estimated $54 million and $32 million, respectively. As we move into the second quarter, our focus remains on the safety of our team and supporting our customers as we work through the delivery of key equipment, parts and services. Adjusting for the estimated impacts from the Middle East conflict that I just mentioned above, year-over-year revenue would have been flat, supported by strong demand for our offshore production equipment, high-performance drill bits and increasing adoption of our digital services, offset by lower global drilling activity levels. First-quarter margins were negatively impacted by about $30 million in tariff costs year over year and a lower mix of aftermarket revenue due to the completion of certain large reactivation projects in 2025. We are focused on improving margins, both through accretive top-line growth—with our Energy Equipment segment achieving four straight quarters of year-over-year revenue growth—and reducing our cost structure. Let me focus on cost reductions by highlighting our strong efforts to streamline our businesses, increase efficiency, and drive better margins and profitability. Since 2025, we have reduced global headcount by 8%, exited over 40 facilities, established a global service center in Kochi, India to better leverage the use of shared services, and increased our investment in IT systems to improve efficiency of operations and support functions. As we mentioned previously, through the first few quarters of these initiatives, tariff costs, upfront IT investments and inflationary pressure in areas like medical costs and certain raw materials are largely offsetting these cost reductions. As we progress through our cost-out program, we will realize additional cost savings and, excluding impacts from the Middle East, expect our efforts to begin to more than offset the tariff and other inflationary costs beginning in 2026. We continue to execute on our return of capital program. During the quarter, we repurchased 3.5 million shares for $67 million and paid dividends of $33 million, which reflected our announced 20% increase in the quarterly dividend. We also extended our $1.5 billion revolving credit facility by one year through 2030. Over the past eight quarters, we have returned over $900 million to shareholders through dividends and share repurchases. During the second quarter, we plan to provide shareholders with a supplemental dividend to true up our 2025 return of capital program where we committed to returning at least 50% of excess free cash flow. Additionally, we filed a claim for a refund associated with the Supreme Court’s ruling on AIPA tariffs. Our first quarter results do not reflect the benefit for this potential refund and we have not factored the refunds into our guidance. Capital expenditures for the year, including our investment in our flexibles facility in Brazil, should be between $340 million and $370 million. We continue to expect to convert between 40% to 50% of 2026 EBITDA to free cash flow, with generation of cash ramping through the remainder of the year. Moving to our segments, starting with Energy Equipment. First-quarter revenue was $1.19 billion, an increase of 4% from a year ago, led by continued strength of our offshore production-related businesses. EBITDA for the first quarter was $131 million, or 11% of sales. EBITDA margins compared to 2025 were negatively impacted by a lower mix of aftermarket revenue, which I will cover in more detail, and higher costs from disruptions in the Middle East. Capital equipment sales accounted for 63% of the segment’s revenues in the first quarter of 2026, growing 16% year over year, led by strength in our subsea flexible pipe, process systems and marine and construction businesses. Aftermarket sales and services, which accounted for the remaining 37% of Energy Equipment revenue, experienced a 12% reduction year over year, primarily the result of certain large reactivation projects completed in 2025 and the negative impact of disrupted deliveries and reduced offshore rig activity in the Middle East. Capital equipment orders for the first quarter were $520 million, resulting in a book-to-bill of 80% for the quarter and an ending backlog of $4.23 billion. Orders during the quarter were led by subsea flexible pipe awards in Brazil and Europe, a semisubmersible rig reactivation project in the North Sea, and a large FEED study for a harsh-environment turret system. Offshore activity outlook, bid pipelines, and customer conversations remain constructive, and we continue to expect full-year 2026 book-to-bill to be near 100%. Our subsea flexible pipe business continued its outstanding performance, achieving record quarterly EBITDA for the third consecutive quarter. Margins improved, driven by strong operational execution and progress on higher-quality backlog, and our quarterly book-to-bill was over 100%. Reflecting the strength of offshore development, demand for subsea flexible pipe has been exceptionally strong, exceeding 100% annual book-to-bill for each of the past four years and extending our backlog into 2028. Our Process Systems revenue was slightly below last quarter’s record level and up more than 50% compared to 2025, reflecting robust activity in offshore production and onshore international gas markets. Record EBITDA for the quarter was supported by a healthy backlog and solid execution. Orders during the quarter included offshore processing equipment and two CO2 treatment projects involving gas dehydration and membrane separation. The Middle East is an important region for this business, and FIDs for several projects could see some temporary delays; however, we expect demand for gas processing systems to remain strong in the region as well as in other international and deepwater markets, where four FPSOs have reached FID so far this year, with the industry forecasting six to eight additional FIDs for the remainder of 2026. Revenue from our drilling capital equipment business declined around 10% year over year, resulting from high progress in the prior year on a large 20 ksi BOP project that was not fully offset by higher revenue from new-build land and jack-up rigs in Saudi Arabia. During the quarter, the business was awarded a contract to support a semisubmersible reactivation, including mud systems, a crane and a BOP stack. Our marine and construction business revenue increased in the high-teens percentage compared to 2025, driven by higher revenue from cranes as well as pipe and cable lay systems, partially offset by lower activity related to wind turbine installation vessels. Demand for cranes from multipurpose support vessels remains high, which should drive additional orders over the coming quarters. Tendering activity for KBAL vessels also remains active, and we still see the potential for a second-half WTIV order, with the industry forecast continuing to suggest a shortage of future installation capacity. We believe that the disruption to energy markets tied to the conflict in the Middle East is renewing urgency around energy security and supply diversity, which will drive demand for all sources of energy. Revenue for intervention and stimulation capital equipment declined approximately 20% year over year due in part to delayed wireline and coiled tubing equipment deliveries to customers in the Middle East, where we were awarded coiled tubing data acquisition hardware and software packages and continue to see broad-based opportunities for our pressure control products. While North America-related demand was soft through 2025, in 2026 quoting activity has recently increased for pressure pumping capital equipment, and during the quarter, we booked several coiled tubing equipment orders supporting more efficient operations for longer laterals. Turning to the aftermarket portion of the Energy Equipment segment, revenue from our Drilling Equipment aftermarket business was most acutely impacted by the Middle East conflict due to suspended rig operations, logistical challenges and delays in upgrade projects. Revenues were down mid-teens percentage year over year and down 12% sequentially. In addition to the impact from lower Middle East activity, the year-over-year decrease is partially related to lower service and repair work due to timing of active projects. Encouragingly, spare parts bookings remained robust during the quarter, higher than their four-quarter rolling average. Given the logistics delays and booking activity, spare parts backlog is at the highest level it has been for the last seven quarters. The business is also executing on roughly 35% more projects compared to this time last year. We expect aftermarket activity to pick up slightly in the second quarter and more materially in the back half of 2026, partially dependent on the timing of the resolution of the Middle East conflict. Revenue from aftermarket parts and services for intervention and stimulation equipment was essentially flat sequentially and down mid- to upper-single-digit percentage year over year. Compared to 2025, wireline and coiled tubing-related aftermarket rose slightly, more than offset by lower North America pressure pumping activity; however, we are seeing increased activity related to reactivations and consumable parts. For the second quarter, we expect Energy Equipment segment revenue to be down 2% to 4% year over year, with EBITDA in the range of $135 million to $155 million. Moving on to the Energy Products and Services segment. Our Energy Products and Services segment generated revenue of $897 million, down 10% from 2025. Results were negatively impacted by disruptions in the Middle East that delayed deliveries of capital equipment. Beyond those delays, segment results reflected lower levels of global activity, which more than offset market share gains in our drill bit business and increasing adoption of our digital services. Adjusted EBITDA was $96 million, or 10.7% of sales. Lower volumes, combined with the absorption impact at our manufacturing facilities, higher tariff costs and inflationary pressures affecting raw materials, drove larger-than-normal decrementals. As I previously mentioned, we remain focused on growing market share and reducing costs through rightsizing operations and consolidating facilities to improve profitability. For the first quarter, the sales mix within Energy Products and Services was 54% service and rentals, 29% capital equipment and 17% product sales. Revenue from services and rentals declined in the mid- to upper-single-digit percentage range year over year as lower global activity more than offset drill bit market share gains in North America and growing adoption of NOV Inc.’s wired drill pipe services, including downhole broadband solutions. Our ReedHycalog bit business continued to gain market share in the U.S., growing revenue 8% compared to a 7% decline in the U.S. rig count since Q1 2025. The business remains focused on supporting our customers and advancing bit performance while also mitigating higher tungsten carbide costs, which have increased by approximately 400% since 2025. In addition to drill bits, our downhole tools, ESPs and production chokes have components that include tungsten carbide. Our teams are focused on mitigating higher costs through sourcing, pricing and operational actions. Revenue from our digital services business expanded significantly compared to 2025, with strong operational performance from our wired pipe services. Based on customer interest, we expect to see continued growth and adoption of our services that provide real-time broadband data transmission from the bottom of the drill string. Rentals of our downhole technologies were impacted by lower activity in North America and Saudi Arabia, but remained mostly steady across other markets as softer activity was offset by adoption of our new technologies, including our Agitator RAGE and Positrac torsional vibration tools in Asia, the Middle East and offshore Brazil. Within our wellsite services business, increased rentals of our TundraMax mud chiller systems and solids control equipment were offset by lower activity in the Middle East and Latin America. Additionally, the business was awarded a contract to deploy its InnovaTherm thermal treatment technology in Guyana, supporting more efficient drilling cuttings management. This will be our first deployment of the technology in Latin America. Our tubular inspection business decreased mid-single-digit percentage from lower levels of activity in North America and a temporary slowdown in our Tuboscope operations as activity in Argentina shifts from Comodoro to the Vaca Muerta. Further development of our TK Dracon premium thermal insulated coating partly offset lower coating activity in international markets, which we expect to pick up in the second quarter. Sales of capital equipment declined in the low double-digit percentage range year over year, primarily due to the Middle East conflict that delayed deliveries of composite pipe. These delayed deliveries, along with lower industrial activity and the timing of composite projects for FPSOs, resulted in a significant decline in revenue versus the prior year for our fiberglass business. While these headwinds weighed on the quarter, the business achieved record quarterly bookings, driven by demand for our produced water transport projects, fuel handling and FPSO-related applications. Given the strong bookings along with production and delivery delays related to the Middle East conflict, backlog is at the highest level in ten quarters. We expect second quarter results to meaningfully improve and revenue in the second half to further increase compared to the first half, supported by robust demand and execution on the strong backlog. Drill pipe orders were also strong, outpacing the average quarterly bookings for the past three years, with offshore demand leading the bookings mix. These bookings follow strong orders in 2025, which contributed to drill pipe sales increasing in the mid-teens percentage range year over year. Backlog for the business sits at its highest level in two and a half years, and we expect strong backlog conversion in the second quarter. The segment’s product sales declined in the mid-teens percentage range year over year, as reduced drilling activity in the Middle East and Asia decreased demand for certain drilling tools for the quarter. However, we did receive a sizable order for drilling motors destined for Turkey that should support sales later in the year, and we have good visibility into the bulk shipments that typically happen in the second half of the year. For the second quarter, we expect Energy Products and Services segment revenue to decrease between 6% to 8% year over year, with EBITDA in the range of $100 million to $120 million. With that, I will turn the call back to Jose. Jose A. Bayardo: Thank you, Rodney. In closing, while the first quarter presented challenges, it also marked a significant shift in the market environment. We believe a meaningful new capital equipment cycle is unfolding, which will cause NOV Inc.’s technology, equipment and expertise to be in great demand over the coming years. We are confident in how we are positioning the company for the future and remain intently focused on delivering long-term value for our shareholders. To the NOV Inc. employees listening today, thank you for your dedication and commitment to safety and execution. We will now open the call for questions. Operator: If your question has been answered and you wish to remove yourself from the queue, please press star one one again. Our first question comes from Arun Jayaram with J.P. Morgan Securities. Your line is open. Arun Jayaram: Jose and Rodney, I was wondering if you could maybe talk a little bit about the flexibles business at NOV Inc. You mentioned how you are doubling capacity over the next several years in Brazil, but I would love to get a little bit of thoughts on where that business is today, perhaps from a top-line basis, and how you see that progression over time as you are increasing capacity there? Jose A. Bayardo: Yes. Good morning, Arun. Thanks for the question. Our subsea flexible pipe business has had extremely strong performance coming out of the pandemic and continues to crank out really good results. The bookings outlook is very favorable. As we sit here today and take in orders, we are looking at lead times that are already extending into 2028 for some projects with some of our customers. Looking further into the future, Brazil will continue to have a tremendous amount of growth. They are pretty transparent in terms of guidance to the public regarding their future activity, and if anything, things continue to ramp up. It is not only continuation with new project development, but we are also entering a time period in which existing infrastructure is aging, and we are on the cusp of a big replacement cycle for offshore Brazil, in addition to more new capacity that is needed. Additionally, we have talked about the solution we have been working on for CO2 corrosion resistance that we are feeling very good about. We think we will need some incremental capacity for that. Elsewhere around the world, even last quarter we were talking about steady improvements and building momentum in the offshore space as a logical source of incremental supply to displace what North America has done over the last year in terms of supplying that incremental barrel to meet demand that continues to grow. All the stars are aligning as it relates to economics, need and opportunity in the deepwater environment, and it is consistent with what we are hearing from our customers. Beyond Brazil’s replacement cycle, other markets have similar needs, and more importantly, many markets have both greenfield development and big plans related to infill projects to leverage existing infrastructure from a production facility standpoint. They are going to need a lot of additional pipe to connect new step-out wells into that infrastructure. Everything looks really good from a demand perspective, and as we map out our capacity and our competitors’, it is pretty clear that in a few years the industry is going to be short on capacity, and we see a great opportunity to step into that and support our customer base. Arun Jayaram: Yeah. Makes sense. Jose, the guidance was quite clear, but I was wondering if maybe you could help us understand what you and Rodney are embedding for 2Q in terms of the Middle East impact. In 1Q, you highlighted a $54 million revenue impact and, I believe, $32 million of EBITDA. What are you assuming as your base case, understanding there is uncertainty in 2Q? Jose A. Bayardo: Good question, Arun. As we look at Q2, it is not a matter of taking March times three for us. There are a number of puts and takes, including that in the third month of the quarter we tend to have a lot of deliveries happen toward the end of the quarter. For some reason, that is just the nature of the business—people want to take everything in the last couple of weeks of the quarter. More importantly, while the disruption is still meaningful and significant in terms of impacts on timelines and logistics costs, things are much improved from the height of the conflict. What we are primarily contending with right now is the closure of the Strait. Our assumption in Q2 is that the Strait remains closed; however, conditions on the ground otherwise are in line with what we are seeing now, which is a resumption of trade activity getting steadier and a more constructive environment than at the peak of the conflict. Putting those pieces together, we are looking at a slightly larger impact than we saw in all of Q1, but not a huge difference. Operator: One moment for our next question. Our next question comes from James Michael Rollyson with Raymond James. Your line is open. James Michael Rollyson: Hey, good morning, guys. Lots of interesting commentary to open there, Jose. As you see things unfolding now and based on conversations with customers so far, you mentioned increased activity and amplifying that activity once it settles down. Maybe add a little color around what conversations you are having, how broad that is, and how you expect this to translate. One of the things you have mentioned over the last several quarters is that NOV Inc. has not been firing on all cylinders—it has shifted around from one market to another—and it sounds like what you are saying implies maybe a more broad-based recovery over a period of time. I am trying to fit NOV Inc. into that equation. Jose A. Bayardo: Thanks for the question, Jim. A quarter ago we felt very good about the mid- to long-term outlook, but we anticipated that 2026 would be another somewhat rough year with the supply overhang. We have seen several years of improving fundamentals within the deepwater space that have driven growth and margin improvement within our Energy Equipment segment. The other big chunk of our Energy Equipment business, our rig business, has been in a more difficult environment over the last 12 to 18 months as our primary customers contended with white space in the offshore environment while the industry waited on FPSOs to come out of shipyards and be put in place to commence drilling campaigns. We saw a wave of those FPSOs launch at the end of the year—about 15 coming into the market—and that has resulted in what we expected: a massive increase in the number of tenders to offshore drilling contractors and a substantial increase in the average duration of those contracts. That was the setup for later this year and into 2027 that we are excited about. In the interim, we expected North America to remain flattish with significant discipline, and potentially some downward flow due to the supply overhang. Fast forward to today, that overhang is gone. We are at an extreme deficit. There is going to be a need to accelerate activity in the Middle East to bring things back online and resume plans to steadily bring production and activity back up, particularly in Saudi with bringing back the suspended rigs. We already had, and continue to have, good momentum related to development of unconventional resources within the broader Middle East as well as in Latin America. That is continuing, and we expect it to be amplified and move forward with more urgency once things settle down. First and foremost, we hope for a quick resolution to the conflict in the Middle East so that our employees, customers, vendors and stakeholders can get back to life as usual in a safer environment. Whether we like it or not, the world is very different today than it was three months ago, and that is a more constructive market for a provider of capital equipment and efficiency-enabling tools to enable the production of energy around the world. Demand is going to be very high. Late this year and into 2027, we could finally be in that environment where all eight cylinders of NOV Inc.’s engine can fire, and we can demonstrate significantly higher earnings power than what we have been able to show in a limited market over the last several years. We are looking forward to demonstrating that capability, and the team has worked incredibly hard to position us for that environment. James Michael Rollyson: Got it. Appreciate the color. If I transition that into the cost and margin outlook, you have faced a lot over the last few years and still ramped margins until the recent air pocket and the Middle East conflict. You mentioned normalizing tariffs with your cost-out program in the second half of the year, but we also face the Middle East impact. How many lingering impacts might fall out from that, and as we get into 2027 and beyond, how do you think about margin progression given moving pieces on the cost side? Rodney C. Reed: Thanks, Jim. I really wanted to highlight the hard work from the team on cost reductions throughout the last 12 months. As mentioned in the prepared comments: headcount reduction down 8%, facilities down about 40, and business process improvements including shared service center opportunities in India. All of that has improved our cost structure. Some headwinds over the last 12 months—tariffs and other inflationary items—have offset most of that. Looking at 2026 and into 2027, starting with Energy Equipment: we have had four straight years, 2021 to 2025, of top-line growth and margin improvement, reflecting the strong portfolio. Business units with technological differentiation have more pricing leverage in their markets, lifting margins. In 2025, our rig aftermarket business, with white space in the market, did not have as much margin impact; as we look to the second half and into 2027, we see a meaningful impact from rig aftermarket going forward. For the Energy Products and Services side, similar story: good market share gains in ReedHycalog—8% up on drill bits in North America versus a 7% decline in rig activity—and highlights in digital services. Over the last 12 to 18 months, as the U.S. market declined about 15% from an activity perspective, that has not been a pricing-rich environment; but as we roll out new technologies to create more efficiencies on longer laterals, those are areas where we can get better pricing leverage. The cost-out is the hard work we control, and the market setup we are seeing on the Energy Equipment side with production equipment, the improving aftermarket, and where Energy Products and Services is heading, leads to better margins in 2026 and then in 2027. Operator: One moment for our next question. Our next question comes from Marc Bianchi with TD Cowen. Your line is open. Marc Bianchi: Thank you. Rodney, when you were talking about tariffs, you did not mention the new proclamation from the administration that is going to change the way February works. Should we take that to mean you do not see that being a big change for you? Rodney C. Reed: Let me give a couple of comments on tariffs. Starting with the positive news: in February, the Supreme Court ruled the AIPA tariffs unlawful. We have started to file claims for a refund associated with that ruling. That is not in our Q1 numbers and not in our Q2 guidance, but, in round numbers, what we paid in under AIPA is about $40 million. The administrative process of filing those claims and working through it will determine the end result, but that is a general ballpark. The other changes during the quarter were some of the exclusions from a February perspective, which has a mixed impact across our businesses—beneficial to some and a detriment to a couple of others—and replacing some of the AIPA tariffs, as you know, is Section 122 tariffs. Putting those together, as mentioned in Q4, our tariff expense was about $25 million; in Q1, we expected a slight increase, which is what we saw. Going forward, tariffs being in that ~$30 million range—which is reflected in our Q2 guidance—is a good marker. So, on the changes you referred to—one on the refund and two on the February changes—the latter probably adds a touch of incremental cost. Marc Bianchi: Okay, that is very helpful, thank you. The other one is on the second quarter. The war impact is a little bit more on a dollar basis than in 1Q—recognizing we have three months of disruption, so on a run-rate basis, it is less. There were some deferrals of shipments from 1Q into 2Q, and maybe further deferrals from 2Q into 3Q. What does the run rate of the business look like? Is there help that 2Q is getting from those deferrals, or is it a wash because more gets deferred into 3Q? Jose A. Bayardo: Mark, I would say it is effectively a wash. Yes, you have the benefit of some delayed deliveries from late Q1 falling into Q2. But we are going to see ongoing logistics delays, and, as noted in prepared remarks, we are rerouting some manufacturing to other facilities around the world to reduce risk, which actually extends lead times in many situations. There are areas where things will continue to slide out quarter to quarter. Overall it should be a wash, but hopefully we will find a way to start catching up a bit as conditions improve. Operator: One moment for our next question. Our next question comes from Douglas Lee Becker with Capital One. Your line is open. Douglas Lee Becker: Jose, on the last call, you mentioned leaning harder into M&A and organic growth. We saw the expansion in Brazil, but now we have this underlying shift in the industry. Do these changes make you more aggressive on allocating growth capital or on M&A going forward? Jose A. Bayardo: Good question, Doug. As highlighted last quarter, we were shifting from a more conservative, defensive mindset given the market environment of recent years to a more offensive mindset. We talked about leaning into compelling organic growth opportunities, including the expansion of our subsea flexible manufacturing facility in Brazil, which we are very encouraged about. The market setup is spurring additional confidence in our outlook and opportunity set. We will remain extremely disciplined, particularly in M&A, but we want to be opportunistic and lean hard into organic growth opportunities out there, and we expect more to emerge as the market tightens. Very encouraged on that front. Douglas Lee Becker: It was encouraging that the full-year book-to-bill is still expected to be near 100%. Do you think there was any impact to orders in the first quarter from the Middle East conflict? Tough to gauge, but how might orders progress as the year goes forward, assuming the conflict ends relatively soon? Jose A. Bayardo: There are always puts and takes when a shock like war breaks out, which lends uncertainty for a short period. Our customer base has quickly gotten over the initial shock of disruption, and confidence continues to build around a sustainably higher oil price that will drive more activity and urgency and start pulling FIDs forward. As touched on in the prepared commentary, industry outlooks for FPSOs have increased versus expectations coming into 2026. Looking at the number of offshore opportunities we are pursuing, we are seeing a much wider set of customers than a year ago, more LNG opportunities in Asia, and firmer timelines. To be determined exactly how things play out, but hopefully you get the sense we are more confident about the order outlook going forward. Operator: One moment for our next question. Our next question comes from Analyst with Barclays. Your line is open. Analyst: Good morning, Jose. You talked about a new capital equipment cycle starting up. It has been a long time since we have seen one, and the last one likely looks different than what we are about to enter. You gave guidance for this year, but thinking about 2027 and 2028, what does a new capital equipment cycle mean to NOV Inc.? Where are the key drivers you really see—aside from FPSOs—in terms of orders over the next few years? Jose A. Bayardo: Thanks for the question. It is always hard to predict the future, but it is clear there has been limited investment across the industry, particularly in the service complex asset base. We went from excessive investment to a market that has slowly normalized over about a decade as activity declined. A couple of quarters ago, we started pointing out that the market for equipment is tighter than most appreciate. We thought the oil supply overhang would give the industry ample time to recognize the issue and start investing, but recent events have accelerated and amplified the process. It starts as it usually does: pricing and utilization go up for service companies and drilling contractors, cash flow improves, and they reinvest in their asset bases aligned with activity needs. I do not think it will be constrained to any one market—this is an environment where all eight cylinders get to fire across our businesses, including capital equipment and enabling tools and technologies across our EPS segment. Expect continuation and amplification of deepwater activity; acceleration and amplification in unconventionals driving pull-through of modern drilling and completion efficiency-enhancing tools; and offshore drilling needed to support offshore development. The marketed utilization of the deepwater fleet is already around 95%, as tight as it has been since the prior cycle. Customers will continue to bring other assets back where possible, but opportunities are limited and costly. That will allow drilling contractors to gain pricing leverage and improve dayrates. Operators could start getting nervous about availability. I do not want to speculate on a newbuild cycle, but it is not off the table—though a few years away—and that conversation is coming up more frequently. In the interim, there are more upgrade and reactivation opportunities, including upgrades to digital capabilities, automation and robotics, rapid emergency disconnect systems to reduce BOP shear times, and upgrades to 1,400-ton hoisting capacity. Long way of saying: there is material upside across our operations; exactly how far it goes is to be determined, but the outlook is strong. Analyst: In terms of North America, it looks very tight from attrition and equipment moving out of the U.S. Are you having those conversations yet around unconventionals, or is it still a little early? Jose A. Bayardo: It is early days, but the conversations are happening. There is more discussion related to reactivating the limited stacked equipment that can come back, and some talk about new capital equipment orders. As Rodney mentioned, we saw demand for coiled tubing equipment in North America this quarter. Large-diameter, extended-reach coil already has some legs. We are seeing some of that translate into orders. That said, this geography has been through difficult conditions with everyone highly disciplined. Pricing for the service complex has not been good; they will focus on getting utilization and pricing up before materially expanding capacity. But I believe that is coming. Operator: Ladies and gentlemen, this does conclude the Q&A portion of today’s presentation. I would now like to turn the call back over to Jose for any further remarks. Jose A. Bayardo: Thank you, everybody, for joining us this morning. First and foremost, we really hope and pray for a very quick resolution to the conflict so that our friends and colleagues can get back to life as normal across the Middle East. We are very optimistic about the mid- to longer-term outlook. We remain confident in how we have positioned the company for the future and believe that will present the opportunity for us to demonstrate meaningfully higher earnings power over the coming years. We appreciate everyone joining us this morning and look forward to visiting with you again in late July. Operator: Thank you, ladies and gentlemen. This concludes today’s presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.
Operator: Good morning, and welcome to Nucor's First Quarter 2026 Earnings Call. [Operator Instructions] Today's call is being recorded. After the speakers prepared remarks, I will provide instructions for callers wishing to ask questions. I would now like to introduce Chris Jacobi, Director of Investor Relations. You may begin your call. Chris Jacobi: Thank you, and good morning, everyone. Welcome to Nucor's First Quarter Earnings Review and Business Update. Leading our call today is Leon Topalian, Chair and CEO, along with Steve Laxton, President and COO; and Jack Sullivan, CFO. Other members of Nucor's executive team are also here with us today and may participate during the Q&A portion of the call. Yesterday, we posted our first quarter earnings release and investor presentation to Nucor's IR website. We encourage you to access these materials as we will cover portions of them during the call. Today's discussion will include the use of non-GAAP financial measures and forward-looking information within the meaning of securities laws. Actual results may be different than forward-looking statements and involve risks outlined in our safe harbor statement and disclosed in Nucor's SEC filings. The appendix of today's presentation includes supplemental information and disclosures, along with a reconciliation of non-GAAP financial measures. So with that, let's turn the call over to Leon. Leon Topalian: Thanks, Chris. And as always, I want to begin by recognizing our 33,000 teammates across the company for their continued commitment to working safely. Safety is and will always remain our most important value. And at Nucor, that means more than the physical safety of our team. It encompasses the mental health of all of our teammates as well with May being mental health awareness month, it's a great time to reinforce that commitment. And as we move through 2026, we are firmly focused on making this the safest year in Nucor's history. Before turning to our financial performance, I'd like to briefly highlight a few leadership updates. Effective March 1, Jack Sullivan was promoted to Chief Financial Officer, Treasurer and Executive Vice President. Since joining Nucor in 2022, Jack has demonstrated strong leadership, deep financial acumen and a clear understanding of Nucor's culture and how to create long-term value for our shareholders. Congratulations, Jack. We also announced that Dan Needham, our Executive Vice President of Commercial, will retire in June after 26 years with Nucor. I want to thank Dan for all the sacrifice and leadership during this time in which he and his family the very best in retirement. Turning to Nucor's first quarter financial results. We generated EBITDA of approximately $1.5 billion and earned $3.23 per share. This is an excellent start to the year and a significant increase compared to the fourth quarter, driven by strong performance across all 3 of our operating segments. Consistent with our capital allocation framework, we returned $254 million to Nucor's shareholders through dividends and share buybacks during the quarter, while also reinvesting $661 million into the business. Roughly 40% of CapEx in the quarter went towards our new sheet mill in West Virginia. Operationally, our team has performed incredibly well during the quarter. One of the clearest indications is the record shipments our steel mills achieved for the quarter. At 7 million tons, this was the highest quarterly shipment volume in Nucor's history, reflecting strong execution across our 26 steel mills and growing contributions from recently completed projects. Equally encouraging is the momentum evident in our backlogs. At the end of the first quarter, our steel mills backlog was up to 4.7 million tons, a 20% increase from year-end and the highest level we've seen since the second quarter of 2021. And Steel Products, our backlog grew 9% from year-end with increases across all major product groups. I want to thank our operating and commercial teams for a strong start to 2026 and for putting Nucor in a position to deliver even better second quarter results for our customers and our shareholders. Turning to trade policy. The combination of Section 232, steel tariffs and trade remedy orders have been effective at reducing imports with that trend accelerating in the second half of '25 and continuing in the first quarter of 2026. Import share of the U.S. finished steel market declined from over 22% in the first quarter of 2025 to approximately 15% this quarter. More recently, we were pleased to see the administration reaffirm the 50% 232 tariff on steel and implement important changes to how derivative steel products are treated specifically applying tariffs to the full value of those products. This action simplifies administration and enforcement while closing a key loophole that has allowed for undervaluation and circumvention. Taken together with existing trade remedies, these measures are working to ensure a more level playing field for domestic producers. We appreciate the administration's recognition of the importance of a healthy and competitive American steel industry. That said, we remain vigilant and there is still work to be done as USMCA discussions continue, there is an opportunity to address ongoing challenges including steel subsidies provided by the Canadian government and the use of North American channels as back doors to our domestic markets, putting U.S. manufacturers at a competitive disadvantage. We also continue to advocate for policies that prioritize the use of American made steel in critical sectors such as energy, infrastructure, defense and shipbuilding. With that, I'll turn it over to Steve for an update on the growth initiatives and market outlook. Steve? Unknown Executive: Thank you, Leon, and thank you all for joining us this morning. Our team continues to make great progress on our new sheet mill project in West Virginia, and we'll see key milestones achieved in 2026. We're entering the final phases of construction and will be sequencing commissioning of operations throughout the year, beginning with the pickle line in the second quarter. By the end of the year, we expect commissioning, inspecting and testing of all equipment across the mill to be complete. Following commissioning, our priority will be to operate safely and reliably as commercial shipments begin ramping up in early 2027. We will be increasing production and advancing product development throughout 2027 and '28. And with capacity utilization and product offerings building steadily over time. Once fully ramped, Nucor West Virginia will supply some of the cleanest and most advanced sheet steel in North America with expanded capabilities to better service automotive and consumer durable markets. This positions Nucor to grow market share in the Midwest and Northeast, 2 large sheet consuming regions where Nucor is relatively underweighted today. In addition to West Virginia, we have several major capital projects under construction or ramping up, and we're making meaningful progress across all of them. Starting with projects under construction, in our Towers and Structures business, we're building 2 new utility towers facilities, 1 in Indiana and 1 in Utah. In Indiana, we expect to be fully operational in the third quarter of this year. And in Utah, we expect to reach full production by mid-2027. We are also advancing the construction of the second galvanizing line at our Berkeley County, sheet steel mill in South Carolina. Once complete, this line will expand our ability to service automotive customers in the Southeast. Equipment commissioning is planned for the middle of the year, and we expect production to begin in the fall. In addition to projects under construction and commissioning, we have recently completed several growth projects that are advancing their strategic and commercial plans as expected. In the bar group, our new micro mill in Lexington, North Carolina and our new melt shop in Kingman, Arizona, were both EBITDA positive in March. In the sheet group, our new galvanizing line at Crawfordsville, Indiana was also EBITDA positive in March, and we expect to commission the paint line later this year. Finally, our Alabama towers and Structures facility is expanding its customer base, improving production and on track to reach EBITDA positive run rates by the end of the summer. Before I turn the call over to Jack, let me share how we're thinking about the current market environment and Nucor's place in these markets. Already the established industry leader, producing roughly 1 out of every 4 tons of steel in the United States and having unparalleled range of product offerings in our downstream businesses, Nucor continues to find ways to grow. After achieving approximately 6% growth of shipments in 2025, we expect shipments to grow by more than 5% in 2026. A confluence of factors are enabling this. First, consistent with our comments on Nucor's fourth quarter earnings call in January, overall demand remains relatively stable. There are pockets of strength, such as data centers, energy, border fence and infrastructure. and there are some markets that have remained softer for now, including consumer cyclicals, traditional office, heavy equipment and agriculture. Taken as a whole, we expect domestic steel consumption to be stable with overall demand remaining flat to up 2% for 2026. Second, as Leon highlighted, enforcement of trade laws is stabilizing what might have happened in the past where patterns of flooding dumped imports shock the supply picture. And third, execution by our team with the investments we've made. Nucor is well positioned with the portfolio we've developed to service market segments exhibiting particular strength right now. A few examples include, we can supply 95% of the steel needed to build a data center. We're the leading manufacturer of HSF structural tubing that are the primary building materials for large sections of the border fence. Our industry-leading pre-engineered metal buildings and insulated metal panels offering helped to accelerate our customers' speed to market, which is increasingly valued in today's landscape. And as a leading domestic producer of beams [indiscernible] bar. We are an essential material supplier, an enabler for the construction of pipelines, LNG terminals, bridges, manufacturing facilities, and power generation and transmission infrastructure. Nucor's national reach, coupled with our strength in raw materials, steelmaking and downstream products provides supply chain integration, improved reliability and operating efficiencies that no other North American producer can match. We have the right capabilities and team for this moment, and we're always looking ahead to ensure Nucor remains well positioned as markets evolve. With that, I'll turn it over to Jack for a closer look at our first quarter financial results and our outlook for the second quarter. Jack? Jack Sullivan: Thanks, Steve, and good morning, everyone. In the first quarter, Nucor generated net earnings of $743 million or $3.23 per share, exceeding the midpoint of our guidance range by nearly $0.50. The beat was largely due to higher volumes and higher margin product mix. After some weather-related shipping delays early in the quarter, the team delivered a very strong March with our sheet, plate and rebar groups all setting quarterly shipment records while structural steel shipments reached levels not seen since 2021. Turning to the segment level results for the first quarter, the steel mills segment generated $1.1 billion of pretax net earnings, more than double the prior quarter. Volumes and average selling prices increased across all 4 product groups with sheet and structural being the largest drivers. Metal spreads also expanded across all formats. In Steel Products, we generated pretax earnings of $285 million, up 24% from the fourth quarter. Volumes increased 13% on stable pricing with our Tubular group setting a new quarterly shipment record. Strong demand related to the border fence was a significant contributor, and we expect that to continue for the next several years. We did see some margin compression due to higher steel input costs flowing through, but we expect this to ease as the year progresses and realized pricing catches up. And in our raw materials segment, we generated pretax earnings of approximately $45 million compared to $24 million in the prior quarter, reflecting higher DRI production following 2 planned outages in the fall. Pre-operating and start-up costs totaled $108 million for the quarter. As a reminder, we expect these costs to trend higher as we work our way further into 2026 and toward the completion of our West Virginia sheet mill. Moving to the balance sheet. Our strong investment-grade credit profile is the foundation of our capital allocation framework. It allows us to execute our strategy of disciplined investment to grow our business while still providing meaningful cash returns to shareholders. We ended the quarter with approximately $2.5 billion in cash and liquidity of $3.2 billion. Total debt as a percentage of capital sits at 24% and our credit ratings remain the strongest of any U.S.-based steel producer. Capital expenditures totaled $661 million for the quarter, and we remain on track with our $2.5 billion CapEx estimate for the full year. While this level of investment remains elevated as we finish several remaining growth projects, it is moderating compared to recent years. And as our CapEx is trending down, our cash from operations is moving up. That combination produced a meaningful increase in free cash flow for the quarter, and we expect this trend to continue. We also returned over $250 million to shareholders in the form of dividends and share repurchases or roughly 34% of quarterly net earnings. Consistent with our long-term track record, we remain committed to returning at least 40% of net earnings to shareholders on an annual basis. Looking ahead, Nucor's financial strength, highly variable cost structure and business diversification, position the company to invest in growth, reward our shareholders and navigate through economic cycles. Turning to our second quarter outlook, we expect higher consolidated earnings with improvement across all 3 operating segments. In steel mills, we expect stable volumes and increasing metal margins. The margin improvement reflects higher realized pricing, partially offset by rising raw material costs. Within the segment, we expect our sheet and plate businesses to be the largest contributors in the sequential increase. In Steel Products, we expect higher volumes and stable pricing. And some of our longer lead time products like fabricated rebar and joist and deck, margins have been impacted by rising substrate costs but are poised to improve as we work through backlogs and start to realize higher average selling prices. In raw materials, we expect higher earnings driven primarily by improved realized pricing for DRI. Taken as a whole, the earnings uplift across all of our operating segments will be partially offset by higher corporate and intercompany profit eliminations upon consolidation. As we look further into 2026, we continue to expect that Nucor's earnings and cash flow will trend significantly higher than 2025 as we benefit from strong nonresidential construction and infrastructure demand and begin to see returns from the investments we've been making these past few years. With the hard work and dedication of the Nucor team, we are confident in our ability to create value for our customers and shareholders. And with that, we'd like to hear from you and answer any questions you may have. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from Bill Peterson from JPMorgan. William Peterson: Congratulations on a strong quarter. Congrats to the new management appointees, and thanks for the details thus far. On the West [indiscernible], which you provided some granularity, I was hoping to get a bit more color on the phasing of commissioning the strategy through year-end and maybe what to expect for the next few years? I guess, specifically, how long do you expect the commission phases it be complete? When do you expect the construction of the galv line to be complete? And I guess, how should we think about when you're going to start production as well as the customer qualifications? And then any sort of thoughts on utilization in the next few years as well? I appreciate that. Leon Topalian: All right, Bill, thank you for the question. I'm going to kick it off and maybe just stay at a high level and then ask Steve Laxton or Noah to jump in with some more of the details around the commissioning of that mill. But look, I want to begin with the backdrop of our most important value, which is the safety, health and well-being of the entire new quarter 33,000 team member family. Today, we sit at 65 of our divisions are recordable free at this point. It is an amazing accomplishment, and I want to thank each and every one of our teams who are delivering exceptional results, and you will see and continue to see those amazing results continue as we push into the quarter. More specifically, Bill. And as we think about West Virginia, and we touched on it in the opening remarks. I and our team could not be more excited about the capability set that, that mill will bring [indiscernible] for our customers, our shareholders, the value that's going to be generated and created in the largest sheet consuming region in the United States. Johnny Jacobs, who is our Vice President, GM and his team have done an incredible job. And as you know, the work that sits behind the scenes during construction and start-up is tireless. It's thankless and it is just a really, really challenging environment. And those individuals have done an amazing job. So thank you to our entire West Virginia team. And again, I'll let Stephen, Noah maybe update some more on the details. Unknown Executive: Yes. Happy to do that. Thanks for the question, Bill. And I'll just echo what Leon said about the team in West Virginia. They've had a remarkable safety record. I'll lead off with that. They've only had 1 reportable in all the years of that project. So outstanding safety culture and leadership in that team. And in terms of the specifics of your question, right now, Bill, we're about 85% of the way through construction. So we still have work to do on the construction side. Having said that, we're starting right now with some of the commissioning, and we'll be sequencing that throughout the year. And so we'll start with the pick line, and then we'll bring up the cold mill and proceed through one of the galv lines, the automotive quality galv line will be the next thing we start up after that in commissioning. Ultimately, we'll get to commissioning the melt shop and in hot mill later in the year. By the end of this year, we'll be done with all the commissioning. We're on track to hit that milestone. And then we'll start moving up through production and ramp-up in '27. Bill, what you'll see there is a very intentional and deliberate plan from that team and our entire sheet group, Noah and our team in the Sheet Group have really design an excellent plan to bring that mill up in a very constructive and coordinated and intentional way. And so by the time we get to the end of 2027, you asked about utilization rates and markets are going to dictate some of that. So I might hedge here just a little bit depend on market conditions somewhat that we'll be operating somewhere near that 50% of capacity by the end of next year. And so that team is poised. We're going to make great progress over the next 1.5 years and into 2028, even with product development and continued penetration of the markets. Anything you want to add. William Peterson: Great. And Steve, obviously, I've been working with you as a CFO and now we have Jack congrats on -- for both of you. Maybe the next question is for Jack is your new role how should investors think about any potential shifts in strategy relative to recent years? Or anything you would continue anything you would change or just any sort of insights on how you're considering your new role. . Jack Sullivan: Yes. Thanks, Bill. I appreciate that. I step into this role with a lot of humility and gratitude to serve this great company and the 33,000 teammates to make it such a special place preceding me in the role are 4 highly accomplished Nucor CFOs. And really, my goal is just to carry on their long-standing tradition of doing 3 things really well. maintaining a healthy balance sheet, investing for the future and generating attractive returns for our shareholders. . And Steve Blackstone, who's sitting right here to my right, did a terrific job during his 4-year tenure, funding $15 billion in growth investments returning $9 billion to our shareholders and improving our credit profile along the way. So that's a pretty impressive tra factor right there. And as the old thing goes, if it ain't broke, don't fix it. So Bill, no major shifts from that winning strategy. But what I would say is, I think I bring a fresh set of eyes, a strong understanding of this business and how we make money. And just a lot of excitement to accelerate what is already 1 of the most compelling stories in American manufacturing. Operator: Our next question is from Alex Hacking from Citi. Alexander Hacking: A couple of questions. I'll ask them together, if that's okay. Firstly, on the sheet side, the new slow and steady approach to price hikes in this cycle that we're seeing right now, could you maybe discuss the rationale a little bit there and how the customer feedback has been? I mean I hear only good things from customers, but I'm curious. And then secondly, on structurals, demand are very, very strong. imports are down, but don't seem to be down that much. Is there any particular subsegment that's driving structural to be so good. Leon Topalian: Yes, I'll kick it off, Alex, thanks for the question. And again, keeping a little broader base. But the question you asked around sheet is an important one. And there's some very deliberate strategies there that I'll ask Noah to kind of walk us through because again, I think it's an important context as you overlay the backdrop of the current sheet market and demand today versus '21 and '22. And again, no can touch on that. You mentioned the structural side. And again, having spent 3 years at Nucor-Yamato our Nucor-Yamato team and our Berkeley beam mill continue to deliver excellent performance, both from a safety standpoint as well as from a just net earnings. They are absolutely on fire. Their backlogs are at historic levels. Their customers, customers are busier than anything that I've seen in again, my 30-year career. So -- where is that going? I mean, it's obviously the non-res data centers, energy structural side and infrastructure around energy and chip plants and facilities, warehousing and in an area that we're going to continue to see expanded into the military complex in the years to come for Nucor. So I would tell you it's hitting on all cylinders. And while data centers are white hot, everyone's looking to participate if you pulled out all of the data center backlog from Nucor mean it only takes that down about 10%. So the historic backlogs we're seeing are really, really spread out incredibly well across the enterprise that give -- give me great confidence that not only as we indicated, Q2 will be better, but I think 2026 is going to be a very strong year for Nucor -- or for Nucor. So with that, Noah, why don't you walk through a little bit of the sheet strategy and where we sit today. Noah Hanners: Thanks for the question, Alex. We like slow and steady, and our customers are like and slow and steady, and let's take a little time to unpack that. The fundamentals supporting pricing right now are really strong, and I would say the rally we're in is probably the strongest kind of fundamentals we've seen for some time. Maybe to give you some context for how we see the rest of the '26 would step back to the last inflection point in the market, which was Q4 of last year. The low side of pricing in Q4 of last year. And to think about how our strategies work differently this year. You recall that historically, what would have happened in that low point that trough in the market is we would have had opportunistic speculative buyers overloading their order books to try to time the market. And the result, if you think about traditional behavior in Q4 would have been that we would have overbooked on the mill side, lead times would have jumped significantly, prices would have jumped significantly and we would have really overshot basic market fundamentals. So then due to the spreads and the lead times we then inevitably create the surge of imports that arrived a few months later, similar to what we saw in the back half of '24. And that's what usually happens. We've seen this time and time again in the sheet world. But this time, our trajectory and our behavior has been markedly importantly different in this cycle. We didn't chase the market down in Q4. We managed our order book to match what we saw as true underlying demand. And you saw this reflected in our steady, I would call it, modest consistent approach with pricing [indiscernible] consistent modest increases that were supported by underlying demand. And then this is one factor that we believe has helped to keep imports low. If you think back to '24 and you saw imports that were 9 million-ish tons -- this year, we're tracking $4 million or under. So there's a 5 million-ton window of serviceable market for domestic suppliers. That's a huge impact to the positivity with which we see the market today. And then as importantly, the supply chain is really healthy right now. Inventory levels are modest, which just tells you we haven't seen the speculation that traditionally drives the volatility we would see in this market. A couple of other notes just on the strength of the current market while we have a pretty positive outlook. We have some key markets that are starting to show signs of positive outlook. Service center shipments are starting to move up. They're trending up. We heard from HVAC customers recently that are really in the nonresidential construction space about about a really strong second half there. So there's some tailwinds there in non-risk construction that yields some strength as well. And then you already heard mention of the Board defense, which is 1 million, 1.5 million tons over this year and next. So all that together, we believe, supports a strong operating environment through '26 and then into potentially next year. Operator: Our next question comes from Timna Tanners from Wells Fargo. Timna Tanners: I wanted to follow up, if I could, on the guidance comments. So the 5% year-over-year volume increase would seem to imply that this level that we saw in the first quarter year-over-year is not sustainable. So I'm just curious about what's driving that expectation? And I conclude just looking at the values that perhaps the bigger driver into Q2 could be price catching up with the market rather than volumes. Is that a fair conclusion? And if you could comment a little bit more about the moving parts, that would be great. Leon Topalian: Yes, Tim, look, I think both are true. I think you're going to see volumes. And again, Nucor's operating rate is about 87% right now, utilization across the board, some groups being a little higher, some a little lower. So we have room. And again, from a contract standpoint, when you think about sheet market and the things Noah just walked through, we remain and have tons available in a very strong market. So we maintained some discipline at not booking all of those tons through contracts. So we have spot tons to offer. But again, we have -- we still have availability. And again, I think you're going to see that continue to move up the demand drivers. Again, I'm not going to underplay this I've been in this business a long time. I've been in our long product businesses or [indiscernible] and -- from a loan perspective, our customers that I'm talking to today are busier than anything they've ever seen in their history. So when I tell you the demand driver drivers today are -- it's like '21, '22 or even beyond in some cases, depending on the product group. So it is an incredible market. So I do think you're going to see some improvements in volume, to your point, on the 5%. Yes, I think you're right. I think it's much more likely that it pushes closer to double digits. -- again, a number to say it's going to be at or above 10%. But we -- I think it will strongly be above that 5% mark. So you're going to see that move up as well. So I think that answered the 2 questions you were pulling on. Did I miss anything there, Tim? Timna Tanners: I think that's fair. I think I just -- it would be always helpful to get a little bit more color on how to think about some of the lags in pricing if you want, that would be great. And then I guess, the second question I was going to ask us to do a cost and Obviously, we all track scrap really closely, and that's a key one, but I just wondered if you could elaborate on some of the cost pressures that you alluded to earlier in the script, that would be great. Leon Topalian: Yes. Steve, actually, why don't I take both, I mean the cost as well as the lag effect on -- which, again, I think playing through, but will play through very positively as we head into Q2. SP1773698727 Here, Tim. The lag effect, just to elaborate on that just a little bit on the prior question. You know this, but for the other listeners on the call. of our volume goes to our downstream business, and that gets in our financial results backed out through intercompany Elen. So you see that impacting financial results for us, but also with over 70%, 80% of our business in sheet being contract and some other businesses that have a lag effect to the pricing as pricing trends move up, it does -- there is this catch-up effect that takes time. And so to the heart of the question you were asking just a minute ago you'll see some volume pickup. We had weather effect, particularly some of the downstream products. You'll see a little bit more volume pickup relative to pricing in our products grow. But on the sheet side -- or excuse me, steel side, you're going to see it the other way around. -- where the pricing is catching up with catching up with the trends that you're seeing today in the marketplace that's sort of putting a little bit finer point on your comment about the lag effect. And with regards to cost, new course costs have been down year-over-year and quarter-over-quarter. I think that's important to note. And a lot of that has to do with utilization. Our utilization is up and -- but also supplies and services are down on a few other little details. The 1 area that is up that might be on investors' mind is energy, but I think it's important to note that energy is around 10% of the cost in steelmaking and it probably has a far less pronounced impact than some investors might be thinking because of what some of our integrated competition has in terms of their costs. So our profile is simply different there. we hedge -- we typically forward by anywhere between 40% to 50% of the year's worth of natural gas heading into it. And most of our cost, 80% of our energy cost is related to power anyway. So we don't have quite the same degree of exposure to near-term moves and costs on that front. Operator: Our next question comes from Lawson Winder from Burfa Securities. Lawson Winder: Could I ask about the capital return? So in recent years, Nucor has exceeded the 40% net income return. I mean, last year, it was like just under 70% -- is there room to push that higher in 2026? And how are you thinking about that? And then the corollary to that would be looking at the investment opportunity set, are you seeing any new opportunities in which to invest in the business that could compete for that free cash flow versus capital return? Jack Sullivan: Lawson, it's Jack. Thanks for the question. In terms of share -- returns to shareholders, I think over the past 5 years, we've trended close to 60% of net earnings over that time. Starting out the first quarter a touch under that 40% target, and that was really the result of our earnings beat. So as we work our way further into the year, you should expect us to continue to close that gap and potentially exceed it. But when it comes to actual returns to shareholders, it's sort of that balancing act between staying true to our long-standing targets of roughly 40%, recently higher, but also being opportunistic about other areas to create value for shareholders. And a lot of that is through reinvestment. So we'll continue to do just that, balance reinvestment opportunities as they come along, maintain a healthy balance sheet along the way and make good on our commitment to shareholders. Lawson Winder: Okay. That's quite clear. And Jack, congratulations on the promotion. If I could ask follow-up questions related to joist and deck. You noted that pricing is expected to recover to help offset some of the higher substrate costs going forward in 2026. Can you just speak to some of the strength and weakness that you're seeing in the underlying market for that business? Jack Sullivan: Yes. This is John. I'll take that question, Lawson. So really, the biggest market for the joist and deck business is the warehouse market. That's really in a steady state. It's certainly not what it was in '21 or '22, but leveled off to a good position. The data center market continues to be really strong for us. That's where we're seeing a lot of our price increasing. And our backlog pricing has benefited from that and will continue to over the course of the year. So we feel good about where we are in that part of the business. Operator: The next question comes from Katja Jancic from BMO. Katja Jancic: Earlier, you mentioned the recent change to Section 232 tariffs impacting derivative products. Have you since then seen an increase in inquiries from manufacturers that could potentially try to reduce the impact? Or do you expect that to happen? Leon Topalian: Got you. I want to make sure I understand the question. With the 232, are we seeing our customers look to basically shore up their supply chains domestically? Is that. Katja Jancic: Right or even the nearshoring because there's an ability for them to reduce the tariff from 25% to 10% if they use 100% U.S. steel. So I'm just wondering if you're seeing any inquiries. Leon Topalian: Yes, we absolutely are. And again, I think what you've seen with Trump 2.0 and the trade things that he's implemented both from a NO and 232 is to create a long-term level fair playing field. And so again, we're seeing import levels trend down to 15%, which is certainly the lowest I've seen in my entire career at Nucor. So it's at a healthy and what I believe is a very sustainable level for the U.S. industry. But yes, to answer your question, and it's something that we will certainly support in the melted made in America provisions of any trade policy that gets enacted. And so yes, our customers are certainly aware of that and looking to see how they can control their cost and output. And so yes, the domestic industry is healthy. It's strong. And again, Nucor's best days are still in front of us. Katja Jancic: And maybe going back to the energy side. I understand that it's only 10%, but maybe looking more longer term, given that there is this expectation data centers are going to consume more energy and power costs are going to be moving higher. How are you thinking about your power costs longer term? Or are you thinking in any way to potentially look at longer-term contracts? Or how should we think about it? Leon Topalian: Yes, Katja, Look, this is something we've talked about for a long, long time. In fact, very early days from when I became CEO in 2020, we've taken small positions, but financial positions in things like NuScale Power, which is the small module reactor technology because we need all the power that we can get, not just in solar and wind, which are good. We're suppliers to both of those industries, but it's simply not enough. We've got to embrace -- or we believe Nucor believes we've got to reembrace nuclear power in this country. It is the cleanest, most sustainable, always-on demand-driven power that we can bring to the grid. So you saw us invest in NuScale. You saw us invest in Helion that we're incredibly excited about. But those investments also tied to being able to build those facilities, whether it's nuclear or vision and/or Fusion behind the meter so that we could generate our own supply, any excess then would go to the grid. So to your point, the demand profile and what the U.S. economy is not doing to keep up with supply has been an issue and something we've thought about for a very long period of time at Nucor. So we've made those positions. But Steve mentioned it earlier as well, part of the reason why we hedge our natural gas buys. It's part of the reason we got into drilling wells on our own to begin with. It's the reason why we have a great relationship in every state that we're in that we have a steel mill in with the utilities so that we maintain long-term uninterruptible power contracts that are very, very efficient and cost effective. So do I expect in the years to come that will get a lot of pressure? Absolutely, 100%. As you know, the data centers aren't pushing 200, 300, 400 megawatts. Now they're pushing gigawatts. These facilities are massive, and they are massive power consumers. And so we've been thoughtful about it. We continue to be thoughtful about it, and we will continue to invest in the things not because we want to make electrons, but we recognize that this nation has to reembrace nuclear. Today, China is building 46 new nuclear facilities. The U.S. is building 0. We've got to change that. And again, I think it's one of the clearest ways that we remain a superpower in cloud computing, AI and the things that are going to transform and revolutionize the U.S. economy. Operator: Our next question comes from Carlos De Alba Morgan Stanley. Carlos de Alba: So a couple of questions that are basically follow-ups from prior inquiries. One is on returning money to shareholders. As your CapEx starts to peak and you get the benefit of the new projects, would you have any preference between incremental buybacks or special dividends? Or are you agnostic to those 2 choices? Unknown Executive: Yes. I think -- thanks for the question, Carlos. With respect to the best way to return cash to shareholders, traditionally, our preference has been through -- there have been very few instances over decades in which we've contemplated a special dividend. Not taking that entirely off the table. It's just our traditional practice has been through buybacks and sort of dollar cost averaging our way through the year. Carlos de Alba: And then the other question is related to imports. The administration recently put out procedures for submissions by steel or aluminum producers that would be committed to new capacity in the U.S. This is related to the proclamation 10984 on imports of medium and heavy-duty vehicles and vehicle parts. How do you think this could impact potentially the announcement of new capacity in the U.S., steel capacity in the U.S. Unknown Executive: Imports from 50% -- sorry, not imports, but the tires from 50% to 25%. Leon Topalian: Look, Carlos, I think it's a fair question. And look, we've seen it. We've seen the interest from overseas. We've seen Nippon Steel come in and buy the U.S. steel assets, and that company no longer exists, right? It's now owned and operated by a Japanese company. You're seeing similar results in Louisiana with Hyundai building their sheet mill there. And when I think there are drivers to that, not just trade policy, but when you're the strongest economic situation in the world, people want to come here and build things. Certainly, there are some incentives for them to do that. But Ben, maybe just touch on some more specifics to Carlos' question. Unknown Executive: Yes, Carlos, I appreciate the question. We're obviously aware of that to EO. We've studied as well. I would not add much more actually than Leon did, right? We continue to study that. I think that a lot of people are always going to tend to move towards the U.S. market as strong as it is. However, we're still a wait-and-see approach on that EO, along with many other things that are coming out right now. Operator: Our next question is from Nick Kash from Goldman Sachs. Nicklaus Cash: I just want to double-click on Timna's question in response from earlier. So, the guide from 4Q was about 5% volume growth, and now it sounds like Nucor is expecting more than 5% volume growth for the year. You sound pretty positive and constructive on that in the environment. So I'm just trying to -- any more color on what specifically has changed over the past, I guess, 2 to 3 months? Are you more positive on the end markets? And does that give you conviction in heading into the back half of the year? Or are certain end markets seeing stronger-than-anticipated rate of change over the past 2 months, imports weaker than thought or what you're seeing potentially even across the backlog? Any additional color would be helpful. Unknown Executive: Yes, Nick, look, I appreciate the question. And I think you're seeing a trifecta come to fruition. So I think it's all the above. So I'll unpack it in 3 categories. One, I think in our core businesses, we're seeing incredible demand, incredible growth. Our long products groups are from rebar, MBQ, our structural backlogs are beyond numbers that we've ever seen. Our customers' customers in the nonres, the structural fabricators are incredibly busy. There is a demand picture today that is incredibly robust that I think is a part of that driver. The second piece of that is our expand beyond businesses that are continuing to ramp up. When we talk about insulated metal panels, our doors and door technologies, the towers and structures, greenfield plants, that we're building that, again, we are incredibly excited about what they're bringing to the table. And then the enclosures and data center spaces all are going to be contributing to a much healthier bottom line for Nucor and our shareholders, not just this quarter, not just in the coming quarters, but year-over-year, you're going to see it. And then the third and last and probably most important point, Nick, we spent nearly $20 billion since I took over the company as CEO. And our teams have done an incredible job of a, implementing that cash and projects safely. They've worked tirelessly to bring those projects through construction, commissioning, start-up, you're beginning now to see some of those in that planting and that toiling and just nurturing come to harvest. So for, again, years of working towards and building out, you're now beginning to see the harvest starting to hit the balance sheet, and that's only going to continue. The pent-up tsunami of earnings power that Nucor has invested is still yet to hit the balance sheet. It is why I am so incredibly optimistic and looking at where our share price closed last night, the opening this morning, we're just getting warmed up. And so Nucor's best days, weeks, months and years are still in front of it, and I couldn't be more optimistic. So those 3 factors combined bring to me what's going to generate the healthiest returns Nucor shareholders have ever experienced and ever seen and higher lows than Nucor has ever experienced by balancing out the M&A portfolio with countercyclical companies and product ranges that are in different end markets that, again, just stabilize the earnings portfolio through the balance sheet. So again, I couldn't be more optimistic. And that -- those 3 pieces really are why we feel very confident about 2026 and beyond. Chris Jacobi: We currently have no further questions. So I'd like to hand back to Leon Topalian, Chair and CEO, for any closing remarks. Leon Topalian: Well, thank you all for joining us on today's call. And before I conclude, I want to once again thank our team for delivering a strong start to our year and also for your unwavering commitment to becoming the world's safest steel company. I'd also like to thank our customers for the trust that you place in us each and every day. And finally, to our investors for your continued confidence in our long-term strategy. Thank you, and have a great day. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Good morning, and welcome to the Polaris First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to J.C. Weigelt, Vice President, Investor Relations. Please go ahead. J.C. Weigelt: Thank you, Gary, and good morning or afternoon, everyone. I'm J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2026 first quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer; and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing our 2026 first quarter results as well as our expectations for the remainder of 2026 and then we'll take your questions. During the call, we will be discussing various topics, which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2025 10-K and our other filings with the SEC for additional details regarding risks and uncertainties. All references to 2026 first quarter actual results and future period guidance are for our continuing operations and are reported on an adjusted non-GAAP basis, unless otherwise noted. Please refer to our Reg G reconciliation schedules at the end of the presentation for the GAAP to non-GAAP adjustments. Before I turn the call over to Mike, I'd like to recognize the upcoming retirement of Peggy James on May 1. Peggy has been an integral part of the Polaris Investor Relations team for more than 20 years, and her contributions over that time have been tremendous. We will miss her experience and steady presence on the team and wish her all the best in retirement, likely spending more time with their grandchildren, more time on the golf course and enjoying more snowmobiling. Now I'll turn the call over to Mike Speetzen. Go ahead, Mike. Michael Speetzen: Thanks, J.C. Good morning, everyone, and thank you for your interest in Polaris. We delivered a strong start to the year with our first quarter results reflecting strong fundamental performance across the business. I'm proud to say our team did an excellent job focusing on what we could control, executing commercially driving operational efficiencies, advancing our tariff mitigation plans and optimizing our portfolio. Results exceeded our expectations during the quarter, with reported sales up 8% or up 14% organically, excluding Indian Motorcycle and its related impacts. And we delivered adjusted EPS of $0.13, which was well above our expectations. And EPS, excluding Indian would have been $0.26. First quarter sales were driven by double-digit growth in our Power Sports segment. led by our utility RANGER line, our fast-growing commercial business and Snowmobiles. PG&A also had another great quarter, bolstered by strong performance in utility and 14% growth in snowmobile, accessories, parts and apparel as ridership remains strong. Across our portfolio, North American retail grew 1% with ORV up 3%, both measured exclude used vehicles. We ended the quarter with share gains in both ORV and Snow as well as with Godfrey pontoons. Dealer inventory levels remain healthy, reflecting strong operational alignment across our manufacturing plants, shipment plans and retail channels. Our margins, even with 240 basis points of headwind from tariffs, we're able to improve gross margins by 389 basis points. This was higher than our initial expectations due to a better mix within ORV and Marine, more favorable net pricing as well as improved operational efficiencies. Adjusted EBITDA margins increased 277 basis points with strong operational performance, partially offset by the timing of certain operating expenses moving into the first quarter. This resulted in an adjusted EPS of $0.13, well above our original expectations. Overall, it was a strong start to the year, and we believe the actions we have taken to refocus Polaris are creating a stronger foundation for the future. advancing our focus on leadership in Powersports, localizing and strengthening our operating footprint and positioning Polaris to deliver higher earnings power and stronger returns over time. Digging deeper into retail, North American ORV retail was up 3%, and we gained share for the fourth consecutive quarter. While retail within the recreational category continues to be challenged, down high single digits this quarter, we are seeing strong growth in our utility business, which speaks to the strength and diversification of our product portfolio. Utility ORV, which now makes up 70% of ORV revenue grew to a high single-digit rate as the industry continues to grow. While the growth in utility remains broad-based across our product portfolio. We did see an uptick in demand for vehicles used to move equipment and people across large data center construction projects that can span hundreds or even thousands of acres. As these build-outs continue to expand, we see this as a secular tailwind for the business and believe we are well positioned to continue gaining share in supporting that demand. The monthly cadence of retail performance in the quarter started out strong in January and February given a constructive consumer backdrop. However, this was followed by a decline starting in mid-March, which correlated with increased geopolitical tensions and rising oil prices. Interestingly, we are now seeing retail performance return to growth in April with positive metrics across all categories, excluding youth, where we continue to build back inventory. For Snowmobiles, the '25'26 season delivered retail growth of 25% and driven by early season snowfall in the flat lands. Conditions varied later in the season, but many mountain areas experienced lower snowfall with some seeing close to low snowfall levels on record. Despite this, we gained multiple points of share due to our strategic promotional activity to help dealers move noncurrent inventory and innovation in the Wide Track and Sport Utility segment. Turning to Marine. First quarter retail was down low double digits according to the last SSI report, which is not a complete data set with important states yet to report. The first quarter represents about 10% of annual retail and therefore, we don't extrapolate these results the rest of the year. Importantly, boat show activity was up year-over-year for both brands, and there remains strong excitement around our premium offerings at both Bennington and Godfrey. Before moving on, I want to touch on our product portfolio. something that can be hard to fully appreciate through a 10 or 20 dealer survey. Simply put, this is the strongest portfolio I've seen in my nearly 11 years at Polaris. Our broad ORV lineup delivers a distinct customer on distinct customer needs, whether it be for a work vehicle to find their next adventure or to have an unmatched day on the dues. Our category-defining utility vehicle, the RANGER XD 1500 sets the sets the bar for capability, while the Polaris expedition offers the industry's only adventure vehicle. And for customers looking for uncompromised performance in the wide open category, the Razor Pro R has continued to define what's possible with victories at the car, King of the Hammers Desert race and our recent wins at the San Felipe 250, demonstrating the vehicle's leadership. The innovation at the top carries down across the lineup. We've talked about the success of the RANGER 500, which delivers exceptional value to customers and continues turning at dealers at unprecedented levels. and the recent launch of the new RANGER 1000 cab and RANGER XP 1000 cab, which strengthens our offering in the latest and fastest growing full cab utility category. In fact, we are seeing strong double-digit utility side-by-side retail growth in April on the heels of this launch. In our seasonal business, we launched our model year '27 snowmobile lineup in February which featured the expansion of our Rec utility sleds and the new 9RVR1dynamics. Originally launched on our Razor lineup, Dynamics technology was later introduced in our snow portfolio in 2025 and it remains the industry's only snow system with full shot control. This year, 1/3 of SnowCheck orders included dynamics. In Marine, we continue to set the standard for innovation and quality with the newly redesigned Bennington QX and the Godfrey Sanpan, which was named Boating Magazine's Pontoon of the Year and the Hurricane Sundeck 3200 won the innovation award at the Miami Boat Show. It's easy to focus on individual products, but would truly differentiates Polaris as the strength of our entire portfolio. We're the global leader in powersports, and we operate like it, living the riding experience and constantly working to make it better. And while it's still early, I'll say this, I have not been misexcited about what we have yet to come. Dealer inventory continues to be in a good place as we've taken a thoughtful approach in pacing our shipments in line with current demand. Our dealer inventory levels are healthy across our major categories. With some help from Mother Nature this last season, we made significant progress on snowmobile inventory and ended the quarter down over 50% from a year ago. We exit the snowmobile season with dealer inventory healthier than it's been in many years. So whether you look at our inventory on a days sales basis, which remains near 100 days or on a current to noncurrent mix, which skews positively to more current our inventory at dealers is in a good spot. We remain committed to the alignment of build, ship and retail as we partner with dealers to provide them with the right mix and quantity of vehicles to succeed. I'm now going to turn it over to Bob to provide you with more details on the financials. Robert Mack: Thanks, Mike. We delivered a strong first quarter with results that exceeded our expectations coming into the year. Before turning to the quarter, I want to note that we are now reporting our business in 3 new segments: Polaris Powersports, Marine and Aixam & Goupil. Going forward, we will discuss our performance through this new segment structure, which I'll touch on in more detail in a moment. . Sales were up 8% or approximately 14% organically when excluding Indian Motorcycle. Growth was led by strong hour sports performance in ORV, commercial and seasonal, and we also benefited from positive net price reflecting higher year-over-year selling prices and lower promotional activity. Internationally, our Powersports segment was up 7%, which includes ORV and seasonal products sold outside of North America. Adjusted EBITDA margin improved by approximately 280 basis points, primarily due to favorable mix in all segments. Net price also flowed through to benefit margins, and we continue to see gains from operational efficiencies. These improvements were partially offset by higher operating expenses, largely related to the timing of certain costs moving earlier in the year than originally planned. Tariffs also posed a 240 basis point headwind in the quarter but were in line with expectations. Keep in mind that the significant new tariffs were first imposed in April 2025. Altogether, this strong operating performance drove adjusted EPS of $0.13 above what we expected back in January. Now turning to our new segment structure, which we introduced during the quarter. The reportable segments are Polaris Powersports, Marine and Aixam & Goupil. We designed the structure around our customers who they are, what they buy and where they buy it, which better aligns the organization with our dealer channels and how we go to market. Polaris Powersports is almost 90% of total sales and includes all products from the former Off-road segment with the addition of Slingshot. Marine remains the same and carved out of the former On Road segment is Aixam & Goupil which are 2 small vehicle businesses in Europe. Aixam manufacturers, smaller license free passenger cars, 1 would typically see in city centers and rural towns in Europe, while Goupil focuses on light-duty electric utility vehicles, sold to municipalities and transportation companies. Both businesses are based in France. Now moving to our segments. Sales in Polaris Powersports were up 14% year-over-year Ranger and commercial shipments far outpaced last year's levels as utility demand continues to grow across a variety of categories. PG&A was up 14%, driven by parts and continued oil sales which are a strong indicator of an active engaged rider base. Gross margin in the quarter was up 422 basis points, overcoming the anticipated significant headwind from tariffs due to strong mix, positive net price and operational efficiencies. Sales in Marine were driven by a richer mix of pontoons given the recent launch of the Bennington QX and Godfrey Sanpan lineups which have generated significant excitement with dealers and customers. Both of these are premium lines for each brand. There was also a modest benefit from net pricing. Gross margin improved 64 basis points year-over-year again, driven by the mix benefit in the quarter, which we expect to continue throughout the selling season as well as higher net price. Aixam & Goupil sales were up 9%, driven by higher shipments for Goupil and higher year-over-year pricing with Anexo. Gross margin improved 294 basis points driven by higher mix within this segment. With our renewed focus on our core business lines following the completion of the separation of Indian, our top capital priority in 2026 remains investing in higher-margin profitable growth while maintaining a disciplined and balanced approach to returns and leverage. Second, we continue our long-standing commitment to returning capital to shareholders through dividends, marking our 31st consecutive year of dividend growth. Third, we remain focused on debt reduction following more than $530 million in debt reduction during 2025, which supports our ongoing improvement in our leverage profile. From a working capital perspective, our lean initiatives are driving meaningful efficiency gains. We continue to target a negative working capital position supported by better alignment across demand planning, procurement and production, continued supply chain localization and ongoing optimization of payables. First quarter free cash flow is typically our weakest quarter of cash generation in the year due to seasonal payments while a net outflow, our first quarter cash flow was better than we had planned. Overall, we are very confident in our financial position. Our capital deployment is disciplined. Our cash generation remains strong we continue to strengthen balance sheet flexibility. We are reaffirming the guidance we updated on March 3 when we raised our outlook following the earlier-than-expected closure of the Indian motorcycle separation. While we remain pleased with the operational performance of the business, which drove much of the first quarter over performance. Importantly, we believe this performance is grounded in operational discipline execution and factors that are within our control. We continue to manage the business, anticipating a relatively flat retail environment with build, ship and retail closely aligned. This approach helps maintain healthy dealer inventory and reduces the need for excess promotional activity, which benefited results in the first quarter. Given our first quarter performance, strong underlying fundamentals in the positive retail trends in April. The business demonstrated the capability to support a higher outlook. However, given the current level of uncertainty, we have decided to take a prudent and disciplined approach to the outlook given factors outside of our control, including uncertainty around the consumer driven by higher energy prices and ongoing geopolitical conflicts as well as the evolving tariff environment. This year, we are expecting our financial results to return to historic seasonal patterns with the second and third quarters being our highest revenue and EPS quarters. Specifically, for the second quarter, we expect sales to grow year-over-year in the range of 5% to 7%, driven by utility and our plan to ship in line with retail. Adjusted EPS is expected to be between $0.70 and $0.80. While this assumes no change in current tariff policy, we expect a negative year-over-year impact from tariffs to be between $30 million and $35 million. We still expect the Indian motorcycle separation to be accretive by approximately $50 million to adjusted EBITDA, which is more weighted to the back half of the year and into January 2027 due to motorcycle sales seasonality. Looking ahead, we remain on track with our tariff mitigation strategy to reduce China source material cost of goods sold from 14% last year to below 5% by the end of 2027. Based on current policy, we continue to expect total tariff costs of approximately $215 million this year, excluding potential refunds related to EPA tariffs paid in 2025 and into 2026. As a reminder, we paid approximately $125 million in IEP tariffs, and we intend to seek refunds for the full amount. The work we've done to realign the portfolio and implement lean across our plants is already driving operational gains and we expect that momentum to continue. Combined with the strength of our product lineup, this positions Polaris in a renewed way, 1 that emphasizes dealer partnership, rider driven innovation, profitability and returns. We are more aligned, more focused and more disciplined than we have been in many years, and we are confident in the path ahead. With that, I'll turn the call back over to Mike. Go ahead, Mike. Michael Speetzen: Thanks, Bob. Let me spend a moment on our clear vision to win because this really anchors how we're operating Polaris today. At the highest level, our ambition is unchanged to be the global leader in powersports that starts with a solid foundation built in our brands, our people and our culture and a disciplined focus on execution. There are a lot of distractions in the world right now, which makes it even more important to stay focused on what we can control and execute relentlessly against those priorities. Operationally, we're seeing steady improvement inside our manufacturing facilities. The actions we've taken over the past several years around lean are increasingly showing up in cost performance, quality and delivery. And as volumes increase, we expect these efforts to continue to pay dividends. On innovation, I'd put our product portfolio up against any of our competitors. We continue to invest in new products that expand our reach, strengthen our premium position and drive differentiation across our portfolio. From a working capital standpoint, we remain focused on driving efficiencies and executing the fundamentals to improve cash generation. We generated over $600 million of free cash flow last year and continuing to deliver strong cash generation remains a top priority. Dealer health is also critical. We continue to partner closely with our dealers to ensure they have the right product mix and the right inventory levels to meet customer demand. This balanced approach remains a clear strategic advantage at the dealership level. All of this supports a very clear vision to win. We are here to deliver for our customers by providing the best innovation, quality and experience in the industry. In leaning into our innovation, we are strengthening and advancing our #1 market share position in powersports. And finally, we believe we're positioning Polaris for long-term financial growth with a model built on consistent cash generation, attractive returns and sustained value creation. The consistency of this strategy and the discipline of our execution gives us confidence in how we're navigating today's environment and building Polaris for the future. Our priorities for 2026 are unchanged from what I outlined 3 months ago. We continue to expect a relatively flat retail environment, which is consistent with what we've seen so far this year. Utility remains the stronger growth component of the portfolio relative to recreation. We will continue to operate our facilities so that production shipments in retail remain aligned. And if demand shifts based on dealer feedback or data, we are prepared to flex production accordingly. We closed the Indian motorcycle separation earlier than expected and thus far, the separation has gone smoothly. Our lean journey continues with additional lean lines coming online later this year. In total, we've achieved over $240 million in structural savings through this journey. We remain committed to executing our tariff mitigation strategy. we expect tariff policies to continue to change, including potential changes from the review of the USMCA trade agreement. While the ultimate outcome remains uncertain, our goal is clear. We remain committed to the U.S. with the largest powersports manufacturing footprint in the industry, supporting U.S. workers and suppliers. We are also well underway with our goal to reduce China source components to under 5% of material cost of goods sold by the end of 2027. We have a dedicated team in place. We're on track, and I'm confident we can achieve this goal. So to wrap up, we're encouraged by the way the year has started. Our teams are executing incredibly well in a dynamic environment. Our product portfolio is strong, our dealers are healthy and our strategy is working. While there are factors outside of our control, we remain sharply focused on what we can control. We believe the actions we've taken to refocus Polaris are creating a strong foundation for the future by advancing our focus and leadership in powersports, localizing and strengthening our operating footprint and positioning Polaris to deliver higher earnings power and stronger returns over time. We believe this positions Polaris well to navigate the near term and to create long-term shareholder value for stakeholders. We appreciate your continued support. With that, I'll turn it over to Gary to open the line for questions. Operator: [Operator Instructions] Our first question today is from Craig Kennison with Baird. Craig Kennison: First, I just want to say to Peggy, it's been a pleasure working with you, and you will certainly be missed. But my tariff question is fairly multifaceted. So if you'll give me a second to ask it. Could you help us unpack your tariff exposure in guidance after the IEEPA ruling and including recent Section 232 changes. And to that end, I think regarding IEEPA, if I'm right, you have a $30 million tailwind in 2026 relative to 2025, and that is not in guidance. And then regarding Section 232 changes, could you help us what is expected as an impact in 2026 and break that down into the growth and the mitigated impact. Thanks for indulging the long question. Michael Speetzen: Well, I mean, it certainly is a complex topic, Craig. So let me I'm going to kind of take you through a few different aspects and then provide you a little bit more color around 232 because we've clearly gotten a lot of questions. As Bob mentioned, our tariff impact has stayed consistent with what we talked about at around $215 million. The math works this way. With the Supreme Court ruling that pulled the IEEPA tariffs off, but then the administration immediately put the 122 tariff in place at 10%, not the 15% that they talked about. Those changes yielded about a $40 million benefit to us. Unfortunately, when the 232 changes were made, that effectively offset that. So to dispel some of the commentary that's been out there, we are not unaffected by 232. We are definitely affected by it. So number one. Number two, the rules around 232 are pretty complex, and I'm not going to try and go through and pull all that apart. But safe to say, we do have a different product portfolio as well as a very different manufacturing footprint. We're not manufacturing everything down in Mexico. And obviously, as you know, we have manufacturing in Minnesota as well as in Alabama. And then the third component I'd say, around 232 is we are a significant consumer of U.S. steel. And as you know, from the regulations, there are different tariff rates based on U.S. versus non-U.S. steel components. So in a nutshell, that's essentially where we're at. There's been some questions around, hey, how does this start to annualize into Obviously, tough to predict what's going to happen with tariff policy. But assuming the tariff regime that's in place at this moment, and assuming the same volumes that we would have, we would not expect tariffs to be greater than what we're experiencing this year. And in fact, we're working hard, as I indicated in my prepared remarks, to pull down the amount of China source content that's coming into the U.S. that we're paying tariffs on with the goal of getting below the 5% of material cost of goods sold next year. And obviously, there's some timing differences with how things flow out of inventory. But we think, if anything, that gives us the opportunity to get in there and further mitigate that. The last thing I would say is that, that excludes any funds from the refund. As Bob indicated, it's about $125 million. We are in the process of either going through or understanding the refund process that's unfolding and we'll be working hard to get that money that's rightfully ours to get back. Craig Kennison: That's really helpful, Mike. So are you saying that the incremental impact of the Section 232 changes for 2026 should be around $40 million, which offsets the benefit you had from other issues. . Robert Mack: Correct. Yes. And as you stated in your question, Craig, we originally thought it was $30 million back in March as we've done the math, that's about 40%, and we hadn't changed our guidance to reflect that. and we're also not changing our guidance to reflect the 232 since they kind of net out. Michael Speetzen: And I think -- and I'm sure the question is going to come up around guidance, but I do think that's a prime example. I mean when we were at a conference in March. The question was, hey, with IEEPA coming off, there's an inherent benefit. Why are you not taking guidance up and it was for this very reason. I mean, we knew that the 232, we also know that 301 is under review, there's a common period coming up in May. USMCA is under review, that's going to start in July. There's been a comment period leading up to that. I mean there's just a tremendous amount of uncertainty around this. And so we're obviously being conservative in the way we're approaching things, but we think that's prudent given this environment. Robert Mack: The other thing, there's been a lot of discussion about inventory. And so let me talk a little bit about how these different tariffs work. So the when the EPA tariffs went away and the 122 came in, right, there's about a quarter lag on when we see that impact because we're bringing parts in about a quarter ahead of production. And so -- by the time it gets into a product and rolls through cost of goods sold, there's at least a quarter lag or more, whereas the 232s were announced, I think, on a Friday and went in effect effectively on Monday. . And there's been some things written and talked about that, hey, we've got 100 days of dealer inventory. And so we're not seeing an impact for 100 days. That's not how it works. The 100 days of dealer inventory has already been recognized into revenue. We've sold that to the dealers, and it's being replenished every day. And certainly, like a lot of companies, we paused shipments for a short period of time as we dug in to understand the new rules and adjust our systems to be able to process all that but we started shipping relatively quickly after they were announced. So we're feeling the 232 impact almost immediately. So it's not a 100 day deferral because of the dealer inventory on 232. Operator: The next question is from James Hardiman with Citi. James Hardiman: So there was a lot to digest on the tariff front. If that weren't complicated enough, and it's probably too early to have a great feel for this. But maybe initial thoughts on the competitive environment that, that now creates for 2026 and I don't know, 2027 is probably too far out to really get your arms around. But I think as we sit here today, you guys should now be benefiting on the cost side relative to, I think, your competitor up north, right, the Canadian competitor and then presumably your major Chinese competitor who also imports from Mexico think the Japanese are generally in a good place from this, but maybe walk us through how you're thinking about that if that impacts sort of your ability to price or your ability to gain share? Any initial thoughts on that front would be great. Michael Speetzen: Yes. Thanks, James. And yes, there's a lot there because there's a lot there. And this organization, unfortunately, has had to spend a tremendous amount of time on it, and I'm proud of the work they've done and the team we've got on top of it. Look, I don't want to get into commentary about our competitors and what they're dealing with from a cost perspective. What I can tell you, though, is that there's not a tremendous amount of price elasticity in this market. . I'll remind you that there was significant price taken coming out of COVID when the supply chains and the massive amount of inflation that this country went through. And so the pricing had already been somewhat elevated through that process. And the consumer backdrop isn't incredibly strong the Utility segment, which obviously makes up the majority of our ORV business has remained strong. But that doesn't mean there's an infinite level of price elasticity there. The REC side, whether that be the Marine or the razor portion of our business is incredibly sensitive to everything that's going on. As I mentioned in my prepared remarks, when we saw oil prices spike and that combined with what's going on overseas, we saw those customers pull back Utility remained strong during that time period, which was encouraging. But I just don't think there's a tremendous amount of elasticity in the marketplace. I mean, we'll obviously continue to look for that. And quite frankly, our focus from a competitive standpoint is exactly what I went through in my script. It's the products. We have the best innovation in the market. We're moving fast. We're regaining our foothold. We've gained share for 4 quarters in a row in ORV and that's really going to be the focus that we have inside the organization and continue to be the push. I'm really excited about products that we're going to be launching this year and then the visibility we have out for the next several years. And regardless of the cost positioning, I think we're going to be in an incredible spot to continue to win. Robert Mack: Yes. One thing I would say, James, is everybody needs to keep in mind with tariffs. It's not that we're not impacted. I mean we've been dealing with this since 2018. And as Mike stated, when he started the answer to that question, we have a team that meets every day is highly focused on this. We've been executing our plans to mitigate tariffs. And so as we came into the 232 announcements, we're well versed in what our steel and aluminum content is by part and by product. And so we were able to get on top of that fairly quickly. It is incredibly complicated, and it's tough to figure out where it's going to go. But I don't think it's going to dramatically change the overall competitive dynamic given all the things Mike said about elasticity in the market. James Hardiman: Got it. That's really helpful. And then to the guidance, by my math, you'd be -- once we sort of factor in the earlier Indian close, you beat the first quarter by almost $0.50, obviously not flowing it through to the full year. And in the prepared remarks, you called out, I think, 2 items. One, just uncertainty around the consumer and two, the evolving tariff environment. I guess, as I sit here and listen to your other comments about how things sort of slowed down and then reaccelerated in April. That seems like maybe we're coming out of the other end in a better place. . And then the tariff conversation, I guess maybe let me ask the question this way. Like if we don't see some sort of unforeseen downturn in the consumer from here, right, after April has gotten a little bit better. And if we don't see some incremental new tariffs beyond 232 that we're not even really thinking about at this point, does that scenario equate to upside relative to what you've laid out today? Or am I not thinking about that the right way? Michael Speetzen: No, I think you are. I mean, I think Bob and I tried to be pretty blunt in our comments that we were playing this conservative, prudent, whatever the words are that you want to choose. But I think, look, if the consumer backdrop continues playing out like it has. And if tariff policy, fingers crossed were to just stay where it is today. We would have certainly been looking at taking guidance up. And I think what I'd reinforce is the business is performing better than it ever has. When you step back and you think about the fact that we've got dealer inventory aligned in an environment where things are fairly static, we actually grew revenue on an organic basis, 14% and I talked about our gross profit coming in at 20.5%. That's up year-over-year despite the tariff headwind. And if you pulled tariffs out, which I wish we could, we'd be at 23%. I mean that is a significant improvement, and I think reflective of the improvements we've made in our operational efficiencies, warranty, utilization of the factories gaining share for 4 quarters in a row and ORV cash flow performance despite the headwinds of the tariffs, strong safety performance in the business alignment with our dealers. We've rightsized this portfolio to really get focused on the most profitable. I mean, James, we have this business in a really good spot. And I think the first quarter results really reflected that I would really like to see us get past the uncertainty on the tariffs because it's not just uncertainty for us to predict financially, but it is uncertainty from a consumer standpoint. I mean inflation is a big deal right now. And certainly, the conflict overseas is generating inflation from an energy perspective. But even outside of that, the consumer hasn't necessarily demonstrated significant strength. And so I think getting some certainty around tariff policy would certainly alleviate that pressure. And I think start to put the consumer in a better spot in terms of future interest rate expectations and things like that. So I think the message for everyone is this business is performing better than it has in years. We're excited about that. And with some stability, we would certainly see this generating even more upside than we saw in the first quarter. Robert Mack: Yes. I mean if you look at the incrementals in the first quarter, with tariffs factored in, it was above 40% if you accounted for the tariff headwind has been over $70 million. So just really, really solid performance. And obviously, we benefited a really good strong mix in the quarter. We continue to see strength at the high end and the low end of the market with the middle kind of being the weakest part. But that high-end mix served us well in the quarter. And obviously, we had some carryover price from price increases, normal price increases we took out in last year. But -- so the company is performing really, really well. To Mike's point, this is really just not having great visibility into what happens with the consumer given the ongoing conflicts around the world. And then what's going to happen with tariffs. We know the 122s have to -- they have to expire in July. I don't know that there's a way to extend them. And what we don't know is what, if anything, will come in after that. So that's the caution. James Hardiman: And Peggy, you will be missed. Good luck with the next chapter. . Operator: Next question is from Joe Altobello with Raymond James. . Joseph Altobello: Just want to follow up on the tariff commentary, make sure I understood you right. So if we assume nothing changes, and I know that's a big assumption at this point. It sounds like at worst, tariffs are neutral and could potentially be a tailwind for '27. Michael Speetzen: Yes. The caveat to that is that we are still working the mitigation efforts that we talked about. And so flowing through the effect of getting our China-based spin down sub-5%. And how that stratifies into '27 obviously, is an unknown, but should be a net benefit. We continue the focus on the lobbying efforts that we've been pursuing to evaluate some sort of relief across the powersports industry. I think that's probably a more difficult task in this current environment with everything that's going on, but we have continued to press forward and we continue to have support from key constituents in places like Minnesota and Alabama. And then obviously, there's a lot of caveats to that, right? Aside from tariff policy remaining consistent. It's also volumes and things like that. But I think from an annualization of the impacts and the fact that the IEEPA net of [ 122 ] favorability was almost essentially perfectly offset by the 232 impact coming in, that's effectively where we would be. Robert Mack: Yes. I think if you're thinking about next year, the $215 million we guided to this year, plus or minus a little, is probably a good place to start. To Mike's point, we'll have where we land on mitigations, which involves moving a lot of parts and a lot of timing that we won't know yet that continue to evolve through the year. But the timing -- while the timing was different with the EPA stuff happening in February and the 232 stuff happening in April because of the lag they sort of balance each other out, if you think about them on a full year run rate basis. So we think that's where it will be, depending on whatever the administration decides to do with new tariffs and then obviously, all the things Mike talked about with volume and other things that we don't have visibility into for '27 yet. Joseph Altobello: Got it. Very helpful. And just a follow-up on that. I think, Bob, you mentioned earlier there was some spending that got pulled forward into the first quarter. Could you quantify that for us? And secondly, would you expect all of that to reverse in the second quarter? Or is it spread out throughout the year? Robert Mack: So it was kind of split evenly between profit share or incentive comp. And that's purely because the way we had originally had a forecast to lose money in Q1. And now we're obviously had the earnings we have. So we had to recognize more profit share in the quarter. And then the other stuff is really kind of just a myriad of corporate things that got pulled into the quarter. So all of it will turn around, and I think it will turn around relatively evenly through the course of the year. Joseph Altobello: And how much was it in the quarter, sorry, roughly? . Robert Mack: I'm sorry, it was about $30 million in the quarter. And I think we're still on our guidance for OpEx for the year. So we're not seeing anything that says we're going to spend over what we guided. It's just timing in the quarter. And like I said, it will turn around over the next 3, not all in Q2. . Operator: The next question is from Noah Zatzkin with KeyBanc. Noah Zatzkin: I guess maybe just 1 on the ORV gross margin coming in better than expected. Obviously, I think price mix and ops contributed there. Is there any way to quantify or frame the magnitude of the ops improvement that played a part there -- and then just how should we be thinking about the potential margin benefit of ops improvement looking through this year and then as you move into next year? Robert Mack: Yes. So if you think about it for the quarter, I would say the biggest driver was volume and mix. We said we had good mix. Next would be net price and then after that would be the plant performance. I think that the -- as you think about the year, the price will continue. We did our normal price increase. promo, we don't expect radical changes in promo. There'll be some seasonality of promo as we head into peak selling season. Obviously, Q1 is typically a light promo quarter plant performance, I think, will continue really kind of on pace. And so I think that will be an ongoing benefit. The margin profile in Q1 was really, really good. and mix played a big piece of that. We had strong mix into sort of high-end utility vehicles. If the consumer demand stays, that mix will continue to look good. if we see a slowdown, obviously, that could change. So a little bit tough to predict right now. But as long as we don't see a drop off in volume, the factory performance that we saw in Q1 should continue really for the rest of the year. Michael Speetzen: Yes. No, it's something to keep in mind, we've been undershipping retail for the last couple of years. And now that we've got things more in line the volume recovery going through the factories, a matter of factory utilization is now getting up closer to 70%, still not at the optimal level, but much better than where it was last year. So when you couple that with the things that Bob talked about with mix, you couple that with the work we've done around lean. I mean, it puts us in a really good spot. And that's why when I talk about the future value creation of the company. I mean, we're still in the early days. We've only effectively got on lean line at each of our factories, and we're in the process of expanding that this year. And this is going to be a multiyear journey, but we're looking at you sprinkle in a little bit more volume and the amount of efficiency and volume leverage. As Bob mentioned earlier to 1 of the other questions, it's exciting to see that come through and encouraging in terms of the amount of earnings leverage that we can get moving forward. Robert Mack: The other thing to keep in mind, which doesn't jump out just as you look at the puts and takes in the guidance, and it's staying where it is, is commodities, we went into the year thinking commodities were going to be about a $20 million headwind. We think it will be double that, maybe a little more now. And primarily driven by steel and diesel and diesel really is a proxy for both diesel in the transportation side and resins in the production side. And we're forecasting to overcome that with our operational efficiencies inside of our guidance but that will be a little bit of an offset because that's a headwind, I think, across most industries right now. . Noah Zatzkin: And maybe just 1 kind of housekeeping question. I think there was a $22.5 million adjustment related to distressed supplier. Just kind of any color there would be helpful. Robert Mack: Yes. So we had one of our suppliers was part of the first brands bankruptcy. And so we made payments during the course of the evolution of the bankruptcy to help get inventory and keep inventory flowing. And then we partnered with several other customers of the supplier to help facilitate that company being sold and approved by the bankruptcy court to be sold to another industry participant. And so that $22 million is us taking through period costs, the support payments we made to facilitate that transition. It would have been a tough supplier to transition, and we would have lost a lot of margin if we had lost supply. So -- and I think that was true for sort of all of the participants in the industry. And so we all had to step up to sort of rescue the supplier and get it out of the first brands bankruptcy, which we were able to do and it's performing well now, and I think we've moved on from it. So just a 1 period -- 1 quarter impact from that. Michael Speetzen: No, I would say it just demonstrates the fact that we are the leader in powersports. We saw this supplier struggling well before that bankruptcy. We had been working with them closely. And so we were able to effectively take charge of the process and guide it to another supplier so that we could ensure continuity, not just for us, but many others in the industry. And again, I would just point to this team. and the culture that we have, the focus around execution and relentlessly pursuing everything we can to ensure we execute and deliver for the customer. And I think this is a prime example of the team doing that. I'm really proud of what they accomplished. Operator: The next question is from David MacGregor with Longbow. David S. MacGregor: You mentioned the RANGER 500 performing well. I just wanted to get your thoughts, Mike, on how you're thinking about the opportunity in developing product line extensions and Utility and other categories just down into lower price points. Michael Speetzen: Yes. I mean, look, it's something that we've actually been focused on for quite a while. Obviously, Indian is not part of the portfolio, but it was something that we focused on there in terms of trying to get a sub-$10,000 entry point for the Scout lineup. It's something we're focused on, not just in the RANGER product category. I would say it's a gap that we have within the ATV lineup. And the reality is we're not going to overpivot down into the value segment. But as the industry evolved over the last decade, 1.5 decades. So has the price point. The vehicles become larger, more capable, more sophisticated, more options. And I think we and many others kind of rush to the high end of the category, and we ended up leaving a gap at the lower end. And when we looked at the price points, we look at the size of the consumer group and then we also studied entry points for consumers, whether that's coming in at a value RANGER or coming in on our ATV lineup, we know that a significant portion of those customers end up trading up as well as expanding. So for example, someone coming into ATVs, eventually a good portion of those folks are going to go into the side-by-side category. And the nice part about that is they're not just buying side-by-side, so they keep buying ATVs. And so we've really taken a very customer-centric view. I wouldn't sit here and tell you that we're going to overexpand into the value segment. We just think it's an important price point to have. I think even what you saw us do with the RANGER 1000 cab and the RANGER XP cab providing lower price points that give people features that they're looking for, but obviously don't dilute what we have at the high end where you get far more features and higher-performing vehicles, but allowing people to experience some of the things that they want to at a price point that's a little bit more attractive than where they'd have to go to today. And so I think it's an important aspect of the business and making sure that we have a broad and diverse portfolio. And then obviously, that complements everything we do to continue to look for extensions outside of the core portfolio, like we did with Polaris XPEDITION where we have significant market share and really don't have any competition in that adventure space and an area where we can continue to find derivative vehicles and expand. David S. MacGregor: Great. Great color. Just as a follow-up. I guess I wanted to focus on the REC segment. And if you think about REC, as you look at the various moving parts in that category, obviously, there's higher rates and weak consumer confidence and those would certainly be cyclical factors. But what are you seeing that you might characterize as structural change in REC that would impact that business going forward? Michael Speetzen: Yes. I don't -- I think the only structural change is there were a few different dynamics that happened. I think you had a little bit of a pull forward or acceleration during COVID. People went out and bought a lot of stuff. And then you went through a brief period probably 1 year, 1.5 years, where people stopped using vehicles. And I think a lot of that was as folks are being called back to the office. There was a rebalancing of what they were doing in their off time. But for the last couple of years, we've seen strength in vehicle usage. We've talked about it a number of times on the call. We track everything from the number of miles that come in, the repair activity, spare parts volume, tire consumption, oil consumption, everything that we look at on a monthly basis continues to point to usage of the vehicle, where we have the ability to track ridership through RIDE COMMAND, we can see that the miles written has increased. So we know people are using the vehicle. I think what's happened is we've had a bit of a delay in the replenishment repurchase cycle. What I will tell you is that when we see those brief moments of stability, either encouraging interest rate moves or inflation starting to tick down we see the REC customers starting to come back in. We're not seeing huge movement, but we're seeing not negative from a retail standpoint. And so from my standpoint, I think its folks are waiting for the moment to come back in. We know that they want to. There's been so much innovation since they last purchased a vehicle, and we know they're dealing with extended repurchase intervals. And when you couple that with the fact that they're using the vehicles, they're going to come back in. So I don't know that we see a permanent structural. I think we've just got a lot that happened over the last several years. And then right now, I think these consumers, because it's a want vehicle, not a need, they're waiting for some stability in the backdrop, whether that's macro, geopolitical inflation, energy costs, you name it. I think a little bit of stability will go a long way to at least stabilize that market and get it back to a little bit of growth. Operator: The next question is from Tristan Thomas-Martin with BMO. Tristan Thomas-Martin: Just 1 quick tariff qualification question. The $40 million headwind from the [ Jansen ] 232, is that a gross figure or a net figure? Michael Speetzen: It's net figure. Robert Mack: Yes. I mean we don't have any mitigations -- we're not -- this is they've been in place for 2 weeks. So there's not net of mitigation. Michael Speetzen: Yes. And there's -- I mean, we're not going to get into the detail by product and all that kind of stuff. But I mean, when I make comments like we were a heavy consumer of U.S. steel, I think you can interpret that, that means we're probably at the lower tariff rate. But there really isn't a whole lot you can do. I mean, yes, could we shift manufacturing? I'd tell you, we are not in a stable enough environment from a policy decision that I'm going to go do anything significant, pulling something out of Mexico and putting it in the U.S. and then subject it to a different set of tariffs. . And we know the 301 regime is under review. We know USMCA is under review. So at this point, we're just focused on broader mitigation efforts, the things I articulated earlier, whether that's the China spend content reduction as well as the lobbying efforts that are underway. And aside from that, we're going to go focus on all the other elements that we can drive efficiencies inside of the company. And I think you saw when we focus what came through in the first quarter. Robert Mack: Yes. Just to clarify, Tristan, I couldn't tell if you said 30% or 40%, it's 40% effectively offset by 40% from the IEEPA 122 switch. And then the only other thing I would point out, I would never say that we would benefit from the difficult market in recreational products, but as you folks know, as Utility has done well, our primary plan for Utility is -- and we also make a much of ATVs up in ROS. So that's that the mix has certainly benefited us more towards our U.S. footprint. . Tristan Thomas-Martin: Okay. That makes sense. And then just reason a little more. Just on -- given the new segments, anything you wanted to flag in kind of a margin standpoint, whether it's seasonality or incrementals or anything else we should be thinking about? Robert Mack: Yes. So I think as we pointed out, we are returning to normal seasonality here in -- we think in 2026. So you'll see obviously, Q1, typically our smallest revenue quarter to Q2, Q3 will be larger. Q4, you should think that it's going to look fairly similar to Q1. again, mix is going to play a big part in this. mix was really strong in Q1. We'll just have to see what retail looks like and how that drives mix in Q2 and Q3. But otherwise, it's just be normal seasonality. Michael Speetzen: And I think the only other thing would be just as we get through the second quarter, then your tariff year-over-year starts to become far less noise because it ramped it was very small in Q1 built in Q2 and then we were kind of at run rate Q3, Q4. So... Robert Mack: Yes, we'll still have tariff -- pretty good tariff headwinds in Q2 relative to 2025, the tariffs didn't -- they started in April, but by the time you sort of got them in and they went through inventory, they didn't really hit until Q3, I think we only had about $10 million of tariff in Q2 last year. So it will be more similar to Q1 this year. . Operator: Next question is from Gerrick Johnson with Seaport. Gerrick Johnson: Just wanted to talk about TSAs real quick. I know they're neutral to your earnings but how did they affect the various buckets in the first quarter? Robert Mack: Yes. So it is complicated, but you basically had about $25 million of that flowed through revenue, and that's us really selling engines and some limited motorcycles that we finished up in Q1 to India. That came at a negative that was recovered in other income. And then there's about another $5 million in OpEx, which has also recovered in other income. So think about it as $25 million in revenue at a little bit of negative GP, $5 million to $6 million in OpEx, that plus a little bit of margin all recovered in other income. So not really significant, but a little bit slightly a bit better than breakeven, but just a geography issue. . Gerrick Johnson: Okay. Great. That's helpful. And finally for me, the impact of youth ORV in the quarter, honestly found it a little odd since youth is mainly sold in the fourth quarter. So how did that impact your ORV retail inventories? What would ORV have been without youth or with youth? Robert Mack: It wasn't -- the impact wasn't dramatic. I mean it's -- the issue with youth is we continue -- we had to move it out of China. We moved into Mexico. We're just starting to ship the RANGER 150. We haven't been shipping those. It wouldn't have changed retail a whole lot in terms of actual percentages, and it certainly would have impacted margins. . Operator: This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to LGI Homes, Inc. First Quarter 2026 Conference Call. Today’s call is being recorded and a replay will be available on the company’s website at www.lgihomes.com. After management’s prepared comments, there will be a question-and-answer opportunity. At this time, I will turn the call over to Joshua D. Fattor, Executive Vice President of Investor Relations and Capital Markets. Please go ahead. Joshua D. Fattor: I will remind listeners that this call contains forward-looking statements, including management’s views on the company’s business strategy, outlook, plans, objectives, and guidance for future periods. Such statements reflect management’s current expectations and involve assumptions and estimates that are subject to risks and uncertainties that could cause those expectations to be incorrect. You should review our filings with the SEC for a discussion of the risks, uncertainties, and other factors that could cause actual results to differ from those presented today. All forward-looking statements must be considered in light of those related risks, and you should not place undue reliance on such statements, which reflect management’s current viewpoints and are not guarantees of future performance. On this call, we will discuss non-GAAP financial measures that are not intended to be considered in isolation or as substitutes for financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be found in the press release we issued this morning and in our Quarterly Report on Form 10-Q for the period ended 03/31/2026, which will be filed with the SEC today. This filing will be accessible on LGI Homes, Inc. and the SEC’s website. I am joined today by Eric Thomas Lipar, LGI Homes, Inc.’s chief executive officer and chairman of the board, and Charles Michael Merdian, chief financial officer and treasurer. I will now turn the call over to Eric. Eric Thomas Lipar: Thanks, Josh. Good afternoon. Good afternoon, and welcome to our earnings call. The first quarter played out largely as we expected, reflecting disciplined execution across the organization and steady demand for our homes. As the quarter progressed, sales activity improved across most of our markets, enabling continued backlog growth and providing a solid foundation as we have transitioned into the spring selling season. During the quarter, we delivered a total of 916 homes. Of this total, 881 homes contributed directly to our revenue of $320 million. The remaining 35 closings were currently or previously leased homes, the gains from which were reflected in other income. Notably, our average selling price increased nearly 3% to approximately $363,000, demonstrating our ability to preserve pricing while continuing to support affordability through targeted price discounts and financing strategies. We ended the quarter with 142 active communities and averaged 2.2 closings per community per month. This was consistent with the pace achieved last year and in line with our expectations for the period. During the first quarter, our top five markets on a closings-per-community basis were Charlotte with 4.6, Las Vegas with 3.2, Phoenix with 2.8, and Northern California and Seattle each with 2.7 closings per community per month. Our gross margin before inventory-related charges of 20.2% and adjusted gross margin of 23.4% were both modestly above the high end of our full-year outlook, highlighting the benefits of self-development, the durability of our operating model, and the strategic choices we continue to make around pricing incentives and inventory management. Sales activity during the quarter was positive. Net orders were 1,221 homes and our cancellation rate was 45.6% driven by buyers who were ultimately unable to qualify for financing. Our backlog at quarter end was 1,699 homes, which represents a 63% increase year over year, a 22% increase sequentially, and marks the highest number of units in backlog since 2022. Before turning the call over to Charles, I want to emphasize our confidence in the long-term fundamentals of the housing market. The persistent undersupply of attainable housing, coupled with favorable demographic trends, continues to support a long runway of demand for homeownership. LGI Homes, Inc.’s 100% spec, entry-level focused business model centered on providing an affordable alternative to renting is purpose-built for this backdrop. Underpinning that model is a strong, low-cost land pipeline which is nearly 100% on balance sheet, providing investors full transparency into our capital structure, driving margin durability by capturing the developer’s economic value, and minimizing reliance on external partners whose priorities may not align with the long-term value creation we are focused on. These advantages underpin our confidence as we focus on execution today while investing to drive durable, long-term growth for many years to come. With that, I will invite Charles to provide additional details on our financial results. Charles Michael Merdian: Thank you, Eric, and good afternoon. Revenue in the first quarter was $319.7 million based on 881 homes closed at an average sales price of $362,924, up 2.9% year over year, primarily driven by geographic mix and a lower volume of wholesale closings. The 9% year-over-year decrease in revenue was driven by an 11.5% decline in closings, partially offset by higher ASP. Of our total closings, 111 were through our wholesale channel, representing 12.6% of total closings, compared to 179, or 18%, during the same period last year. Our first quarter gross margin was 18.7%, in line with the guidance provided on our last call. Gross margin, excluding impairment-related charges, was 20.2%, compared to 21% in the same period last year. The year-over-year decline was primarily attributable to financing incentives and discounts on older inventory, partially offset by the structural margin benefit of our self-developed lot positions and our disciplined approach to pricing. Adjusted gross margin was 23.4%, up 110 basis points sequentially, in line with our result last year, and above the guidance we provided on our last call. Adjusted gross margin excluded $10 million of capitalized interest and $389,000 related to purchase accounting. Combined selling, general, and administrative expenses totaled $60.5 million, or 18.9% of revenue, an improvement of 200 basis points year over year. Selling expenses were $32.7 million, or 10.2% of revenue, compared to 12% in the same period last year. The decrease was primarily due to overall cost efficiencies in advertising spend. General and administrative expenses were $27.9 million, or 8.7% of revenue, compared to 8.9% in the same period last year. Other income was $4.9 million, driven primarily by the sale of 35 currently or previously leased homes and gains from the sale of finished lots and commercial land. Adjusted EBITDA increased 30% to $24.4 million, representing 7.6% of revenue, compared to 5.3% in the first quarter of last year. Pretax net income was $4.3 million, or 1.4% of revenue. The effective tax rate in the first quarter was 50%, above our outlook, and reflects the timing impact of share-based compensation expenses that vested during the quarter. This impact is isolated to the first quarter, and we continue to expect our full-year effective tax rate to be approximately 26.5%, in line with our previously issued guidance. First quarter net income was $2.2 million, or $0.09 per basic and diluted share. Excluding impairment-related charges and associated tax impacts, net income was $5.6 million, or $0.24 per basic and diluted share. Turning to our land position, at March 31, we owned and controlled 59,028 lots, a decrease of 12.9% year over year and 3% sequentially. The decrease reflects our continued strategy of aligning land investment with current sales trends, acquiring lots in markets where demand supports it, and moderating investment where inventory rebalancing is still underway. Of our total lots, 51,193, or 86.7%, were owned. 7,835 lots, or 13.3%, were controlled. Of our owned lots, 34,168 were raw land or land under development, approximately 20% of which were in active development and 80% were in engineering or undeveloped land. Of the remaining 17,025 owned lots, 13,404 were finished vacant lots, and 3,621 were completed homes or homes under construction. During the quarter, we started 1,137 homes to support the seasonal uplift in sales trends. I will now turn the call over to Josh for a discussion of our capital position. Joshua D. Fattor: Thanks, Charles. We ended the quarter with $1.7 billion of debt outstanding, including $579 million drawn on our revolver, resulting in a debt-to-capital ratio of 44.8% and a net debt-to-capital ratio of 44%. The slight increase sequentially reflects our typical first quarter cadence as we invest in vertical construction ahead of the spring selling season. We remain focused on reducing leverage as we work through older inventory and selectively monetize lot positions, with a long-term objective of maintaining a ratio of total debt to capital near the midpoint of our 35% to 45% target range. Total liquidity at the end of the quarter was $355 million, including $61 million of cash on hand and $294 million available under our revolving credit facility. We ended the quarter with over $2.1 billion in equity, equating to a book value per share of $90.50. At this point, I will turn the call back over to Eric. Eric Thomas Lipar: Thanks, Josh. We are encouraged by what we are experiencing in the market as we transition into the spring selling season. As always, affordability and consumer confidence remain important considerations for buyers, particularly in a volatile rate environment. However, despite an uptick in interest rates late in the quarter driven by geopolitical uncertainty, recent trends have remained healthy across most of our markets, suggesting many buyers are looking beyond short-term rate movements and focusing on value and the impact of the tools we are using to support affordability. Buyers continue to inquire about homeownership and engage with our sales teams, and we are right on track to achieve the full-year guidance metrics we provided on our last call, including annual closings between 4,600 and 5,400 homes, 150 to 160 active communities by year end, an average selling price between $355,000 and $365,000, and SG&A as a percentage of revenue between 15% and 16%. However, based on first quarter margins exceeding the range of our previous guidance, and our visibility into our growing backlog, we are raising our full-year gross margin to a range between 18.5% and 20.5%, and adjusted gross margin between 22% and 24%. We believe we are executing well on the elements of our business that we can control, and we are positive about our ability to achieve our full-year expectations. Finally, I want to thank our team members for their ongoing dedication to our company and our customers. Being recognized for the sixth consecutive year as a Top Workplaces USA employer based on direct employee feedback is a significant honor and underscores the strength of our culture as experienced by our people. Thank you for your hard work and for ensuring that LGI Homes, Inc. is providing the best customer experience in the industry. We will now open the call for questions. Operator: Thank you. If you would like to ask a question, please press 1-1. If your question has been answered and you would like to remove yourself from the queue, please press 1-1 again. Our first question comes from Trevor Scott Allinson with Wolfe Research. Your line is open. Trevor Scott Allinson: First one is on gross margin, better than you were anticipating. You are raising your full-year guidance as well, so that is encouraging and heading in the right direction. You talked about some strategic decisions around pricing incentives. Can you talk about what drove the better gross margin than what you were anticipating and what is driving your improved outlook for the year? And then second is on demand trends through the quarter. It sounds like those were still relatively healthy. Did you see any impact in March when rates went up and you had the Iran conflict really start to take off? And then how has demand trended so far in April, perhaps relative to seasonality? I am not sure if I heard an April closing number as well, and any color so far on how April is shaping up as well. Eric Thomas Lipar: Yes, Trevor. Thanks. This is Eric. I can start. I think the driver of gross margin is a couple of different things. One is we are seeing cost relief consistently throughout the quarter. The team is doing a great job of reducing our older inventory, so our newer inventory that is closing in the quarter is benefiting. We were able to push pricing in a number of select communities across the country in the quarter, and, also, geographic mix always plays a part in gross margin as well. Because of the success in the first quarter, we thought it was prudent to raise gross margin for the year, and we are comfortable with that new range. On demand trends, January and February were tougher closing months. March recovered based on the strength of February sales, and that strength continued into March. We anticipate closing between 400 and 450 in April. It is still a little early; we are waiting for all of our final underwriting and mortgage commitments to get everything scheduled over the next couple of days, but it should be similar to March, similar to last year, somewhere in that 400 to 450 range for the month of April. I would say sales trends in April have been similar to March. There does not seem to be an impact because of war or higher rates. There is a little bit of seasonality built in, but we continue to spend money on marketing. We are continuing to see demand. Our teams continue to do a great job with that customer experience, working with them on affordability, working with them on down payment, paying off debt—whatever is needed to get them into the house. It is still a challenging time, but our teams are doing a great job dealing with those challenges of affordability and really working hard and producing results that, relative to the last couple of years, are more positive. Operator: Our next question comes from Michael Rehaut with JPMorgan. Michael Rehaut: Good afternoon. Thanks for taking my questions. Just also, obviously, going to be a lot of focus on the gross margin. To revisit that, if I may, Eric, I think you cited cost relief, some pricing power, and some mix. I just wanted to clarify, are those factors all what played out to the upside relative to your original expectations when you provided guidance for the quarter, or was there one particular factor that more drove the upside versus others? And then as we think about the rest of the year for this metric, I believe you took up the adjusted gross margin outlook to a range of 22% to 24%. In the first quarter, excluding purchase accounting, you were closer to the high end of that range, 23.4%. How should we think about the second quarter coming up, and are there any factors that might push you more towards the middle of the range, which would imply maybe the rest of the year on average being slightly below the first quarter? Lastly, the cancellation rate being somewhat elevated the last couple of quarters, what impact might that have on operations, if any? Eric Thomas Lipar: I think it all played a factor, Michael. Also, the way we usually focus on guidance, we want to be conservative. We were not sure going into the year where gross margin was going to be exactly, so it was probably a conservative guide to start with, which we hope is still conservative, but we are comfortable with the number for now. A lot of our gross margin strength is tied to the strength of our balance sheet and the value of our land. LGI does a lot of self-development across the United States, so our gross margin should be higher than the peer group. We have to make sure we are capturing that developer profit inside of that gross margin as well as providing incentives to our customers to keep up with the competition. We are still leaning into incentives, but increasing gross margin at the same time. On the second quarter, it is going to depend on mix and other factors on pricing, but generally we expect the second quarter adjusted gross margin to be similar to the first, which is why we are right in the middle or just above the midpoint of our range on our annual guidance. On cancellations, the emphasis should be on our closing guide, and the closing guide remains the same. Our backlog is the highest since 2022, which we are excited about. From this point forward, it is really just managing the pipeline. Because of the challenging affordability situation and the challenging absorption rate, we have been working with customers. We have had a lot more flexibility keeping customers on the houses longer as they are saving up for down payment, paying off some debt, and working on their credit scores. We think that has been a positive strategy and a great customer experience, as well as benefiting LGI. As that backlog has grown, that may not be a tool that is needed as much. We will analyze that community by community across the United States. We need to continue to work with those customers and continue to follow up. Our team of 400-plus salespeople across the United States is one of LGI’s strengths, as we have the team in place to keep in contact with these customers. We are still dealing with an affordability-challenged market, but we believe we are up for that challenge. The team and leadership are doing a great job. We anticipate cancellation rates remaining elevated versus historical for the last couple of years, but we think that is a positive and necessary for this point in the cycle. Operator: Our next question comes from Alex Rygiel with Texas Capital Securities. Your line is open. Alex Rygiel: Thank you. Backlog has increased sequentially. Has the time to close on this also increased, and do you see any evidence that time to close could be improving? And to follow on that, are you still seeing an improvement in the move-up buyers? Eric Thomas Lipar: I would say generally yes, Alex. We do not have the information in front of us, but time to close—with customers saving for down payment, as an example—is going to be elevated. The other thing that is happening in our business, which is positive, is sales relative to the amount of houses we had under construction is increasing. So we are selling more customers further out, and customers are going on houses that are under construction or on houses with permits in hand or permits pending that we have not started construction on. That is going to lengthen the time under contract to close, but we also think that is positive as well. On move-up, the overall business is so focused on the entry-level buyer that it is tough to judge, but we are seeing success in our Terrata brand. It is about 10% of our community count nationwide, around 15 communities. But the overall market, like we said in our scripted remarks, is still a challenging market. We are dealing with some economic uncertainty and consumer confidence headwinds—those are still there. Our optimism comes from being relative to expectations. We feel really good where we are, and we feel really good with our guidance for the year. Operator: Our next question comes from Jay McCanless with Citizens Bank. Your line is open. Jay McCanless: Hey, good afternoon, everyone. First question: really good gains in the Northwest—average sales price up 7%. The West was up 5%. Was this more of a one-off thing, or is this representative of what you have sitting in backlog right now and maybe helps you get to the high end of that ASP guide for the year? And if you think about price/cost right now, it sounds like you are seeing a little lower direct cost, but what are you seeing for land, and especially with lumber prices starting to move up, how are you feeling about that for the balance of the year? Also, in your prepared comments, you talked about how the age of some of the specs you are selling now are younger. Do you have any type of metric around the average age of your homes in the field now versus a year ago? Eric Thomas Lipar: It is community specific, Jay. We have opened up some new communities, and I think the whole industry is going to be facing this: as new communities come online, our lot cost is going to be higher. That is directly going to have an impact on ASP. There is going to be a geographical mix component in our average ASP for the year. Certainly, the West has the highest average sales price, so the percentage of the West compared to the rest of the company for the year will dictate where we are in the ASP range or even exceeding it. On cost, we have not seen a lot of land development cost increases. In house cost increases, with oil where it is right now, we do not expect our house cost to go down. We do not really forecast costs going down over the next few quarters or years. We tell all of our employees we believe house prices are going up because every component of building a house and developing land is likely to be higher over the next few quarters and next few years. That is going to continually drive our ASP higher. On the age of specs, I do not have anything quantifiable. Charles Michael Merdian: What I would add, Jay, is we are running about 2,100 completed units right now, and that is a little heavier than we typically would like on our overall inventory. We have about 1,300 that we have started. We did not start a lot in January, but that trend is increasing as we get into the summer. As we continue to work on our older inventory, we would expect our completed inventory units to start to work their way down into a more balanced level. Typically, we would want to see about half of our inventory complete and about half in progress. So we are still a little bit heavier weighted to complete, but that is a focus, and we expect that to trend down. On development costs, we have 13,000 finished vacant lots, so the development costs that we are seeing are really going to affect most of those communities 12 to 18 months out. Another reason why we feel very strongly about our balance sheet, land, and inventory is because those costs are generally pretty locked already as those sections have been developed. We run just above 20% of our ASP in finished lot costs and feel pretty confident in that number going forward, with maybe some potential upside as we get into the later part of the year and next year. Operator: Our next question comes from Alex Barron with Housing Research Center. Your line is open. Alex Barron: Hi, good afternoon. I just wanted to confirm your order ASP seems to have gone up in the quarter. I am getting that from looking at the ASP in the backlog relative to last quarter. What drove that? Was there a big change in mix? And in terms of the wholesale business, do you have a breakdown of what percentage of the orders came from that versus regular sales? Also, do you have any guidance or suggestions on how to think about the other income line item? Eric Thomas Lipar: The backlog ASP is elevated primarily because of results in the West. In the West, we tend to sell further out, with not as much spec inventory on the ground. So that probably comes down a little bit in the future and will be consistent with our annual guidance for ASP. On wholesale, closings were 12.6% of our closings in Q1. Charles Michael Merdian: I would add that the backlog at the end of the quarter has just over 400 units related to wholesale. We had a fairly large transaction in the fourth quarter, and not a lot of activity in the first quarter. I would say order activity in the first quarter was pretty limited from the wholesale business, but we do have a decent backlog—over 400 is up 70% from last year’s first quarter—so we feel good about the units we have under contract going in. As the wholesale market evolves as the year goes on, we will evaluate where the full-year results end up. On other income, it is pretty variable. Over the last few quarters, we have been around the $5 million number, and that is a combination of selling lots and commercial land and also the profit from our previously leased homes. There is potential for that to bounce around a little bit, but for modeling purposes, if you look at what we have done over the last several quarters and extend that out, that is a reasonable guess at this point. Operator: Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Eric Thomas Lipar for closing remarks. Eric Thomas Lipar: Thanks, everyone, for participating on today’s call and for your interest in LGI Homes, Inc. Have a great day. Operator: Thank you. This concludes LGI Homes, Inc. First Quarter 2026 Conference Call. Have a great day.
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Residential Trust, Inc. Q1 2026 Earnings 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 would now like to turn the call over to Kristen Griffith, Investor Relations. Please go ahead. Thank you. Good day, everyone, and welcome to the NexPoint Residential Trust, Inc. conference call to review the company's results for the first quarter ended 03/31/2026. Kristen Griffith: On the call today are Paul Richards, Executive Vice President and Chief Financial Officer; Matthew Ryan McGraner, Executive Vice President and Chief Investment Officer; and Bonner McDermett, Vice President, Asset and Investment Management. As a reminder, this call is being webcast through the company's website at nxrt.nexpoint.com. Operator: Before we begin, I would like to remind everyone that this conference call contains forward-looking statements. Kristen Griffith: Forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's most recent Annual Report on Form 10-K and the company's other filings with the SEC for a more complete discussion of risks and other factors that could affect any forward-looking statement. The statements made during this conference call speak only as of today's date, and, except as required by law, NexPoint Residential Trust, Inc. does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also includes an analysis of non-GAAP financial measures. For a more complete discussion of these non-GAAP financial measures, see the company's earnings release that was filed earlier today. I will now turn the call over to Paul Richards for the financial results. Please go ahead, Paul. Paul Richards: Thank you, Kristen, and welcome everyone joining us this morning. We appreciate your time. I will cover our Q1 2026 financial results and then walk through a refresher on our full-year outlook. Matthew will then discuss the operating environment, our technology platform and AI strategy, as well as portfolio positioning. Q1 2026 results are as follows. Net loss for the first quarter was $6.8 million, or $0.27 per diluted share, on total revenue of $63.5 million. This compares to a net loss of $6.9 million, or $0.27 per diluted share, in Q1 2025 on total revenue of $63.2 million. Total NOI was $37.6 million across 36 properties, including Sedona at Lone Mountain, which we acquired last December. This compares to $37.7 million on 35 properties for Q1 2025. On a same-store basis across our legacy 35 properties and 12,984 units, total income was $61.4 million, down 2.2% year over year. Total operating expenses declined 1.6% to $24.8 million, resulting in same-store NOI of $36.7 million, a 2.7% decrease, and an NOI margin of 59.8%. Same-store occupancy closed the quarter at 93.6%. While the year-over-year comparison reflects the tail end of a supply-driven pricing reset, our monthly trajectory is improving materially, and Matthew will walk you through that cadence and the structural factors driving our confidence in the second half. We reported Q1 core FFO of $17.3 million, or $0.68 per diluted share, $0.03 better than consensus, compared to $0.75 per diluted share in Q1 2025. The year-over-year decline is primarily driven by interest expense, which I will address now. We have always been transparent that 2026 carries a meaningful interest expense headwind as certain swap positions fall off. Q1 total interest expense was $15.4 million versus $14.4 million in Q1 2025, with the swap benefit declining from $8.4 million to $5.5 million. Since we issued initial guidance in February, the forward SOFR curve has shifted 7 to 47 basis points higher across the remaining quarters of 2026. This adds approximately $2.2 million, or roughly $0.08 per diluted share, of incremental interest expense versus our original assumptions. Q1 came in essentially in line with our prior model. Q2 is modestly higher, Q3 steps up as swap positions begin to expire, and Q4 reflects the full run-rate impact. Full-year 2026 interest expense is now projected at $69.3 million versus $67.1 million in our original model. We do not attempt to forecast rates. We manage the risk. The same volatility that has moved the curve against us in recent weeks creates the entry points for our next swap execution. We have visibility into the maturity schedule and the optionality to execute forward-starting hedges before September, and we will move when economics are compelling, as we did with the $100 million JPM forward swap last April at 3.49%. We are not waiting for September 1. Interest rate swaps currently fix the rate on $917.5 million, or 62%, of floating-rate mortgage debt. We continue to evaluate opportunities to layer additional hedges and will act when risk-adjusted economics are compelling. Moving to expense detail. On the expense side, same-store operating expenses improved 1.6% year over year. Payroll declined 4.3%, a direct output of the centralized operating model and AI-enhanced leasing platform that Matthew will discuss in detail. Real estate tax decreased 11.2%, and insurance declined 23.5%, partially offset by a 15.2% increase in repairs and maintenance, which included bulk fiber service contract costs offset by revenue gains, and a 50.5% increase in marketing spend as we invested in lease-up velocity at properties below target occupancy. The repairs and maintenance increase reflects two primary drivers. First, we accelerated deferred maintenance at several properties as part of a deliberate portfolio quality initiative. Second, we incurred elevated one-time costs associated with lender-required CapEx at select Florida properties. These are episodic expenses that position the affected units for improved performance and do not reflect a structural change in our cost base. Importantly, our expense outlook is steady relative to our original model. Operating expense is on track, as is corporate G&A. On insurance specifically, we settled rates for our new policy renewal on April 1, achieving a 13.3% reduction year over year, better than the strongest end of our originally guided range of 0% to negative 10%. Moving to the value-add update. During the first quarter, NXRT completed 252 full and partial upgrades and leased 225 upgraded units, achieving an average monthly rent premium of $69 and a 19% ROI. Since inception, NXRT has completed over 10,100 full and partial interior upgrades across the portfolio, generating average monthly premiums of 13.3% and inception-to-date ROIs of 20.7%. In addition, we have completed 5,027 kitchen and laundry appliance upgrades and 11,199 tech packages, generating ROIs of 63.5% and 37.2%, respectively. For Q1, we declared a dividend of $0.53 per share, paid 03/31/2026. Since inception, we have increased our dividend 157.3%. We remain fully committed to the current distribution level. At our core FFO guidance midpoint, coverage stands at approximately 1.21x, and we expect coverage to improve as revenue trends strengthen through peak season into 2027. On the balance sheet and liquidity. On 01/30/2026, the company entered into a 55% LTV, $40.3 million mortgage loan secured by Sedona at Lone Mountain with Newmark. The loan matures on 02/01/2033, with all principal due at maturity, and bears interest based on 30-day average SOFR plus a margin of 1.23%. As of 03/31/2026, total indebtedness was approximately $1.6 billion at an adjusted weighted average interest rate of 3.3%, with $18.5 million of unrestricted cash and $143 million of undrawn capacity on our credit facility, providing approximately $161.5 million of available liquidity. We have no scheduled debt maturities until 2028, when our $33.8 million 4.24% fixed-rate loan matures at Residences at West Place. That loan should be easily refinanced with a new agency senior when the time comes. NAV per share. Our estimated net asset value at quarter-end is $47.70 per diluted share at the midpoint, using a blended cap rate of 5.5% across the portfolio. The range spans $40.66 at a 5.75% cap rate to $54.74 at 5.25%. Based on approximately 25.6 million diluted shares outstanding, the closing stock price as of yesterday at $26.36 represents a 44.7% discount to our midpoint NAV. Even at the most conservative end of our range, the stock trades at a 27% discount to estimated liquidation value. We believe the disconnect between public market pricing and the underlying real estate value is significant. The capital recycling initiatives we will discuss provide a path to validating these values through third-party transactions. 2026 guidance reaffirmed. We are reaffirming our full-year 2026 core FFO guidance range of $2.42 to $2.71 per diluted share as well as our same-store NOI range, with a midpoint of negative 0.5%. Two months ago, we issued initial guidance. Since then, we have absorbed two distinct headwinds and realized meaningful offsets that, in aggregate, fully neutralize the pressure. On the headwind side, a 7 to 47 basis point shift in the forward SOFR curve adds approximately $0.08 per share incremental interest expense and a slightly lower-than-modeled Q1 leasing environment. On the offset side, a stronger insurance renewal, expense discipline, and strategic fee income from our adviser private capital platform, which Matthew will address in a moment. Together, these fully absorb those pressures. Our core FFO and same-store guidance ranges are unchanged. We are also reaffirming our same-store sub-metric ranges for the year. To reiterate our full-year targets, we see the ranges as follows: same-store rental income growth of 0% to 1.9% (midpoint 0.9%); same-store revenue growth of 0.1% to 2.0% (midpoint 1.1%); same-store expense growth of 2.8% to 4.2% (midpoint 3.5%); and same-store NOI growth of negative 2.5% to positive 1.5% (midpoint negative 0.5%). With that financial overview, let me turn it over to Matthew. Matthew Ryan McGraner: Thank you, Paul. Let me start with the macro backdrop because the structural setup for our portfolio has become increasingly compelling, and even the largest real estate investors in the world are now publicly validating themes we have been articulating. Last week, Jon Gray described real estate as a sleeping giant at Blackstone and signaled conviction that an acceleration is approaching, particularly around sectors with favorable supply-demand fundamentals. Reinforcing this point, they highlighted the collapse in new supply that will be very supportive to fundamentals over time across major sectors, including multifamily, where industry forecasts call for deliveries this year to be at their lowest level in 12 years. Twelve years. That is the headline. Multifamily deliveries in 2026 will be at their lowest level since 2014. That is precisely the supply backdrop we are operating in, and it is the primary structural driver of our confidence in the second half of the year and into 2027. Let me put some numbers around it. National multifamily deliveries peaked near 100 thousand units in 2024 and are declining sharply. New construction starts have fallen 70% from their peak. Units under construction nationally have declined 29% from their Q1 2024 high of 760 thousand units. By Q4 of this year, net deliveries are projected to fall to roughly 69 thousand units nationally, the lowest level in a decade. In our Sunbelt markets, this deceleration is even more pronounced. In NXRT's specific submarkets, the demand picture is compelling. Q1 net absorption was positive 1,307 units against supply of 2,426 units, with total demand of 3,733 units. For the full year, our submarkets are projected to see 10,158 units of supply against 10,239 units of demand—effectively a balanced market, with demand now outpacing the remaining supply wave. On the demand side, homeownership remains increasingly out of reach. Today, average monthly mortgage payments run 36.7% above average multifamily rents nationally. Move-outs to purchase a home fell to 7.9% for the quarter, down from 10.6% a year ago. The longer-term demographic picture remains favorable, as I covered last quarter. The bottom line: while near-term fundamentals are weaker than initially expected in select markets, the structural setup is improving quarter by quarter. The supply cliff, the construction starts collapse, the demand-supply convergence—these are all intact and accelerating. The recovery is asymmetric rather than synchronized, with roughly 35% of our NOI already at or near equilibrium and another 44% reaching that threshold through the balance of the year. We expect fundamentals to stabilize and then accelerate as the back half of 2026 unfolds. On to operating performance. Let me walk through the leasing cadence because the monthly trajectory tells the story. Across 1,388 new leases signed in Q1, our new lease trade-out was negative 6.6%, or a $97 per unit decrease. On 1,528 renewal transactions, we achieved positive 2.3%, or a $33 per unit increase. The blended rate across 2,916 total transactions was negative 1.9%. The monthly progression is what matters. New lease trade-outs improved from negative 7.0% in January to negative 5.6% in March. Blended trade-outs narrowed from negative 1.9% in January to negative 1.7% in March. And the momentum has continued into April. New lease trade-outs have improved to approximately negative 4% month to date—a 300 basis point improvement from January to April. Blended trade-outs have narrowed to approximately negative 1.2%. At the market level, Las Vegas renewals led the portfolio at positive 12.2%, or a $164 per unit increase. Raleigh renewals grew 2.2%, with new lease trade-outs at negative 3.8%, the shallowest decline in the portfolio. Dallas generated 181 renewals at a positive 1.9%. On the occupancy front, the same-store portfolio closed Q1 at 93.6% physical occupancy, up from 92.6% at the start of the quarter and 92.7% at the end of Q4. April month to date has improved to 93.9%, and our leased percentage reached 95.9%, the highest since 2025. Per ApartmentIQ data, our portfolio is outperforming market comps by 130 basis points in occupancy, which validates both our pricing discipline and the effectiveness of our centralized leasing program. Resident turnover was 44.4%, essentially flat sequentially but down from 46.3% a year ago. Resident retention improved to 55.6%, with March reaching 57.2%. Same-store total income was $61.4 million, down 2.2% year over year. Rental revenue declined 3.1%, partially offset by a 39% increase in other income driven primarily by resident amenity fee programs, which added $469,000 of incremental revenue versus the prior year. The standout within revenue is bad debt. We achieved 0.55% of gross potential rent in Q1, down 45.7% year over year from 1.02% of GPR. This is a structural improvement driven by AI-enhanced screening and centralized credit evaluation, not a one-quarter anomaly. On to concessions. Let me address concessions directly because I know this is front of mind for our investors. First, the context. Our portfolio-level concession rate is 1.9% of gross potential rent. Per ApartmentIQ, the competitive set in our submarkets is running 5.7%. That is a 380 basis point advantage, and it reflects a deliberate operating philosophy. We compete on occupancy through operational execution and technology, not through concession givebacks. Our revenue per available unit exceeded comps by 3.77% in Q1. Second, the concentration. Total concessions were approximately $1.15 million in the quarter, up from $271 thousand in 2025. However, 39% of the year-over-year increase, or $342 thousand, was driven by a single asset in Pembroke, where a concentrated competitive supply wave entered the submarket in Q4 2025. Concessions were deployed proactively to defend occupancy and market position, and that strategy has worked. We closed Q1 at 94.1% occupancy at Pembroke and have continued to build, reaching 94.9% quarter to date. Concessions at Pembroke have already been reduced from one month free to a $500 incentive, which is a 75% reduction. Excluding Pembroke, the portfolio concession increase was approximately $535,000, or roughly two times the prior year—elevated, but a fundamentally different story than the headline. Third and most importantly, the forward trajectory. Our full-year 2026 operating forecast projects concession utilization declining 75% from Q1 levels by the second half of the year. Q1 ran at 2% of GPR; we forecast Q2 at 1% of GPR, Q3 at 50 basis points, and Q4 at 40 basis points. Simultaneously, financial occupancy improves from 92.8% in Q1 to 94.0% in Q2 and 94.1% in Q3. Six of our 10 markets showed improving concession environments sequentially in Q1 versus 2025—those are Atlanta, Las Vegas, Nashville, Orlando, Raleigh, and South Florida. Even in the four markets still facing supply-driven pressure, the rate of deterioration has stopped. As one-month-free concessions roll off, we realize approximately an 8% pop in effective rents without raising prices. This is an embedded tailwind that begins to materialize through the balance of the year as supply deliveries decelerate and seasonal demand strengthens. We believe Q1 was the trough for concession deployment in this cycle. Let me spend a few minutes on the technology platform Paul alluded to because Q1 results are a direct product of the investments we have been making. We are deploying a two-layer architecture model for technology. Layer one is property operations—BH Management and their Funnel Leasing AI CRM platform handling day-to-day leasing, maintenance, and resident services under their centralized operating model. Layer two is what we are building at the adviser level—NextPoint Intelligence, an asset management platform that drives better decisions at the portfolio, market, and unit level. We are literally building agents per property across the portfolio to enhance predictive analytics. This architecture is deliberate. Self-managed peers investing in AI must spend across both layers simultaneously. Our model delivers a disproportionate share of the AI impact at a fraction of the capital outlay. BH Management's Funnel AI platform gives us the property operations layer as a managed service, and we focus our investment on the intelligence layer for the highest-value judgments to happen. We will provide the full AI product roadmap and financial impact thesis at REITweek in early June. Q1 results from the platform. Our AI-powered Leasing Pro platform processed 31,882 leads and converted them into 1,571 signed leases during the quarter—a 4.9% lead-to-lease conversion rate versus the industry benchmark of 3.2%. Year over year, leads were up 26%, applications were up 34%, and move-ins were up 53%. Our lead-to-tour conversion was 36.8% for the quarter, the best of the four quarters since we launched our new AI-enabled CRM system. Self-guided touring technology enabled 24.7% of our leases to be executed after business hours—demand that would have been lost entirely without technology-enabled engagement. We hosted nearly 800 self-guided tours during the quarter and expect to surpass 1,000 per quarter as we move into peak leasing season. Fifty-nine percent of self-guided visitors submit a lease application—an extraordinary conversion rate that speaks to the quality of the funnel. The 4.3% payroll reduction, 45.7% improvement in bad debt, the 130 basis point occupancy advantage over comps, and concessions at 1.9% of GPR versus 5.7% for the comps—these are all outputs of a centralized, data-driven model. Turning to Sedona at Lone Mountain as a quick update on our latest acquisition. As a reminder, we acquired this 321-unit community in North Las Vegas in December for $73.25 million. Occupancy closed Q1 at 87.9%, and as of April 28, the property is approximately 90.3%, with a projected 30-day trend of 92.2%. The rent roll cleanup and operating recovery are ahead of our underwriting and tracking well ahead of budget. Q1 rental income beat budget by 6.7%, or approximately $88,000, driven by lower-than-expected bad debt write-offs. Total expenses beat budget by 13.4%, or $71,000. All in, NOI is leading budget by 13.4%, or $130,000, through Q1. We continue to target a 7.2% NOI CAGR through 2029, taking this asset from a high-5% cap acquisition to a 7.5% stabilized yield. On to the transaction market, capital recycling, and other earnings opportunities. Per Walker & Dunlop, Q1 2026 institutional multifamily sales volume was $15.1 billion across 213 deals at a weighted average cap rate of 5.09% and $260 thousand per unit. Full-year 2025 volume reached $161.6 billion, up 9.1% year over year. Institutional capital is returning selectively, with institutions and REITs comprising 36.6% of multifamily acquisitions in 2025—the highest share since 2019. Related to our capital recycling and transaction activity, I wanted to address proactively one element of our potential growth that Paul touched on—the role of strategic fee and interest income generated through our adviser's DST platform. Some context. Our adviser, NextPoint, is one of the largest sponsors of Delaware Statutory Trusts in the United States, distributing through the NexPoint Securities broker-dealer network. Since 2017, NextPoint has sponsored over $4 billion of DSTs across a variety of property types, including core and core plus multifamily. The DST market itself reached a record of $8.4 billion of equity raised in 2025, up 49% year over year, and multifamily is the largest category within it. Each DST transaction generates fee opportunities for sponsors—financing, acquisition, and asset management fees—and creates lending and bridge capital opportunities where a balance sheet partner is needed. Looking forward, we see meaningful potential for additional activity of this type within NXRT. The DST platform is active, the multifamily category within it continues to grow, and NXRT's balance sheet positioning is well suited to participate selectively. While we are not embedding additional transactions in our 2026 guidance, we believe this represents a credible source of incremental earnings optionality, essentially in the range of $0.10 to $0.20 of core FFO over the next 12 months under favorable conditions, balanced against our risk-adjusted return discipline and capital availability. More broadly, this reflects a deliberate strategy to diversify NXRT's earnings streams. Larger peers like Prologis, Welltower, Realty Income, Ventas, and Equinix have all built private capital platforms in response to capital markets dynamics where public equity costs can be prohibitive. NXRT possesses the core infrastructure, through its external adviser, to pursue a similarly and appropriately scaled strategy. We will be outlining the broader vision at NAREIT in early June. Let me close with this. We are entering the most favorable supply backdrop in over a decade. Again, Blackstone is calling multifamily a sleeping giant. New construction starts are down 70% from the peak. Deliveries are projected at their lowest level in 12 years, and demand is absorbing the remaining supply wave in our submarkets. The setup is asymmetric. 2026 absorbs the swap repricing and the supply tail. 2027 captures the supply cliff and earn-in. To put numbers around that earn-in, if new lease growth returns to 2% by Q4 of this year, consistent with the deliveries cliff, the carryover earn-in alone delivers 150 to 200 basis points of 2027 same-store revenue growth before a single new 2027 lease is signed. We are not providing 2027 guidance today, obviously, but the structural drivers are clear, and they compound in our favor. Against that backdrop, our operating platform is performing. Bad debt is at a multiyear low, payroll is declining, insurance renewed significantly better than expected, leasing conversion rates are at record levels, concessions are at 1.9% of gross potential rent versus 5.7% for the competitive set, and occupancy is building again—93.9% in April and rising. Potential DST transactions can generate incremental fee and interest income that diversify our earnings streams, but the operating thesis still stands on its own. The monthly trajectory is encouraging. New lease trade-outs improved 300 basis points from January to April, and we are entering the peak leasing season with strong conversion metrics, declining supply, and really tepid expectations. The trends and trajectories give us reason for optimism. We appreciate everyone's continued hard work here at NexPoint and BH. I will now turn the call over to the operator for questions. Operator: At this time, if you would like to ask a question, press star followed by the number one. We will now open the call for questions. There are no questions at this time. Oh, sorry. We do have a question from Michael Lewis with Truist Securities. Matthew Ryan McGraner: Thank you. Analyst: My first question, I wanted to ask—you talked about it a little bit—this 200 basis point difference between the occupied and leased percentages. I was just wondering if there is any opportunity to narrow that. And likewise, the resident retention in the mid-50% range looks like it was going up the last couple of months. Do you see upside there through operational efficiencies as well? Matthew Ryan McGraner: Yes, definitely. Thanks, Michael, and good morning. We definitely see an opportunity to continue to drive renewals and also retention, particularly as you get into the summer months—folks do not want to move in our Southeastern and Southwestern markets. That has always been a core focus, and any incremental improvement there obviously allows us to drive new lease growth as the supply wave captures. I know if you have anything to add to the first point. Yes. I think on that spread, we are here in April, the start of peak leasing season. The properties are looking great. Traffic flows—if you look at the highlights section, you can see Q2 last year traffic patterns. This is where our demand funnel is the widest. Getting that leased percentage higher helps us with pricing power. Fewer units available, we are able to push pricing dynamics a little bit more and try to continue to narrow that gap on the new lease pricing side. So that is the focus—pushing, as I alluded to, going into the back half of the year, continuing to hopefully start to inflect positively on rates. The more leases we can sign, the better pricing dynamics we have. Analyst: Okay. And then you know, you talked about the core portfolio like it was essentially in line. You kept the full-year same-store guidance. But occupancy was up quite a bit across the markets. Las Vegas was up a lot sequentially. I was wondering if the occupancy increase surprised you at all. And is it fair that Q1 ran in line with your expectations, or are you running a little bit ahead to start the year? How would you frame that? Paul Richards: I think Q1—Bonner, you can give your thoughts—but to me, Q1 felt better. I would not say we hit our budget. In fact, we missed our NOI budget by a quarter million or $300,000. But it did feel better from a demand perspective in that we saw the rent rolls continue to firm, we saw trends build, and we did not particularly give up that much relative to the prior quarters. I am pleased with, and as you can tell from my prepared remarks, I think it is firming out there, and I am pleased with the trajectory and the trends in occupancy. Bonner, if you have anything to add. Yes. On our more aggressive internal forecast, we would love to squeeze 10 to 20 basis points higher on occupancy. It is improving, and that is structurally where we are looking to go in the peak leasing season. I would say the major wins—Matthew described it in the call—the ability to squeeze that bad debt back down to 55 basis points is a real win. We utilize a software technology called Two Dots. We are getting to a point now where we can get to a credit screening approval on an application in a 15-minute interaction, and being able to close those leads the same day, same interaction—where some of our prospects may be applying here and across the street—time to decision is really important to us. That is helping occupancies. The operating platform that we are building is really helping. So I would say we are happy with occupancy and would love to continue to build it. We described a little bit of the uptick in concession utilization and hope to see that moderate. But overall, revenue expectations were within 1% of our optimistic goal for the quarter. Analyst: Okay. And then lastly for me, this seems like the most interesting question. I do not know exactly how to frame it, or if you can answer it, but the interest expense is going to be higher because rates are higher. It sounds like the offset is the fee income that you talked about. Is there anything—you said you are going to give more details at NAREIT. Is there anything more to say about how that is offsetting this year? What you need to invest or what you are earning or what you are going to be doing to earn—I think you said $0.10 to $0.20 over the next 12 months. Is there any more detail you could share on that? Bonner McDermett: Yes, happy to. Matthew Ryan McGraner: The one thing we know is that we are going to be wrong on the curve. It is bouncing around, it has bounced around, and unfortunately the sell side tends to model max rate pain and we get fundamentals out there possibly. That is the backdrop. As the NexPoint platform, we manage about $20 billion or so across a variety of property types with a built-out broker-dealer infrastructure across those property types. That allows NXRT to utilize that broker-dealer infrastructure. What I mean by that is NXRT would sponsor the DST program. Utilizing the balance sheet, we could be a lender to the transaction and make a spread above our credit line—you have a 300 to 400 basis point spread there. The sponsor takes acquisition fees, which could be 1% to 2% of the gross purchase price of the deal. You can estimate that fee income to be typically $1 million to $2.5 million per transaction. It adds up. Given the fact that we have been an aligned shareholder here since inception—when we took public with fee deferrals, fee waivers, extraordinary side-by-side alignment and ownership—this is just another tool in our toolkit to help earnings and diversify earnings. We think it is the right thing to do for the business. The hope is we do not need it—the curve comes our way, we are able to swap appropriately and opportunistically, and we just add this extra earnings layer on top of it. We see it as a good thing. Bonner McDermett: Thank you. Matthew Ryan McGraner: You bet. Operator: Your next question comes from Buck Horne with Raymond James. Analyst: Congrats. Just wondering if you could give us a little bit more detail on the real estate taxes line and what were the good guys, and how those year-over-year comps are looking as you peer into the back half in terms of appraisals or potential recoveries? What is going on with taxes this quarter and the outlook for the remainder of the year? Bonner McDermett: I am happy to help you with that. In Q1, we were still fighting last year's taxes. We got some wins on the board. In particular, Dallas County (DFW) had a number of favorable protests from last year rolling into the Q1 booking. In terms of overall outlook, we have been working with our tax consultants. We have gotten initial values notices in May in Texas and a couple other municipalities. Overall, I think our outlook is pretty stable. Valuations are down. There is less ammunition—there are fewer sales. We are really pushing the equal and uniform story for us. We believe taxes should be favorable this year. In the last couple of years, we have in our numbers roughly 4.1% year-over-year growth at the midpoint, with some of the savings in the Q1 booking. We are going to continue to shoot to outperform that. There is work to do there—some of those fights roll into the next year—but overall, the outlook is in the 3% to 4% range, and we booked three or four settlements in Q1 to help that quarterly number. Analyst: Got it. Got it. That is very helpful color. And just on the repairs and maintenance expenses that you mentioned—you pulled forward some deferred CapEx. Is that trend going to continue into the second quarter? When does that deferred CapEx spending or that maintenance spend start to normalize? Bonner McDermett: There were a few things that were a little bit noisy. Again, it is one quarter. Some of that is seasonal. Some of that is lender driven on the 2024–2025 items. We think repairs and maintenance broadly stabilizes. When you look at the component parts of R&M that we report, one of the things that is in there is that service contract billing, and it probably deserves some better specification outside that. That includes our bulk fiber contract billing, so it looks a little bit outsized, but there is a revenue offset there. Q1, I would say, we got hit by a couple of one-time items and a few of the deferred maintenance items Matthew mentioned. But I think the outlook for the year generally is pretty favorable—again, kind of inflation-level R&M growth—and we are certainly working to outperform. Analyst: Got it. Alright. Very helpful, guys. Congrats. Good job. Paul Richards: Thanks, Buck. Operator: There are no further questions at this time. Matthew Ryan McGraner: Thanks for everyone's participation, and we look forward to seeing everyone at NAREIT in June. Have a good day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Welcome to Franklin Resources, Inc. Earnings Conference Call for the Quarter Ended 03/31/2026. Hello, my name is Nicole, and I will be your call operator today. As a reminder, this conference is being recorded, and at this time, all participants are in a listen-only mode. I would now like to turn the conference over to your host, Selene Oh, Head of Investor Relations for Franklin Resources, Inc. You may begin. Selene Oh: Good morning, and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc. which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties, and other important factors are described in more detail in Franklin Resources, Inc.’s recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of our most recent Forms 10-K and 10-Q. Now I would like to turn the call over to Jennifer M. Johnson, our Chief Executive Officer. Thank you, Selene. Jennifer M. Johnson: Welcome, everyone, and thank you for joining us today to review Franklin Resources, Inc.’s second fiscal quarter results. I am joined by Matthew Nicholls, Co-President and CFO, and Daniel Gambach, Co-President and Chief Commercial Officer. We will take your questions shortly, but first I will highlight key results and themes shaping our business. This was an excellent quarter for Franklin Resources, Inc., with $16.9 billion in long-term net inflows across public and private markets, reflecting the strength and breadth of our diversified global platform. We delivered record gross sales and generated positive long-term net flows in every region, reflecting sustained client demand and strong local engagement. Importantly, each of our key growth drivers—private markets, retail SMAs and Canvas, ETFs, and solutions—contributed meaningfully to these results. This quarter is a clear example of the power of our multiyear strategy in action. We are ahead of our five-year plan and remain focused on delivering strong investment outcomes, deepening client relationships, and continuing to evolve our capabilities to drive sustainable, long-term growth for our clients and shareholders. In my travels meeting clients around the world, one message is consistent: Our clients look to Franklin Resources, Inc. as their trusted partner for one-firm reach and resilience of a global platform together with the distinct expertise of our investment groups. As client expectations continue to evolve, more asset owners seek multifaceted partnerships with fewer firms that can deliver across asset classes, styles, and regions. We believe our business is well-suited to meet that demand. We are seeing a clear structural shift in how clients allocate capital and partner, including increased demand for vehicles such as active ETFs, customization, and tax-managed solutions, and prioritizing firms that can deliver across public and private markets, offer global consistency in how they invest and operate, and bring together capabilities into outcome-oriented solutions. This is not a short-term reaction to market conditions; it reflects a more fundamental change in expectations. Scale, breadth of capabilities, and the ability to deliver them in an integrated way are increasingly defining competitive advantage. Against this backdrop, we remain focused on executing as one Franklin Templeton. This means bringing together our strengths as investment specialists, innovation drivers, thought leaders, and strategic partners seamlessly in every client interaction. To that end, we continue to simplify our go-to-market approach to better serve clients and capture opportunities across the business. Ultimately, our strategy centers on helping clients achieve better outcomes by staying focused on performance, solutions, and partnership. We are continuing to build a business that is more resilient, more relevant, and positioned to deliver long-term value for our clients and shareholders. Now turning to our results. This quarter marks another step forward in the successful execution of our strategy and reflects the growth potential of our business. We delivered another consecutive quarter of positive long-term net flows of $16.9 billion, driven by multiple, diversified investment groups with continued progress across our key areas of investment and growth. This momentum is reflected in long-term inflows of $118 billion, up 28% quarter-over-quarter and 38% over the prior-year quarter, excluding reinvested distributions. Gross sales increased across all asset classes, highlighting the strength of our global distribution platform and the progress we are making across the business. Looking ahead, our institutional pipeline of won but unfunded mandates remained strong at $20.2 billion, consistent with the prior quarter, supported by steady funding rates and ongoing replenishment from new wins. Our assets under management of $1.68 trillion remain well-diversified across asset classes, client segments, regions, and investment groups. Public markets continue to be a core strength and an important driver of growth. Multi-asset AUM stands at $207 billion and generated $9.5 billion in positive net flows, marking our nineteenth consecutive quarter of positive flows in that asset class. These results reflect growing client demand for outcome-oriented, comprehensive solutions that span public and private markets. Across equities, net outflows were $4.7 billion. Investor activity remained selective, and we saw positive net flows across large-cap value and core, systematic, and single-country ETFs, infrastructure, and sector strategies. In fixed income, net outflows were approximately $300 million during the quarter; however, excluding Western, fixed income flows were positive $3.6 billion, marking a ninth consecutive quarter of positive long-term net flows. Momentum continued in multi-sector, munis, stable value, and global fixed income strategies. Turning to alternatives, Franklin Resources, Inc. is a leading manager of alternative assets with $283 billion in alternative AUM. Our breadth and scale continue to position us as a partner of choice for clients seeking differentiated sources of return and access to private markets. We fundraised $14.3 billion in alternatives this quarter, including $13.2 billion in private market assets, diversified across alternative credit, secondary private equity, real estate, and venture credit. Fiscal year-to-date fundraising in private markets reached $22.7 billion, already in line with full-year 2025 levels, positioning us to exceed our $25 billion to $30 billion annual fundraising target, which was already adjusted upward at the start of our fiscal year. Within alternatives, private credit continues to be an area of focus. While market attention has increased, the opportunity remains highly differentiated across strategies and risk. Our alternative credit capabilities in the U.S. and Europe are focused on the middle market, with a disciplined approach to underwriting and credit selection, and include diversified portfolios that have less than 10% exposure to software. Alternative credit represents $96 billion in AUM and was a significant contributor to fundraising this quarter. Looking across our broader alternatives platform, we continue to see strong momentum in secondary private equity where investors are increasingly focused on liquidity solutions, portfolio rebalancing, and access to high-quality assets at more attractive entry points. We are also seeing a pickup in demand for private real estate, including in the wealth channel, as investors position for opportunities emerging from the current market environment. Franklin Resources, Inc.’s private markets $8 billion core evergreen products spanning secondary private equity, real estate equity and debt, and private credit continue to gain traction. These products had positive net flows, contributing approximately $1 billion to fundraising in aggregate in each of the last two quarters. Across the platform, clients are increasingly engaging with us for broad and differentiated investment vehicles, and we are seeing that demand translate into sustained, diversified growth. ETF AUM reached a new high of $61.6 billion, a 67% increase from last year, with $4.5 billion of net inflows, our eighteenth consecutive quarter of positive flows. Active ETFs now represent 45% of ETF AUM, further extending our active management strategies into new vehicles. This is evident in areas such as the conversion of 10 of our muni funds into ETFs in Q1, which generated over $600 million in positive net flows this quarter, and the success of our Putnam Focused Large Cap Value ETF, which is close to $10 billion in AUM. Delivering personalization at scale continues to represent a compelling long-term opportunity. Advancements in technology are enabling us to extend capabilities traditionally associated with separately managed accounts more efficiently and consistently across a broader client base. A leader in retail SMAs, we manage $168.3 billion in AUM and generated $2.7 billion in net inflows during this quarter. With more than 40 years of experience, we are well-positioned to deliver at scale through our breadth of capabilities along with our custom indexing platform, Canvas. Canvas continues to gain momentum and reached record AUM of $22.9 billion, a 27% increase from the prior quarter, with positive net flows of $5.3 billion reflecting strong client interest in personalization and tax efficiency. Since its acquisition in 2022, Canvas has been net-flow positive in each quarter and continues to scale across all distribution channels, supported by our over 200 partners and expanding adoption across retail, RIA aggregators, and traditional RIAs. This growth underscores a broader shift in the industry where tax efficiency is becoming increasingly central to portfolio construction and the adviser-client relationship. Including Canvas, our tax-managed products now represent $110 billion in AUM. As the industry evolves, we continue to invest in areas of long-term innovation, and digital assets remain a key focus. Earlier this month, we announced plans to acquire 250 Digital, an active cryptocurrency investment management firm, and to launch FranklinCrypto. Alongside Franklin Templeton Digital Assets, we are bringing together crypto-native expertise with Franklin Resources, Inc.’s global distribution to target institutional growth. FranklinCrypto will expand Franklin Resources, Inc.’s existing crypto and blockchain venture capital investment offerings and will broaden the firm’s digital assets investment management platform. From a regional perspective, our growth remains globally diversified with positive net flows in all regions. Internationally, Franklin Resources, Inc. manages nearly $500 billion in assets, with positive long-term net flows of $5.5 billion in aggregate. Non-U.S. gross sales grew 29% quarter-over-quarter with particularly strong momentum in EMEA and APAC. As a leader in emerging markets, Franklin Resources, Inc. was appointed trustee and manager of the National Investment Fund of Uzbekistan in January 2025, supporting the country’s privatization agenda and governance reforms across state-owned enterprises. In April, USENIF confirmed plans to proceed with a dual listing on the London and Tashkent stock exchanges, marking an important step in advancing Uzbekistan’s capital markets and broader privatization strategy. This engagement reflects our role as a trusted partner to official institutions and continues to drive deeper relationships with central banks, sovereign wealth funds, and government-related entities. Now turning to investment performance. Investment performance remains competitive, supporting both client retention and organic growth. Over half of our mutual fund and ETF AUM is outperforming its peer median over the three- and ten-year periods, and approximately two-thirds over the one- and five-year periods. This strength is further supported by our municipal strategies where 95% of AUM is outperforming its peer group over the three-year period. Similarly, over half of strategy composite AUM is outperforming its benchmark over all time periods, and 71% over the ten-year period. In fixed income, 83%, and in equities, 82% of AUM is outperforming benchmark over the one- and five-year periods, respectively, reinforcing the depth and durability of our investment capabilities. Turning briefly to our financial results, adjusted operating income was $475 million, increasing 8.5% quarter-over-quarter and 25.8% from the prior-year quarter. These results reflect the continued execution of our strategy, with disciplined expense management alongside targeted investments in areas of growth and innovation, positioning the firm for sustained, long-term performance. Taken together, our performance this quarter underscores the strength of our platform and the progress we are making against our multiyear strategic priorities. We are building a more diversified, higher-growth business with multiple drivers of organic growth, and we are seeing that momentum continue to build, positioning us to deliver long-term value for our clients, shareholders, and employees. I want to thank our employees around the world for their continued dedication and focus on serving our clients. Their efforts are fundamental to the successful execution of our strategy and the progress we are delivering across the firm. With that, we will open the call to your questions. Operator? Operator: If you would like to ask a question, please press 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference, please press 0. We request that you limit yourself to one question to allow for participants on the call this morning. Our first question comes from Alexander Blostein with Goldman Sachs. Please go ahead. Alexander Blostein: Thank you. Hey, Jenny. Good morning, everybody. I wanted to start with a question around private markets growth. Obviously good momentum in the quarter, $13 billion. I was hoping you could break that down by key strategies as well as whether Lexington, their flagship fund, contributed to that at all. And as you look out for the rest of the year, what are going to be some of the bigger drivers for the rest of 2026 in private markets fundraising? Jennifer M. Johnson: Sure. Great. Thanks for the question, Alex. As you recall, last year we had set a target of $13 billion to $20 billion in the alt space to raise, and we ended up raising $22.9 billion. This year, we raised that to $25 billion to $30 billion, and we would expect to be above $30 billion. When you look at this quarter, I cannot give you details on Lexington’s flagship funds, but I will give you some insights. Our largest contributor was our private credit managers, but Lexington was meaningful. Lexington is in the market with their flagship fund, and they are right on track. There is demand for secondaries, but they are also in the market with other products—their co-invest and their middle market—which all contributed as well. There were no catch-up fees in this quarter. You will get a specific update on Lexington’s flagship fund when they do a filing, probably towards the second half of 2026. All of our alternative managers contributed to this quarter’s momentum. There were over 30 vehicles that contributed, so it was a very diverse and strong quarter, and we felt very good about the flows across the board. Alexander Blostein: Great. Thank you. You saved me a follow-up on the catch-up fees there. I did want to ask about the comment you have in the release around the dry powder. You give us the total AUM, $263 billion in private markets. Some of this fee-paying, some of this not fee-paying. Is it possible to break down the non-fee-paying piece and help us think through the timing of when that is going to come into the fee-rate run rate? Jennifer M. Johnson: It obviously varies with each manager. Alex, let us get back to you with what we are willing to say publicly on that, so give us a little bit here. Matthew Nicholls: But actually, only fee-earning AUM out of balance is about 90%, approximately 89%. Alexander Blostein: Yep. Do you want to— I think the next question? Operator: Our next question comes from Glenn Paul Schorr with Evercore. Please go ahead. Glenn Paul Schorr: Hi. Thanks very much. A question on Canvas and tax optimization strategy. There has been a lot of growth. There is a lot of competition, but also really low penetration. Could you talk about what you see for further growth in terms of penetrating the current base of clients, any capacity issues you might see, and importantly, how you differentiate in a crowded field, meaning leveraging the brand and distribution relationships that you have? Jennifer M. Johnson: What I would say is, one of the differentiators of Canvas versus others is that it was built by quant people as opposed to tax people. It is much more about the technology, which gives it a lot more flexibility going forward. Canvas is being selected in many cases because people recognize it has really impressive technology. When we added the managed options solution over it, it gave us more creativity around product development. For example, if you have high-basis concentration in a stock, you can use the managed options component to make a more tax-efficient portfolio. What started out as a direct indexing opportunity has evolved into an ability to take that technology as an overlay and create tax-managed, tax-efficient overlays on active strategies. Our conversations are now not just about using it as a platform to manage SMAs or direct indexing, but also using it as a way to optimize the tax efficiency of our strategies, opening up more partner conversations. Daniel, do you want to add? Daniel Gambach: I will add two aspects to the success we are having in the tax alpha and tax optimization space, which is growing very fast for the industry and we are capitalizing on it. First, our retail SMA presence, being so big at close to $170 billion, makes us uniquely positioned, including the legacy business that we have on the SMA side. On Canvas, there are two elements to highlight. One, the tax optimization that we do is unique and differentiated because we can receive in-kind positions and we are very flexible in how we do the optimization, and clients are focused on that. The other part is we add simplicity and we are very innovative. Canvas includes, as Jenny mentioned, not only direct indexing, but we also have risk-factor overlays, we have options for income within the same platform, and we have added fundamental third-party manager tax optimization, including for our different fundamental managers. On top of that we have added long/short—130/30, 140/40—all on the same platform. Finally, we have added municipal bond ladders in the same platform. The simplicity is giving us substantial momentum. It has grown at a 72% CAGR and grown 10 times since acquisition to $23 billion. The momentum will continue. AUM doubled over the past 12 months, and we expect that to continue given how differentiated the platform is. Glenn Paul Schorr: Alright. Thanks for all that, Jenny and Daniel. Appreciate it. Operator: Our next question comes from Craig Siegenthaler with Bank of America. Please go ahead. Jennifer M. Johnson: Operator, maybe— Operator: We can just move to the next one. We will get Craig back on. Seems like there is a technical problem with Craig’s line. Jennifer M. Johnson: Okay. Operator: Our next question comes from Daniel Thomas Fannon with Jefferies. Please go ahead. Daniel Thomas Fannon: Thanks. Good morning. Matt, just wanted to follow up on the guidance that you gave. There has been some change from last quarter, but you also reiterated things you have been saying around flat with fiscal years 2024 and 2025. Could you clarify the moving parts? And in the quarter, there was an announcement of some voluntary retirements across the equity division. I assume that is incorporated in this guidance and maybe the outlook for the year, but is that incremental or not? Matthew Nicholls: Yes, the voluntary buyout is included in our full-year projection. First, I will go through the quarter guidance and then the annual. On the third quarter guide, our effective fee rate we are guiding to mid-to-high 37s, very consistent and stable with the second quarter. Compensation we are guiding at $830 million, assuming a $50 million performance fee at a 55% payout. IS&T is $155 million, which is in line to slightly higher than last quarter based on AI investment specifically. Occupancy is $70 million in the guide. And G&A we expect to be a little higher at $210 million to $215 million, but this includes elevated fundraising-related expenses around $23 million to $25 million and an additional $9 million to $10 million for advertising and marketing. For the full year, as outlined on page 14 in the IR deck, this assumes flat markets from now and excludes performance fees. We continue to guide approximately in line or slightly above fiscal year 2025 expenses excluding performance fees. This assumes current market levels, higher sales and fundraising that we have presented today, and stronger performance. Strong performance means we have some compensation-related expenses tied to better performance that are formula-driven, so that is going up a little bit. For perspective, we end up at the level illustrated on the page, which is about 1.5% higher versus 2025. We would expect investment management fee revenue to increase at 4x that rate at least. Meaning, if expenses increased by 1.5%, we would expect investment management fee revenue to increase by at least 6% year-over-year, all else equal. This is consistent with previous commentary on margin expansion going into our fiscal year-end. That would result in fiscal fourth quarter margin in the high 29s and for the year in the 27s for the full year, both representing meaningful margin expansion ahead of plan and on our way to 30%+ margins later in 2027, all ahead of plan as presented last quarter. Jennifer M. Johnson: Thank you. Next question, operator. Operator: Our next question is from Patrick Davitt with Autonomous Research. Please go ahead. Patrick Davitt: Hey, good morning, everyone. There has been a lot of press focus on secondaries PE strategies and the policy of marking up deals immediately upon close. Much of that has been focused on other companies. Could you give us more color on how much of Lexington’s fund performance is driven by that initial markup versus natural appreciation, and more broadly, do you see the increased attention on this practice impacting regulatory scrutiny or demand for the asset class? Thank you. Jennifer M. Johnson: The issue that happened there was because I think a manager changed the policy and was unclear in how that went down, which created a lot of noise. Traditionally, in secondaries, the discount-to-par markup is about 20% to 25% of total return over the life of a fund. That gives you a sense that most of the appreciation really comes in the asset itself. That is the beauty of a firm like Lexington, a premier buyer of these deals. They are selective as to which deals they choose and they have a ton of information—information on 55 thousand private companies—so they are tracking and deciding which underlying funds they believe are going to have the best upside opportunity. That is how they are underwriting it, and then they negotiate a discount. That gives you a sense. Operator: Our next question comes from Michael J. Cyprys with Morgan Stanley. Please go ahead. Michael J. Cyprys: I wanted to ask about AI. Could you update us on how you are using AI across the organization today, the use cases that have been most impactful so far and key learnings, and if you are able to help quantify any of the benefits that you are seeing? As you look out over the next couple of years, what steps are you taking to further embed AI throughout the organization? I know, Matt, you mentioned some uplift on expenses in part from AI investments. Maybe you could elaborate on some of those investments and how you are thinking about the longer-term benefits. Jennifer M. Johnson: We look at AI across growth and efficiency. Having run technology, I do not think many companies can say AI is yet material; everyone is doing a lot. I am proud of our work because we were early adopters in multi-agent orchestration of AI—our Intelligence Hub—which is our platform used for distribution in partnership with Microsoft. If I bucket our AI efforts, in distribution and investments it is about growth opportunities; in operations and technology it is about efficiencies and throughput. The simple problem is ensuring salespeople are seeing the right clients and having the best conversation. The Hub pulls data from CRM, product systems, external product systems, and maybe social media. LLMs are not great with analytics, so you marry them with other agents. Early on, we see our wholesalers seeing about 10% more clients. It is too early to quantify the sales uplift, but we see administrative efficiency gains and signs of sales uplift, and we are rolling it out more broadly. Our investment teams use AI differently by team. We run hackathons; teams create agents and put them in a central library for reuse. We created a virtual research analyst for one team, where we fed views and philosophy, and it will generate ideas and challenge proposals—“have you thought about these things?”—and it has reviewed historical trades. The important thing is a centralized group to share AI expertise and learnings. Where we outsource, we are reviewing contract lengths so AI efficiencies do not accrue only to vendors. In-house, in reconciliation, RFPs, and other functions, we are seeing some efficiencies. It is early, and in technology we measure how much code is being written by AI to gauge adoption. Matthew Nicholls: In terms of spend, we have a fully staffed dedicated centralized team. Within that team, we have individuals focused on investment and sales functions and on effectiveness and efficiency. There is a revenue part and a cost part. We are tracking dollars spent versus dollars saved or gained from using and adopting AI. It is early days, but we are building that discipline. Operator: Our next question comes from William Raymond Katz with TD Cowen. Please go ahead. William Raymond Katz: Thank you. On the tax minimization/tax optimization side, there has been discussion around a potential adverse tax rule for Exchange 351. It seems arcane, but it has been coming up in investor dialogue. How real is that as a change? Is that more of a disclosure issue? Would that have any impact on the business? Second, on Lexington XI, you previously raised $22 billion, and I know Matt just gave some guides around platform or placement fees into the new quarter. Is there any reason to think that the next fund will not be of similar size? And third, on capital return, could you talk a bit about your priorities looking ahead? Thank you. Jennifer M. Johnson: I will quickly jump on Lexington and then turn it over to Matt on the tax point. There is no reason to believe the next flagship will not be at least the size of the last one. As I said, they are on track and there is good demand for secondaries, and we do not see cannibalization with the evergreen funds we have done in secondary. That is going smoothly. On the tax question— William Raymond Katz: It is a bit arcane, but in the index/ETF world there is discussion between ICI and the IRS. Just in terms of an adverse ruling about tax optimization under the exchange, would that limit maybe the use of options as a way to shield income? Jennifer M. Johnson: I am on the ICI board, and we talk a lot about the unequal tax treatment of mutual funds versus ETFs because of in-kind redemptions. There is always a worry that goes away. The reality is it is actually unfair that a mutual fund investor has to pay capital gains because the fund experienced gains versus their individual ownership, like they would if they owned a stock. That has been a disadvantage for mutual funds. ICI discussion is often about making mutual fund treatment more fair. I am not aware of discussions about ETFs losing theirs as much as the hope that mutual funds become more fair. Daniel Gambach: I will add that none of our major ETFs use options overlays in the way in which they are constructed. We have not been hit with that question given the nature of our current ETFs. We do have an excellent options capability within our SMA business, which we call MOST, and we have seen substantial demand there. On SMAs with individual securities, there is no such discussion. But on 351 exchanges in ETFs, we are not part of those; we do not have products structured like that. Jennifer M. Johnson: And to clarify the point, there are some strategies for high-net-worth investors who contribute via 351 exchanges. We have not really participated in that. It could impact ETF share classes as part of a mutual fund; we will see how that evolves. Operator: Our next question comes from Brennan Hawken with BMO Capital Markets. Please go ahead. Brennan Hawken: Hey, good morning. Thanks for taking my question. Two questions on alts fundraising. Thanks for providing the evergreen AUM. Could you talk about what sort of flows you are seeing on a quarterly basis and how we should think about that? And on Lexington, you referenced that you would be giving an update at year-end. Can you help us understand why it would be year-end? Is that your updated expectations for the first close? Jennifer M. Johnson: On Lexington, they are actively fundraising. They will decide on the timing of their first filing. It has not been year to date, so it will be in the second half or towards the end of the year—our fiscal year-end could also see an update, potentially even in July. On evergreen, we have said that we are raising about $200 million a month across our three strategies. We have three that are over $1 billion, and we continue to see that kind of demand—about $200 million a month into the three evergreen strategies. Brennan Hawken: And that has remained consistent recently? Jennifer M. Johnson: Yes. Diversity helps. Daniel Gambach: It is important to say that we do not have a big BDC or large exposure to software within the platform. We have continued to raise in line or higher across all our evergreens—secondary PE, real estate debt, real estate equity—over the last two years, in line with our penetration in the wealth business. We have not seen a slowdown from our end. Operator: Our next question is with Benjamin Budish from Barclays. Please go ahead. Benjamin Budish: Hi, good morning, and thanks for taking the question. Following up on alts fundraising, you mentioned that most of it came from credit in the quarter, obviously not from BDCs. Can you unpack what pockets of credit you are seeing the most demand for? And a quick housekeeping on G&A: you mentioned some one-time fundraising expense associated with larger flagships. Should we think about those as recurring or near-term elevated but not in the run rate for next year, unless more flagship fundraising returns? Matthew Nicholls: On expenses, I would not call it one-time in the sense you could have other quarters with elevated fundraising, but $23 million to $25 million is obviously a large number and would be one-time associated with a good fundraise expectation with higher-fee-type alternative asset funds. Jennifer M. Johnson: On alts fundraising, on the credit side, we have both BSP and what was formerly Alcentra, which we are calling BSP Europe. We had strong fundraising from both. Part of it was CLOs, but they also have an opportunity fund, a real estate debt fund, special situations—contributions came across the board. There were at least 15 different funds that contributed to credit. We are also seeing Clarion with real estate pick up. Clarion has tremendous performance. People have been nervous, and there is about $20 billion in redemption requests on private credit managers out there; that money will go somewhere else. People like real estate because it is a good source of income and an inflation hedge, and we are seeing that pickup in interest. Our venture group has done well too. The key message: this was a very diversified raise as opposed to a concentration—over 30 entities raised money in our alts space. Daniel Gambach: One more point: this quarter, we had positive contribution from every region. In the alts fundraise, 40% came from outside the U.S., about 16% from EMEA and 23% from APAC. We launched new vehicles in Korea, Thailand, and Taiwan, with strong momentum in Japan, a key market where we are increasing investment. In EMEA, we now service 11 markets, five more than a year prior, given increasing demand for our LTVs across all three capabilities, including ventures. Benjamin Budish: Great. Thank you all very much. Operator: And our last question comes from Kenneth Brooks Worthington with JPMorgan. We are seeing ETF distribution fees being requested by intermediaries and being dismissed by some of the largest ETF managers. How is Franklin Resources, Inc. thinking about ETFs and distribution fees, and do you see the potential for ETF access to drive market share shifts in ETFs potentially favoring Franklin Resources, Inc.? Jennifer M. Johnson: Since Daniel’s career started at BGI in the early days of ETFs, I will let him answer this one. Daniel Gambach: Thank you for the question. ETFs are one of the most exciting developments at Franklin Resources, Inc. Our platform reached $62 billion at the end of the quarter, double what we had 18 months ago. Organic flow growth fiscal year-to-date—two quarters—is 49%. We are growing across the board. Three main drivers: Active ETFs—45% of what we have—grew 70% year-over-year. Our Focused Large Cap Value ETF (PVAL) is nearing $10 billion and has doubled in six months, and we plan to launch ETFs for every major fundamental PM with a large franchise. Second, we converted 10 muni mutual funds last quarter; now that is a full growth platform, helping growth in ETFs, muni mutual funds, and muni SMAs. Third, single-country and regional ETFs represent 30% of the platform, all with excellent inflows—we grew over $3 billion into country ETFs, including Korea, Japan, and Taiwan. Given our heritage in managing local markets, we will continue to develop and launch more country and regional ETFs. Fourth, systematic and smart beta is 20%, managed by Franklin Templeton Investment Solutions; our Franklin International Low Volatility High Dividend ETF is approaching $5 billion. We have a great track record and are doubling down. Our capabilities leverage excellent relationships and partnerships with clients. Our U.S. wealth platform is almost $800 billion with hundreds of salespeople covering advisers. We review our business with all platforms regularly. As we evolve our platform and value to clients, we will prioritize platforms that deliver the most value to us. On ETF distribution fee discussions, we are creating business plans with partners. Those that invest in education, sales and support, and impact the business will continue to be major partners as we discuss how to grow together. ETFs are an area where you will hear much more from us. Jennifer M. Johnson: To that last point, platforms always want more revenue share. ETFs are not structured the same way as mutual funds. Depending on the platform, they can influence growth and opportunity for ETFs or not. If the platform will have positive influence, then that is a discussion. If they cannot influence, then we would not consider those fees. Kenneth Brooks Worthington: Got it. Because some are not going to participate in or do not want to participate in the fees, do you think it drives share to shift from those that are willing to partner with distribution to those that are not? Jennifer M. Johnson: Different platforms have different influence. If you can heavily influence, yes, there will be some amount of shift on what you can influence. But the reality is financial advisers are getting more independent. If they are on one of these platforms and they are an RIA, they do not care what the platform is telling them; they are going to sell what they sell. That is where having a huge sales force is important because it is hand-to-hand. If they choose the model from the platform, then the platform influences it. Most of the big RIAs who are big ETF users decide on their own. Matthew Nicholls: A quick point of clarification from an earlier question. I think Alex asked about alternative asset fee-generating versus non-fee-generating. To be clear, approximately 90% is potential to earn fees. Current fee-generating AUM is about 80%. That is on the full $283 billion and varies depending on the manager; that is blended. Operator: Our next question comes from Brian Bertram Bedell with Deutsche Bank. Please go ahead. Brian Bertram Bedell: Great. Thanks for squeezing me in. One on FranklinCrypto. Jenny, could you talk about what market you are targeting and the different product types as you evolve Franklin Templeton Digital Assets? And on tokenization of money funds, the Benji Fund, what is your view on how much tokenized money funds could accelerate given the use cases and yields within digital asset platforms? Jennifer M. Johnson: I love blockchain because it is an efficient technology that drives down costs—good for our industry and clients. But you have to have a wallet to hold a token. All of our traditional distributors, very few have a wallet, so you have to go to the exchanges. The near-term opportunity is with crypto exchanges—Kraken, Ondo, Coinbase, Binance—that have wallets. Two things are happening. One, it is an obvious place to integrate Benji so people can put money into cash. If assets sit in a stablecoin, they do not earn yield; they can shift into a money market fund and earn yield. Second, the top five exchanges have roughly a billion wallets. From a new-client-base perspective, that is interesting, and they are thinking about offering traditional products. We have launched tokenized ETFs—eight on Kraken and five on Ondo—and we are talking to other exchanges. These are for investors interested in more traditional products. You could not hold an ETF or mutual fund unless it was tokenized because they have no other way of custody. We think that is an interesting new opportunity. We are also bringing in a small team, 250 Digital. They have an institutional crypto venture capability. There are institutional investors who want exposure to the space but are not comfortable with a small firm. As part of Franklin Resources, Inc., we think we will see demand from institutional clients interested in investing in the venture part of the crypto space when they start this fall. Brian Bertram Bedell: So we should expect an acceleration of tokenized products as you roll this out over the next few quarters? Jennifer M. Johnson: These things are often a hockey stick. It depends on adoption of tokenized ETFs on exchanges. We are seeing some traction where Benji is an option in programs, and we are starting to see traction there, but it takes time to educate in this space. Matthew Nicholls: We think someone was trying to get in earlier with a question on capital management, so why do we not answer that while we have time? On capital management priorities, our dividend is always top of the list. We want to protect and increase the dividend each year. Our organic growth is taking up more capital than in the past. Our seed capital and co-invest balance sheet allocation has increased to $2.9 billion, up from $2.8 billion last quarter. We expect that to be close to $3.0 billion by the end of the year. We always repurchase our employee-related stock grants to hedge and keep the same amount of shares outstanding. Then we have opportunistic share repurchase. M&A is very active, mostly distribution-related, and some bolt-ons related to alternative assets, in particular overseas. Most of the M&A or inorganic activity is around partnerships and strategic activity in connection with distribution. Jennifer M. Johnson: Great. I think you covered it very well, Matt. Operator? Operator: This does conclude today’s Q&A session. I would now like to hand the call back over to Jennifer M. Johnson, Franklin Resources, Inc.’s CEO, for final comments. Jennifer M. Johnson: Thank you for participating in the call today. We are a people business, and I want to thank all our employees for their hard work and dedication to the company. We look forward to speaking with all of you again next quarter. Thank you. Operator: Thank you. This concludes today’s conference call. You may now disconnect.
Operator: To ask a question, press 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, press 2. If you are using a speakerphone, please lift the handset before asking your question, and please refrain from typing and have your cell phones turned off during the question and answer session. Your host for today's conference call is Matthew Grover, Senior Director of Investor Relations. Matthew Grover, you may begin your conference call. Matthew Grover: Thank you, and welcome to AvalonBay Communities, Inc. First Quarter 2026 Earnings Conference Call. Before we begin, please note that forward-looking statements may be made during this discussion. There are a variety of risks and uncertainties associated with forward-looking statements, and actual results may differ materially. There is a discussion of these risks and uncertainties in yesterday afternoon's press release, as well as in the company's Form 10-Ks and Form 10-Q filed with the SEC. As usual, the press release includes reconciliations of non-GAAP financial measures and other terms that may be used during today's discussion. The attachment is also available on our website at investors.avalonbay.com, and we encourage you to refer to this information during the review of our operating results and financial performance. When we get to the question and answer session, we kindly ask participants to limit their questions to one and rejoin the queue if you have any follow-up questions or additional items to discuss. With that, I will turn the call over to Benjamin Schall, CEO and President of AvalonBay Communities, Inc., for his remarks. Ben? Thank you, Matt, and thank you, everyone, for joining us today. Benjamin Schall: I am here with Kevin P. O’Shea, our Chief Financial Officer, Sean J. Breslin, our Chief Operating Officer, and Matthew H. Birenbaum, our Chief Investment Officer. As is our custom, we have also posted an earnings presentation, which Sean and I will reference during our prepared remarks before turning to Q&A. Starting with the key takeaways on slide four, our first quarter results exceeded our expectations, driven by lower expenses, higher development NOI, and the benefits of our share buyback activity, which was not included in our original outlook for 2026. Our portfolio is well positioned heading into peak leasing season, with very low turnover, solid occupancy, and rents tracking as expected through the first four months of the year. We are also benefiting from the ramp in development NOI in 2026, which will further accelerate during the year and into 2027. Leasing velocity at our projects in lease-up has been strong in a typically slower first quarter, which bodes well for the upcoming peak leasing season. During the quarter, we completed $340 million of dispositions and repurchased $200 million of our shares at an implied cap rate in the low 6% range. Turning to slide five, same store residential revenue grew 1.6% year-over-year, with occupancy up 10 basis points to 96.1%. During the quarter, we started nearly $190 million of new development, with two starts in suburban New Jersey, and we are on track for $800 million of planned 2026 development starts with projected initial stabilized yields of 6.5% to 7%. Our performance in Q1, both operationally and from a capital allocation perspective, sets us up well for the balance of the year. Slide six details the components of our favorable first quarter core FFO per share results relative to our initial outlook. Of our $0.20 of NOI outperformance, 20% was revenue-driven and 80% was attributable to lower operating expenses. On the expense side, certain operating costs budgeted for the first quarter are now expected to be incurred over the balance of the year. Other drivers of our outperformance for the quarter were $0.01 of favorable development NOI from our lease-up communities, as well as $0.01 from our share repurchases in the quarter. Looking ahead, slide seven highlights several factors that continue to support apartment demand and our operating outlook as we move through 2026. First, market occupancy in our established regions remains solid, supporting near-term fundamentals and allowing us to enter the peak leasing season with relative strength. Second, our customers continue to experience healthy wage growth, which will support rent growth throughout the year. Third, the supply backdrop remains very constructive in our markets, with new market-rate apartment deliveries expected to stay at historically low levels for the foreseeable future. And fourth, the economics of renting versus homeownership remain very favorable. During the quarter, the percentage of customers leaving us to purchase a home declined to 8%. Taken together, these factors give us confidence in the resiliency of apartment fundamentals and in the positioning of our portfolio as we move through the balance of the year. Slide eight highlights the strength of our operating and development capabilities to drive differentiated internal and external growth in the years ahead. On operations, we continue to leverage our scale and leadership in centralization, technology, and AI to deliver superior service for our residents and drive operating efficiencies and incremental NOI. Our forecast has us on track to generate $55 million of annual incremental NOI by year-end, our original Horizon 1 target. Our next set of priorities includes the further deployment of AI solutions and our seamless digital self-service experiences, additional enhancements to our technology and data platforms, and further optimization of neighborhood and centralized staffing, all on our way to our Horizon 2 target of $80 million of annual incremental NOI in the coming years. On development, our sector-leading platform is poised to contribute meaningful earnings and value creation in the coming years, with $3.5 billion of development underway, with a projected initial stabilized yield of 6.3% at quarter end. These investments were match funded with capital raised over the past three years at a weighted average initial cost of 4.9%. This spread is well within our strike zone, targeting yields of 100 to 150 basis points above our cost of capital and underlying market cap rates. These deals were conservatively underwritten on an untrended basis and, in many instances, are seeing favorable construction cost buyouts relative to pro forma. These communities will also deliver into an operating environment with meaningfully less new supply. With this tailwind of activity, we continue to expect a meaningful ramp in development NOI and are projecting $47 million of development NOI this year, increasing to $120 million in 2027. Turning to slide nine, we had three dispositions close during the first quarter, and we continue to deploy capital into accretive share repurchases. Beyond crystallizing the significant public-private disconnect in asset values, selling 40-year-old high-rise assets improves our go-forward cash flow growth profile, particularly after factoring in CapEx. Including our repurchases last year, we have now repurchased $690 million of our stock and have $914 million of remaining authorization. In summary, we have a high-quality portfolio well positioned heading into the peak leasing season, operating and technology initiatives that continue to drive internal growth, and a development platform that we expect to contribute an accelerating stream of earnings over the next several years. With that, I will turn it over to Sean to walk through the operating environment and leasing trends in more detail. Sean J. Breslin: Thank you, Ben. Turning to slide 10 to address recent portfolio trends, year-to-date asking rent growth has been pretty consistent with historical norms and our original expectations for this year. Since January 1, the average asking rent for our same store portfolio has increased in the high 4% range, and, importantly, the growth we have experienced this year is well ahead of what we realized in 2025, setting us up well for better rent change as we look forward. Turning to slide 11, our same store portfolio is well positioned as we look ahead to the peak leasing season. Occupancy has been north of 96% and trending modestly ahead of our budget. Turnover remains well below historical norms; it even ticked down 50 basis points compared to Q1 of last year, supported by a variety of factors, including a historical low 8% of residents moving out to purchase a new home and declining new supply in our established regions. As a result, the number of homes available to lease has been lower than last year and has contributed to the 260-basis-point ramp in rent change we have experienced since the beginning of the year. Looking forward, we expect a continued acceleration in rent change. Renewal offers for May and June were delivered at an average increase in the 5% to 5.5% range, which is about 100 basis points higher than where we sent offers for February and March. In terms of regional color, the stronger performers continue to be in the New York Metro Area and Northern California, both of which produced revenue growth slightly ahead of our budget through Q1. Within the New York Metro Area, the strongest markets were New York City and Northern New Jersey. In Northern California, San Francisco has been the strongest market, followed by San Jose and then the East Bay. The entire region has benefited from relatively healthy net job growth over the last few quarters, so the strengthening we have experienced in San Francisco and San Jose started to spill over into the East Bay this past quarter. The Mid Atlantic also outperformed our revenue budget for the quarter, albeit modestly, with slightly higher occupancy across the region and greater other rental revenue. With the hangover from job cuts over the past year starting to fade, we believe the meaningful reduction in new supply will help support the stabilization of the Mid Atlantic region sometime this year. I would not say it has turned the corner just yet, but it is definitely more stable than mid to late last year. In terms of the weaker markets, Boston, Los Angeles, and Seattle modestly underperformed our revenue expectations during the quarter, and the other regions were collectively on plan. Moving to slide 12 to address our lease-up portfolio, we generated very strong leasing velocity of 32 per month during Q1, well ahead of our historical velocity of 23 a month, and we generated that velocity at an average effective rent that is slightly above our original pro forma. It is clear our customers value the new differentiated product we are delivering in these various submarkets and selected an average lease term that exceeded 15 months during the quarter. The occupancies that result from our leasing activity will continue to support the meaningful increase in development NOI projected for this year and into 2027 as Ben noted earlier. Overall, we are off to a good start this year with same store metrics trending at or slightly ahead of expectations, strong leasing activity at our lease-up communities, and the recycling of capital into buybacks at a compelling value. I will now turn the call back to our operator to begin Q&A. Thank you. Operator: We will now open the call for questions. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. To get to as many of your questions as possible, we kindly ask participants to limit their questions to one. You can rejoin the queue after with any follow-ups. Our first question comes from James Colin Feldman with Wells Fargo. Please proceed with your question. James Colin Feldman: Hi. Thanks for taking the question. If you could provide an update on your thoughts on hitting your new renewal and blend guidance for the rest of the year. You still have a pretty meaningful ramp, so can you remind us of the math behind it and what kind of tailwind that gives you? And then as you think about the markets that are doing better and worse, and the expansion markets, how they fit into the story—what gives you comfort on keeping the guidance where it is and your ability to hit those numbers? Sean J. Breslin: Hey, Jamie. In terms of the outlook, to remind everybody, we expected rent change to average 2% for the calendar year 2026, which reflected the first half forecast at 1.25% and the second half at 2.5%. Breaking it out between move-ins and renewals, we reflected move-ins being about 0% for the year and renewals averaging around 3.5%, blending to that 2%. As I mentioned in my prepared remarks, asking rent growth is pretty much tracking about what we expected; it is actually slightly ahead. We came out in the first quarter slightly better than we anticipated, and we have pretty good momentum going into the second quarter. You can interpolate the math required for Q2 to get to the 1.25%, and we feel very confident we are in the right strike zone to hit those numbers. In terms of markets, momentum is certainly strongest in the New York Metro Area and the Bay Area. It is nice to see strength spill over into the East Bay, which typically lags San Francisco and San Jose. The expansion regions are collectively pretty much on track—some slightly ahead, some slightly behind, but as a basket, on plan. Operator: Thank you. Our next question comes from Eric Wolfe with Citibank. Please proceed with your question. Eric Wolfe: Good afternoon. It looks like the percentage of available homes in April is down year-over-year, and you mentioned very low turnover in April as well. Does that allow you to be a bit more aggressive on asking rents and new leases going forward? Maybe some thoughts on what the current data is telling you about pricing power into May and early results on new leases in May? Sean J. Breslin: Yeah, Eric. Based on what we saw in the first quarter, and as Ben indicated in his prepared remarks, we are slightly ahead of our revenue plan— a little bit on rate and a little bit on occupancy. Looking forward, to get to our 1.25% blended for the first half, April started in the high-1% range, almost 2%, so we think we are in good shape overall. Low turnover and low availability continue to support slightly better pricing power. That is certainly better than 2025, where around this time of year things started to soften. The lines continue to spread further, which bodes well for the rest of the leasing season and the second half of the year. Operator: Thank you. Our next question comes from Stephen Thomas Sakwa with Evercore ISI. Please proceed with your question. Stephen Thomas Sakwa: Thanks. I wanted to focus on dispositions and the buyback. How aggressive or large would you be willing to pursue both sides of that equation, given the dislocation we have seen in apartment valuations of late? Kevin P. O’Shea: Sure, Steve. I will offer a few comments. We are in a very strong position to create value through both development and share buyback activity, supported by our balance sheet and continued access to the asset sale and debt markets. First, buybacks and development are both highly attractive to us today; it is not a binary choice. At current pricing, our stock implies a cap rate in the low 6% range, which makes repurchases attractive and immediately accretive. At the same time, development remains compelling, with projected initial stabilized yields in the mid-6% range or higher, while also driving longer-duration earnings growth and portfolio refreshment. Second, our capital plan for the year contemplated that we would be a net seller of about $100 million—roughly $500 million of dispositions and $400 million of acquisition activity. Year-to-date, we have completed $340 million of asset sales and $200 million of share repurchases, which has effectively replaced a portion of the acquisition activity we originally planned. Third, we are already marketing additional communities for sale, which will provide additional proceeds. If our stock remains attractively priced, we would consider additional repurchases and do so instead of acquiring the remaining $200 million of acquisitions in our plan, on a leverage-neutral basis. How much beyond that? We are open to doing more and are prepared to be nimble, while preserving our balance sheet strength and flexibility so we can deploy capital to the highest and best use available. I would not put a single fixed number on how much more we could flex dispositions up to fund buyback activity. The ultimate level will depend on the timing and amount of future asset sales, the valuation of our shares at the time, and the remaining capital gains capacity we have. In a normal year, without special tax planning, we typically have about $100 million in disposition capacity where we can keep the proceeds. We also have a very clean tax position and could use one-time levers to increase disposition capacity, with proceeds available for any purpose, including buybacks. Operator: Our next question comes from Jana Galan with Bank of America. Please proceed with your question. Jana Galan: Thank you, and congrats on the strong start to the year. A question on the decision to maintain the midpoint of FFO guidance despite the $0.05 outperformance in the first quarter. You said close to $0.02 is expenses that may be incurred later in the year, but you are also benefiting from share repurchases being larger and earlier. Can you walk us through that? Kevin P. O’Shea: Sure, Jana. We think affirming guidance is the disciplined and appropriate decision today. We are off to a strong start with revenue trends on track, a first-quarter earnings beat, and completed buyback activity that should add a couple more cents of incremental earnings as the year progresses. At the same time, we are still early in the year, with peak leasing ahead of us, and some of the Q1 beat was expense timing, not a full-year run-rate change. While full-year earnings are currently tracking modestly ahead of our original plan, it is more appropriate to affirm full-year guidance today and revisit on the second-quarter call when we will have a much better read on peak leasing season and the balance of the year. Operator: Our next question comes from John Pawlowski with Green Street. Please proceed with your question. John Pawlowski: Thanks. Matt, a question on the Avalon Sunset Tower sale. Are you able to share the cap rate both on your seller NOI as well as your best guess of the cap rate on the buyer's NOI? You have owned the property since the mid-1990s, so I am curious what type of property tax reset would be felt on that property. Matthew H. Birenbaum: Hey, John. That is a very atypical transaction. You are right—it is an early-to-late 1960s vintage asset and subject to San Francisco rent control, so it is not representative of where the San Francisco asset sales market would be today. There is also an overhang with regulatory upgrades that will be required—seismic and sprinkler retrofits—which really was part of what drove us to sell it. The cap rate we would talk about as a market cap rate—the buyer’s forward T-12—we think was probably in the low 5% range. That does provide an allowance for a certain amount of CapEx that the buyer is going to have to do related to that retrofit work, so it does not map cleanly to anything else. There are other assets we own in San Francisco where, given the loss to lease, those would probably honestly be in the low- to mid-4% cap rate today, which is more typical for valuing the portfolio. John Pawlowski: And then, Sean, a question on two markets where their economies have been stuck in the mud—DC and Los Angeles. Do you expect pricing power to either reaccelerate from here in the coming quarters, just muddle along, or get worse before it gets better? Sean J. Breslin: Good questions. As I see it today, the Mid Atlantic feels a little bit better. Things were rough mid to late last year, but on-the-ground feedback—both from leasing and renewals—shows less angst among prospective and existing renters. We have been able to peel back on concessions a bit. Average asking rent year-over-year is about flat now—we thought it would be down a little—so it feels a bit better. Job worries have faded some, and in certain submarkets—particularly more defense-oriented—there may be a little optimism. If I had to pick one of the two today, I would say the Mid Atlantic looks a little better. In Los Angeles, it has been tough, and there is not necessarily a near-term catalyst other than potential investments related to the World Cup and Olympics. Tax subsidies to promote entertainment content development have not really trickled in yet. We have not seen a clear demand catalyst yet in LA other than very diminished supply; we are looking for it on the demand side. Operator: Our next question comes from Austin Todd Wurschmidt with KeyBanc Capital Markets. Please proceed with your question. Austin Todd Wurschmidt: Thanks. Good afternoon. Sean, you referenced operating momentum into the second quarter. Was there any specific pickup in demand into April that drove the acceleration in lease rate growth after what looked like a fairly modest improvement from 4Q to 1Q? Anything specific in early spring that drove the improvement? Sean J. Breslin: I would not point to significant macro factors; it is more regional drivers. You heard my commentary on the Mid Atlantic and why that feels better. There has been good momentum in the New York Metro Area for obvious reasons. Softer places are what we expected—LA, Boston with basically no job growth over the last six months, and very little in Seattle. It is more a regional story in terms of momentum rather than a macro shift at this point. Operator: Our next question comes from Adam Kramer with Morgan Stanley. Please proceed with your question. Adam Kramer: Thanks. A more philosophical question: historically you have focused on job growth in the deck, but today you highlighted wage growth. Do you think one is a better indicator of apartment demand? And second, with regards to job growth, are you still assuming an uptick in the second half, or is there a different forecast now? Benjamin Schall: Hey, Adam. It is both jobs and wages—we look to total income growth as the driver of rent growth over time. On your second question, our guidance and reaffirmed outlook for this year are based on the economic environment we were experiencing in the second half of last year and continuing into the first quarter, not on any forward inflection. The two main drivers we talked about being different in the second half are: cumulative benefits of lower supply in our established regions—now down to roughly 80 basis points—and softer comps in the second half, which you can see in the presentation. We do look at job forecasts—those are tough to peg month to month. We have generally looked at NABE; NABE’s forecasts are down some, but when we put the pieces together, it does not change our outlook for the second half. Given Sean’s commentary and our start to the first four months, we feel pretty good about our progress and the setup for peak leasing season and the remainder of the year. Operator: Our next question comes from Richard Allen Hightower with Barclays. Please proceed with your question. Richard Allen Hightower: Good afternoon. On development, given the progress you are seeing year to date—Matt mentioned construction costs are maybe a little more attractive versus original underwriting—how quickly can you ramp up the development pipeline, given moving parts and other potential uses of capital? Could you increase the development start number, and what is the lag on that process internally? Matthew H. Birenbaum: It is always a combination of bottom-up and top-down. Bottom-up is the deals themselves; at any given point, we have a significant pipeline we are managing through entitlements, final design, and permitting. At the end of the first quarter, our development rights pipeline was about $4.2 billion. Through the normal course, those deals would bubble up over the next couple of years to being ready. Top-down is how they underwrite, our cost of funds, alternative uses, and the capital allocation decision. We focus on preserving flexibility and think we do a good job with that, so we would have the ability to dial up development more—whether next year or even later this year—if conditions are favorable and it is the right capital allocation decision. In addition to our own pipeline, we also have our Developer Funding Program (DFP), where we provide capital to third-party merchant builders. Roughly five of the 25-to-30 deals under construction today are DFP deals. Those can ramp up more quickly because someone else has done the early pre-work and the deal is ready and looking for capital. There is a lot of that business out there right now. Most of it does not underwrite—which is why you are not seeing starts pick up in a meaningful way—and we like that. We are consciously trying to take a larger share of a shrinking pie of development activity, and we think we are well positioned to keep doing that. Benjamin Schall: To add to Matt’s commentary, at points in the cycle like now, where others are pulling back but we have competitive advantages and a differentiated cost of capital, it allows us to structure deals more optimally. When Matt talks about having $4.2 billion in a development pipeline, we control that at a very low cost. In today’s environment, we can get control of land with much more flexibility than in past environments. Kevin P. O’Shea: And we have the financial flexibility to lean into those opportunities should they manifest. Access to the Lehman—[inaudible]—market is excellent; we priced ten-year debt in the low 5% range. We have access to the transaction market; we just sold $340 million of 40-year-old assets at a 5.4% cap rate. We could sell more representative assets at a lower cap rate, which would give us an opportunity to fund, accretively, development projects that might stabilize in the mid-6% range if there is more we want to have as a quick start to lean into. Operator: Our next question comes from Haendel St. Juste with Mizuho Securities. Please proceed with your question. Haendel St. Juste: I was looking at the turnover chart. We have gone from almost 60% back in 2009, to 41% a year ago, and now in the low thirties. Understanding affordability dynamics, demographics, and the operating platform, is this level in the low thirties sustainable? Is it a new norm? How should we think about turnover over the next year or two, and what is embedded in the guide for this year? Sean J. Breslin: The 31% is a Q1 number and tends to be one of the lower quarters. On an annual basis, the last couple of years we have been mid-40s and then low-40s. Our expectation for this year is we remain in the low-40s. Several factors drive turnover. Substitutes include availability of for-sale product; we do not see that changing anytime soon. Even if rates come down, the available inventory is not there across our established regions. That remains a tailwind or at least neutral for the foreseeable future. Other substitutes include other available supply; that has ticked in our favor the last couple of years, coming down to historical levels and projected to dip even further over the next year or two. The rest are normal life events—marriage, divorce, children, caring for parents—things that happen regardless. The primary things that move turnover up or down are the options within a market. It takes a while to build new multifamily and to entitle single-family in these markets, so we have a pretty good runway for a couple of years on that point. Operator: Our next question comes from Michael Goldsmith with UBS. Please proceed with your question. Michael Goldsmith: Good afternoon. Thanks for taking my question. I am here with Ami Probandt. On renewals, nice acceleration there—what is driving that? Is it in line with your expectations? And how have renewal negotiations trended recently? Sean J. Breslin: Overall, we have seen nice acceleration this year, as indicated in our release and in the move from Q1 into April. Both occupancy and lease rates are blending to slightly ahead of our original budget, so we are in good shape. Seasonally, asking rents tick up and renewals drift up behind it. Stronger markets—like those I mentioned—see a nicer pickup versus softer ones like Boston, LA, and Seattle. We have seen good movement across most regions with a few exceptions, slightly ahead of our original expectation. Operator: Our next question comes from Alexander David Goldfarb with Piper Sandler. Please proceed with your question. Alexander David Goldfarb: Thank you. On lease-ups, the pace is exceeding normal monthly levels, yet new rents overall are still muted. You mentioned only two standout markets—New York and Northern California—and a lot of your development is elsewhere. How should we think about the strong lease-up pace versus still-muted rents overall? Is it heavy concessions, or why are lease-ups so strong while pricing is still soft? Sean J. Breslin: On the lease-up basket for the quarter, that is nine communities: four in New Jersey, one in Charlotte, two in the Mid Atlantic, one in South Miami, and one in Austin. In general, customers are compelled by the product we are offering. On concessions, customers are choosing on average longer lease terms—over 15 months—and we are doing roughly six weeks free, around 9%, not terribly different from normal. Matthew H. Birenbaum: It is a combination of compelling product in submarkets that have not seen much new supply in a long time. Most of the development NOI is coming from the four New Jersey deals plus South Miami; those are the ones where rents are quite a bit higher than the other markets. In South Miami, for example, the community is over a brand-new fresh market on the south/east side of US-1, with walkability and schools that comps in other neighborhoods do not have. In New Jersey, Avalon Wayne has both townhomes and flats; it is the first new product Wayne has seen in probably 35 years. That is part of our development strategy. One of our starts this quarter is Saddle River—another place with seven-figure home values in Bergen County and no new multifamily in two generations. We are getting an outsized share of demand because of the differentiated and compelling nature of what we are offering. Operator: Our next question comes from Analyst with RBC Capital Markets. Please proceed with your question. Analyst: Thanks. Sean, following up on the average lease term over 15 months—does that come from you nudging people in that direction to lower expirations in-season, or is there a broader shift away from a normal one-year lease term? Sean J. Breslin: It is a little of both. The season and our desired expiration profile for the subsequent year matter. In some markets with townhomes—like Wayne and South Miami—families want to get through the school year and have some time. On average, we were nudging less in Q1 than normal, and people were picking longer lease terms, particularly with that product. Nice to see the preference for slightly longer terms come through from customers. Operator: Our next question comes from Analyst with Cantor Fitzgerald. Please proceed with your question. Analyst: Thanks. I wanted to dive into new and renewal lease rate growth. You mentioned offers out at 5% to 5.5% for renewals and 3.5% renewal for the full year. Is it fair to say that the flat new lease rate growth embedded in guidance could be greater based on numbers you see today, but you are holding the line until you have more information? Sean J. Breslin: We are generally tracking on plan; rates are slightly ahead. Q1 has fewer expirations than Q2 and Q3. We see a nice trajectory in asking rent growth, and things look pretty good. We will have a much better data set as we get through Q2, with a lot more leasing to do. We will revisit at midyear and update our thinking then. We have not seen anything yet that says we should do anything different than reaffirm what we already said. Operator: Our next question comes from John P. Kim with BMO Capital Markets. Please proceed with your question. John P. Kim: Thank you. What are you seeing in terms of market concessions competitors are offering? Any noticeable change as you enter peak leasing season? And what are you expecting for your concessions versus last year? Sean J. Breslin: Concessions are very much regional. In the markets I indicated as stronger or weaker, that is where you will see activity. Concessions are up in Boston, Seattle, and LA year-over-year, and down meaningfully in Northern California and the New York Metro Area. It depends on the market and submarket. For example, in Denver’s particularly urban submarkets, you can see 2.5 to 3 months free; in the suburbs it might be six weeks. In parts of the Mid Atlantic, some places are down to no concessions; others are a month. Hard to generalize overall. On a net effective basis, rates are tracking in line with what we expected—modestly ahead, but not a lot. Operator: We have reached the end of the question and answer session. I would like to turn the floor back over to President and CEO Benjamin Schall for closing remarks. Benjamin Schall: Thanks for your questions today. Thanks for joining us, and we look forward to visiting with you soon. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.
Operator: Good morning. My name is Krista, and I would like to welcome everyone to the JetBlue Airways fourth quarter 2025 earnings conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. I would now like to turn the call over to JetBlue's Director of Investor Relations, Koosh Patel. Please go ahead, sir. Koosh Patel: Morning, everyone, and thanks for joining us for our first quarter 2026 earnings call. This morning, we issued our earnings release and the presentation that we will reference during this call. All of those documents are available on our website at investor.jetblue.com and on the SEC's website at www.sec.gov. In New York, to discuss our results are Joanna Garrity, our Chief Executive Officer, Marty St. George, our President, and Ursula Hurley, our Chief Financial Officer. During today's call, we will make forward-looking statements about our outlook, strategy, and future performance. These statements are based on our current expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release and SEC filings for information about factors that could cause those differences. We may also discuss certain non-GAAP measures. Reconciliations to the most directly comparable GAAP measures are included in our earnings materials and on our website. And now I'd like to turn the call over to JetBlue's CEO. Joanna Garrity: Thank you, Koosh. Good morning, and thank you for joining JetBlue's first quarter 2026 earnings call. I want to begin by thanking our crew members for their continued [inaudible] during what has been another challenging start to the year. And I also want to recognize the TSA agents for their commitment during this shutdown. This first quarter included multiple winter storms and TSA disruptions, but through it all, we are grateful our teams remained focused on delivering a safe and reliable service for our customers. The conflict in the Middle East and its impact on fuel prices is the most significant headwind we face as an industry since COVID. Given the sharp increase in the price of fuel and the expectation for elevated prices throughout this year, we are suspending our prior full-year guidance as we aggressively adjust to the evolving macro backdrop. I want to be clear: suspending our full-year guidance reflects external factors alone and not a change in the strong progress of Jet Forward. We have taken immediate action to offset fuel costs with our ultimate focus on minimizing the financial impact and preserving our liquidity position. The three primary levers available to us are adjusting fares to better align with input costs, moderating unproductive capacity, and pursuing additional cost savings opportunities. We recognize that customers expect strong value from JetBlue, and we're continuing to carefully balance our path to restoring profitability with meeting those expectations. Importantly, demand remained strong. This backdrop allows us to recover some of the increase in fuel costs, and as such, we've adjusted fares along with the industry over the last two months. Bookings have remained resilient amidst these changes, which is an encouraging sign. However, the first quarter was already over 90% booked before fuel prices suddenly spiked, reducing the opportunity to immediately recapture the impact of this significant fuel increase. We expect 30% to 40% fuel recapture in the second quarter and plan to achieve 100% recapture by early 2027. Given the broader cost environment, we've also made targeted updates to ancillary fees such as checked bags. This allows us to better cover costs while keeping our base fares competitive. We will continue looking for additional ways to strengthen revenue performance throughout the rest of the year. At the same time, we are aggressively reducing capacity, targeting adjustments in off-peak and shoulder periods. We've acted quickly, reducing capacity by nearly one point versus close-in expectations in the second quarter, with plans to reduce the second half by at least two to three points. While we are able to reduce capacity closer in, as we've done, these decisions are more beneficial when made at least 60 days in advance to take even greater advantage of cost savings opportunities. And with demand continuing to remain strong, it's important we take a flexible approach, trimming capacity as we head into the peak summer season. We plan to closely monitor market conditions and expect to reduce additional capacity after the summer peak, assuming fuel prices remain elevated. In addition to managing capacity, we have opportunities to reduce other expenses and better align our cost profile with capacity. This includes efforts to reduce controllable spending and hiring, and in a lower capacity environment, we also expect savings on maintenance and other variable costs such as landing fees. As we meaningfully adjust capacity to address higher fuel, we are committed to pulling all levers available to mitigate potential upward pressure on unit costs. Alongside these efforts, we believe Jet Forward remains the right strategy to navigate us forward. Across each of our priority moves—reliable and caring service; best East Coast leisure networks; products and perks customers value; and a secure financial future—we are seeing clear evidence that our strategy is working. We remain on track to drive $310 million of incremental Jet Forward EBIT in 2026 and $850 million to $950 million in 2027. And as a reminder, we have transformational initiatives launching this year, including domestic first class, continued implementation of our Blue Sky collaboration, and our second Blue House, which are expected to drive significant value for years to come. In closing, demand remains intact. Our Jet Forward initiatives are performing, and we are actively managing levers within our control. I remain confident we have the right strategy and the right team to navigate yet another challenging year for the sector, even in the face of these macro factors. As we gain greater visibility into fuel and its impact on the macro environment, we will plan to provide an updated view on full-year expectations. I'll now turn it over to Marty. Marty St. George: Thank you, Joanna, and thanks again to our crew members. We delivered strong RASM performance, a positive 6.5% in the first quarter, in line with our revised guidance and exceeding the midpoint of our initial RASM range by 4.5 points. The Caribbean airspace closure in January and winter storms Fern and Orlando combined to reduce capacity by nearly four points, which benefited RASM performance by two points. The remaining 2.5 points of our RASM beat is a reflection of demand strength and the effectiveness of our Jet Forward initiatives. Demand trends strengthened as the quarter progressed, and importantly, that momentum has carried into the second quarter. We saw strength across the booking curve, both close-in demand and further out, with improvements in both peak and trough periods. Premium continued to outperform core, with year-over-year premium RASM better than core by nine points in the first quarter. We are encouraged by improvements in core demand and RASM, which is now strongly positive year over year, reflecting a more balanced demand environment across our offerings relative to what we experienced last year. Delivering the differentiated JetBlue experience across each unique customer offering meant even more in core remains a priority, reinforcing our commitment to all customers, not just select segments, even as fuel costs remain elevated. Lastly, while we saw strength in both domestic and international bookings, domestic has recovered meaningfully, and year-over-year RASM outperformed international. First quarter RASM was also benefited by about 1.5 points from a shift of outbound Easter traffic into late March. This was a historic quarter for our loyalty program, highlighting the investments we've made in our product and operation. Loyalty cash remuneration grew 19% year over year, driven by double-digit growth in spend on the JetBlue card. In addition to record levels of spend and a 45% increase in card acquisitions, we achieved all-time highs for TrueBlue active members and attach rates in our non-focused city geographies. Blue Sky is also driving co-brand sign-ups, reflecting the broader reach the collaboration brings to our loyalty program. We continue to add utility and value for our members in other ways this quarter, including the ability to use points for ancillary purchases, which is off to a very strong start. We also launched Family Tiles, an industry first that allows parents to earn status faster when traveling with their children. Finally, customers are responding exceptionally well to our Blue House at JFK, with NPS trending well above expectations and driving premium credit card sign-ups beyond our initial targets. We believe the opening of our next lounge in Boston later this summer will be a further catalyst for premium growth, alongside the launch of domestic first class, expected in the second half. As these products and perks ramp, and both new and existing members deepen their loyalty engagement, we expect meaningful sequential growth in loyalty revenue throughout the year. Strong customer response to our strategic growth in Fort Lauderdale drove first quarter RASM growth of 5% even with capacity growth of 23%. In late March, we announced another round of additional service from Fort Lauderdale—one new destination to Cleveland, and added frequencies on nine routes—where customers want more choices where they fly. With the addition of Cleveland, JetBlue will have launched nonstop service to 21 cities and increased frequency on over 20 high-demand markets in Fort Lauderdale over the past year, further strengthening our investment in building depth and connectivity in Florida's biggest premium market. Through our recent growth and competitive reductions, we've been able to take advantage of newly available gate space to build a schedule with four connecting banks beginning this summer, up from two banks previously. This provides our customers in the Northeast significantly more opportunities to connect to our growing portfolio of destinations in the Caribbean and Latin America. We remain excited about the long-term opportunity in this focus city, and continue to view it, in addition to key leisure destinations throughout the state of Florida, as an essential component of our network strategy. We've now grown to 11 destinations in Florida, following the launch of service to Destin-Fort Walton Beach from both New York and Boston in the first quarter. Blue Sky reached a new milestone in the first quarter with the launch of interline flight sales with United. We are encouraged by the early results we're already seeing and are excited by the new opportunities we expect this collaboration to bring to our customers. This quarter, reciprocal loyalty benefits across Mosaic and MileagePlus tiers are expected to turn on, in addition to sales of rental cars through our Paisley platform. For the second quarter, we expect continued strength in RASM supported by sustained demand trends and progress from our Jet Forward initiatives. This quarter is anchored by peak periods in early April, late May, and late June. The Easter outbound shift represents a second quarter headwind of about 1.5 points of RASM. As a result, we expect RASM to grow 7% to 11% year over year on 1.5% to 4.5% more capacity. Our investments in Fort Lauderdale now comprise all of our second quarter capacity growth. We are taking a similar approach to guiding RASM as we have in the past—guiding to what we see today, which points to a sustained level of strong yields and loads for the remainder of the quarter. As we progress through the quarter, we plan to monitor the demand environment for opportunities to continue optimizing yields to help offset fuel costs. As of today, over two-thirds of the quarter's revenues are on the books, and as mentioned, our second quarter RASM guidance implies we recaptured 30% to 40% of the fuel cost increases versus our initial plan for the quarter. We are encouraged by the demand trends we're seeing, and believe we are well positioned to generate significant RASM growth this quarter as we head into the summer peak travel season. Now I will turn it over to Ursula. Ursula Hurley: Thank you, Marty. As Joanna mentioned, the start to 2026 was marked by a dynamic operating environment and macro backdrop. The industry climate seems to be evolving every day, and we are responding quickly to position JetBlue to our financial priorities. For example, we've actioned several capacity reductions across the second quarter and plan to stay nimble in the second half of the year. At the same time, we are prioritizing capacity investments in our Fort Lauderdale focus city where customer response has been strong and the resulting RASM is performing extremely well. Our underlying business is clearly improving, with a roughly five-point spread between RASM and CASM ex-fuel expected at the midpoint of our guidance ranges this quarter. We haven't seen a gap like this in years, and it reflects strong demand for our product, better cost discipline, and real momentum from our Jet Forward initiative. During the first quarter, CASM ex-fuel growth finished up 6.6%, four points of which was due to close-in capacity reductions from the operational disruption. Without these impacts, CASM ex-fuel would have finished up 2.5%, or two points better than our initial midpoint. One point of this beat was due to cost-saving efforts, while one point of spend is expected to shift into the remainder of the year. For the second quarter, we expect CASM ex-fuel to increase in the range of 3% to 5% year over year. We continue to expect CASM ex-fuel growth to moderate down during the second half of the year, with over two points less unit cost growth than the first half, although this remains subject to how the price of fuel evolves in the coming months and our final capacity levels. Average fuel price for the first quarter was $2.96, 26% higher than the midpoint of our initial guidance. We expect second quarter fuel price to be in the range of $4.13 to $4.28, with the midpoint 75% higher year over year, which is derived from the forward Brent curve as of April 10. As a reminder, every 10¢ increase or decrease in fuel price is the equivalent to about $85 million of expense for the full year. To help offset a portion of fuel costs, we continue to focus on our fuel efficiency programs, with 30% of our second quarter capacity powered by more fuel-efficient new engine technology, supporting a targeted 5% fuel-efficiency improvement over the last three years. With oil and crack spreads expected to remain elevated for a sustained period, we are actioning incremental cost reductions beyond capacity cuts to mitigate the impact. These include reducing spend across both OpEx and CapEx and slowing hiring in some work groups to better align with our capacity expectations. At the same time, we are executing on our structural cost initiatives under Jet Forward, including rolling out new technology and AI to support improved planning for our crew and operation, launching a sourcing center of excellence to further optimize contract spend with business partners, and implementing more efficient insourcing and outsourcing opportunities across the business. Taken together, we expect our near-term cost reduction efforts and our Jet Forward cost initiatives to support strong cost control this year. While we did suspend our full-year CASM ex-fuel guidance, we expect its historical relation to capacity to continue this year, which implies roughly flat CASM ex-fuel on mid- to high-single-digit capacity growth. Turning to our fleet and capital expenditures, in the first quarter, capital expenditures totaled $141 million, $59 million lower than our initial guidance due to timing shift of deliveries. Looking ahead, we expect approximately $275 million of capital expenditures in the second quarter and approximately $800 million in 2026. There has been a slight shift to our A220 deliveries, and we now expect 12 total aircraft deliveries this year, down from our January guidance of 14 aircraft. And as previously discussed, we expect CapEx to remain below $1 billion annually through the end of the decade. Shifting to our balance sheet, we believe our unencumbered asset base and liquidity help us successfully manage through industry shocks like these, and I am pleased with the runway we've built for JetBlue. We raised over $3 billion back in 2024 to secure our financial future and give Jet Forward a runway to perform, and the cash we have on hand as a result is a valuable cushion in this volatile high-fuel environment. We ended the quarter with $2.4 billion of liquidity, or 26% of trailing twelve-month revenue, above our liquidity target of 17% to 20%. This excludes our $600 million undrawn revolving credit facility. Earlier this month, we raised $500 million secured by aircraft collateral, with an accordion feature that allows us to upsize to $750 million. We plan to reassess our funding needs as the year progresses. We also recently repaid the remaining $325 million of our 2021 convertible notes. Lastly, following this month's capital raise, our unencumbered asset base remains over $6 billion, with approximately a quarter in tangible collateral. Our priority remains maintaining a strong liquidity position and ensuring Jet Forward has the runway to perform. To wrap up, the environment we are operating in is challenging and volatile. We are focused on taking swift action and executing on our Jet Forward strategy to put JetBlue in a position to restore operating profitability when the environment has normalized. We have taken meaningful action across the three main levers we control—fares, capacity, and cost—and we are pleased with the early results of these actions. We remain encouraged by the underlying performance of the business and are confident that Jet Forward is the right plan to navigate this challenging environment and deliver value for our shareholders. With that, we will now take your questions. Operator: Thank you. If you would like to ask a question, please press [inaudible]. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please requeue. And your first question comes from Mike Linenberg with Deutsche Bank. Please go ahead. Analyst: Mike Linenberg, Deutsche Bank: Yeah, hey, two questions here. With respect to your domestic first class, have you actually started selling that for the back part of the year? And if you are, can you just give us a sense of what the initial uptake looks like? Okay, great. And then just my second question probably to you, Joanna. There appears to be, like, a subset of the industry that, among other things, is requesting a suspension of the ticket tax, and given that that is a user fee to fund the system, could we be in a situation where half the industry is, I don't know, subsidizing the use of the system for the benefit of the other? Is something like that even possible? I'm just curious about your thoughts about that. Thanks for taking my question. Marty St. George: Hi, thanks. Good question, Mike. We have not begun selling it yet. We want to wait until we understand fully the implementation timeline. As we said, it was gonna come in 2026, and we're still on track for that to happen, but we will announce the open sales date when we know the first plane is to be out there for sale. We're currently going through the certification process. On the ticket tax question, I'd also add the ticket tax is viewed by the industry as a very unfair tax because we way overpay versus private aviation. I would love for it to be reformed for other reasons, but I'm not sure this is the reason. Joanna Garrity: Yeah, not entirely sure maybe which fee you're speaking about, but if it were to apply to one carrier, it would presumably need to apply to everybody. The numbers associated with that—we looked at that early on—aren't significant. Every dollar counts, but it ultimately was somewhere in the area of $2.025 billion annually. Operator: Your next question comes from the line of Conor Cunningham with Melius Research. Please go ahead. Analyst: Conor Cunningham, Melius Research: Hi, everyone. Thank you. I'm trying to understand the comment that you were 90% booked in 1Q when jet fuel started to move up and just what that means to sequentials. Again, I realize you expect 30% to 40% recapture, but I would think that the fact that—I think there's been, what, six industry fare increases—that the uplift in revenue would have been a little bit better in 2Q. So if you could just talk about what's going on there in a sequential step-up? I realize the capacity is stepping up with it, but just any thoughts. And then, Ursula, maybe you could—I think you have $6 billion of unencumbered assets. I realize you probably don't want to touch that quite yet, but if you could just talk about the accordion that you have within that current structure, what scenarios you would see yourself looking to tap that $250 million, just in general? Thank you. Joanna Garrity: We were 90% booked in 1Q because, remember, fuel spiked in early March. We were already 90% booked for the quarter. So you aren't able to recapture with those fare increases for the bookings already on the books because they were booked in January and February at a lower price. Everybody would have been largely in the same position as us—there were already bookings that had taken place for 1Q. So headline, there's no news there. It's just saying we weren't able in 1Q to take advantage of the fare increases because people already bought fares at the lower prices. Going forward, once those fares started going in, very different story. Ursula Hurley: Thanks for the question, Conor. We're certainly pleased with where we ended the quarter in terms of liquidity. Our target is 17% to 20%. We ended the quarter at 26%, so we still have a cushion. Our original 2026 plan assumed that we would raise $500 million this year. We executed a deal utilizing aircraft to lock that in. We've drawn on a portion of that already, and we'll draw on a second portion later this year. We obviously built in flexibility in the accordion, so we do have an incremental $250 million that we can draw on. Given the magnitude of the fuel price impact that we're seeing in the business, we will most likely draw down on that in order to maintain our 17% to 20% liquidity target. Operator: Your next question comes from the line of Dan McKenzie from Seaport Global. Please go ahead. Analyst: Dan McKenzie, Seaport Global: Oh, hey. Good morning. Just, Ursula, following up on that last question, what additional cash could potentially be raised from extracting equity from deliveries or just aircraft financing? And under what scenarios might you want to raise additional capital beyond that accordion? And second question here, maybe for Dave or Marty: going back to the script here, two points of RASM beat from stronger-than-expected demand and demand that sort of accelerated at the end of the quarter. What's driving that? How sustainable is it? And at what point would you expect demand to be more elastic? Ursula Hurley: Thanks for the question, Dan. Our target is 17% to 20% liquidity, so I feel comfortable staying within that range. The aircraft that are purchased this year—there are 12 of them coming—we're assuming we purchase those with cash. So if we are at risk of falling below our liquidity level, we could decide to lever up those new deliveries. We also currently have a healthy unencumbered asset base of $6 billion—about 30% of that is aircraft and engines that we currently have on property. And then we also have our slots, gates, and routes, our brand, and incremental loyalty that we can do. So we have options, and if we're at risk of falling below our liquidity target, we'll assess all markets and look at all of our collateral and decide what would be the most effective. Marty St. George: Dan, thanks for the question. I'd say two things. In the fourth quarter, when we did our fourth quarter call three months ago, we called out that we had RASM performance accelerating through 2025. So what we saw in early 2026 is consistent with what we've seen in general. The revenue environment has been extremely robust even in the face of pretty high fare increases. Air travel is still a really good value. A4A put out a document looking at price changes from 2019 to 2026 across 20–30 different commodities—air travel was the only one where prices are actually down from 2019. Eggs up 96%, air travel down 3%. It's very common that you can fly, for example in June, from Orlando to JFK for cheaper than it takes to take an Uber from JFK to Midtown. With the quality of JetBlue, demand has held up very well for us. Even with the price increases, we still see economy demand strong and positive unit revenue in the economy cabin. Maybe I'll just add our Jet Forward initiatives are contributing to this—product, loyalty, merchandising—driving stronger engagement and yield performance. Our co-brand acquisitions are up, so elements of the strategy are also contributing to this stronger environment specific to JetBlue. Operator: Your next question comes from the line of Jamie Baker with JPMorgan. Please go ahead. Analyst: Jamie Baker, JPMorgan: Hey, good morning, everybody. So, Marty, JetBlue ordinarily generates less revenue in the third quarter relative to the second quarter, and of course there's a positive Easter benefit in this year's second quarter, making the comparison even tougher. But there's significant yield momentum right now. Fuel recapture improves over time. What probability would you ascribe—the third quarter revenue being higher than that of second quarter? Or is that simply off the table? And second, Joanna, you're not a member of this association for value airlines, but I've seen varying press reports that maybe you did participate in the recent $2.5 billion bailout request. Can you clarify and bring us up to speed in general on your thoughts as to selective government bailouts? Marty St. George: We've not guided third quarter and we're not going to guide third quarter. Based on what we're seeing in the demand environment right now, we remain optimistic that as the year progresses we will continue to recover more and more of the increased price of fuel. We need to recover more than that because many of our other inputs have gone up, but we feel very optimistic about demand. For the last month of the third quarter, we've talked about capacity cuts—internally, we've taken two to three points out of our second half supply, very much focused on the September through December period. We're assuming fuel prices at the current curve, and because of that, there's certainly capacity that we think will not be economical. That's also contributory to a good revenue environment. I won't give a probability, but as of now, we're very happy with the demand environment we're seeing in both premium and coach. Joanna Garrity: Thanks. High level, it's no secret that the last administration contributed to a disadvantage in the industry, whether it's Spirit–JetBlue's proposed merger or the blocking of the NEA, contributing to a sector that is less resilient compared to some of the larger carriers. We're in a different position because we have a healthy unencumbered asset base and strong liquidity. Never say never—we're open to anything and everything, assuming the terms would make sense for JetBlue. But at this point, we're focused on executing Jet Forward, continuing to control the pieces of the business that we can control to offset the impact of elevated fuel prices, and we'll watch like you're watching to see how that shakes out with Spirit and the value carriers and whether anything comes their way. Operator: Your next question comes from the line of Duane Pfennigwerth with Evercore ISI. Please go ahead. Analyst: Duane Pfennigwerth, Evercore ISI: Thanks. Maybe just a follow-up right there. Joanna, in the scenario where Spirit gets support but nobody else does, would this influence your thinking about consolidation? And then, Marty, as you think about dialing down your schedule in the second half, what is your focus? What types of flights are most under the microscope? Joanna Garrity: No. There are enough people out there commenting on every little piece of the business right now. We're focused on executing the plan. Even in a potential Spirit bailout scenario, we’re going to continue to execute our Fort Lauderdale strategy. As was mentioned, our Q1 ASMs were up 23%, RASM is up 5%. Customers are clearly picking JetBlue—it’s a better product and better service, and we’re going to fly. We have a great plan regardless of the outcome at Spirit. I feel for their people—we’re hiring a number of them to try to make sure they have a soft landing. But it's a really tough situation. There continues to be an imbalance of scale in the industry. We’re doing what we can with Blue Sky. It is full steam ahead in Fort Lauderdale, and we look forward to continuing to bring the great JetBlue product and service there. We’re now the number one carrier at Fort Lauderdale compared to pre-COVID, and we look forward to continuing to grow. Marty St. George: Thanks. That's a simple one. We are assuming the fuel price for the rest of the year will match what the forward curve is saying, and at that level, there are certainly a small percentage of flights that we believe will not be accretive during that time period. The economics of reducing capacity are very much biased towards reducing it further out in advance because you can save a lot of expense when you do that. We did a little bit of pulling from the May schedule; it's much less effective that close-in because crews are already bid. But when we make decisions early for the fall, it's very effective to save significant expense. Where the pulls are happening is generally off-peak periods—Tuesdays, Wednesdays—nothing unusual. Although we are seeing good strength in the troughs, they're still troughs compared to peaks. It's a math exercise rather than a strategic exercise. Our goal is to get to the best top line we can, and if we see stuff that won't contribute, we will take action. Operator: Your next question comes from the line of Savi Syth with Raymond James. Please go ahead. Analyst: Savi Syth, Raymond James: Hey, good morning. Marty, on Fort Lauderdale, given all the changes you’ve done and the significant investment there over the last years, post this summer rebanking, where are you in the innings of really building up Fort Lauderdale, outside of maybe the opportunity if you get more gate? And as a follow-up, on New England strength—where are you on that front? Marty St. George: Great question. The real question is what happens with our biggest competitor there. We have added significant capacity; we're double the size of our next biggest competitor. We did not go into this with any expectation of Spirit going away. We've taken advantage of gate availability with some of their pull-downs to add more service and have a more formal bank structure, which we're excited about. To the extent they keep pulling down, we will backfill that capacity. Adding roughly a quarter of our capacity and still having RASM about one point off system RASM is outstanding performance. The JetBlue value proposition resonates in South Florida. We're extremely excited about the arrival of the domestic first class product later in 2026. Success should breed success, and we’ll continue to build Fort Lauderdale as capability allows. When we first talked about Fort Lauderdale, we said our goal was to get to the size of Boston. As capability happens, we will be at that point—a third leg of the stool. A lot depends on gate availability. On New England, I’m comfortable with what we’ve done. The addition of service in places like Bradley and Providence, in addition to Boston, is performing well. Airplanes will follow demand. We’re on year two of the ramp and generally ahead of where we expected, in some cases way ahead. Summer is somewhat lower demand for Fort Lauderdale; once we get to the fall, we should expect significant additional growth in Fort Lauderdale to the extent we have gates. Operator: Your next question comes from the line of Michael Golding with BMO Capital Markets. Please go ahead. Analyst: Michael Golding, BMO Capital Markets: Good morning, and thank you for the question. You're seeing healthy card spend and acquisitions. Can you unpack this by region? Is this really JFK-driven right now? And how does that influence your thinking for the opening of Boston, as well as how things are trending with Fort Lauderdale? And then on Paisley and Blue Sky, can you talk about the pipeline and initiatives to add additional partners to scale this platform, over and above United? Marty St. George: Hi Michael, thanks for the question. I wouldn’t say there are significant regional differences in card spend. There are regional differences in where the cards are—New York, New Jersey, New England account for the majority. One focus in 2026 is to increase our base in South Florida. We’ve done well with the credit card but are under-indexed in South Florida. As we add capacity there, plus United’s capacity and Blue Sky redemption opportunities—customers can fly anywhere in the world with TrueBlue points—we’re bullish about building a broader offering from South Florida that will translate into credit cards. Given the location of the Blue House, New York and Boston are focal points for the card business. We are looking to find space for a Blue House facility in Fort Lauderdale. Terminal 3 is tough for lounge space, but we’re working with Broward County Aviation to find a solution—no news to report yet. On Paisley, we’ve talked to a single-digit number of other partners—some airlines, some non-airline. We’re in the RFP process with one partner now and are very excited. Nothing to report on details, but we expect to be competitive. We are starting to get some United content independently. Today, you can buy a JetBlue Vacations package that has United air in it, and JetBlue Vacations has sold packages to United destinations. Rental cars are coming very soon, hotels at the beginning of the third quarter, and we’ll continue with packages, cruises, etc., later in the year. The relationship with United has been very strong, and we’re excited to get their customer base to experience Paisley. Operator: Your next question comes from the line of Tom Fitzgerald with TD Cowen. Please go ahead. Analyst: Tom Fitzgerald, TD Cowen: Hi, thanks for the time. Sticking with Blue Sky, I think on this call a year ago you talked about a TrueBlue person who might need to go to, you know, Omaha or Boise, and the value prop for them. Are you seeing the response from those customers that you hoped for? And what's the early response from MileagePlus customers onto your own network? And as a follow-up for Ursula: lessons learned on pulling controllable spend closer in than expected, and levers you're looking to pull in the back half of the year? Marty St. George: Great question, and we watch this closely. We have a forecast of where we would expect United customers to book on us, and it's exactly what we expected—LA–New York, Boston–New York, LA–New York, San Francisco–New York, San Francisco–Boston. Surprisingly good results at DCA—DCA to Florida and DCA to Boston—given United’s large customer base. This is exactly what we hoped for: JetBlue flights within the United distribution channel help us in places where we don't have the same share of mind, like Washington or the West Coast. We’re working on mixed-metal connections—flying JetBlue into, for example, New York–Houston in United’s banks and then connecting on United to secondary destinations. No date yet; it’s a tech challenge, but we’re optimistic. At its core, this is like our other 50-something interline relationships, just with a very big airline with strong distribution that complements our network. I’ll just add, the whole point is not to give customers any reason to choose anyone but JetBlue, particularly in Boston and New York. We’ve heard investor anecdotes where, because of United connectivity through Blue Sky, they booked via JetBlue to Asia, earned TrueBlue points, and chose us over a Boston-based competitor. Ursula Hurley: Thanks, Tom. I’m super proud of the team and how they’ve managed controllable costs. We pulled a significant amount of capacity out of the network last year given the lack of demand, and the team found $40 million that allowed us to maintain our full-year guide. We get creative—better aligning hiring, revising maintenance schedules, reducing discretionary spending. Great progress on fuel efficiency initiatives—about 5% savings over the last three years. We’re advancing Jet Forward cost initiatives: creating a sourcing center of excellence, leveraging data science and AI to build tools for better operating efficiency and planning. We’ve simplified the fleet by exiting the E190. Q1 is the high watermark, also impacted by disruptions. As Jet Forward cost initiatives ramp through the rest of the year and as capacity grows slightly in the second half, we’ll continue to see efficiencies. We’re going to do everything we can on controllable costs to come as close as possible to the original full-year guide. Operator: Your next question comes from the line of Brandon Oglenski with Barclays. Please go ahead. Analyst: Brandon Oglenski, Barclays: Hey, good morning, and thank you for taking the question. Joanna, it’s another frustrating year with volatility in oil markets and potentially another year of not turning a profit. You mentioned the lack of scale versus larger competitors with better balance sheets and profitability. How do you structurally address the lack of scale relative to competitors? Is there something you need to think about strategically? Joanna Garrity: Thanks for the question. Starting with Jet Forward: we are seeing it work and drive underlying performance. If you look at our operating margin for Q1 and adjust for fuel, it would have actually been five points better than the actual operating margin, and three points better than implied guidance—so negative five if you adjust for fuel versus an implied negative eight. Year over year, there was a three-point expansion when you adjust for fuel. We’re seeing gains in NPS—we’re back at the top of the industry; nice progress in Fort Lauderdale; a five-point RASM–CASM spread in Q2, the most we’ve seen since the start of Jet Forward. It’s a big year for Jet Forward: Blue Sky implementation, lounges, domestic first, and more. The strategy is working; the challenge is the macro environment and volatility. While macro factors impact the timing of our return to profitability, the goal is, when those subside, we’ll see all the benefits of Jet Forward come to fruition. On scale, we recognize its importance—that’s why we tried the NEA and Spirit merger. We’ve pivoted to Blue Sky, and early points show we’re giving more utility and relevance to customers even if we don’t serve a particular destination. We continue to raise concerns in Washington about imbalance, but we’re focused on what we control—our network, our loyalty platform—and accelerating relevance where people know and love our brand: the Northeast and Fort Lauderdale. Scale will continue to be a challenge for midsize and small carriers, but Blue Sky is an important part of helping with that. Paisley is the other piece—a low-capital business that should drive earnings over time and give us an independent revenue stream to help propel us back to profitability over time. When the macro subsides, the plan should produce; early signs show it is producing, masked by macro headwinds. Analyst: Brandon Oglenski, Barclays: I appreciate that. And Ursula, as you think about capital needs, is taking potentially more debt the right path here as well? Ursula Hurley: I’m cognizant that the balance sheet isn’t where we want it to be; it’s been strained post-COVID. Our number one priority is maintaining adequate liquidity to navigate volatile times. We acknowledge interest expense is material, so we don’t take debt raises lightly. We need to maintain our 17% to 20% liquidity target and be thoughtful. Our priorities are: positive operating margin, delivering free cash flow, and delevering the balance sheet. We’ll focus on execution and, if there’s risk we fall out of our 17% to 20% target in the back half, we will assess all markets—we have $6 billion of unencumbered assets—so we have flexibility in how we raise, on a go-forward basis. Operator: Your next question comes from the line of Atul Makharia with UBS. Please go ahead. Analyst: Atul Makharia, UBS: Good morning. Thanks for taking my question. I want to circle back on the second quarter recapture rate of 30% to 40%. It seems a little lower than some larger peers who are about 10 points ahead on recapture. Your booking curve is probably shorter than theirs since you have more domestic business, implying more of 2Q would be booked at higher fares for you. Any color on why the lower recapture rate versus legacy peers would be helpful. And as my second question, on the capital raise plan—the $750 million in total—what fuel recapture and demand scenarios did you use to come up with that number? Just trying to assess whether you might need to raise more capital later in the year. Marty St. George: Thinking about what we heard on other calls, I don’t think we’re dramatically lower. Recapture rate is different at different fare levels. A big focus of Jet Forward is improving penetration in the premium market. Airlines selling $6,000 business class fares to Asia may have a different recapture profile than we do. That will get better as we finish Jet Forward over the next 18 months. Our internal calculations and timing—late 2026 or early 2027 for 100%—are similar to what we’ve heard from others. If there’s a slight difference, it may be premium and corporate mix, which we’re addressing through Jet Forward and first class launching at the end of the year. Ursula Hurley: At the highest level, our original 2026 budget assumed Brent at $63. Clearly, we’re in a severely elevated environment. The original budget assumed we would raise $500 million this year to maintain our 17% to 20% liquidity target, so we locked that in. We have an accordion for an incremental $250 million. It’s too early to tell, given the volatility of oil in the back half, what the impact will be—part of why we pulled full-year guidance. We will assess as we progress if we need to raise more liquidity to maintain that 17% to 20% target. We are planning for multiple scenarios at different fuel prices and maintaining flexibility to time transactions and leverage our unencumbered asset base in the most favorable way possible. Operator: Your next question comes from the line of Chris Stathoulopoulos with SIG. Please go ahead. Analyst: Chris Stathoulopoulos, SIG: Good morning, everyone. I’ll keep it to one. As we think about response to demand elasticity or potential demand destruction, could you frame potential resiliency around yields? You have Blue House JFK and Boston, domestic first class, Blue Sky. Could you speak to that in a scenario where we start to see pushback from more price-sensitive travelers—how you think about yield resiliency? Joanna Garrity: First and foremost, we’re not seeing meaningful elasticity. Demand is strong across the booking curve. We are focused on yields, consistent with broader industry trends. Load factor is holding up well, and we are cutting flights that don’t make economic sense in the current fuel environment. Our VFR customers are an extremely resilient part of the franchise. We’re also increasing premium share—which is more resilient when inflation goes up—through domestic first and Even More Space, where we’ve seen nice progress. Fort Lauderdale growth targets the largest, more premium market in Florida. We’re happy with our focus on more resilient customers. Inherently, our model has a strong VFR component—loyal customers traveling to see family and friends—who are quite resilient. Marty St. George: We’ve already taken action to reduce capacity in the second half. When we hit windows of making significant cost commitments, we’ll relook at the demand environment. If it makes sense to pull additional capacity, we will. Our number one goal is to get our performance back where we want it, and being flexible on capacity is an important part. Operator: Your next question comes from the line of Catherine O’Brien with Goldman Sachs. Please go ahead. Analyst: Catherine O’Brien, Goldman Sachs: Hey, good morning. You noted a strong 45% increase in credit card acquisitions, and it sounds like Blue House is a driver. Can you give color on how much the JetBlue Premier card growth was within that? And is there a notable difference in annual spend between the Premier card and some of your other cards? And then for Ursula, with suspended full-year guidance and multiple moving pieces, based on capacity cuts versus the original plan and 1Q actuals, it looks like capacity will be up low single digits as of now. If that’s correct, is it reasonable to assume that on low single-digit capacity growth, your CASM ex would be mid-single-digit range for the year based on your commentary on the relationship between capacity and CASM? Anything to be aware of on cadence over 3Q and 4Q? Marty St. George: Hey Katie, a couple of things. We only lapped the Premier card in the first quarter, so for half the quarter there was no base to compare to. For the first year, we put what I’d call a prudent forecast in, knowing the lounge wasn’t open until later in the year, and we significantly exceeded that. The 45%—the Premier account is a contributor, but a lot of that is the base card we offer every day. The secret sauce of Blue Sky is utility: the value of TrueBlue points dramatically changed when you could earn and burn anywhere in the world on the United network. Later this year, we will have full elite benefits between the two airlines as well—Mosaic 3 and 4 will have an experience on United similar to JetBlue. Our goal is that customers can go anywhere they want within TrueBlue, which we’ve not had for a while. The acceleration we’re seeing is without any change in approval rates; it’s just more interest in JetBlue. Also, our core customer base—New York, New Jersey, New England—is generally more affluent and high-spending, so spend going up on the base card is a huge positive, and better than what some competitors have discussed. Ursula Hurley: Thanks, Katie. The historical relationship between capacity and CASM ex-fuel still stands. If capacity is mid- to high-single digits, ex-fuel would be roughly flat. Your example of low single digit capacity growth implying mid-single digit CASM ex-fuel is in the ballpark. As mentioned, we expect CASM ex-fuel growth to moderate in the second half—over two points less in 2H versus 1H—based on what we know today, including pulling two to three points of capacity in 2H. All of this is dependent on the oil backdrop. If we get relief or further pressure, we will adjust capacity as necessary. The team has historically done a great job executing on controllable costs, and I’m confident we can get as close as possible to the prior guide given what we know today. Operator: Your next question comes from the line of Ravi Shanker with Morgan Stanley. Please go ahead. Analyst: Madison for Ravi Shanker, Morgan Stanley: Hi, thanks for taking the question. More color on international in light of potential fuel shortages in Europe and resource allocation across the company—is there an opportunity to cut back there, or do you need to defend the spots you have? Joanna Garrity: We serve eight countries in Europe. Our frequency this summer will be about 14 daily flights. It’s only 6% of our ASMs as we navigate through the summer, so exposure is small. There are supply concerns in Europe; we’re watching closely and working with A4A and peers to advocate for operating procedures to consume as much fuel as possible. We’re hopeful that long-haul flying will be more protected versus short haul. We’re engaged and involved, but exposure is minimal for us. Operator: Your next question comes from the line of John Godyn with Citigroup. Please go ahead. Analyst: John Godyn, Citigroup: Hey, thanks for taking my question. I want to better understand the philosophy behind capacity cuts in the back half. Great that you’re making changes in response to fuel. Across the board, companies have been reluctant to cut to levels that directly offset fuel. What is your guiding light as you contemplate 2% to 3% being appropriate and maybe the next cut behind it? Is it trying to get to 100% pass-through? It doesn’t seem to be free cash flow. It’s not margin neutrality. When you’re running scenarios, what output are you managing to? And just as a follow-up: the curve implies a large embedded tailwind by year-end. It seems like you could hit pass-through numbers you’re describing even if demand doesn’t improve—does that framework resonate? Marty St. George: Our goal is to maximize EBIT and free cash flow with the assets we have. To the extent we make decisions early, we can save more expenses. With the fuel price we’re assuming for the rest of the year and expected demand—especially in trough periods—it’s important to take action soon to maximize EBIT. I’ve seen more talk of capacity cuts than action elsewhere. We are taking action. Pre-war, our goal was positive operating margin this year; we’ve suspended that guidance, but our goal is to get as close as possible. Given the fuel curve, it would be imprudent to make decisions that aren’t profit-maximizing. We do have constraints with slot usage at JFK—this is a long-term asset, and we won’t risk slots. This is transitory; we expect to get back to normal. We’re very happy with Fort Lauderdale, so there will be fewer cuts there. With fuel up materially, there will be flights that are not cash contributors, and those flights have to go. On the curve implying a tailwind: we also wonder how realistic it is. When we hit windows for making cost commitments—like pilot bidding—we will re-evaluate the capacity plan. If the curve improves, maybe we put points back; if it worsens, we’ll pull more. It’s prudent business to maintain flexibility. Joanna Garrity: We will maintain as much flexibility as possible. If you could tell me where fuel will be in September, I could tell you closer to what capacity will look like. Given demand and our investments in Fort Lauderdale and New York slots, we want to be mindful but aggressive on capacity cuts if fuel remains highly elevated. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Greetings, and welcome to the Varonis Systems, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Tim Perz. Please go ahead. Tim Perz: Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' first quarter 2026 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis. After preliminary remarks, we will open the call to a question-and-answer session. During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our second quarter and full year ending December 31, 2026. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned Forward-Looking Statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our first quarter 2026 earnings press release and our investor presentation, which can be found at varonis.com in the Investor Relations section. Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson. Yaki? Yakov Faitelson: Thanks, Tim, and good afternoon, everyone. We appreciate you joining us to discuss our first quarter 2026 results. Our Q1 results reflect our strong performance as we execute on the growing need to secure data and safely enable the usage of AI. In Q1, SaaS ARR, excluding conversions, increased 29% year-over-year to $522.6 million and total SaaS ARR, including conversions was $683.2 million. Guy will review our results and our guidance in more detail shortly. We continue to see strong demand from both accelerating new logos and existing customers because companies understand that they must secure their data and their AI stack. Varonis helps them to do that with minimal effort because of the automation built into our platform. In Q1, we saw continued adoption of MDDR and AI-related products as well as traction in securing cloud environments. Early feedback on our newer products driven by acquisitions over the last year, including database activity monitoring, Interceptor and Atlas reinforces our belief that these offerings are a strong fit to our platform and can help drive ARR growth over time. Now I would like to take a step back from our near-term results and discuss why we believe we are best positioned to help companies safely adopt AI and prevent data breaches. Varonis founded on the belief that managing and protecting data would be impossible without automation. That belief is even more important today as customers work to adopt AI securely. The security model of the last 30 years was not built with AI in mind. Many organizations want to capitalize on the productivity gains from AI, but only connected a small portion of their data to AI because of security concerns. Companies want to connect more of their data to take advantage of the productivity gains, but need the right guardrails in place to confidently move faster. When we look at what's standing in the way of broader AI adoption, we see three barriers: securing the data itself, securing the AI systems and agents that touch that data and fighting AI-powered adversaries. The first barrier is securing the data and making sure only the right data is accessed by the right agents and systems. AI pushes existing access controls to their limits because many systems and agents inherit user access that is far too broad. One classic example of this is an employee asking an AI chatbot, a basic question and getting confidential information that they should not have access to such as salary data, financial record or intellectual property in a response. This is content a human mistakenly had access to, but was less likely to find without AI. Previously, a human employee had to log in, navigate, download and take action. There was friction because it took time and effort that reduces risk. In the agentic world, an agent can access a huge amount of your data estate in seconds. Agents can move fast, behave unpredictably and maximize privileges by design. And if an agent doesn't have permissions, it will try to get them. Connecting agents and models to data is what's blocking organizations from safely adopting AI faster. They need remediation at scale and to understand abnormal behavior, visibility alone is not enough. The second barrier is securing the AI systems themselves. In Q1, Varonis found a vulnerability called Reprompt, which allowed attackers to bypass safety controls in Microsoft Copilot [ personal. ] The vulnerability, if exploited, would give the attacker access to everything the Copilot [ personal ] session itself could access, including prompts, conversation history and all of the data [ consumer assist ] could access. The third barrier is fighting the AI-powered adversary. We have already seen examples of this, including last year when attackers used cloud code to breach a major organization with minimal human involvement or earlier this year, when a lone unskilled attackers use AI to scale an attack across 600-plus firewalls in 55 countries, an attack that would have previously required a team of experts to execute. AI-powered phishing doesn't just target humans. It targets agents too. Agents can read e-mail, Slack and key messages. One human clicking maliciously is one compromised identity. An army of agents can multiply the attack surface. The three barriers together, overexposed data, unsecured AI systems, AI-powered adversaries create a dangerous environment and companies must build foundational controls that operate at the speed and scale of AI starting from the inside out. Varonis does just that by securing the data itself using the automated find, fix and alert approach. The first piece is find. Know what you have across the entire data store, structured, unstructured, semi-structured and application data, classified for sensitivity, context and staleness, so you know what should and should not be connected to AI. The second is fix, rightsized permissions, label data and masking. Manual process can't work anymore. The remediation must be automated and AI-driven. And finally, alert, monitoring who and what is accessing your data and detect abnormal behavior quickly to stop breach before it happens. This is the basis for AI detection and response. AI security and data security are intertwined with one another. You need an inventory of every model, agent and pipeline running in your environment and you need access posture to know what data they can touch, what permissions they have and where they are vulnerable. You need runtime guardrails to block malicious inputs before they reach the model, preventing sensitive data from leaking in outputs and restricting tool use. Finally, you must fight AI-powered adversary, the volume and speed these attacks demand automation. These layers only work if they are connected. AI inventory and runtime protection is significantly more meaningful when you know what sensitive data they access and what data they are trained on. Guardrails that leverage the same accurate classification and labeling applied to enterprise data store reduce friction and increase control. We knew it would be impossible for humans to control data risk without tremendous automation. Only AI can defend AI risk. When you trust your brakes, you feel safe driving faster. When you have the right guardrails, data and AI become a force multiplier, not a breach waiting to happen. With that, I would like to briefly discuss a couple of key customer wins from Q1. This quarter, a global technology company with over 50,000 employees became a Varonis customer. They needed to quickly and safely roll out AI tools and also wanted to better protect customers and company proprietary intellectual property data to meet compliance requirements and perform forensics analysis in an event of the breach. During the risk assessment, our MDDR team detected multiple active threats. We also identified risks in Salesforce and Microsoft 365 and provided an operational plan to fix these risks with intelligent automation. Our ability to provide these outcomes and safely enable the usage of AI were the key reasons why we were selected over several DSPM point solutions. They ultimately purchased Varonis for AWS, Salesforce, Google Cloud Platform and Google Drive as well as Varonis SaaS for hybrid with MDDR and Varonis for Copilot. We also continue to see existing customers expand into new use cases as they consolidate point tools and utilize the breadth of our platform. In Q1, ServiceNow, a global leader of workflow automation, expanded its Varonis investments to cover internal AI systems and e-mail security, including protection against advanced phishing and social engineering attacks used by AI-powered adversaries. In summary, AI is forcing companies to prioritize data and AI security, and Varonis is uniquely positioned to help with our unified platform that allows customers to put the right guardrails in place in order to accelerate their AI deployment plans. With that, let me turn the call over to Guy. Guy? Guy Melamed: Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. Our first quarter performance represents a strong start to 2026, and we are excited by the momentum we are seeing in the business. Demand was healthy across both new logos and existing customers, and we are excited to raise our full year guidance after our strong start to the year. As a reminder, we are focusing on SaaS ARR growth, excluding conversions, which reflects our ability to add new SaaS customers and also expand with existing ones as this is the primary growth driver of our business in the years ahead. In the first quarter, SaaS ARR, excluding conversions, increased 29% year-over-year to $522.6 million, and total SaaS ARR was $683.2 million. In Q1, we had $11.3 million of conversion ARR, and we finished the quarter with approximately $83.7 million of non-SaaS ARR remaining. This quarter, we generated $49 million of free cash flow, down from $65.3 million in the same period last year, which reflects the previously communicated headwind from the end-of-life announcement of our on-prem platform and also includes approximately $12.6 million of acquisition-related costs related to the accounting treatment of our acquisitions. Adjusting for the acquisition-related costs, free cash flow would have been approximately $61.6 million in Q1. We remain on track to achieve our full year free cash flow guidance. Now I'd like to recap our Q1 results in more detail. In the first quarter, total revenues were $173.1 million, up 27% year-over-year. SaaS revenues were $161.1 million. Term license subscription revenues were $6.9 million, and maintenance and services revenues were $5.2 million. Our SaaS renewal rate was over 90%. Moving down to the income statement.I'd be discussing non-GAAP results going forward. Gross profit for the first quarter was $134.9 million, representing a gross margin of 77.9% compared to 80.2% in the first quarter of 2025. Our gross margin continues to be healthy and in line with our long-term target set at our Investor Day. Operating expenses in the first quarter totaled $136.3 million. As a result, first quarter operating loss was $1.4 million or an operating margin of negative 0.8%. This compares to an operating loss of $6.5 million or an operating margin of negative 4.7% in the same period last year. First quarter ARR contribution margin was 14.1%, down from 16.7% last year. This is in line with our expectations and as a reminder, is impacted in 2026 due to the end of life for our self-hosted platform. During the quarter, we had financial income of approximately $5.7 million, driven primarily by interest income on our cash, deposits and investments in marketable securities. Net income for the first quarter of 2026 was $7.5 million or net income of $0.06 per diluted share compared to net income of $0.7 million or $0.00 per diluted share for the first quarter of 2025. This is based on 132.8 million and 136.7 million diluted shares outstanding for Q1 2026 and Q1 2025, respectively. As of March 31, 2026, we had $900 million in cash, cash equivalents, short-term deposits and marketable securities. For the three months ended March 31, 2026, we generated $55 million of cash from operations compared to $68 million generated in the same period last year, and CapEx was $5 million compared to $2.3 million in the same period last year. During the first quarter, we repurchased 5,355,445 shares at an average purchase price of $24.67 for a net total of $132.1 million. As a reminder, we will provide quarterly SaaS ARR, excluding conversion guidance for this year only. We are doing this because of the difficulty in modeling the year-over-year growth rates due to the impact of conversions in 2025 and 2026. We are also providing a bridge to quarterly total SaaS ARR in our investor deck, which again assumes zero conversions from a guidance perspective for the upcoming quarter. For the full year 2026, we will provide annual guidance for both SaaS ARR, excluding conversions and total SaaS ARR. For more information, please see our earnings deck in our Investor Relations website, which includes a more detailed breakdown of our financial guidance. For the second quarter of 2026, we expect SaaS ARR growth of 24% to 25%, excluding conversions, total revenues of $175 million to $178 million, representing growth of 15% to 17% non-GAAP operating loss of negative $1 million to breakeven and non-GAAP net income per diluted share in the range of $0.00 to $0.01. This assumes 131.1 million diluted shares outstanding. For the full year 2026, we now expect total SaaS ARR of $814 million to $845 million, representing growth of 27% to 32%. This represents SaaS ARR growth of 20% to 21%, excluding conversions. Free cash flow of $100 million to $105 million, total revenues of $731 million to $737 million, representing growth of 17% to 18%; non-GAAP operating income of $7 million to $9 million, non-GAAP net income per diluted share in the range of $0.11 to $0.12. This assumes 132.1 million diluted shares outstanding. In summary, we are excited by the strong start to the year and continue to see healthy momentum from both accelerating new customer wins and expansion within our installed base. Our Q1 results, coupled with the underlying drivers of our business, give us the confidence to raise our full year guidance for total SaaS ARR growth to 27% to 32%. In addition, we increased our guidance for SaaS ARR growth, excluding conversions, to 20% to 21%, and we believe we can sustain this level of growth as a fully SaaS company. With that, we will be happy to take questions. Operator? Operator: [Operator Instructions] Our first question comes from Saket Kalia with Barclays. Saket Kalia: Nice start to the year. Maybe a question for both of you. I think one of the thoughts this year has been that Varonis sales teams could spend more time now on new business rather than on both new business and conversions as they did last year. Guy, maybe for you, can you expand on how that's looking the first quarter into that new model? And Yaki, for you, where are you having that success in driving new business? Guy Melamed: Saket, you're right. We talked a lot about the fact that the conversions from on-prem subscription to SaaS, we're cannibalizing the time of the reps. And that in 2026, the way we've structured the commission plan and the way we've focused our reps is to go back and focus on upselling SaaS customers with additional products and going into new TAMs and selling new products and selling our SaaS offering to new customers. And we saw an acceleration in the new customer contribution, which we're extremely happy with, and it very much fits with what we were trying to achieve and the strength of the platform. So our sales force is able to go and with the simplicity of the SaaS offering, sell to customers that we wouldn't be able to sell before, and that's worked really well in Q1, and we expect that to continue in the year ahead. Yakov Faitelson: In terms of what's in the market, the reality that for organizations to realize the value from AI for models and agents, they need to connect their organization and information into it. The AI is as good as the data. And this is the biggest problem that we see for organizations. We call it the 3% paradox. It's very hard for them to securely connect the data. So the MDDR becoming this AI detection and response, automated remediation of excessive permissions is the holy grail. If not, just these agents will create and read a massive amount of information that they should never touch. And you also see just a lot of attacks that are AI based, and this is hitting on all cylinders with the value proposition of the platform. You need just foundational security that is automated, but it needs to be security. It can be just partial discovery at scale and AI just hits every data type, structured, unstructured application in the cloud and on-prem, this works very well for us, and we see that it's driving the business. Operator: Our next question comes from Rob Owens with Piper Sandler. Robbie Owens: I want to build on Saket's question a little bit and just drill down into the selling efforts. And I know in the prepared remarks, you talked about accelerating new logos and expansion. Anything you can do to quantify that for us or give us a sense of how and where that's trending? Yakov Faitelson: Just in terms of the conversion, we see that just organizations need to convert all the data stores and definitely AI creates more urgency around it because what happened essentially, and it's happened very fast that just the tech stack, if you will, that organizations have is changing completely. Before we had a user that is accessing data through a user interface to a file system or just through a user interface to an application, and it changes completely. Starting to have an agent that is accessing in robotic speed and many times by using tools, from any kind and our customers and prospects understand that they need to understand what they have and to protect this data immediately because before, in the model, you had a lot of friction. User needs to be malicious or to do just a gross mistake in order to get to information they shouldn't get. The agents will get to it immediately. So what happened fairly fast is that the most important security controls are moving to two places to the agents and to the data, and this works very well for Varonis. Guy Melamed: And Rob, just to quantify in terms of the new customer contribution, we saw, as we mentioned in the prepared remarks, an acceleration in the actual total number of new customers. It was pretty significant from our end. And what we also think and believe is when we look at the contribution from some of the new products, even though Atlas only closed in February, we saw some nice contribution there, nothing too material, but definitely something that gives us the confidence that we can continue to sell that at an accelerated pace throughout the year, and that's not baked in the guidance. So when we look at the Q1 behavior, it was definitely kind of driven by the new customer side with a lot of opportunity throughout the year from an upsell opportunity with some of the products that we have that isn't baked in the numbers that we put out there. Operator: Moving next to Meta Marshall with Morgan Stanley. Abhishek Murli: This is Abhishek Murli on for Meta Marshall. Congrats on the quarter. I was wondering if we could get an update on the Microsoft Copilot partnership and whether there are any channels that are driving new customers there. Yakov Faitelson: So Microsoft Copilot is one of them, but what we see is that organization needs just control plan for every AI from just -- a lot of just models and Copilot and just -- there is just so much technology and so much innovation that is just happening in a neck break speed, and we are protecting everything. With the acquisition of Atlas, we have the ultimate control plan for agents, models and pipeline. We protect every data type. And what happened is that I think that what is important to understand is that the overall velocity. You have these agents that accessing data, you need to be ahead of them in your remediation. You need to understand any abnormal behavior. If a weather forecasting agent is accessing HR records in 2 a.m. in the morning, you better know about it, and you will be amazed how often things like that are happening. So Copilot is one of them, but we definitely see that in order for these AI agents and models to be useful, they need to be connected to data. And the only way that you can do it is in a secure way. And it just slowly but surely, we are becoming the foundation for organizations to adopt AI in a secure way. Operator: Next, we have Joshua Tilton with Wolfe Research. Joshua Tilton: Congrats on a pretty solid quarter. I have one. It's more of a clarification. I think maybe you addressed it in the beginning. I'm not sure if I heard you correctly, but I was kind of under the impression that the free cash flow guidance for the year is the way it was because there was an assumption around churn because you guys are basically guiding to no conversion or some assumption that some of these remaining on-premise customers would convert. And then you have a quarter where you did convert some customers, but the free cash flow guidance for the year kind of stayed the same. So I'm just wondering why the free cash flow guide isn't moving up as you actually execute on converting customers that I'm assuming were assumed to churn originally in the guidance. Guy Melamed: Let me clarify that. When we gave guidance on the full year numbers, we assumed the bear case scenario and a bull case scenario on the conversions, which was $50 million to $75 million. We are on track to achieve those numbers, and that's part of our free cash flow guide. It's not that the free cash flow guide assumed zero conversions. It assumed that midpoint range, that base case scenario of that $50 million to $75 million. And we're actually -- when we look at the Q1 conversion numbers, they were actually on track, and we felt very good with the numbers that we were able to convert in Q1. So the actual reduction that we announced last quarter on the free cash flow side was on the delta, the expectation of churn with the announcement of the end of life. And that was the headwind that we were talking about, but it was still baking in that $50 million to $75 million, and we feel very good with that guidance for the year on the free cash flow side and still assuming to be within that base case scenario of conversions for the year. Operator: We'll take our next question from Roger Boyd with UBS. Roger Boyd: Congrats on the quarter. For Yaki or for Guy, you mentioned enterprises prioritizing AI security. I think this has been kind of the bull case around Varonis for a while now. I'd love to get your sense of like did something change this quarter? And how did that actually manifest as you look at kind of the -- on a monthly basis throughout the quarter? Would you characterize demand from enterprises as ramping throughout the quarter and guide, just any sense of what you're seeing through April and how that kind of factors into the guide for -- I think it was kind of flat net new SaaS ARR ex-conversions. Yakov Faitelson: I think that what you mainly see just from a broader marketing, obviously, everybody just investing a lot in AI tooling and understanding how they can just derive real value from it. And there are obviously some use cases that are unbelievably strong, but the realization that we see is that they get -- they understand that they need to connect data securely and to make sure that these agents can work like employees, they need to make sure that they can connect it to all the universe of knowledge that the organization has. This is something that is just very hard to do because what happened that before, if you have excessive access control or data was exposed, the user need to be malicious in order to get to it. The agents are getting it immediately by design and making many times all efforts to remove very important security controls. So more than anything else, what you see is that just slowly but surely just an understanding that you need to secure the AI systems and the data that powers it. And this is something that works very well for us. We see more strategic conversation. We definitely see that organizations understand that they need to look at everything. Even when you look at databases, historically, databases was DBAs accessing databases and you have what we call connection pool. But now with agents, they can access it like a collaboration. So just a lot of the way that these agents and models consume information, it's something that put the security and AI security is a top priority. Guy Melamed: And I'd like to address the second part of your question. When we look at the Q2 guide, it really is kind of just following the same responsible guidance philosophy. And we're really excited with the start for the year and the performance that we had in Q1, and we feel very good about Q2 and the pipeline that we have for the rest of the year. So it really is just keeping the same philosophy guidance. Operator: Moving on to Matt Hedberg with RBC Capital Markets. Matthew Hedberg: Congrats on the results. Obviously, a lot of moving parts here. I guess there's a lot of uncertainty in the market, whether it's the Iran war, maybe demand trends in the Middle East or even some of the headcount reductions that we've seen out there from customers in different verticals. I'm just kind of curious if that's starting to creep in any customer conversation? And Guy -- is SaaS NRR trending up? It sounds like renewals are strong, but I'm kind of curious on the SaaS NRR side. Yakov Faitelson: In terms of just the conversation with organizations, it was primarily about just data and AI security. If you look at our pricing scheme and model, so much of it is just based on the volume of data and data store. And for us, it's just the identities that are accessing data. So just reduction in headcount is not something that we are feeling and affecting our pricing in any way. But our teams are just tremendous, and I want to thank them that during this conflict, we're able to maintain the right productivity levels, and we were just in front of customers, helping them secure the data. Guy Melamed: And from an NRR perspective, obviously, we provide the NRR on an annual basis. But in talking about the trends, we feel very good about our ability to go back to customers, SaaS customers and sell them additional licenses. And we talked a lot about the being able to finish the transition quickly and have our sales force focus on selling additional products. And it's definitely something that we saw in Q1, and we believe that we can actually continue and do even better throughout the year with the platform offering that we have. So when we look at the trends and when we look at the conversations and when we look at the pipeline and look at and track the meetings, it's definitely trending in a positive way, and we feel very good with our platform ability to go back and have the sales force focus on what they know how to do best, which is sell to new customers and upsell to our existing SaaS customers. Operator: We'll go next to Brian Essex with JPMorgan. Brian Essex: Great to see a Q1 beat and raise in such an uncertain macro. I guess I wanted to poke on the non-SaaS ARR remaining, and it was great to see that you had $11.3 million of conversion business in the quarter, and you guided to 0. I wanted to understand what the composition of that outperformance was. And then of the remaining $83.7 million of non-SaaS ARR, can you help us understand what the composition of that cohort is? Have the weaker or single-threaded customers churned off? Have we seen like a front-loaded churn rate and maybe it's higher quality? Or maybe just to give us a sense of your level of confidence in that portion of business that may convert over? Guy Melamed: Brian, there's a lot to unpack. I'll try and tackle them one by one. I'll start with the conversion guidance. We said at the beginning of the year that we're giving a base case scenario, a bull and a bear case range, basically, that $50 million to $75 million. We stand with that number and feel good about our ability to get to the conversions. We saw very healthy conversions in Q1. And the reason we didn't guide for any numbers on a quarterly basis, it's not that we don't expect conversions to happen. We just didn't guide for them. And there are two reasons for that. Reason number one is we want to focus investors on what matters the most, which is SaaS ARR, excluding conversion, which is a KPI that puts the emphasis on how this business would grow post transition. And we don't want to put too many numbers out there that would confuse everyone. We know that there's a lot of moving parts during this transition. And keep in mind at the end of this year, SaaS ARR would be ARR. We will -- with the announcement of end of life, we're condensing everything, and this will be very, very simple. And there's only three quarters to kind of go through with the moving parts. So that was reason number one of not putting a number on the guidance from a conversion perspective. And the second reason is that there are a lot of customers that kind of fluctuate on their conversion period. And some of the customers in Q1 where the renewal was up for renewal on the on-prem subscription side, will convert later on in the year. So we're definitely seeing those numbers kind of move, and we didn't want to put a number out there that would confuse investors and analysts. And that's why we're just giving that full year range of $50 million to $75 million, and we feel very good with that number. In terms of the single-threaded breakdown, we saw that continue in the same trends that we have seen in the past. And if you remember, the focus of those on-prem subscription customers that will not convert was mostly on the federal and state and government customers. That was the cohort that we felt would be impacted the most by not moving to SaaS, and we still think that is the case. But when we look at the numbers of that single threaded that converted, they continue to convert at the same rate that we have seen in the past. So we felt very good about that as well. I hope I answered all of your components of the question. But really, just the highlight of my answer is that we felt good with the conversions in Q1, and we feel good with what's yet to be converted for the rest of the year. Operator: And Richard Poland with Wells Fargo has our next question. Richard Poland: On the cash flow, I just wanted to clarify one point. I think you called out $12 million to $13 million of acquisition-related costs that seem to affect the cash flow side of things, but obviously not the non-GAAP operating income. I just wanted to see if there's anything for the remainder of the year with respect to some of those acquisition-related costs. And is it a scenario where we should try to back that out for a cleaner, I guess, year-over-year compare? Guy Melamed: So the biggest impact, obviously, was in the Q1 numbers, and that's why we broke it out. Obviously, we're still -- we remain on track to achieving the full year free cash flow guidance, and we want to emphasize that and highlight that. But for visibility perspective, we wanted to highlight that $12.5 million headwind coming from the accounting treatment of the acquisitions, and that's mostly the AllTrue that took place in February. We wanted to put that out there so investors can understand the apple-to-apple comparison, and that's why we highlighted that. Operator: We'll go next to Mike Cikos with Needham & Company. Michael Cikos: Congrats on the quarter here. I just wanted to come back to the commentary, whether it's the press release or the prepared remarks here, but it seems like the company is being more assertive as far as what the sustainable growth is for this company ex conversion, citing that 20% to 21% growth. If I'm just looking at the trend rate here, last quarter was 32%, [indiscernible] 29%. We're guiding to 24% to 25% this coming quarter. Can you just give us a better indication of what gives you the confidence to be putting that bogey out there today, just to help draw the lines for some of the longer-term investors who are looking at this asset post conversion? Guy Melamed: So first of all, you're right. When you look at kind of the full year guidance, we went from 18% to 20% to kind of having the low end starting with a two handle, and we feel very good about that. And we feel -- we believe we can continue that growth rate. We talked for a long, long time about our ability to continue to grow 20-plus percent with the platform that we have and with our ability to sell to new customers and go to the base and sell to -- upsell to existing SaaS customers. And I think that when you look at the trends that we've had in Q1, they give us the confidence. When you look at the environment out there, being able to accelerate with new customers is definitely something that we feel very good about and gives us the confidence. And when we see how our existing SaaS customers are receptive to additional licenses and the platform offering that we have, we definitely believe that there's a lot for us from a customer value perspective, customer lifetime value perspective to go back. And we've seen how many of the customers consume more and more. And that's part of the reason that we feel very good about that and noted it in our Q1. Operator: Moving next to Joseph Gallo with Jefferies. Joseph Gallo: Can you just talk a little bit more about Atlas initial traction, feedback and who you're competing with? Is it against pure plays? Or are people trying to do this themselves use a platform? And then if at all, did the AllTrue.ai acquisition contribute to ARR this quarter? Yakov Faitelson: We see just a lot of momentum around Atlas in terms of just the overall interest. In terms of the AI life cycle, we strongly believe that it's the most comprehensive product out there, but it also has a massive force multiplier with the Varonis platform. So the key is how you connect everything to data. Atlas is your best way to manage agent models and pipelines and then connect it to Varonis is what will give you the ability to use AI in a secure way. So there is just a lot of noise in the market. But at this point, no one has -- just on the actual pipelines, tools and models, no one has something that is so comprehensive. And the sales motion is together with everything that we have. Guy Melamed: I want to clarify that when we acquired AllTrue, there was no ARR that was added as part of the acquisition. So really, if you remember that the transaction closed in February, and it's not that we expected that it would have a significant impact, and it didn't have a significant impact in Q1, but there were definitely early signs that were encouraging in terms of conversations and in terms of some of the evals that were put in and even some several POs that we were able to get. But again, nothing significant that impacted the quarter from an ARR perspective. However, and as Yaki mentioned, the conversations and the pipeline that we're seeing is definitely giving us the encouragement and the expectation that we would see AllTrue contribute more throughout the remainder of the year. And as I mentioned before, that is not part of our guidance. We didn't bake in any optimistic assumptions with AllTrue selling throughout the year, but it's the upside ability and the conversations that give us the confidence to actually see that happen in Q2, Q3 and Q4. Yakov Faitelson: The initial conversations and more so the results from the POCs are very encouraging. Operator: Our next question comes from Shaul Eyal with TD Cowen. Shaul Eyal: Congrats on the solid performance and guidance. Yaki, supply chain attacks remain a major threat, especially when sensitive data moves beyond your original provider. As you look at your platform today, do you believe your supply chain security capabilities are sufficient? Or is this an area where you plan to invest and expand? And maybe a second one, who are you displacing given some of those big logos that you just announced one of them earlier on the call? Yakov Faitelson: Yes. Thanks. So in terms of supply chain attacks, this is how bad actors are getting in and with AI, it's much, much easier for them to get in and Interceptor is doing an unbelievable job. But -- and we believe that what we have in terms of the phishing sandbox and all the assets that we have with the browser extension and the mobile devices, we are just in the best position in the market. But as attacks becoming more sophisticated, we keep investing in it. And we -- and I think that this is in terms of just overall phishing, spear phishing and phishing attacks of this nature. This is how adversaries will get in, and we are extremely well positioned, and it's also worked unbelievably well with our MDDR and in terms of just replacements, it can be just database activity monitoring, other point solutions that related to DSPM. But what we started to see this quarter is that AI security and overall AI budgets starting to move slowly towards our platform. Operator: Our next question comes from Rudy Kessinger with D.A. Davidson. Rudy Kessinger: I'm curious, I want to dive in on the makeup of the SaaS net new ARR ex conversions, up 31% year-over-year. Was that primarily driven by higher new logo contribution or similar expansion rates on a larger renewal pool? And then also, how did the composition of that net new ARR look relative to recent quarters in terms of the workloads that you're protecting, specifically maybe in Microsoft for the Azure ecosystem versus everything else? Guy Melamed: So I'll start, and then Yaki can provide some color. When we look at the contribution in Q1, it was definitely driven by new customer acquisitions, and that's why we highlighted the acceleration on the new logo side. But as I mentioned before, we saw very encouraging signs in terms of our platform ability and our additional upsell opportunity throughout the year and our ability to go back to SaaS customers and sell to them additional licenses, both the SaaS offering that we have and some of the additional tuck-in acquisitions that we have made. So I think when we look at the holistic view of that, the new customer was the encouraging part and the upsell was definitely there, and we think that it can actually do better throughout the year. Yakov Faitelson: In terms of just the Microsoft ecosystem is a very small part of the data. We are doing very well with all the SaaS applications, AWS, GCP, Azure, data on-prem, databases everywhere. So it's just AI consume data wherever it lives, and we protect it. But overall, Microsoft is starting to be a small portion of the entire information estate that organizations have. Operator: And moving next to Jason Ader with William Blair. Jason Ader: You guys talk a little bit more about the kind of the broader competitive landscape? I know that some of the cyber guys have some overlap with what you're doing and you have some of these start-ups. Maybe just talk through if you're seeing different players than you normally have seen? Are you seeing more people at the table during bake-offs? I mean you had a strong new customer acquisition quarter. Were those competitive deals versus what you've seen in the past? Just some more kind of specifics on the competitive landscape would be great. Yakov Faitelson: Yes. So obviously, now the platform is so much broader now. But if you look at what they call this [ DSPM ] market, this is not data security. We have a comprehensive data security platform that provides automated outcomes. So what there is in the market is data discovery tools that doing something that 20 times what's called sampling, the partial classifications, we see them from time to time. But when customers are [indiscernible] versus just data security and AI is pushing data security because you need to do automated remediation and understand abnormal behavior to data and understand the identity component, there is -- we just usually crush them immediately. On the interceptor, this is sometimes we can see just companies like Abnormal or Proofpoint. But primarily, we sell it with the platform. In the database activity monitoring, we're replacing the incumbent like Imperva and -- Imperva and Guardium. So this is really the dynamics that we see. But what happens is that the platform is starting to address more and more use cases. And what we're starting to see that is interesting, we can take budgets from point solutions, but we're also starting to get budgets from just AI. Digital transformation and security is such a key fundamental component out of it and these organizations that pushing AI hard understand that, first and foremost, they need to secure the data and have the observability to what's going on in the life cycle of the AI tools, and this is another source of budget for us. Operator: Moving next to Jonathan Ruykhaver with Cantor Fitzgerald. Jonathan Ruykhaver: I'm curious, Yaki, to hear your thoughts on where you see the boundary between Varonis and identity vendors, particularly given the convergence we're seeing between identity and data security strategies. There does seem to be a question related to who ultimately owns that control and governance layer around AI agents. So any color on how that strategy might be resonating? Any customer feedback or color on adoption of identity -- of your identity solutions would be helpful. Yakov Faitelson: Thanks for the question. I think what happened early on is that organizations thought that they can use identity solutions to solve the problem, but failed. The identity is critical. You need to provision an identity, understand how they are going to use it. But the identity itself, if you can see what data it's touching and if there is any abnormal behavior and exactly what are the AI tools they are using, you have -- you are very limited in the value that you will get and you can provision identity in the right way and then the agent will use the wrong tools and will access the wrong data, and it will end in a catastrophe. So I think what we benefited from in Q1 was actually the understanding that the identity provisioning is very important but limited. And what you need to do is really to manage this whole thing from -- inside out from one side is the data and one side is the pipeline and tools. And obviously, we coexist. Organization needs both of them. But to get the value, you need to connect it to data and the only way to do it to get the benefit without the downside is to do it in a secure way. You need very good brakes in order to drive fast in this AI era. Operator: And next, we have Erik Suppiger with B. Riley. Hearing no response, we'll go next to Todd Weller with Stephens. Todd Weller: Just a question on the expansion opportunity. Could you talk about the relative opportunity between data workload expansion versus cross-selling the new products you have? And then from a workload type perspective, what do you see driving kind of the strongest growth? Yakov Faitelson: So I will start from the end. The workload is everything. So if you really think about what applications are accessing and what users are accessing to do their job, this is what the agent needs to access in order to be useful. So most data in organizations and a lot of the time in order really to build this data estate and derive good conclusion, they also take a lot of historical data. So the overall data estate becoming very super critical, even data that is stale. So it's really everything. What the AI does essentially, it really drives -- it really drives to protect all data. And with that is whatever data you want to connect to your AI systems, this is how we can expand. And I also think that some use cases that were a bit more compliance driven like database activity monitoring becoming just a top priority for security risks because the consumption change with the AI usage. So this is really what we see. The data is everywhere, and these technologies are accessing all the data in just a neck break speed, and you need to be ahead of it with robotic value proposition. Operator: And we'll go back to Erik Suppiger with B. Riley. Erik Suppiger: I apologize for that. Congratulations on a nice quarter. Say, in your conversations with customers, how much of your new ARR is driven by the traditional threat of outsiders exfiltrating data versus how much of your discussion is focused on AI and securing agents? And then on the former, has the news that came out of Anthropic about enhanced capabilities for vulnerability, identifying vulnerabilities, has that made a difference in terms of some of the discussions with customers? Are they more looking at securing data in a more urgent manner in terms of some of these vulnerabilities coming out? Yakov Faitelson: I think that -- I think what the security concerns regarding information that we had with humans becoming it's the same concerns. But just if you think what happened in the agentic world, the probability that something will happen just increases by orders of magnitude, it's very easy. They start to deploy agents and especially something happened that really triggered the need for organizations to understand it. In general, with everything that is happening with these models that finding vulnerabilities, organizations understand that many times because you can find the vulnerability, it can be easier for bad actors to come in. And then when they are coming in, essentially what they want is data. If you had a breach and no one touch any data, nothing happened. If data was taken, you have what we call the lasting damage. So it's just -- it's -- everything works together, but it just amplifies the need to secure your data. And also there is an understanding that this needs to be completely automatic. Operator: Moving next to Shrenik Kothari with Robert W. Baird. Shrenik Kothari: Congrats on the solid quarter. So you sounded especially encouraged by the acceleration in the new customer contribution in the quarter driven by new logo with a lot of upsell expansion opportunities still in front of you. So just as the field is spending more time on true new and upsell rather than conversion, like how should we think about the current mix between the new and expansion? And over time, like in supporting your durable 20% plus organic growth algorithm you talked about, what does the steady-state balance of those new versus expansion look like? Guy Melamed: The ability to go to new customers with our SaaS offering is very clear to us, and we have seen it throughout the transition. But obviously, where reps had to focus on the conversion, we talked a lot about the cannibalization of time. And as we kind of move past the transition, they can go back and focus on the new customer sell. And we've definitely seen that with the offering we have, we can reach to new customers that we didn't have the opportunity to do it before. If you look longer term, the expectation is that the platform that we have, the majority of the ACV should come from the existing base. We definitely see that opportunity as a significant one with the offering that we have. And when you have such a large base, and when you think about the run rate that we have, we're expected to finish the year just under $850 million, that's a big base of customers, thousands of customers that you can go back and sell them additional products and protect them in a way that will give them the comfort to use AI and be able to address the needs. So if you look longer term, we definitely believe that the contribution from existing SaaS customers should drive our growth. But again, with a focus on new customers and when you look at the comp plan, we made sure that reps would focus on both new customers and existing SaaS customers, and that's how they can make the most amount of money because we believe that, that should drive our trajectory and growth in the years ahead. Operator: And moving next to Junaid Siddiqui with Truist Securities. Junaid Siddiqui: I just wanted to ask, what are you seeing from customers that are adopting Athena AI? Specifically, what are you seeing? How quickly are they adopt -- how quickly is adoption ramping up post deployment? And what's distinguishing customers who embed Athena into their daily workflows versus those where usage stalls after initial enablement? And is that -- are you seeing any change in deal sizes or close rates or post-sale expansion versus customers that are not using it? Yakov Faitelson: It's part of the product. And this is the key that you are able to use it in just natural language without any enablement, and it works very well for our customers. And big part of the platform and the automated outcome is what we call no touch value. That a lot of the value just from the remediation and threat detection and automated classification, everything is happening automatically. And when you need to do something, you can do it by just talking to the platform, and it works very well. But just part of day-to-day usage of the platform. Operator: We'll go next to Fatima Boolani with Citi. Fatima Boolani: Guy, I wanted to ask you about ARR contribution margin and how we should think about the linearity of that over the course of the year, understanding the ebbs and flows of how conversions are trending. But maybe if you can help us map it back to the Bull and Bear case as you framed it for conversions and the relationship to ARR contributions against what are appearing to be very responsible organic OpEx investments. Guy Melamed: Absolutely. We talked about the conversion kind of breakdown behavior throughout 2026. And the expectation is that a big part of the churn on the on-prem side will be related to Q3 because if you remember, that's the quarter with the largest federal and state and government. So the expectation was that a lot of the conversions would actually happen in Q4 towards the end of the year. Obviously, we will try to convert many of them before, and we're focused on that. But if you look at kind of the behavior throughout the year, I think it will be somewhat back-end loaded from a yearly perspective. And as such, the ARR contribution margin will look -- will kind of even out throughout the year with the contribution that you see on the conversion itself. So that's kind of the framework to think about. That's the way to think about generally kind of the profile there. And also, if you look at the actual -- regular seasonality of SaaS sales, we do have a significant portion of our sales that take place in Q4. So when you look at that as well, you can see that from a cost perspective, they are somewhat, I'd say, for the most part, relatively flat. And therefore, when you look at the profile margin in previous years, you would see that the biggest contribution does take place in Q4, and I expect that to be the case in 2026 as well. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Tim Perz for closing comments. Tim Perz: Thanks again for the interest in Varonis. Please reach out if you'd like a call back. We look forward to seeing everybody at the investor conferences this quarter. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.